Categories
Forex Fundamental Analysis

AUD/CHF Global Macro Analysis

In this analysis, we will look into endogenous economic factors that influence Australia and Switzerland’s growth. We will analyze factors that affect the fluctuation of the exchange rate of the AUD/CHF forex pair.

Ranking Scale

Both the endogenous and exogenous factors are ranked on a sliding scale from -10 to +10. The ranking depends on correlation analysis of the endogenous factors with domestic GDP growth, and exogenous factors with the AUD/CHF exchange rate.

Domestic currency increases in value when the endogenous factor has a positive score and depreciates if it is negative. Similarly, the AUD/CHF exchange rate rises if the exogenous score is positive and drops if negative.

 

Summary – CHF Endogenous Analysis

Indicator Score Total State Comment
Switzerland Unemployed Persons -6 10 153,270 in November 2020 2020 mean is 142,100 above the historic average of 59,003
Switzerland Producer Prices Change -3 10 Decreased by 2.7% in November 2020 Represents the 23rd consecutive month of a price decrease
Switzerland Capacity Utilisation -6 10 78.11% in Q4 2020 Q4 is the lowest recorded in 2020. It’s also lower than the historical average of 80.03%
Switzerland Household Saving Ratio -5 10 Expected to reach 15.4% in 2020 This would be the highest level in Switzerland’s history
Switzerland House Price Index 1 10 172.82 points in Q3 2020 Throughout 2020, the Swiss Residential House Price Index has remained above the historic average of 106.48 points
Switzerland Fiscal Expenditure 3 10 Projected to hit 235 billion CHF in 2020 This would be the highest level in Switzerland’s history. It’s a direct result of the unprecedented expansionary fiscal policy
Switzerland Bankruptcies 1 10 14,800 companies in 2020 Precipitated by the adverse operating and economic conditions due to the coronavirus pandemic
TOTAL SCORE -15
  1. Switzerland Unemployed Persons

In Switzerland, the labour market is made up of Swiss citizens aged 16 to 65 years. The number of unemployed persons includes those who are available for work but could not get employed during the survey period. Note that the number of unemployed persons does not cover those working temporarily and must include those who have made efforts to seek gainful employment within four weeks. This number shows the prevailing economic situation in Switzerland since employment levels correspond to economic growth.

In November 2020, unemployed persons in Switzerland rose to 153,270 from 149,118 in October. In 2020, the mean of the unemployed persons in Switzerland is around 142,100 above the historic average of 59003. It has a score of -6

  1. Switzerland Producer and Import Prices

The Swiss PPI measures the change in the price of goods produced within the country and sold to wholesalers. It also includes the price changes of goods that are imported for resale in Switzerland. The PPI is a leading indicator of inflation in Switzerland since the change in the producer prices is passed to the final consumers of the products.

In November 2020, the YoY Swiss PPI  dropped by 2.7% compared to a 2.9% drop recorded in October. This is the 23rd consecutive drop in the PPI. However, it was the slowest drop since March indicating that domestic demand is picking up. It has a score of -3.

  1. Switzerland Capacity Utilisation

This tracks the percentage change in the ratio of actual industrial production in Switzerland and the maximum potential output. This ratio shows the rate at which the Swiss industries utilise the available resources. Typically, when the capacity utilisation rate increases, the output in the Swiss industrial sector also increases. This corresponds to economic expansion and improved living standards.

In Q4 2020, the Swiss capacity utilisation rose to 78.11% compared to 76.67% in Q3. However, the Q4 ratio is lower than the 81.34% in Q1, 80.03% in Q3, and the historical average of 83.45%. Consequently, it has a score of -6.

  1. Switzerland Household Saving Rate

This is the ratio between the amount that Swiss households save to their disposable income. In an economy, when the savings rate is high, domestic consumption takes a hit. Since a higher household savings rate corresponds to a drop in domestic demand, it leads to a decrease in GDP growth, and vice versa.

In 2020, Switzerland household saving rate is projected to hit 15.4%, which would mark the highest level in Switzerland’s history. It has a score of  -5.

  1. Switzerland Residential House Price Index

This index tracks the change in the quarterly change of the price of single-family homes. Price change in the real estate sector is a leading indicator of overall economic growth. Residential property increases in price due to rising demand, which means there is access to affordable financing or increased disposable income.

In Q3 of 2020, Swiss housing price index increased to 172.82 points from 169.22 points in Q2. Throughout 2020, the Swiss HPI has remained above the historic average of 106.48 points. This shows that domestic residential property did not take a hit as a result of the coronavirus pandemic. It has a score of 1.

  1. Switzerland Fiscal Expenditure

This measures the totality of expenses by the Swiss government. They include expenditure on goods and services, public investment, and transfer payments. Note that fiscal expenditure is a primary method for the government to influence the economic growth rate.

In 2019, the Swiss government’s fiscal expenditure increased to 224.309 billion CHF from 221.715 billion CHF. It is projected to hit an all-time high of 235 billion CHF in 2020 due to unprecedented fiscal expansionary measures to combat the pandemic. It has a score of 3.

  1. Switzerland Bankruptcies

This measures the number of companies operating in Switzerland that are forced to close down due to the inability to service their debt obligations. Typically, the number of bankruptcies increases when the economy is performing poorly.

In 2020, the number of Swiss bankruptcies is projected to reach historic highs of about 14,800. It has a score of 1.

AUD/CHF Exogenous Analysis

  1. Australia and Switzerland Terms of Trade Differential

A country’s terms of trade are derived from dividing the value of its exports with its imports. Thus, a country with a surplus net current account balance has terms of trade above 100%. Conversely, when its balance of payments has a deficit, the terms of trade will be below 100%.

In international trade, the domestic currency appreciates when a country has favourable terms of trade, and depreciate when unfavourable. Thus, when the differential of the terms of trade between Australia and Switzerland is negative, the AUD/CHF pair is expected to be on a downtrend. If the differential is positive, we can expect an uptrend for the AUD/CHF pair.

From January to October 2020, Australia’s average TOT was 97.9% while Switzerland had 121.15%. The differential is -23.25% and has a score of -4.

  1. Annual GDP Growth Rate Differential between Australia and Switzerland

The differential in the annual GDP growth rate is the difference between Australia’s and Swiss annualised GDP growth rate. Naturally, a country with a higher GDP growth rate tends to have a stronger currency than those with a slower GDP growth rate.

When this differential is positive, Australia has a higher annualised GDP rate than Switzerland. Since the AUD will subsequently appreciate more than the CHF, we can expect a bullish trend for the AUD/CHF pair. Conversely, if the Swiss economy has a higher annual GDP growth rate, then the differential will be negative. Consequently, the AUD/CHF pair has a bearish trend.

Australia had an annual GDP growth rate of -8.8% during the first three quarters of 2020, while the Swiss economy has an annual growth rate of -10%. The differential is 1.2%, and it has a score of 2.

  1. The AUD/CHF interest rate differential

In the forex market, the interest rate differential determines the flow of capital between two currencies. For the AUD/CHF pair, the interest rate differential determines if traders and investors will go long or short the pair.

A positive interest rate differential means that Australia has higher interest rates than Switzerland; hence a bullish AUD/CHF pair. Negative differential means Switzerland has a higher interest rate than Australia; hence a bearish AUD/CHF.

In 2020, the Reserve Bank of Australia cut interest rates from 0.75% to 0.1% while the Swiss National Bank maintained interest rate at -0.75%. Therefore, the interest rate differential for the AUD/CHF pair is 0.85%, and it has a score of 5.

Conclusion

Indicator Score Total State Comment
Australia and Switzerland Terms of Trade Differential -4 10 A differential of -23.25% Switzerland has a current account surplus hence better terms of trade than Australia
Annual GDP Growth Rate Differential between Australia and Switzerland 2 10 1.20% Australian economy marginally contracted at a slower pace than the Swiss economy
The AUD/CHF interest rate differential 5 10 0.85% The SNB has maintained interest rate at -0.75% and has no short-term prospects of changing the policy. A policy change from the RBA might trigger any changes in the differential
TOTAL SCORE 3

 

The cumulative exogenous score for the AUD/CHF pair is 3, which implies that we can expect the pair to continue trading on a bullish trend. The pair’s weekly chart’s technical analysis shows it is attempting to break through the upper Bollinger band. Furthermore, it has formed a series of bullish ‘hammer’ candles meaning that sellers have failed to drive down the exchange rate.

 

Categories
Forex Fundamental Analysis

AUD/JPY Global Macro Analysis: Ranking Impact Factors

The global macro analysis of the AUD/JPY pair focuses on endogenous factors that impact GDP growth in Australia and Japan. We’ll also analyze exogenous factors that determine the exchange rate fluctuation of the AUD/JPY pair.

Ranking Scale

We will rank these factors on a scale from -10 to +10 depending on the severity of their impact.

To determine the rank for endogenous factors, we will conduct a correlation analysis with the GDP growth rate. If the ranking is positive, the endogenous factors have led to an increase in either the AUD or JPY. If the ranking is negative, they have resulted in domestic currencies shedding some of their value.

For exogenous factors, ranking is derived from correlation analysis with the exchange rate of AUD/JPY. If the ranking is negative, the exogenous factor has resulted in a bearish trend for the pair. Conversely, a positive ranking implies the factor resulted in a bullish trend.

AUD Endogenous Analysis

  • Australia Unemployed Persons

As an economic indicator, unemployed persons show the number of the working-age population actively looking for employment. This number is used to show the health of the labor market. It also estimates how well the economy is performing; an expanding economy creates more job opportunities, hence decreasing the number of unemployed persons. Conversely, a deteriorating economy results in job losses, increasing the number of unemployed persons.

In November 2020, the number of unemployed persons in Australia dropped to 942,100 from 959,400 in October. This number is still higher than the historic average of 639,530 and higher than 722,060 recorded in January. It has a score of -6.

  • Australia Producer Prices Change

This indicator measures the changes in the price of goods that manufacturers sell directly to wholesalers over a particular period. It is a leading indicator of overall inflation since the prices of goods and services from the manufacturers will be passed to the final consumer. Typically, an increase in demand in the market leads to higher prices while a drop in aggregate demand results in lower prices. Thus, changes in producer prices correspond to changes in GDP.

In the third quarter of 2020, the YoY Australia producer price changes dropped by 0.4% same as Q2. In Q1, the index was higher by 1.3%. Thus, we assign a score of -4.

  • Australia Capacity Utilisation

Capacity utilization measures the degree to which a country’s manufacturing and production capabilities are being put to use. It shows the total output being produced vs the maximum potential output produced using the same resources. In Australia, capacity utilization includes companies operating in the industrial sector; which include manufacturing, mining, and utility firms. It is a leading indicator of overall economic growth.

In November 2020, Australian capacity utilization rose to 79.32% from 77.93% in October. This shows that the industrial sector is expanding from the lows of the pandemic. However, the current utilization is still below 81.34% recorded in January. It has a score of -5.

  • Australia Household Saving Ratio

This represents the portion of the disposable income that households do not use to purchase goods and services and transfer payments. Typically, what is not consumed is considered savings. Therefore, when the household saving ratio increases, Australian households are spending less on domestic consumption. Since GDP heavily relies on domestic expenditure, an increase in household savings ratio is a leading indicator of economic contraction.

In the third quarter of 2020, Australia’s household saving ratio dropped to 18.9% from historic highs of 22.1% in Q2. Q3 reading is the fourth-highest since 1960. It has a score of -7.

  • Australia House Price Index

In Australia,  the HPI measures the quarterly change in the price of residential property in eight cities. Canberra, Sydney, Brisbane, Hobart, Melbourne, Perth, Adelaide, and Darwin. When the HPI increases, it shows that demand in the real estate market is growing, which corresponds to economic expansion.

In the third quarter of 2020, HPI in Australia increased by 0.8% from a drop of 1.8% in Q2. The Q3 increase is attributed to the easing of COVID-19 restrictions that stifled the economy in Q2. It has a score of 2.

  • Australia Fiscal Expenditure

This includes the totality of government expenditure on the purchase of goods and services, transfer payments in social security, and investments. It is used in the computation of the total government budget value. Fiscal policy is used to stimulate economic growth. Usually, in times of economic crises, the government increases its fiscal expenditure – mostly on transfer payments. This is meant to cushion households from adverse economic conditions. More so, it increases domestic demand which spurs economic growth.

In November 2020, Australia’s fiscal expenditure dropped to 49.504 billion AUD from 50.801 billion AUD in October. In May, Australia’s fiscal expenditure hit historic highs of 79.545 billion AUD. It has a score of 5.

  • Australia Bankruptcies

This shows the number of companies operating in Australia unable to continue with their operations due to the inability to repay their debts. It corresponds to changes in economic conditions and demand for goods and services by households.

In October 2020, the number of companies that declared bankruptcy in Australia dropped to 279 from 298 in September. There has been a steady decline in Australian bankruptcies since March when it reached yearly highs of 683. It has a score of 3.

Conclusion

Indicator Score Total State Comment
Australia Unemployed Persons -6 10 942100 in November 2020 Above the historic average of 696530. The increase in unemployed persons in 2020 is attributed to economic shocks of COVID-19
Australia Producer Prices Change -4 10 Dropped by 0.4% in Q3 2020 The PPI has dropped in 2020 primarily because of the depressed domestic demand
Australia Capacity Utilisation -5 10 79.32% in November 2020 The industrial sector in Australia is resuming full operations from the pandemic lockdown. The capacity utilisation is still below pre-pandemic levels
Australia Household Saving Ratio -7 10 18.9% in Q3 2020 Q2 reading was the highest in Australian history. Q3 ratio is the fourth highest. This shows that domestic demand was depressed in 2020
Australia House Price Index 2 10 Increased by 0.8% in Q3 2020 An improvement from a drop of 1.8% in Q2. Demand in real estate is picking up after easing of COVID-19 restrictions
Australia Fiscal Expenditure 5 10 49.504 billion AUD in November 2020 2020 was characterised by the unprecedented increase in fiscal expenditure as the government attempted to avert an irreversible recession
Australia Bankruptcies 3 10 279 companies in October 2020 A steady decline in the number of bankruptcy filings since May
TOTAL SCORE -12

 

JPY Endogenous Analysis

  • Japan Unemployed Persons

This indicator shows the Japanese labour market’s state by analysing the changes in the number of people who are actively seeking employment. It shows the rate at which the domestic economy is creating and shedding jobs. When the number of unemployed increases, it means that the economy is losing more jobs than creating, showing that the economy is contracting; and vice versa.

In November 2020, the number of unemployed persons in Japan dropped to 1.98 million from 2.14 million in October. Since January, it has increased by 340,000 is higher than the historic average of 1.67 million. It has a score of -7.

  • Japan Producer Prices Change

The producer price change measures the YoY change in the prices of goods and services sold to the wholesalers directly from the producers. The index covers all sectors in the Japanese economy. Hence it is a leading indicator of the overall inflation in the economy.

In November 2020, the YoY Japan producer price change dropped by 2.2% down from the 2.1% drop recorded in October. The November drop is attributed to petroleum & coal products. The historic average for the japan producer price change is 1.36%. It has a score of -3.

  • Japan Capacity Utilization

Japan’s economy is heavily dependent on industrial activity. Capacity utilisation shows the percentage of actual output from the industrial sector compared to the maximum capacity. Note that this indicator only measures the relative capacity utilisation based on a benchmark year. When it increases, the industrial sector is expanding with the available resources being put to the most use possible.

In October 2020, Japan industrial capacity utilisation increased to 95.4% from 90% in September. This is the highest recorded since March. Throughout the year, the capacity utilisation in Japan has been below the historic average of 110.32 points. It has a score of -2.

  • Japan Workers’ Households Ratio of Net Savings and Insurance

This measures the amount of income that households in Japan save in relation to their total disposable income. When the ratio increases, Japanese households are postponing consumption. This is interpreted as expectations that future economic conditions might worsen; hence, households save for a rainy day. In such a case, domestic demand for goods and services is depressed, which means that the GDP drops. Conversely, when the savings ratio decreases, expenditure increases; hence, rise in the GDP.

In October 2020, household saving rate in Japan rose to 29.7% from 19% in September. Due to the economic uncertainties of COVID-19, June 2020 recorded the highest ever personal saving ratio in Japan of 62.1% it has a score of -5.

  • Japan Residential Property Price Index

This tracks the price changes in the Japanese real estate market for residential property, including condominium, land, and detached houses. Note that price in real estate corresponds to changes in the demand. Thus, when demand is high, the residential property index increases, and drops when demand is low.

In August 2020, the Housing Index in Japan was 113.86 points up from 111.9 points in July. The August index is higher than the historic average of 104.99 points but lower than January’s 114.66 points. It has a score of -1.

  • Japan Government Spending

Japan government spending shows the amount of money that the Japanese government uses to purchase national goods and services, repayment of government debt, and transfer payments. Whenever the government intends on influencing economic growth, it adjusts the government spending as part of its fiscal policy measure. This involves adjusting budgetary targets, levels of taxes, and expenditure plans. During the coronavirus pandemic, for example, the government increased its national spending, especially in transfer payments. That was meant to shield households from the economic shocks and to stimulate economic growth.

In the third quarter of 2020, Japan government spending rose to 114.509 trillion JPY from 114.404 trillion JPY in Q2. This is the highest government spending in the history of Japan. It has a score of 4.

  • Japan Bankruptcies

Bankruptcies show the monthly change in the number of Japanese businesses unable to service their debt obligations and thus forced to cease operations. As an indicator of the domestic economy, bankruptcies show how well the economy supports businesses in terms of creating and shedding jobs. Naturally, when bankruptcies increase, it correlates with increases in job losses and contraction of the economy.

In November 2020, the number of bankruptcies in Japan was 569 down from 624 in October. It has a score of 1.

Conclusion

Indicator Score Total State Comment
Japan Unemployed Persons -7 10 1.98 million in November 2020 Above the historic average of 1.68 million. The Japanese labour market has lost about 340,000 jobs since January
Japan Producer Prices Change -3 10 Down by 2.2% in November 2020 The decrease in PPI mainly attributed to a drop in the price of petroleum and coal products
Japan Capacity Utilisation -2 10 95.4% in October The highest recorded since March. The economy is gradually returning to full operations
Japan Household Saving Ratio -5 10 29.7% in October 2020 The ratio is dropping from historic highs of 62.1% in June. Shows domestic demand is picking up
Japan House Price Index -1 10 113.86 points in August 2020 The HPI is higher than the historic average of 104.99 points; but lower than pre-pandemic levels
Japan Fiscal Expenditure 4 10 114.509 billion JPY in Q3 2020 The highest in Japan’s history
Japan Bankruptcies 1 10 569 companies in November 2020 Bankruptcy filings drop as COVID-19 restrictions ease
TOTAL SCORE -13

 

AUD/JPY Exogenous Analysis

  • Australia and Japan Terms of Trade Differential

A country’s TOT shows the ratio between the value of exports and the value of its imports. It represents the units of exports that can purchase a unit of imports. Therefore, when a country has a current account deficit, its terms of trade is less than 100%. If it has a current account surplus, its TOT is more than 100%.

In this case, the differential between Australia and Japan’s terms of trade is the difference between Australia’s terms of trade and Japan’s. When this differential is positive, it means that Australia has a higher current account balance than Japan. Consequently, implying that the AUD is in higher demand in the international market than the JPY, hence a bullish AUD/JPY. Conversely, the differential is negative when Japan has higher TOT than Australia, resulting in a bearish AUD/JPY.

Between January and October 2020, Australia TOT averaged at 97.9% while that of Japan at 106.43%. The terms of trade differential between Australia and Japan is -8.53%. It has a score of -3.

  • Annual GDP Growth Rate Differential between Australia and Japan

Annual GDP growth rate measures if a country’s economy is expanding, contracting, or stagnating. It tracks the change in GDP growth at a particular period over the preceding year. By measuring the annual GDP growth rate differential, we can effectively compare economic growth in Australia and Japan since both economies have different compositions, making absolute comparison ineffective. The differential is positive when the Australian economy is expanding faster or contracting slower than the Japanese economy. In this case, the AUD/JPY pair will be bullish, and vice versa.

In the first three quarters of 2020, Australia’s annual GDP growth rate was -8.8%, and that in Japan is -17.8%. The differential is 9%, and thus, has a score of 6.

The AUD/JPY pair’s interest rate differential shows whether the pair is bound to be bullish or bearish in the long term. If positive, then Australia has a higher interest rate than Japan which means that traders and investors would earn higher returns by selling the JPY and buying the AUD’ hence, a bullish AUD/JPY. When Japan has a higher interest rate, traders will earn higher returns by selling AUD and buying JPY; hence, a bearish AUD/JPY.

In 2020, the RBA cut interest rates from 0.75% to 0.1% while the BOJ maintained interest rate at -0.1%. Thus, the AUD/JPY interest rate differential is 0.2% and has a score of 3.

Conclusion

Indicator Score Total State Comment
Australia and Japan Terms of Trade Differential -3 10 A differential of -8.53% Japan has better terms of trade than Australia
Annual GDP Growth Rate Differential between Australia and Japan 6 10 9.00% Japanese economy contracted faster than that of Australia. This might change as economies open up
The AUD/JPY interest rate differential 3 10 0.20% The BOJ has no prospects pf changing the -0.1% interest rate. The differential is expected to change with changes in RBA’s interest rate policies
TOTAL SCORE 6

 

The exogenous factors have a score of 6 which means the AUD/JPY pair can be expected to continue trading in a bullish trend. Technical analysis of the pair’s weekly price chart shows it is attempting to breach the upper Bollinger band. More so, the pair has formed ‘hammer’ candlesticks showing that bears have failed to push the price lower.

Categories
Forex Education Forex Psychology

Beliefs That Can Limit Our Forex Profits

In this article, I will try to expound on “Limiting Beliefs”: what they are, why they appear, and how they affect us in Trading.

What are limiting beliefs?

Limiting beliefs are norms that we absorb in our childhood, for example through the education of our parents, the media, school, etc. We simply believe what we are told and our subconscious assumes it as something real, And even more so, those beliefs are deep inside of us that we don’t even question. These beliefs are to blame for our failure to achieve our goals and live our values.

For example, some typical limiting beliefs:

  • I have to work hard to make money
  • The safest thing is to be a civil servant
  • Success takes time
  • It costs a lot to make money
  • It is better to buy flat than to rent
  • If someone offers me something sure that they want to cheat me

And if you focus on trading, a lot of those limiting beliefs come to mind:

  • Only 5% of investors are successful
  • It takes a lot of capital to make money
  • It is not possible to live off the markets
  • Strong hands control the markets
  • I have to ruin myself several times before being profitable

I’m sure you know a lot more.

Everyone’s beliefs form their own reality, and until you disassociate yourself from your limiting beliefs associated with trading, you can never succeed in trading.

A clear example of the negative power of these beliefs is found in athletics. In 1954, athlete Roger Bannister ran the mile below four minutes. Until then, it was assumed that it was physically impossible to do so. The breaking of that record, and of that limiting belief, made a year later 37 runners fall out of the four minutes, and two years later more than 300 runners got it.

When I read in blogs or forums, I notice that there is a very negative feeling regarding the Market. I do not stop reading post always asking the same or even reaffirming negatively the impossibility of being profitable:

  • Can you beat the market?
  • Who really wins in the markets?
  • How to invest and not die trying

Unconsciously, many people are taking these beliefs that they read as reality, they are creating their own limiting beliefs. Unfortunately, there are few comments positively reinforcing this issue, and if someone appears saying that it is profitable, usually instead of learning from it what is done is to criticize it (very common in the Spanish-speaking world).

But how do we eliminate those beliefs?

There is a work process called PCM, which are the initials of:

  • Possibility: achieving any goal is possible
  • Capacity: we are able to achieve this goal
  • Merit: we deserve to achieve that goal

Therefore, let’s assume that our goal is to achieve 50% profitability every year (some right now will be saying: only!! if I already win 100%; and others will be thinking: that’s impossible. well, guess who has the limiting problem).

The next step is to take a walk through the three pillars (Possibility, Ability, and Merit) and ask questions, so we have to find the limiting beliefs that prevent us from developing that goal. For example, one may think that it is not possible, or that it does not deserve it, but why? Perhaps because he believes he does not have the necessary resources (capital, training) or does not have the necessary skills, or because speculating is frowned upon by his family, etc. We have to ask ourselves until we find the root of the problem and discover what are the beliefs that limit us to continue growing.

And the next step is to change those beliefs. We have to turn them around and put them in our subconscious until they are part of us and our reality. This process of change may be more or less long depending on the person, their faith, but it is key to establishing new beliefs that will help us achieve our goals. To really see it first we have to think about it and believe it.

There’s a saying from Henry Ford that says, “Whether you think you can, or you think you can’t, you’re right.” So it’s up to you.

Categories
Forex Forex Education Forex Risk Management

Forex Lot Size: How to Limit Risk in Forex More Easily

Position size is usually the easiest way to keep maximum transaction loss under control, and sometimes it is the only way. The size of the forex position is how many forex batches (micro, mini or standard) you order per transaction. Your risk is broken down into 2 parts-transaction risks and account risk.

What is a lot in forex, how much is a lot and why does it matter? An obsessive approach to risk and money management, which means keeping transaction risk as low as possible or avoiding relatively large losses, whatever you call it, it separates the long-term elite survivors from the majority who eventually retire. The size of your positions is a fundamental part of risk management because the smaller the lots you handle, everything else being the same (leverage, number of lots, and more), the lower the value of a pip.

So, smaller batches of forex mean less profit in each percentage of movement in price, but also more important, less loss. It’s the losses that could end up with your capital, your trust, and your trading career. For a large number of reasons based on the history of fórex trading, currency pairs are traded in standard batches of 100,000 units of base currency (1 forex lot). To make trading more profitable for the average individual, online fórex brokers invented mini accounts with lots of 10,000 (1 mini lot) and micro-accounts with lots of the size of 1,000 units (1 micro lot). We don’t just like these innovations. We love them. Because a small lot reduces the risk for each lot traded, they give you a large number of advantages over standard lots.

They provide better flexibility to adjust the size of your positions to the circumstances:

When you’re winning, you can increase the size of the position by adding foxes.

While you’re learning, making the transition from a demo to a live account or a losing streak, small batches help you keep losses in check until your situation improves and is successful for weeks or months.

When you want to enter or exit from a staged position with only part of your planned position (another risk management technique), small lots make this technique easier to do while keeping total venture capital within 1-3 percent.

Here is how these elements link to give you the ideal forex position size, no matter what the market conditions, the mode of the transaction, or what forex strategy you are using.

Continue reading for more information on what is a lot in forex, how much is a lot, or begin to trade and see for yourself in real-time as the size of the lot in the forex influences your gains and losses.

01 – Determine the limit risk per transaction in your account.

This is the most important step in determining the size of the forex batch. Determine a percentage or a limit amount that you will risk for each transaction. The vast majority of professional traders dispose of their risk in a ratio of 1 to 3 percent of their account. Let’s take an example, if you have a $10,000 trading account, you could risk $100 per transaction if your risk is 1 percent of your account. If you risk 2%, then you can risk $200. You can also use a fixed amount, but ideally, this should be less than 2% of the value of your account. For example, you risk $150 per transaction. As long as your account balance is at $7,500, then you’re risking 2% or less. While other transaction variables may change, account risk remains constant. Choose how much you’re willing to risk in each transaction, and stick to that. Don’t risk 5% on one transaction, 1% on the next, and then 3% on another. If you choose 2% as the risk limit per transaction, then each transaction should risk 2%.

02 – Determine pip risk in a transaction.

You know the maximum risk you will take per transaction, now pay attention to the transaction in front of you. The Pip risk of each transaction is determined by the difference between the entry point where you place your stop-loss command. The stop-loss closes the transaction if the losses reach a certain amount. This is how we control the risk in each transaction to keep it within the limits set for the account, as discussed above.

Each transaction varies, based on volatility or strategy. Sometimes a transaction can have 5 pips of risk, and in another, there can be 15 pips of risk. When making a transaction, consider both your point of entry and the stop loss point. You want the stop loss point to be as close as possible to your entry point, but not so close that the transaction is settled before the expected movement occurs. Once you know how far the stop-loss entry point is, in pips, you can calculate the size of the ideal lot for the transaction.

03 – Determine the size of the forex position.

The ideal size of the fórex position is simply a mathematical formula equal to:

Pips at risk * value of the pip * negotiated lots = money at risk

We already know the figure of money at risk, because this is the maximum we can risk in any transaction (step 1). We know the Pips put at risk (step 2). We also know the value of the Pip for each currency pair (or you can search for it).

Now what needs to be done is discover the lots negotiated, what is the size of our position. Let’s assume you have a $5,000 account and risk 2% of your account on each transaction. You have the possibility to risk up to $100, and contemplate a transaction in EUR/USD where you want to buy at 1.3030 and set a stop loss at 1.2980. This situation results in 50 risk pips.

If you are trading mini lots, this way every pip move is worth $1. Therefore, taking the position of 1 mini lot will result in a risk of $ 50. But you are in the possibility to risk $ 100, therefore, you can acquire a position of 2 mini-batches. If you lose 50 pips in 2 mini fórex positions, you will have lost $100. This is the exact amount of risk you tolerate in your account; then the position size is accurately measured with respect to the size of your trading account and transaction specifications. You can enter any number in the formula to get the ideal size of your positions (in batches). The number of batches produced by the formula is linked to the value of the pip entered in the formula.

A proper selection of the size of forex positions is essential. Set the percentage you will risk per transaction; 1 to 3 percent is recommended. Note the risk per pip in each transaction. In relation to the risk taken on your account and pip, you can already calculate the batch size for your forex positions.

The smaller the size of the forex lot, the lower the risk because it reduces the following:

  • The value of each forex pip.
  • The cost of every 1 percent that moves against you.

Potential loss if your stop-loss order is reached. We measure the risk not by the total size of your position but by the potential loss if your stop-loss order is reached.

Yes, a smaller position means less profit when prices move in your favor, with less income as a result of trading operations. But the top priority is to have as few losses as possible. Always. A loss percentage requires a higher percentage to recover, as you have less base capital. Once you find the right combination of trading styles, instruments, and analysis that best suits you, you’ll have the time to increase batch size, risk, and profit potential.

Until you are consistently successful for many months (regardless of the percentage of successful transactions), the priority is to maintain risk and loss in any transaction within 1 to 3 percent of your account size. Benefiting only from the minority of successful transactions is fine, because many successful traders achieve it that way, as we will discuss in other articles.

Categories
Forex Education Forex Indicators

The Absolute Best Forex Indicators (and How to Combine Them)

One of the most challenging and time-consuming aspects is trying to find out what your trading style is and the time period that best suits you. From the perspective of technical analysis, that means finding the right tools that you will usually use and learning well.

What are Forex indicators?

Forex indicators are useful in helping you answer these dilemmas. What to do if a currency is making historical maximums and minimums, so there is not enough or no support and resistance to guide you in and out decisions? How do you know if you’re not shopping at the top, or selling right at the bottom, right before the trend ends? Ideally, in any case, you’d wait for a retraction of some kind, but in the meantime, you risk losing the trend!

If you’re in a winning transaction and you’re approaching your planned exit, how do you know if you should take a planned exit, or leave at least some of the position in the hope of letting the winnings run with a trailing stop?

The consensus is about 5 technical indicators that in the balance indicated between sufficient information to make appropriate decisions and not too much for you do not suffer from an information overload, paralysis by analysis. Practically, a precise combination of forex indicators can mean anything from three to seven indicators; ultimately it is your decision. You don’t have to get attached to the same tools all the time; just limit the number you’re seeing at a certain point. Those negotiating over longer periods of time have more time and can afford to see more indicators. They should also be more informed about the key long-term indicators of:

The savings of the currencies they are trading.

The macroeconomic engines of the global economy push the appetite for risk and influence all markets all the time.

This is very critical. As a minimum, it involves following a few fundamental analyses to read and at least an indicator that gives you a big perspective like the S&P 500 index (and what is driving it in the period of time you chose).

Continue reading for more information or start risk-free trading and combine the best fórex indicators in a successful way. Use software to create Expert Advisors to test and optimize your strategy and use it as a fórex robot for automated trading.

Recommended Forex Indicators

While the number of indicators you choose may vary with your preferences, needs, and trading style, the main principle in selecting your toolkit of indicators is to have a balance that gives you a good perspective of the different types of information you need, specifically:

  • Trading trend or range
  • Momentum
  • Support/Resistance
  • Timing or cycles

Trend or Range of Indicators

Indicators that follow trends, as the name suggests, are designed to take advantage of market trends. Examples of these include moving averages (Mms), the average directional index (ADX), and on-balance volume (OBV).

Range-based indicators are mostly designed to show oversold and oversold conditions in a price range that includes Bollinger Bands, the Commodity Channel Index (CCI), the Relative Strength Index (RSI), and the stochastics indicator. Some indicators, such as the moving average convergence divergence (MACD), can be used to generate either a trend-following signal or a range-based signal depending on the time periods used in the calculations.

Probably the best fórex indicator in the world is the Double Bollinger Bands -The Bollinger Bands with a brilliant extension. Dbbs are really a hybrid trend and an indicator of momentum. In markets where there is a certain regression to the average, the DBB provides points of support and resistance(s/r). When there is a trend, they show the momentum of the trend and the power to stay probably.

The euro/yen with 50-day and 200-day moving averages. Image by Sabrina Jiang © Investopedia 2020

Indicators of Momentum

The basic problem traders and investors have is that they are paid to be correct about what will happen later, but the vast majority of the best-known indicators we have covered so far are lagging indicators rather than leading indicators. They inform us of the past, and with that information, what we can do in the best way is form a hypothesis about the future.

What does a trader do? uses momentum indicators. They are leading indicators because:

They can tell if a trend is strengthening or weakening.

They can tell whether an asset is overbought or over-exploited relative to past activity over a given period, and also indicate whether the trend is likely to reverse.

Knowing this can help you predict changes and have better returns.

Momentum indicators give you additional clues to put the odds of being right in your favor. There are many indicators of momentum, but now we will introduce only some of the most effective and easy to use:

Double Bollinger Bands

Three types of basic oscillators: Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and the Stochastic Oscillator. As with any other indicator, you can use these without knowing how well they work, although if you do, you will be able to use them more effectively and know how to adapt them to your specific situations.

You should consider using the Double Bollinger Bands and one or two oscillators you choose, especially the moving average convergence/divergence (MACD). A few lines of moving averages as we saw before (in periods of 10, 20, 50, 100 and 200) not only serve as indicators of momentum, they also provide points of support and resistance.

Points of Support/Resistance

To add to the obvious price levels highlighted in your chart ( and in periods 4 or 5 times shorter and longer) you should always see:

  • The s/r points generated from the trend or range indicators.
  • The s/r points formed by the western style graphs, both their trend lines and the target points involved in new trends.
  • The s/r points transmitted by the pivot points.

The use of pivot points should be taken into account. A pivot point is no more than a technical analysis indicator, normally used to determine the market’s major trend over different time periods. The pivot point for it is simply the average of the maximum, minimum, and closing prices of the previous trading day. On the following day, the negotiation at a higher point of the pivot point indicates a bullish feeling, while if below the pivot point indicates a bearish trend.

The pivot point is the base of the indicator, but it also includes other support and strength levels that are projected based on pivot point calculations. All these levels help traders to try to guess where the price might have resistance or support. Similarly, if the price fluctuates around these tells the trader that the price goes in a certain direction.

Synchronization or Cycle Indicators

Gann, Fibonacci, Dinapoli, Elliott Wave, and other similar studies are synchronization or cycle indicators. For example, the typical toolkit could include, in addition to any obvious s/r points:

A set of moving averages of periods of 10, 20, 50, 100, and 200: Again, these serve as s/r points as well as momentum indicators if they show a cross or a stratification.

Trend lines and channel lines show the trend and provide points of s/r.

Double Bollinger Bands and MACD show the changes in momentum.

Fibonacci Setbacks One of the most recent trends in every period of time possible are the points s/r. If you need to re-draw these for every period of time you examine, do so, as the primary trend can vary dramatically over different periods of time.

If you can locate any pattern on a western graph, note the levels involved of s/r (maxima, minima, necklines, shoulders, etc.). Japanese candle patterns provide short-term signs of continuing trend or a reversal.

Euro/yen cross with 50-day and 200-day moving averages and MACD indicator. Image by Sabrina Jiang © Investopedia 2020

How to Enter MT5 and MT4 Indicators Into Charts

Then you would have to apply this group of fórex indicators to the time period you are negotiating, as well as those 4 or 5 times longer or shorter. For example, if you are trading daily graphs, you should also see the weekly and two or four hours (depending on what defines your trading day whether it is 24 hours or 8 to 10 hours).

A good graphics program that includes the Metatrader 5 will allow you to store any group of indicators you want since a model on the chart can be applied to any chart of any asset your broker offers.

The purpose of this first visualization in a longer period of time (weekly, in our examples) is to find points of support and longer-term resistance that you should see in the graphs you are negotiating, hoping to find a currency pair that looks like it can reach the s/r área and provide an entry point with a lower risk. That is the first step in locating low-risk, high-yield transactions.

The second visualization would be to examine the possible inputs and outputs in the shortest time periods you are negotiating, to see if you can find situations where your entry point is two or three times further away from the exit point than is your stop loss. The point of taking the winnings is usually easy to see. It is where you can reach the correct stop-loss point that usually determines whether you take the transaction.

The third visualization would be to check in the shortest time period (from two to four hours of the time period in our examples) to see any short-term s/r points, just so you are informed of s/r. time points. If these points are held for much or too often, your transaction may be showing signs that it is failing and you would have to reduce the size of your position. However, these are quickly overcome, this is a sign of progress and a signal to consider adding to your position.

  1. Run an MT5 indicator on the graph.

The most appropriate way to enter an MT5 indicator is to remove it from the browser window. You can also use the indicator command to insert them from the Insert menu or the indicator button in the standard toolbar.

  1. Change the settings of an applied MT5 indicator.

The settings of using an MT5 indicator can be changed. Select the required indicators in the list of indicators and click on “Properties” or use the menu of indicators in the graph.

Use the menu to manage the indicators:

  1. Indicator Properties Properties – opens the properties of the indicators;
  2. Delete Indicator Delete Indicator – Deletes the selected indicator from the graph;
  3. Delete Indicators Window Delete Indicator Window – deletes the indicator subwindow. This command is only available in the indicator menu which is in a separate sub-window. ;
  4. List of indicators Indicator List – Opens the indicator list window.
  5. Move the cursor to a line, symbol, or to the limit of a histogram of an indicator, it is possible to define quite precisely the value of the indicator at this exact point.
  6. Customize the MT5 display appearance

You can customize the appearance of the indicators on the trading platform. You can configure the parameters of the indicators on your trading platform. You can configure the indicator parameters when you apply them to the graph or you can modify them later. The appearance of the indicator is adjusted in the tab “Properties”.

The Color, width, and style of the indicator are configured in the “Style” field.

  1. Choose data to draw an MT5 indicator.

Technical indicators can be graphically based on price data and their derivatives as (Median Price, Typical Price, Weighted Close), also based on other indicators. For example, you can apply the moving average to an oscillator and have an additional AO signal line. First of all, it is mandatory to draw the indicator AO, and once drawn apply the moving mean to it. In the MM configuration select the option, “Previous Indicator’s Data” in the “Apply to” field. If you choose “First Indicator’s Data”, MM will be applied to the first indicator, it can be another indicator.

There are nice variants for the construction of an indicator:

  • Close – Based on closing prices.
  • Open – Based on opening prices.
  • High – based on maxima.
  • Low – Based on minimums.
  • Median Price (HL/2) – Based on medium price: (High + Low)/2.
  • Typical Price (HLC/3) – Based on typical price: (High + Low + Close)/3.
  • Weighted Close (HLCC/4) – Based on average heavy closing price: (High + Low + 2*Close)/4.
  • First indicator’s data – Based on values that were first applied to the indicator. The option to use data from the first indicator shall only be available for indicators in a secondary window because in the main window the main indicator is the price.
  • Previous indicator’s data – based on previous indicator values.
  1. Configure additional MT5 indicator levels.

For certain indicators, it is possible to enable additional levels. Open the tab “Levels” and click on “Add” and then enter the value of “level” in the table. You can also add the description of “level”.

The line color, width, and style of the levels can be configured below. To edit a “level”, click on “Edit” or double click on the appropriate field.

For the indicators applied to the price chart, the levels are drawn by adding the values of the indicator and the specified level. For indicators drawn in a secondary window, “levels” are drawn as horizontal lines through the value specified in the vertical scale.

  1. The MT5 display settings.

The display of the indicator for different time periods can be configured in the tab “Visualization”. The indicator shall only be shown for the specified time frames. This situation could be useful when the indicator is intended for use in specific time periods. The “Show in the Data Window” option allows you to manage the indicator information displayed in Data Window.

Euro/yen cross with three-day RSI overbought/oversold indicator. Image by Sabrina Jiang © Investopedia 2020

Combining the Best Forex Indicators

The forex indicators are great to guide us in manual trading. But if what we want is to automate trade and let Metatrader negotiate on its own while doing other things we cannot simply do that using indicators. Metatrader indicators do not contain trading logic. This is where Expert Advisors come in.

There are many tools that will allow you to generate unencrypted fórex robots. This is where we can help you quite a bit. Instead of spending hours coding, testing, changing, and optimizing your robots, we can offer you a tool that does it for you.

Robo-Advisor is designed to help you analyze, test, and generate strategies. It also allows you to export those strategies easily to the Expert Advisors so you can automate your trading on Metatrader.

Categories
Forex Education Forex Indicators

Forex Robots: Are they Money Making Machines?

If you have always wanted a robot to clean your house or take your dog for a walk, you would understand how attractive a Forex robot is. These services do not clean windows or take care of your pets, what they offer is definitely something much better: a relatively non-interventional way of trading in forex and other financial markets.

Many people dream of finding the perfect trading system, which guarantees profits and requires minimal effort for users. When many Forex robot programmers are available, there are some important questions to be answered.

What Is A Trading Bot?

As the name implies, a trading robot – also known as Robot Forex goes beyond simply testing trading strategies to currently apply them in real-time to make real transactions with live market data. When the robot generates a buying or selling signal, the platform automatically places the transaction. These systems have often been used by institutional traders for a long time in all markets. During the last few times, trading robots have become quite popular with private traders, particularly because they do not require any programming experience to create, execute and optimize them in an automated forex system.

Assuming the robot is well designed, tested, and its performance monitored, robot-assisted trading has some obvious advantages:

-You never miss an opportunity: the robot can work 24/7.

-There are no emotions, pure discipline: a trading robot eliminates the emotions of forex trading as long as you are disciplined enough to let the system work even when you believe that the rules do not apply under certain circumstances.

So if you do:

-You create a set of clear and unambiguous rules that can be expressed in a programming code.

-You have the time and experience to translate these rules into a program and test it, or use a programmer to do it. So automated trading is the best way to execute a precise forex strategy.

How Does A Forex Robot Work?

Trading robots use algorithms and advanced software to automate trading decisions. Services range from giving you a trading signal to placing and handling the transaction for you automatically requiring minimal or no human intervention. If you have a forex strategy that is strictly mechanical and does not require a human decision process, you can program your robot forex to make transactions 24 hours a day.

The most popular robots for retail customers are programmed on the Metatrader 5 platform. These robots are run on MetaTrader as “expert advisors” (trading robots) and are the implementation of some trading rules in a code that Metatrader or other trading platforms can understand and execute. MQL5 (Metaquotes Language) is the integrated programming language designed to develop forex robots with the Metatrader 5 platform and requires advanced programming skills. But, there are several tools available that allow you to generate unscheduled forex robots, known as “EA Generator” or “Strategy Builder” (EA generators or strategy developers).

What Is the Cost?

Many companies create and sell trading robots, but be careful who you do business with if you are in the market to buy one. It is not unusual for brokers, traders, and different unregulated websites to appear overnight and start selling a “get rich right away” robot, including a money-back guarantee so that your money will disappear within 30 days or less. Most of the robots that are made to be bought are not successful, so please do your research beforehand if you are thinking about buying one. The best thing is to be cautious because there are a lot of risks on the learning curve or mining data in the offers that are for purchase. As mentioned above, the alternative is to use an ea forex generator, designed to help you create, test, and export unlimited robots for Metatrader 5, without writing codes.

A Forex robot is much cheaper than a human manager or an account to copy the movements. Most companies sell robot forex for a one-time fee or a monthly fee as well as an annual fee. Even so, any forex robot needs constant parameter optimization and may fail after a successful start. In other cases, customers have access to an EA generator and even an expert within the company dedicated to consultation and support.

Those conditions do not apply to most of us, so the way most of us should use this option is using retail forex trading. Many forex brokers offer a variety of trading systems as part of their offerings. There’s nothing wrong with these, especially if you’re allowed to check them for a while to see how they work.

Expert Advisors (trading robots) are generally designed to work in specific environments, typically for a trend or markets that tend to regress, but not both. Before choosing a forex robot, you must understand what kind of markets and conditions the robot is designed for. A legitimate vendor will give you clear and concise information on what kind of conditions the robot works in, its performance, the amount of time it has been in operation, the benefit you can expect as well as the maximum you can lose.

As with any business proposition, if the benefits of a robot forex sound too good to be true, the odds are that it will. If the benefits look very out of place and their price is very low, well, I hope they allow you to test it first with a small amount of risk, otherwise, continue your search.

Ideally, as far as possible, review as much time as the robot has been operating and understand market conditions during that period of time. For example, at a time of growth and rising interest rates, the trading robots they buy will work well as the riskier currencies are favored. However, during the crises, these robots will suffer.

Typically, the more benefits you get, the greater the chance of losing. If a salesman offers you big profits and losses, he’s being honest. If the seller offers you high profits without a high risk of loss, you should be suspicious. There are many online trader forums dedicated to automatic trading; there are legitimate robot programmers and there are frauds, so consider yourself warned.

But, the main option is to build your own robot forex.

What is the Best Software for Robot Creation?

ROBO ADVISOR 007 is the only software to create robots online. With Robo Advisor 007 you can automate your forex strategy for Metatrader 5 in a comfortable and safe way. No need for you to know anything about advanced programming since the robot generator is smart enough to write the code for you. The source of the program is a very advanced algorithm that tests the strategy, similar to that of Metatrader, but much faster. The program is so fast that you can automatically create and test the strategies.

Robo Advisor 007 has several components:

The generator – The generator is in charge of creating and testing the systems automatically. The generator saves the most successful strategies in the collection. The moment a strategy is generated, it can be exported as a trading robot or send it to the editor for review and improvement.

The collection – when we are using the generator, the program stores successful strategies in a collection. You can search the strategies collected by a certain parameter and send it to the editor for export or review. You can also export the entire collection for further revalidation and use.

The editor- With the editor, you can create and edit strategies by modifying the indicators and parameters. When you edit a strategy, the program tests the historical data, displays the most important statistics, shows the balance sheet, and charts the curve of profits or losses. Since Robo Advisor tests are so fast you can improve your strategies while looking at the graphs. When you find a strategy you like you can export it as a forex robot.

Report- When a strategy is in the editor you can go to Report to see extensive information about test results in the historical data. The report page contains all statistical information, graphs, and the transaction log.

Exporting robots – You can export your robot forex to use in Metatrader. The exported robots use only standard MT5 indicators, which makes it very easy to use the robots in MT or upload your files to a VPS (virtual computer). You can confirm the operation of your robots with the software to test the strategies of Metatrader Strategy Tester with a demo account or data that are not known. If your tests are good, you can use your robot for real trading.

The idea or intention of Robo Advisor 007 is that software to create Forex robots with a good algorithm to test the strategies as well as an execution of the strategies in real time give you as a result a good benefit. Please be extremely careful when dealing with real money and always consider the risks.

How to Create a Robot with a Generator

With the powerful tools used by hedge funds or global investment managers and institutional traders, you can create forex robots with generators without any programming skills and without programming. You will see real results immediately and with just one click you can download the best robot for free and use it in Metatrader 5.

If you are a novice in the markets, you can generate strategies for forex, stocks, indices, raw materials, and cryptocurrencies with just a few clicks. You will see hundreds of strategies that are already tested and ready to be used. A robotic counselor (Robo-Advisor) gives you the possibility to use many strategies in a single account. This way, you can diversify risk and achieve more stable results.

Categories
Forex Education Forex Risk Management

Every Trader Should Know This About Money Management

Money management is generally the most important factor determining profit or loss in Forex trading strategies. This fact is so often overlooked that it must be repeated again and again. It is one of the key commercial essentials. The management of money itself will not give you a margin of victory-you need a good entry into trade and effective exit strategies for that-However, without smart fund management practices, a profit margin will not see your profit potential, and there is even the risk of a total loss.

There are two elements in money management that Forex traders must consider carefully: how much of their account is risked per transaction and the percentage of their account that must always be at risk, measured in full or by some kind of sector. There are no absolute answers to those questions, the best for you will largely depend on your own appetite for risk and your tolerance of loss, temporarily or permanently.

Risks in Your Account

Every time you open an operation you’re risking money. Even if you have a stop-loss, you could suffer a negative slide and lose more than you anticipated. Clearly, if you have many open trades at the same time, even if the whole holds a sense at the individual level, together can contribute to having an unacceptable level of risk. Similarly, if you keep many open trades betting all towards the same currency and in the same direction, you run the risk of a sudden loss beyond what is acceptable. So, it’s a good idea to determine a maximum number of open operations simultaneously; and repeat, but by coin.

For example, it is possible to determine that you will never have more than 2% of your risk account size in open trades or more than 1.5% at risk in a single currency. You should also be very careful when trading in currencies that are linked to another currency by your respective central banks. For example, someone who was short in the Swiss franc last January using even a relatively small amount of leverage of 4: 1 has probably had his account deleted, and this will be independent of whether you have any stop loss, as the movement has been dramatic.

Also, if you are trading with Forex or other instruments that maintain positive correlations, you may also need to put a limit on the total of open transactions that are strongly correlated. This becomes more important if you are operating beyond Forex, for example, oil and the Canadian dollar have a high positive correlation.

The exact amount of maximum risk you must take is up to you but bear in mind that once your account has been reduced by 25%, you need to increase it by 33% just to get back to square one. The lower it gets the worse it gets: a loss of 50% requires a 100% increase!

How Much Risk Per Transaction?

Now that you have some risk limits set for your account in general and by currency type, you must address a different issue as to the amount you must risk per transaction. Of course, it is okay to risk different amounts per operation, but this must be determined systematically.

There are different reasons that need to be analyzed in order to determine the size of the position in your Forex strategies, but any risk per transaction must be calculated as a percentage of its total capital. The capital of the total account can be determined by looking at the amount of cash obtained in your account-you must assume the worst-case scenario, that is, that each open transaction will result in losses.

There are two advantages to this method instead of simply risking the same amount and again this is independent of performance, which is the case when using a predetermined fixed batch size or a fixed amount of cash:

Forex strategies tend to produce payoffs or losses and not a uniform distribution of results. Using a share of capital to quantify the size of each trade, which means you will risk less when you lose and more when you are earning, which tends to maximize winning streaks and minimize bad streaks. You can never completely delete your account! Using a fixed batch size or cash amount could end your account, or at least cause a decline from which you can never recover.

Here are some of the essential elements to consider in determining the amount to be risked per operation:

– What would be the worst performance you could have and what would it look like? Could it deal psychologically with a reduction of 10%, 20%, or even worse? Should it go that far in negative territory?

– The frequency with which you negotiate will also be a factor, as this will have an impact on your maximum fall.

– What are your expected profit and loss percentages? Try your trading again. Let’s take an example, if you have a foreign exchange trading strategy where you plan to lose 80% of your trades, but earn 10 times the risk in the remaining 20%, your transaction risk should be lower than if you were planning to do 3 times your risk in 40% of your operations. And clearly, if you maintain an exit strategy that is flexible, immediately, just make a brief approximation of how it’s likely to turn out over time.

– Is it possible with the size of your account to negotiate as little as possible? Let’s take another example, if you have a $100 trading account, and what you want to risk is 1% for operation, you will have to risk a single penny per pip with a stop-loss of 100 pips. This could be impossible, depending on your broker. However, what you should do is capitalize up or otherwise change your business strategy instead of increasing your risk per transaction if that is the case.

– Is your trading account a savings product or a small amount of venture capital? If your total equity is $25,000 for example, and you have a $10,000 account, you could have less tolerance to falls by comparing it to a $1,000 account.

Always remember that your capital management strategy will act statistically with your earnings rate and the average size of your earnings to directly affect your gains or losses over time.

Stop Loss and Position Size

The stop loss should never be determined based on the minimum that can be allowed. Let’s look at an example… If you want to risk a maximum of $20 per operation, but the minimum size of the position with your broker is allowed to be $1 per pip, therefore this is a horrible reason to put a stop loss of 20 pips and a batch size of $1 per pip! What you could accomplish in this case is look for another broker or increase your trading account balance if you have enough venture capital to invest, or else find a Forex trading strategy that usually uses a stop loss of 20 pips, if you are comfortable with it.

However, it is legitimate to determine the stop loss by measuring average volatility, and, especially in trend trading, this in itself can be a very powerful money management strategy. For example, using a multiple of the average 20-day range to determine the cap, and then basing the size of the position on the percentage of account capital is a very common money management method within the trend strategies of Forex trading.

Even if you base your stop loss on technical levels, it may still be worth using a good measure of volatility to calculate the size of the position. For example, if the average range of 20 days is twice the range in a very long term, you can risk half of the reference risk per pip related to your account’s capital.

Categories
Forex Education Forex Psychology

Alexander Elder and the Psychology of Markets

With the suggestive quote below, Alexander Elder begins his masterpiece, Trading for a Living. Elder, who studied psychiatry in the former Soviet Union, enlisted in a ship from which he fled risking his life and after being chased by his own companions arrived in New York in 1974, with 25 dollars in his pocket and no one to ask for help. He currently presides over Financial Trading Inc., a company mainly dedicated to providing training and is widely known for its contribution to the psychology of trading.

“You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody.”

In this article, we will review the main concepts of this work, which deals with a fundamental aspect, forgotten by many, which is the control of emotions, for many authors this constitutes more than 50% of our success as traders, to which we would add in second place the monetary management (money management) and in the last place we would have our trading system that contributes in a ridiculous 5%-10% to our result curve. If we devote a few minutes to these percentages we will realize that our scale of values was the opposite when we began to take an interest in the stock market.

Success in trading is achieved by understanding that control of emotions is the fundamental part of our operation, the lack of this control is what separates 95% of participants from their money. The trading industry knows this and carries out continuous advertising campaigns to attract new customers by promising a Holy Grail that never arrives and will never arrive if we look for it outside ourselves. A constant source of new entrants is needed to feed brokers, dealers, and the small percentage of traders who consistently make money.

The Amateur trader is attracted to the market by a powerful advertising machine that tries to convince him that this is a zero-sum game, all you have to do is be smarter than the rest of the participants to win large sums of money. The reality is quite different, it is not a game of Zero Sum, but a game of Negative Sum, the trader must fight, not only against the other participants but against the commissions and the slippage, that globally constitute huge amounts of money that is constantly drained by brokers and dealers.

They also convey to us the idea that sliding or slippage costs are necessary, they are the price we must pay to enter and exit the market, is the cost of liquidity. The reality is that every operation we do will be like a bite to our income statement so we must avoid markets with little liquidity and order it for the best, as well as operate with a methodology that performs an excessive number of operations.

Year after year, a large number of people approach the financial markets in order to achieve financial independence, most people with a low profile of risk aversion. Without a doubt, the first attraction that one has towards trading comes for money, however that is not the goal, in the words of Elder: “The goal is not making money, paradoxically, but to trade well”. We must worry about doing good operations and forget about the money that is at stake, only in this way can we make money consistently. By the time we let emotions take over, we’ll have lost the game.

Novice traders and those who want to enter this field often ask how much money can be earned annually, trading in the market, looking for a figure that serves as a reference, a magic figure on which to base the decision to leave a monotonous job and achieve financial independence. This is not, however, the right question, what we should ask ourselves is: How much money am I going to lose until I learn to trade and create a long-term winning trading strategy?

Planning and discipline play a crucial role, we must know at all times what our plan is and follow it to the letter, for this purpose it is advisable to take all the operations in a spreadsheet and write a diary with our operations, in the words of Elder:

“Plan your trade and trade your plan.”

This is a phrase that contains much more content than we see at first glance and that most new traders skip. In our trading journal, we must reflect the trades in as much detail as possible, which will separate us from the casino player and lead us to structure our mind and continuous improvement of our trading system. It is of course easier to write down the days when we have earned money and feel euphoric, we must be disciplined and write down every day we have operated, whether positive or negative. We must have a long-term mentality in our operation, if we are to start operating in the market we must mark a long period of survival in the market.

According to an old adage from Wall Street, “Bears make money, Bulls make money, and pigs are slaughtered”. Having added the sheep to this group, we can already classify all market participants. The price that every action, future, commodities, etc, shows us at every moment is nothing more than a psychological effect of all traders participating in a market. Every day a battle is established between Bulls and Bears. The bulls are those who think that the market will rise, the bears, on the contrary, think that it will go down, the pigs are dragged by greed and have no clear stance to take, while sheep are moved by fear of taking positions in the market and are highly influenced by other participants, analysts, and gurus. Pigs and sheep will always lose money.

According to Alexander Elder the market is a huge mass of traders, in which everyone tries to take the money from others by being smarter. In addition to this fight, traders have to face commissions and slippage, so by opening a position we are already losing money. Independent traders trade for both irrational and rational reasons, the rational reasons are the search for a net return to our capital, while the irrational ones are gambling and the search for strong emotions, We must fight to control our irrational side, which will drive us to operate excessively.

“Remember your goal is to trade well, not to trade often.”

Faced with all these obstacles the trader who works for a firm has the great psychological advantage of not risking his money, besides the discipline is imposed on him by his superiors, but respect can be left without work. Another proof that trading is pure psychology is in the numerous examples of traders who have left their companies to devote themselves independently and due to greed, fear, panic, and euphoria, Their performance has been lower than that obtained as salaried traders.

We can’t control the market, the only thing we can control is our emotions when we open up a position. Being in the market completely changes us and we stop being guided by our system and start to be guided by the movement of the mass. Mass psychology has a great application in the world of financial markets. From the tulip-mania, the South Sea Company to the technology bubble, these phenomena are explained by greed and fear of the masses.

There are two books on mass psychology that are a necessary reference for the explanation of this type of phenomenon of collective madness, Charles Mackay with his work, “Extraordinary Popular Delusions and the Madness of Crowds” and the book by the French philosopher Gustav LeBon “The Crowd”. According to mass psychology, people change completely by getting into the crowd, we are more gullible, more anxious, we strive to look for the leader and we react to emotions instead of reasoning our decisions. Mass behavior will always be more primitive than individual behavior. In the words of Charles Mackay: ‘Men go mad in crowds and they come back to their senses, slowly, and one by one, reflect on this phrase as you think about what happened during the recent technology bubble.

Like the allegory of the sirens’ songs, which captivated the sailors with a song so beautiful that it forced them to jump into the water where they died drowning, In the market, there are also siren songs that will make us follow the mass in our investment decisions. To avoid certain death the sailors tied themselves to the ship’s mast and applied wax to their ears. If on the market we hear siren songs, let us stick to our trading system and our money management rules and thus avoid indications coming from abroad and focus on our way of trading, although this is easier said than done, We’ll get him on discipline.

We must be skeptical of all information coming from outside. As we begin to operate our first objective will be to preserve capital and the second its increase. This order of priorities is reversed in most cases and we skip the first phase, when we start in the markets greed and fear dominate our behavior. If we take as a reference a daily bar chart, we could state that the opening price is marked by amateurs and the closing price by professionals. In markets like the American, it is recommended to avoid the first hour of negotiation since false movements abound and are considered as the time of the novices. Statistical studies show that the best results are obtained by avoiding this first hour of negotiation.

The trader’s work is based on looking for trends and areas of congestion, being the second much more abundant than the first, if we observe a chart the task seems easy. Experts and gurus show us graphs and tell us where we should have entered and left the market as if this was a simple task. The problem is that your broker will not let you place the order in the middle of a chart, it will always require you to do it in the closest part to the right margin, in the most current part. This brings us to a world in which we must make our decisions based on probabilities in an atmosphere of uncertainty. Most people do not accept uncertainty, as they have a strong emotional need to be right in their decisions, keeping the losing positions in the hope that the market will turn around and give us a reason and selling the winning positions prematurely to feed our ego. Wanting to be right in the market can be very expensive.

Trading is a very exciting activity and this leads novice traders to feel euphoric, for an amateur trader being in the market is like a ticket to the cinema or a football game, However, trading is a much more expensive entertainment than film or football and no one can feel euphoria in the market and earn money at the same time, “Emotional trading is the enemy of success”. We should not feel emotions about the results of our operations. We must concentrate on doing good operations and improving our skills day by day and not on the money we are earning or losing.

If we seek financial independence as traders, we must consider trading as a profession. Just like a good doctor or a good lawyer, we must devote many years of preparation or perhaps think that we can practice law, or medicine with 3 or 4 magical systems and two courses on how to operate in the market. Another common mistake is to count the money we are earning or losing while we are in the market, a good professional in any other profession would never do it. The goal of the trader is to make good trades and the money must be in the background, if we make good trades the money will come without us realizing it. We can count the money when we have closed the position, at the time of registering it in our trading journal.

I hope that this brief review of Elder’s work will help you to know better the market and especially to know yourself better, the emotional component of the stock market operation is very important and we must dedicate time if we want to belong to the select club of 5%. Although the author considers money management fundamental, it is a book of psychology and this topic only gives two tips, the rule of 2% risk per position and a maximum 6% monthly loss.

Categories
Forex Education Forex Indicators

Differences Between Price Action and Forex Indicators

If a survey were conducted among Forex and Futures retailers and one of the questions was: “What method or system did they first use to negotiate?” Without any doubt, the vast majority of traders would say that they started with indicators such as moving averages, stochastic, MACD, Bollinger Bands, and the list would follow.

I’m very lucky to be able to talk and help traders with their trading objectives every day, and the list of methods and systems with indicators that I find are endless. You just have to look at any Forex forum to see how many of the new traders are scouring all the “Forex Systems” threads for the latest indicators, because people use new indicator systems whenever they can (not necessarily the most profitable).

The reason the indicators are so popular is that they feed into the new trader’s belief that the indicator can help predict where the price will go. In order to understand the indicators in the right way traders need to understand how the indicators are constructed and project their information. 98% of all indicators are built using old price information to make a late indicator. For example, a moving average is created using the old price to make a mobile line that traders can use in various ways.

The main problem with indicators is that they are always created after the event and traders are using previous information to guide them. In other words, they are using late information to make live trading calls.

A Dangerous Trading Mindset

The other major concern with indicators is that traders rarely stop at an indicator and that’s often where things begin to adjust to the trader mentality. A novice trader will normally have some winners with their first indicator. It doesn’t matter how many losses the trader has suffered or even if they terminate their account. What the trader tends to remember is that the first indicator helped him to make a winning transaction and above all the trader will remember that this first indicator helped to predict correctly the direction of the price. All the losses and bad thoughts have been completely relegated to one side because the trader has already moved on to what comes next and has already solved EXACTLY how it will do everything again and much more.

The trader often thinks: “If an indicator helped me to perform a winning transaction, then two indicators will surely help me to predict even better the direction of the price” and then when two do not help, three have to be even better, etc., but the problem is that, Like so many things in negotiation, this just doesn’t work out this way. Human beings in everyday life are programmed to think that anything worthwhile can’t be simple and new traders often spend a lot of time trying to make trading complicated by adding fantasy indicators for their trading thinking that the more indicators they use, the better they can predict the direction of the price, but this is the exact opposite of what traders have to do.

This mindset is a trap in which it is very easy to fall because the trader may find himself in the usual situation of adding more and more indicators like him begins to have more and more losses, with the erroneous mentality that indicators will help you predict the direction of the price. What ends up happening is that the trader, from the beginning of his trading trip, uses so many indicators in his charts that he ends up in a tremendous mess and in a state of paralysis of analysis. The trader finally ends up with many indicators in his charts, and they all tend to contradict each other and the trader can no longer operate, as he is very confused about what to do. So what does the trader have to do?

Forex Indicators

The simplest and least complicated method of negotiation in the world is the action of price. All that is needed to negotiate according to the share price is a chart of the stock of the blank price and its method of negotiation. The main difference between the indicators and the price share is that with the indicators you are using old and late price share information to try to predict the future, but with the stock price continually reading the live price as it is being printed on the chart.

There are no indicators or external influences at all that are used to trade according to the price share. Basically trading according to the share price is the ability to read the price and make trades on any chart, on any market, in any time frame, and without the use of any indicator at all. Below are two charts, face-to-face, with the price share chart on the left side with just the raw price share and the graph full of indicators on the right.

Training and commitment are required to succeed by operating on the basis of price action as with any other method of trading or worthwhile systems, but the reason why trading with the share price is so successful, and why many professional traders use it, is because it simplifies the negotiation process and the mentality required to be profitable.

Categories
Forex Education Forex Psychology

How to Neutralize Emotions When Trading

In this article, I will try to teach you to neutralize the emotions you may feel during the usual operation. Imagine, for example, that suddenly fear induces you to reverse an operation leading to a pullback, or have greedy thoughts that lead you to assume too much risk while operating; well, there are ways to neutralize sensations and thoughts, in such a way that these do not eliminate the best from you as a trader. So they can’t get the best of you. But you must always keep in mind that there are many occasions to respect fear and use it to be cautious, and there are others to push past it.

First, we must use a trigger-type strategy (trigger) which works when greed makes us risk more than we should. It’s basically a self-regulation strategy to alter the state of mind. The trigger-type strategy is so-called because it sets a positive action that counteracts a negative emotion. When you use a trigger, you are actually using an association between body and mind to get out of one state and into another.

Suppose you’re afraid to open an operation. You want to get over it. To do this we can create a trigger that reminds you of a thought that neutralizes the fear you feel when you press the send key or when you pick up the phone to give an order. The trigger may be to look at an object in the room, hear a sound, or touch something. Sight and touch are often the best triggers for many people, as they are the most powerful primary sensory channels.

For example, the windows in my office overlook a landscaped area with trees. When I look out the window and stop looking at the monitor, I associate this image with peace and quiet. The market goes up and down but the garden is always still, static before news or market turns. The garden helps me to stay stable, making me less susceptible to the emotions that can come into action in the face of the movements that occur on the screen.

In this case, we would have two triggers: the visual stimulus of looking at the garden and the slight movement of my chair to see it. The visual and kinesthetic triggers (the physical movement of my body and turning my head to the left) take me away from any fear or anxiety, something calm, stable, and balancing. My change of orientation towards the garden barely allows me to remember what is happening in the market.

The point is that a trigger becomes strongly associated with a specific mind shift, and the trigger invocation triggers the desired change. While the trigger does not induce me to get up periodically and go out into the garden, remaining totally absent from the market or anything else, it allows me to have a moment of visual refreshment and mint. In general, it is easier to trigger with a real-world stimulus, but it is not necessary. You can use a mental image as a trigger.

The trigger can be as simple as attaching your thumb to your index finger, which can trigger the internal search for a relaxing image that immediately neutralizes any thought of fear or greed. Choose a trigger that is simple for you and associate it with an image that neutralizes those thoughts. As time passes and you do it more and more times, you should notice that the association between your trigger and thought or mental image becomes stronger and stronger.

Some mental images that are effective in neutralizing negative thoughts are, for example, scenes of quiet places you have visited (a coast, mountains, a valley). Any relaxing image will do the job, but experience different images, because the stronger your attachment to the image, the more effective it will be.

The reason why triggers work is that you are building a mind-body connection between your trigger and thought or image. It is very true that it is always possible to move from a negative to a positive attitude without a trigger, using this tool the change occurs in a faster and more intense way.

For those who wish to expand on the use of the mind-body connection applied to the neutralization of negative thoughts and emotions, there are quite a few books on the subject, all of them authors enrolled in the therapeutic school known as neuro-linguistic programming. These techniques have been applied since the mid-1970s in psychotherapy, marketing, communication, education, sports, and trading.

Categories
Forex Education Forex Risk Management

What You Can Do Today to Control Your Trading Risk

Risk, something that you are either afraid of or something that you love, whichever one is you, controlling it is vital if you want to become a successful trader. When you first started you probably created something along the lines of a risk management plan, this will tell you what you should be trading with each trade, what your stop losses should be and all sorts of other important information, its purpose is to protect your account from losses so that you are able to survive a number of losses before losing your account.

The thing is though, a lot of people make one, but make a small one, one with not a lot of information in it, or they simply decide to just ignore the rules that they have worked out. Whichever way they do it, they are avoiding the controlling of their risk, and eventually, this will lead to disaster and the possibility of a completely blown account. When the risk involved starts to rise, we often end up doing things that we would;t ordinarily do, such as closing out trades early, closing out for losses, or simply coding everything through a panic. We will promise to learn from these mistakes, but as soon as we get into a similar situation, we will normally do the exact same thing, not learning from the past, simply because we are not using proper risk management.

The issues start to arise when the risks that you are taking are larger than your risk tolerance levels allow, some of us love the risk others hate it. A lot of traders, especially newer ones will spend all of their time looking and working out when to enter a trade, but they often don’t put a lot of thought into when they will get out, this is where risk management needs to come into play. It is all about working out when you need to get out of your trades, both in winning and losing positions, but of course, being able to limit your losses when your trades are going the wrong way is vital and one of the most important aspects of your trading. So while it is important to know when to get into trades, you need to also work out when you will get out, prior to actually getting into it.

You need to work out where your risk tolerance lies and then adjust your risk management to suit it, the last thing that you want is to be a nervous wreck every time that you put on a trade. It is the same the other way around too though, you want to have some form of caring with each trade, if you do not care about the risk then you will be making silly trades, making trades you probably shouldn’t a risking far too much with each trade, simply because you do not care about the consequences. So it is a bit of a balancing act, but we are now going to look at some of the things that you can do to help manage your risk.

Trade Sizes

Trading with a large trade size can mean that you can make a lot more profit on each trade, on the flip side, you can also make much larger losses, the volatility will go through the roof the larger the trade size you use. So while it can be exciting, especially for those with good risk tolerance, it can be a nightmare for those without, and potentially a disaster for your account. You need to bring your trade sizes more in line with your account balance. Many people decide to risk between 1% or 2% per trade, this gives you a lot of leeway for losses, a loss will only cause you to lose up to 2% of your account and so when you do lose, it is limited and sustainable. If you aren’t able to work out what your trade size should be then it would be best to start small and then work your way up until you reach the appropriate level.

Holding Trades

For many there is only short-term trading, something only becomes long-term trading when one of the short-term trades stays in the red, people just don’t want to close out trades when they are in the red and this is an extremely risky move to make. The longer that you hold onto a trade, especially when it is in the red, the more volatility it is exposed to, this volatility is what is dangerous to your trade and can continue to take it in the wrong direction. You need to be able to limit how long to hold onto trades. If your average trade length is 10 hours, then why would you suddenly hold on to one for 7 days? You shouldn’t and so you need to set a limit to your trade times, try to keep them relatively the same, there is no harm going a little over now and then, but do not suddenly start holding on to them for 10 times your normal length.

Stop Losses

Stop losses! Use them! That is about all we need to say. Stop losses can save an account, they are that important, if you aren’t quite sure what they are yet, they are a limit that you put on each trade, a certain level, when the markets reach that level the trade will automatically close. If you are trading a strategy that requires longer-term trades then you won’t want to be in the position where you need to sit in front of the computer for the next 12+ hours, so instead, in order to protect your account you will put on a stop loss to ensure that you only risk the amount that you are willing to risk. This is a fantastic way of protecting your account and something that you should certainly use.

To go along with the stop losses and take profits, these work in exactly the same way but instead of closing out losing trades, they will close out trades that are positive. This is a way of ensuring that you take the expected or wanted profits, often when a trade goes positive it will eventually return back to a negative figure, this is a way of ensuring that you take the profits even when you are not at your trading terminal.

Risk to Reward Ratio

Your risk to reward ratio details how much you should be winning and how much you should be losing on each trade, this also dictates where you put your stop loss and take profit levels that we mentioned up above. It is important that you understand how this works, it can make or break a strategy as having a bad risk to reward ratio can make your strategy unprofitable. If you are trading at a 1:1 ratio then it can be quite hard to be profitable, you will need more winning trades than losing to be profitable, something far easier said than done. Instead aim to have a reward ratio of at least 2:1, some go as high as 10:1, which would mean that you would only need one trade to be profitable out of every 10 in order to be in profit. Work out what works well for your own risk tolerance as well as your strategy.

Those are a few of the things that you can do to help control your risk when trading, there are of course far more things that you can do, these are just some of the basics. What is important for you to take away is that you need to manage your risk, without doing so you will end up losing a lot more than you expected, so get on top of it and you will be in a good position for being a profitable trader.

Categories
Forex Education Forex Fundamental Analysis

Trading Forex On the Most Important News Events

It is possible that you have come this far because you are thinking about trading when news is published and taking advantage of the big moves that occur at that time. You may also simply wonder if this is possible or how it can be done. The best thing is to go point by point to see how and what news affects when we do trading, everything you should contemplate, and some things that don’t usually tell you.

What Economic News Impacts Trading?

As you may know, there are different news items that affect trading, especially in forex, such as macroeconomic events (for example, interest rate decisions), government policy decisions, employment news publications. Basically, we can distinguish between:

Economic News: GDP, inflation, unemployment or oil reserves, any related economic aspects that can affect a country and its currency.

Political News: decisions and governmental actions that are carried out in the country in question and have direct involvement in currency.

All of them are important (though some to a lesser or greater extent than others) and you can often see how when they are published it makes the currency pair in question move significantly. But how do we know when and what data will be published and the impact it will generate?

How to NOT Predict Trading News

It’s obvious, isn’t it? We already know when they’re going to be published, we’re going to put a lot of money in and let the flute play. NO. This might not work for you. And even if you get it right, you’ll end up losing everything. Events such as the one that occurred in the Swiss Franc (black swan) or the Brexit have left the graveyard full of traders. Even some brokers have had to close. Why?

News Trading Errors

Behind an excuse of losing money by trading when a story is published there is usually one or several of these causes:

Strong Leverage: Enter the market strong with a small account to earn a lot of money in a short time. In the end, your account does not resist and a minimal movement to the contra makes you lose count. Serious error.

Bet Mode: not having a trading system and think that this goes up or down because it comes out in the media, my brother-in-law has told me or because yes. If you don’t have a system, start working for it.

Stop-loss Strategies: Strategies with very small stops often do not have good results when the price moves aggressively. The institutional (the big ones) sweep them away. It’s not that these kinds of strategies are wrong or anything, but consider reviewing how they behave when these data are posted and limiting your trading if it doesn’t affect them in a positive way. This can be done not by being in front of the screen if you operate manually or by disconnecting your systems if you do so automatically.

News-Based Trading Systems

You may have read or thought that trading with the news can be very easy if you place a purchase order and a sales order. This hypothesis starts from the idea that price moves without setbacks. Most of the time this is not the case, since the price can be directed without a trend, either in its initial phase or during the entire period.

The price moves aimlessly before the news. We place a purchase order (above) and a sale order (below). Do not take into account the zones, it is just an example to see it.

Suppose we leave them as they are. They activate both and we lose the difference. Suppose now that when the first is activated we cancel the other. In this case, we also lose because we opened activated the purchase and subsequently the price falls. This doesn’t have to be like this forever, I just give you this example to you realize that what we’re dealing with isn’t as wonderful as appears in your mind.

Be careful with it. Try it, but be very careful and check results with backtesting. Logic makes us think that this can go well but then when we see the results we realize that often this is not so. These types of operations are usually displayed by brokers and platforms so that you operate when there is a lot of volatility and with a lot of money. Then they do their business, earn commissions and win when the customer loses. As a trader, you must be above these things and concentrate on your business and your operation.

Trading with Volatility and News

It is normal that you can think after all this when you open your trading platform “what if the flute sounds? what if it does?”. We’ve all read the typical news in the newspaper where it tells you that x person won an incredible amount of money with x event. Quick and easy. Here the survival bias is very high. Don’t tell you that that could be 0.0001%

Actually, with all this, I’m not telling you that you can’t trade when news comes in, I’m telling you to get your mind off the fact that you make a lot of money luckily. If you do not use high leverage and for example apply swing trading strategies or you have a % risk in each small trade if you diversify. this news will not affect to a greater extent.

In fact, be clear that most of the time there will be a complicated situation in the market: currency wars, economic crises, political decisions. Volatility in the market can occur when you least expect it and you should be a trader who knows how to manage this well.

Mind-Set to Trade News Trading

Many traders think that news is the axis of their ills and that all their losses are due to this or the other. It’s not like that. These are just excuses. You may also have heard something like “but if the data is good, why does the price drop?”. Simply because in the financial markets prices are driven by expectations. That is, the price at which an asset is quoted includes what is expected of that asset in the future. So that’s why when you publish a piece of information that you assume is good, some institutional investors had already taken it into account and even though it would be even better.

You have to have a micro mindset (each operation counts) and a macro mindset (what is really important in the long term and its consequences). So if you play a card with a piece of information or a piece of news, you’re sending the macro to take it for granted. Keep this in mind or you’ll learn it by taking out your wallet and burning accounts.

New Is Not the Solution (or Problem)

Why, instead of focusing on speculation or news, don’t you focus on what you have objectively? That is data-based trading systems. When investing in the long term it makes sense to read and soak up some company and industry news. But by trading, we look for short-term moves. Do you really think you can from home predict a story that is public in a market as big as the currency market?

What you could do is concentrate on creating systems that have a positive statistical advantage and apply them rigorously. If it’s the news and it works well, great. But don’t get obsessed with the idea that news is the origin of everything. Focus on what you can control.

All this being said, in my case what I do is I keep in mind the news to keep in mind the moments where the market can move aggressively. If there is a moment (very punctual) where a lot of news (very important) will be published or a weekend where there is some decision that can make the markets shake, I try to close everything and be out. But this is at very specific times, perhaps less than 1%. Most of the time I take on this volatility and adapt my systems to them.

Ignoring News In the Press

In recent months, for example, a lot of news has been published about Brexit and most of it seemed definitive. The bottom line is that a year has passed and nothing has changed. Another situation: Trump’s ongoing tweets. You can’t predict that. Face it. It’s part of the equation of trading. And it also makes it different.

The press always has a good headline to justify what is happening. For example, after an event, the EUR/USD pair goes up. You can read or listen in some media: “The EUR/USD crossing goes up despite the measures of the European Central Bank.” However, if after that same event the pair falls you can read something like: “The EUR/USD crossing drops due to the measures of the European Central Bank.”

It’s kind of like knowing the end and creating an argument that makes sense to get to that end. We as traders are interested in the behavior in the price market, the rest is just noise that gives us little good. This is another of the big arguments why I trade through systems, they don’t get carried away by this kind of thing.

Categories
Forex Forex Money Management Forex Risk Management

How Much Money Should I Risk On Forex Trading?

Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades.  Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then as long as you can maintain a trading margin (which is not so complicated, there are several well-documented trading margins), you will have a solid model to make a lot of money. You don’t need to choose spectacular trading operations to make large amounts of money, you just have to keep doing the right thing constantly, and let the magic of managing money be composed of snowballs growing from your bottom line. To get it right, start by asking the right questions.

How much money should I put into my trading account?

You have hired an account with a broker, and are ready to start trading. Just deposit some cash. How much should you put? You should be honest with yourself, and consider how much money you have that is available for wealth creation. It should not include assets such as a house or car in that calculation, or pensions: the correct question would be, how much free cash can you get in your hands, without debt, and use it to try to increase your profits? When you have this figure, you should be thinking of placing between 10% –  15% of it in something risky, like Forex Trading. You may think this is a small amount, but it really isn’t – please read on and I’ll explain why.

The risk or “Barbell”

Imagine that there are two traders, trader A, and trader B. Both have USD 10,000 in liquidity, which is all the cash that each of them can get to invest in creating wealth. After opening brokerage accounts, Trader A invests its $10,000, while Trader B invests 10% of the same amount, $1,000, while the remaining $9,000 is invested in United States-guaranteed Treasury bonds that pay a low interest rate.

Consider your respective positions. Trader A will be at a psychological disadvantage, as the account represents all the money he has, so the losses will probably be painful for him. You also need to worry about the broker, lest he files for bankruptcy and be unable to repay any of his funds back unless the broker is backed by a government deposit insurance program and obviously as we always recommend, will have to be a regulated broker.

Even then, its capital could be held back for over a year before he could get any insurance. Because of his fears, even though he knows that the best risk per trade for his trading strategy is 2% of his share account per trade (explain the issue of how to calculate later), he decides to risk less than this. He decides to risk only one-tenth of the total amount, so he will risk 0.2% of his capital on each operation.

Trader B feels much more relaxed than Trader A. She has $9,000 parked with lots of security in US Treasury bonds and has $1,000 in her new brokerage account. Even if he loses the entire account, in the end, he would have lost only 10% of his investment wealth, which would not be fatal and could be recovered. It is the collections over 20% that are challenging to recover. Trader B is psychologically more prepared for risk than Trader A. She has calculated that the ideal risk by trading for your trading strategy is 2% of the capital of your account per trade, just like Trader A, but unlike Trader A, She’s gonna risk that amount in full.

Both Trader A and Trader B will start by risking the same amount per cash transaction, $20.

Trader B, with the account under $1,000 and the $9,000 in US Treasury bonds, ends up with a total profit of $811, of which $117 is interest received at the end of the year on US Treasury bonds. Trader A, with the largest account of $10,000, ends up with a total profit of $627. Although they initially start with the same risk, if they diversify risk capital between a very conservative fixed income and a more risky investment, it pays Trader B a significant profit and gives her the peace of mind to aggressively play the risk as it should be.

How much money should I risk?

This is not a difficult question to answer if you know the average or average benefit you can objectively expect to make in each transaction and are only interested in maximizing your total long-term benefit: use a fixed fractional money management system based on the Kelly Criteria (a formula to will be explained in more detail in the next paragraph). A fixed fractional system has the risk that the same percentage amount of the value of your account in each trade, as shown in the above example of Traders A and B using 0.2% and 2%.

Fixed fractional money management has two major advantages over other strategies. First, you risk less during losing streaks, and more during winning streaks, when the effect of composition really helps to build the account. Second, it is virtually impossible to lose your entire account, as you are always risking X% of the remaining, and never everything.

The last question is, how is the size of the risk fraction calculated? The Kelly Criterion is a formula that was developed to show the maximum amount that could be risked in a trade and would maximize the long-term benefit. If you know your approximate odds for each operation, you can easily calculate the optimal amount using a Kelly Cries calculator. In the best Forex strategies, the amount advised by Kelly’s formula is typically between 2% and 4% of the capital account.

A warning: the use of the total amount suggested by Kelly is bound to result in large reductions after losing the veins. Some veteran traders, such as the prominent Ed Thorp, have suggested using half the amount suggested by a Kelly Criteria calculator. This generates 75% of the long-term benefit, but only 50% of the reduction, produced by the full Kelly criteria.

Monetary management: Part of “Holy Grail”

It’s no exaggeration to say that the main reason why traders still fail, even when they’re following the trend and getting their inputs and exits mostly right, is because they are not following the money and risk management techniques set out here in this article, as part of a global trading plan. Forget the trade result you take today and worry about the overall results of the next 200, 500, or 1000 trades you will take in your place. If you are able to make a profit of only 20% of your average risk by trade, which is feasible using a trend-tracking volatility-breaking strategy, it is totally possible to turn a few hundred into a million within a few years.

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Forex Education Forex Fundamental Analysis Forex Technical Analysis

Fundamental Analysis Vs. Technical Analysis

If you are trying with any kind of financial market for a significant period of time, you will start testing and forming some kind of system. Then, inevitably, you will begin to focus on technical or fundamental analysis, or maybe a little of both. The perfect understanding of the difference between the two types of analysis is the most important issue you should focus on when trying to make a decision about what kind of trader you want to be.

First, a bit of a disclaimer…

No matter what type of analysis you decide to use, it can be cost-effective. However, none of these types of analysis is 100% guaranteed. The fact that you become a good analyst from a technical or fundamental point of view does not mean you will inevitably earn money. As traders, what we’re looking for is the most likely scenario, not working with certainty. The long-term look is what you should focus on, which really means that you make transactions focused on what is most likely to happen, knowing that will not always work.

Technical Analysis

Most retail traders focus on technical analysis as it can be defined with some ease. What I mean by this is that it looks for things like support, endurance, trending lines, moving average crosses, and the like. For example, a trader who is using technical analysis to trade in the markets will observe the full share price.

With technical analysis, you can get a configuration like the following:

The EUR/USD pair has been removed from the upward movement. By using your Fibonacci recoil tool, you acknowledge that we have withdrawn 50% of the maxima, which is an area in which most traders related to Fibonacci would be interested in going long. Beyond that, we have the exponential moving average of 200 days just below the candle on the daily graph, which of course shows support. Finally, the candle formed a hammer, which is also bullish.

A trading system based on a technical analysis tells the trader to prolong.

The trader based on technical analysis is paying attention to what the price does, not necessarily to what it should do. Just follow what the market tells you in terms of price, and this makes trading in financial markets a little easier. This is why you don’t have to think about many other variables other than what the price is making and whether or not it comes close to your technical configuration concept. If you choose any other factors to participate in trade, such as fundamental analysis, something we’ll get to in a moment, things can get a little more complicated.

Fundamental Analysis

The fundamental analysis focuses on economic factors and what a market “should do”. What I want to express with that is that you will take the figures and the economic announcements and try to find out where the price is going. On an equal footing, if interest rates rise in one country over another, then that currency should rebound over the other. For example, interest rates are expected to continue to rise in the United States at the same time as the ECB remains quiet for the foreseeable future. If that is the case, the EUR / USD pair should eventually fall based on interest rate spreads. There is a multitude of announcements that could be looking at, perhaps, GDP figures, employment, and, of course, the prospects for interest rates.

Ultimately, Forex tends to move in the direction of expected interest rate movements. However, there are other problems that may arise, such as geopolitical situations. For example, Brexit has wreaked havoc on the price of sterling for some time. This is because there are many doubts and not necessarily due to the prospect of the interest rate. In a sense, however, even that route will lead to interest rates, at least in the long term. The idea, of course, is that there is a lot of uncertainty about the British economy when they leave the European Union, and we do not know what they will do with EU-related trading.

The EU is, of course, the UK’s largest trading partner, so this could obviously have a significant negative effect on the UK economy. People are essentially fleeing the British pound because of fear, or the fact that they believe that the Bank of the UK will have to keep interest rates extraordinarily low as the economy slows down. In the end, even the most opaque reasons eventually lead to interest rates, although it may not necessarily be immediately apparent.

Fundamental Vs. Technical

The most typical way traders get involved in the market is a combination of both types. For example, by using Brexit as a backdrop, we know that the British pound has fought for some time. A technical trader will understand the basics of that situation and recognize that selling the British pound makes more sense in general.

They understand the fundamentals of the negative for the British pound, although they don’t get too involved with all the nuances of economic advertisements. They just know the feeling is negative. With that information, they then begin to look for patterns of the sale in chandeliers, failures in resistance, or some other type of scenario in which we break down the support as examples.

With the use of both types of analysis, although most traders using a mixture probably use technical analysis of about 80%, the reality is that it gives you a bias in which to trade with the market. After all, fundamental long-term biases determine exactly what determines the trend, while the technical analyst simply looks for signals to get involved.

There is no right way to operate in the currency market, although it must be borne in mind that technical analysis is much simpler than fundamental because, at the end of the day, fundamental analysis suggests what “should happen,” ignoring what appears on the chart. So, I think most people use a little of both to make their trading decisions.

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Forex Education Forex Risk Management

How to Set Up a Forex Risk Management Policy

Working out how to set up your risk management plan is quite a big question. In fact, there are a hell of a lot of things to think about and different aspects to implement. Due to that fact it will be impossible for us to tell you about all of them, as some are individual to each trader. We can, however, go over some of the different things to think about when it comes to your risk management plan. It is up to you how much you do, but remember, one of the keys to being a successful trader is that you have a proper risk management plan in place, to protect your trades, your accounts, and your overall capital. So let’s take a look at some of the things that we should be thinking about when we are setting up our risk management plans.

The first thing that you are going to need to do is simply gain an understanding of what trading is and how it works. There is no bigger risk than to try a trade without actually understanding how it works. So while this won’t exactly go into your risk management plan, you can’t really start to create your plan without actually understanding what it is that you are creating. Trading and forex is a never-ending learning hobby, you will be constantly learning and will never know everything, this also means that you will be constantly learning new ways to reduce risks, so be sure that you are aware of this and always willing to learn more about forex and trading.

You then need to understand how leverage works, it can be a gift but also a curse. Leverage basically allows you to trade with more capital than you have in the account, sounds fantastic, but with this increased trading power also comes increased risks. With leverage of 100:1, you can use a $1,000 account to trade the equivalent of $100,000. This enables you to increase the trade sizes that you can put on, increasing your profit potential, but these larger trade sizes also mean that you have the potential to lose far more with each trade. Ensure that you know the risk of the leverage that you are using, do not go too high, as this can cause issues depending on your strategy, we would suggest not going over 500:1 for any strategy.

You then need to get your trading plan sorted, you need to decide on a strategy that you wish to use, there are hundreds of them out there, try and find one that suits you, something that goes along with your personality. If you hate waiting then go for a shorter time frame strategy like scalping, if you do not have much time to sit at the computer then go for a longer-term one like position or swing trading. This trading plan should also act as a sort of decision-making tool for you when you wish to place a trade. To set out some rules that you need to follow, they will help you work out the right entry and exit price for you to place your trades with. When you do this, you should also keep your trading journal to detail the trades that you make to ensure that they are all in line with your strategy.

You can also set a risk to reward ratio, this is basically detailing how much you are going to risk in order to make a certain amount of money. Many people go for at least 1:3, this means that for every $1 that you risk you will want to try and make $3. For a $100 trade would potentially lose $100 but will have a potential profit of $300. This sort of strategy will mean that you can be wrong more times than right and still be in profit. It is important to set this out correctly as it can make it far easier to work out where to place stop loss and take profit levels.

We briefly mentioned them but you need to learn to use a stop loss and take profits with every single trade that you take. If you place a trade without a stop loss then you are potentially risking the entire account balance on a single trade with a risk to reward ratio of infinite losses. These are paramount to protecting your account from trades gone bad, we don’t need to explain the importance, but any sort of successful trader will be using stop losses.

Learn to control your emotions, something that you have probably heard before, but it is important when it comes to being consistent and minimising losses. Emotions such as greed and overconfidence can really hurt your trading efforts, causing you to place trades that you probably shouldn’t or placing trades that are larger than your account or risk management can take. Try to avoid using these emotions to trade with, if you feel them coming on then work out some coping mechanisms, even if that is as simple as simply walking off and going outside for a bit. If you are feeling emotional or have clouded vision, then try to avoid trading at those times.

Keep an eye out for the news, the news can cause huge movements and spikes in the market, so knowing what news events are coming up and how they may affect the markets can give you an advantage and the opportunity to get out of the markets before they happen. It is always advised that you do not trade during news events or disasters, so knowing when they are coming up (news events that are) will give you the opportunity to get out before they cause the markets to move. It is impossible to see them all coming but knowing some of them will at least be helpful.

You should also get to know the limits of your account, if you have a balance of $1,000 you will have very different limits to someone with an account of $10,000. There will be different possibilities when it comes to trade sizes and the risk management that you can do, as well as different profit potentials. This isn’t a large point, but just be aware of your limits so you do not over-trade on your account.

The final thing that you should be doing is using a demo account, every change that you make to your strategy or your plans you should demo the changes first, this ensures that you are not risking your own money on an untested change. Try the change for a period of time before you do anything else on a live account. Demo demo demo, that is the moral of the story and if you don’t there is a very good chance that your account will eventually blow.

So those are some of the things that you can do and that you should be thinking about when it comes to creating your risk management plan and policy, there are of course other things to think about, but doing at least these things will give you a good starting point for it.

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Chart Patterns Forex Forex Education

How Important are Chart Patterns in Forex?

Chartist analysis in forex consists of identifying figures on the price chart, these are usually repeated historically so you can practice in their identification, also they are usually formed in different financial instruments and periods of time, and through them, it is possible to predict with some reliability where the next price movement will follow. It is perhaps the most classic form of analysis in Forex and surely one of the most effective, so your knowledge is always very advisable.

Chartist figures are formed because the market makes oscillations and leaves a “trail” which helps to detect these figures. There are chartist figures that allow confirming the changes of trend, to identify opportunities to enter the market as well as to set objectives in the prices. Chartist figures are more effective in operating in high temporality, although in short periods they usually appear more frequently, also the failures are very recurrent.

Price Pattern in Forex Technical Analysis

The analysis of price movements originated exactly when the price chart appeared. The first graphs were drawn on millimeter paper, and it was then that the first analysts noticed that there were some areas on the graph where the price made similar oscillations at different intervals of time. Traders called them price patterns because the first patterns looked similar to geometric objects, such as a triangle, a square, or a diamond. With the appearance of computer screens and the analysis of longer time periods, new patterns began to appear. Traders use chart patterns to identify trading signals, or signs of future price movements, to enter to trade at the right place.

Chart Patterns You Should Know

“Triangle”

There are several different types of triangles, however, all are based on the same principle. In classical technical analysis, the triangle is classified as a continuation pattern of the trend. This means that the trend that has been on the market before the formation of the triangle may continue after its formation is completed.

Technically, a triangle is a lateral channel of narrowing that usually emerges at the end of the trend. Basically, the triangle is resolved when the range of price fluctuation decreases to the limit, an impulse arises and the price penetrates one of the limits of the figure, moves away from the rupture. I suggest analyzing the break scenarios both upward and downward in the given example. Although the triangle is the continuation figure, it is no more than a probability, and therefore it is worth considering an alternative scenario.

When trading with a triangle pattern, it makes some sense to open a buying position when the price, having passed the resistance line of the pattern, has reached and exceeded the local highs, marked before the break of the resistance line (buy zone). Expected earnings must be set when the price passes a distance less than or equal to the amplitude of the first wave of the figure (profit zone buy). In this case, a stop loss can be placed at the local minimum level that preceded the breakpoint of the resistance line (stop zone buy).

A sales position can be opened when the price has penetrated the figure support line, reached, or pressed through the local minimum level that preceded the breakpoint of the support line (sell zone). Expected earnings should be set when the price has passed a distance less than or equal to the amplitude of the first wave of the figure (profit zone sell). A stop-loss, in this case, must be placed at the level of the local maximum that preceded the breakpoint of the support line (stop zone sell).

“Double Top”

This pattern is classified as the simplest, so the probability of its effective implementation is somewhat lower than that of other patterns. In classical technical analysis, the double vertex is classified as a trend change pattern. This means that the trend that has been on the market before the formation of the pattern may change after its formation is completed.

The figure represents two consecutive maxima, whose peaks are at approximately the same level. The pattern can be straight and inclined, in the latter case you should carefully examine the bases of the upper parts which should be parallel to the maxima.

In classical analysis, a double vertex works only if the trend is reversed and the price decreases, if the price reaches the third maximum, the formation becomes the triple vertex pattern.

A sales position can be opened when the price has penetrated the figure support line, reached, or pressed through the local minimum level that preceded the breakpoint of the support line (sell zone). Expected winnings must be set when the price has passed a distance less than or equal to the height of any vertex of the figure (profit zone).

“Head & Shoulders”

The figure represents three consecutive maxima, whose maxima are at different levels: central must be above the other two, and the first and third, in turn, must be about one height. However, there are some pattern modifications when the shoulders are at different levels. In this pattern, we must ensure that the central maximum is higher than both shoulders. Another key feature for identifying the pattern is a clear trend line, which precedes the pattern’s appearance.

The pattern can be straight and inclined, in the latter case, you should be careful to check if the bases of the upper parts are parallel to their maxima. The minimums between these maxima are connected by a trend line called the neck.

A selling position can be opened when the price has penetrated the neckline of the figure, reached, or pressed through the local minimum level that preceded the breakpoint of the neckline (sell zone). Expected earnings should be set when the price has passed a distance less than or equal to the height of the central vertex (head) of the figure (profit zone). A stop-loss, in this case, must be placed at the level of the local maximum that preceded the point of break of the neckline or at the level of the vertex of the second shoulder (stop zone).

“Wedge”

In classical technical analysis, the wedge is classified as a continuation pattern of the trend.

Technically, the wedge, like the triangle is a lateral channel constriction, but another difference between the wedge and the triangle is its size. The wedge is usually much larger than the triangle and sometimes takes months and sometimes years to form. Therefore, in classical wedge analysis, it is usually implemented in the opposite direction to the formation of the pattern itself, in other words, the trend changes. A purchase position can be opened when the price has penetrated the resistance line of the figure, reached, or pressed through the local maximum level that preceded the breakpoint of the resistance line (buy zone).

“Flag”

This price pattern is classified as the simplest, therefore its efficiency depends on numerous factors. In classical technical analysis, the flag is classified as a continuation pattern of the trend.

The pattern indicates a corrective retreat, following the strong directed movement that often looks like a channel, tilted against the prevailing trend. In classic technical analysis, the flag pattern works only if the trend continues its direction. A purchase position can be opened when the price has penetrated the resistance line of the figure, reached, or pressed through the local maximum level that preceded the breakpoint of the resistance line (buy zone). The angle formed between the predominant trend and the flag channel should not be greater than 90 degrees. The flagship channel itself should not revert in price more than half of the previous trend.

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Forex Technical Analysis

The Link Between Interest Rates and Forex Trading

Although there are many elements that influence the appreciation of a currency, one of the most important factors to consider is a country’s interest rates. In fact, assuming everything else stays the same, forex traders need to focus on interest rates more than anything else. In this article, we will explore what interest rates mean and how they impact the value of a country’s currency.

What to Look For

If we have a stable economic and geopolitical situation around the world, the foreign exchange market will favor a currency that is seeing an increase in the interest rate and more increases in the future. Even so, the interest rate is not the only factor affecting a currency. Other factors, such as war, geopolitical concerns, inflation, correlation with other markets, and many other things can be relevant.

When the interest rate is higher, it tends to attract a lot of foreign capital. The explanation is because money always wants to go to the place where it is “best treated.” For example, if you manage a large investment fund, you will look for greater returns for your clients. If country A pays 5% in bonus while other country B pays 2% in the same type of bonus, country A is the favorite with respect to where to invest. With the intention of buying that bond or investing in that financial asset, you need to buy in that country’s currency. (Some countries will take bonds or another currency like the American dollar, but we won’t talk about that in this article)

A Case Study

Let’s say you manage a large fund outside the UK. You have the instruction to put the money somewhere, and the most natural place you can put it is to go where we can find the largest growth. Generally speaking, central banks will realize an increase in interest rates if the economy is performing well. It’s a matter of time, but sometimes you might decide to enter a stock market, where you would have to shop in the local currency. The reason for having higher interest rates is that they are worried that the economy will overheat but at the same time there is a proclivity of financial assets to go up in that situation. Looking elsewhere in the world, you make the decision that Germany is the country where you plan to invest as many of the German multinationals are enjoying a big increase in exports. To buy stocks in the DAX you will need to buy euros.

Interest rates on Forex. In this scenario, you will need to purchase the EUR/GBP pair. If the European Union has a strong economy it will not only seek to buy shares in that market, it will also seek to buy bonds. Again, you will have to buy them in Euros. In that scenario, it is the natural flow of money to go after the highest yield. You could be in a situation where the UK has an interest rate of 1%. while Europe has an interest rate of 2.25%, for example.

But, a while later the situation in the world changes dramatically. We’re on the verge of a global recession, and you need to do something with your money. This was the situation during the financial crisis, which began in a way that most people would see as counter-intuitive. When the bubble burst, the initial movement was that the other currencies won. However, the US dollar began to win rapidly over time after the initial shock. The reason for this is that there are few places in the world that can absorb the kind of transactions that the treasure market can in the United States.

In that scenario, we had an exodus of capital from countries around the world in the treasure market, which brought up the value of the dollar. This was counter-intuitive because interest rates were being lowered quickly, but frankly, people were looking to keep their money in a safe place. It didn’t matter that possibly the money was going from New Zealand which had a 6% rate at the time to the United States which was lowering its interest rates. At the time, it wasn’t about getting some kind of return, it was about protecting the briefcases.

When things began to calm down, money managers began to buy other currencies such as the New Zealand dollar, the Australian dollar, and even emerging-market currencies such as the Turkish lira or the South African rand. Emerging market currencies were particularly attractive because some of the interest rates in those countries, despite being historically low for those areas, were still five or six times higher than those in developed countries. Once people thought it was safe to invest again, this was the first place that a lot of money went.

Interest rates are the main factor affecting the value of currencies. But much of it has to do with what traders think on a political and economic level. The general rule is that when people feel comfortable, they buy assets with a higher return, including currencies that have a higher return. When they are not comfortable, currencies with a lower interest rate such as the Japanese yen or the Swiss franc have historically performed better, alongside the dollar. Be sure to first understand the market risk, so you can follow interest rates in both directions.

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Forex Fundamental Analysis Forex Market

ICO´s Are Indeed Risky, But Here’s Why You Shouldn’t Ignore Them…

What will the future of ICOs look like internationally? Without a doubt, ICOs are generating great expectations and I think there is probably an excess of them. Often these are planned too quickly or with a very unclear after business idea. But it is also true that very powerful and interesting projects are coming to light and that they are also generating a lot of benefit to many investors and also in the short term.

The regulations established and the time will make the situation normal, but we must also bear in mind which is very laborious to analyse the real potential that some blockchain companies can have in the long term. Probably, some of the ICOs that have already come out is laying the groundwork for how technology works in the near future.

What is the operation, essentially, of an ICO, why is this system born and what differentiates it from the rest?

An ICO is a new financing (and therefore investment) model for technology companies in the Blockchain sector, although they are also starting to be used in other sectors. ICO stands for Initial Coin Offering and there are certain similarities between an ICO and an OPV. In early 2012, J. R. Willett published a draft of the project he wanted to create: Mastercoin. The summer of 2013 opened a time period where users could buy Mastercoins, the future tokens that the protocol would use to perform transactions.

The idea was that with all the money raised the Mastercoin protocol could be developed, so the appraisal of the tokens would be increased and the initial investors could sell their Mastercoins more expensive than when they bought them. This way both sides would win.

Funding a project through an ICO allows you to get financing through a path that did not exist until recently and with several advantages. Many could be listed, but I will only highlight a few. For example, you can present your idea to thousands of people and not just a dozen investors, so you increase the chances of finding more people willing to invest in your proposal.

Another positive point is not having to negotiate different agreements or contracts for months with different investors. In addition, at no time do you relinquish control over decisions that are made in exchange for investment.

Also, if you look from the investor’s point of view, the ICOs are very interesting because you have a chance to get very good returns in a relatively short time and also has a great range to choose from, although we do not fool ourselves, choosing a very profitable project is not so easy. And finally, note that VCs are increasingly interested in this new figure for the liquidity that allows them and that they in their model can not have.

How to differentiate a cryptocurrency from a “Token”? On many occasions, we confuse them…

We call a cryptocurrency a currency (virtual and digital), which is encrypted using cryptography. By the latter, I mean that encryption techniques are used to secure and verify the performance of transactions.

We could then categorize cryptocurrencies in two ways: altcoins (“alternative cryptocurrency coins”) and tokens.

Altcoins could be said to be alternative currencies to Bitcoin. Some altcoins are a variant of Bitcoin, that is, they have been created using the protocol itself but changing parts of the code leading to a new currency with different features. Some examples of this type of altcoins could be Litecoin. But in addition, there are other altcoins that have not been created from the Bitcoin protocol. This means that they have been created with their own Blockchain and protocol that supports their currency. A very clear example is Ethereum. In short, it could be said that altcoins have their own independent Blockchain, where transactions relating to their native currency occur.

Tokens are the representation of a certain value or functionality and are normally located above another blockchain. For the latter reason, creating tokens is a much more “easy” process as you don’t have to modify the code of a particular protocol or create a blockchain from scratch. All you have to do is follow the requirements of a certain blockchain such as Ethereum or Waves, which allows you to create your own tokens.

In short, one of the main differences between altcoins and tokens lies in their structure. altcoins use their own blockchain, while tokens operate on a blockchain It could also be explained or differentiated in another way. Altcoins can be used as money, and tokens “only” can be used on the platform that created them. Although this does not mean that a token can also be sold or purchased at a certain price.

What is the procedure to launch an ICO? And to go to an ICO?

There are really different ways to launch an ICO but I could summarize some common points that you have to have the knowledge very clear when launching. The first, and one of the most important, is to know if the token of the ICO has a sense, a real utility, in the future project. Otherwise, it doesn’t make much sense to throw an Initial Coin Offering. Linked to the token, it is also highly recommended to correctly set the type of token sales model (reverse Dutch auctions, hybrid capped, etc.) because it is another of the many elements that can influence whether or not to collect the required amount.

Another point to bear in mind is to have the right legal and tax advice. First, because being such a recent sector it is difficult to find real professionals. And second, because if you don’t have the legal and fiscal conditions well defined, the ICO could be blocked at some point.

With regard to security, it could be said that a smart contract should be developed to raise funds and issue tokens that have passed different security audits. You have to be prepared to receive “attacks” to the web and be very attentive to the different forms of phishing that are given, either from your own web as in social networks and forums.

To achieve the highest visibility of the project, and therefore, a large number of investors is vital to proper marketing planning where I can tell you that the costs of campaigns are very high given that there are more and more ICOs that need to stand out from the rest. And more briefly, it is necessary to write a detailed Whitepaper, get agreements with the most important exchanges, have an investment committee, and that the customer service before, during, and after the ICO is excellent.

Regarding the steps to go to an ICO. To tell you that it is complex because you must have a wallet compatible with ERC-20 tokens, find a solid ICO, and with revaluation possibilities. Once you get to that point you should wait for the day of the launch of the ICO, be quick not to stay out, and also buy your tokens correctly. Well, it is usually difficult not to arrive on time because it usually takes several weeks before all the tokens have been purchased, unless it is a very important ICO since there have been cases that in a matter of hours all the tokens have been sold.

Are ICOs safe? Of course, there have been cases of failure and success.

Let’s not kid ourselves, investing in an ICO is a high-risk operation but it is proportional to the great returns you can get. However, if you take different measures you can partially minimize that risk. For example, you must read the Whitepaper several times to be well informed about the project and from there you can look for additional information: know the state of the sector where it will operate, know in more detail the equipment behind, request information in case of doubt, analyse whether the distribution and destination of the money to be collected are correct, etc.

A story, in this case, of success, because it has achieved high profitability, which I always like to name is that of the Stratis project. The price of the token during the ICO cost $0.007 and a few weeks ago I got to see it at $4.9 which is an x700. But I have also seen for example the token of Virtual Accelerator that was worth $0.04 in its beginnings and that its price has been at some point at $0.002.

And we ask ourselves the next question, what is the most important thing we need to know before we enter the world of cryptocurrencies? The most important issue we need to take into account with respect to the two big cryptocurrencies of the moment, Bitcoin and Ethereum, is that if you plan to invest in them you must do it with long-term thought and not sell even when there are moments of heavy falls. However, it is only a point of view and in the end, everyone decides their strategy and what to do with their money.

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Forex Risk Management

Are Risk and Volatility One In the Same?

According to the dictionary, someone or something is volatile when it changes or varies easily and unpredictably. Speaking of a financial asset, its volatility or standard deviation is a statistic that describes simply with a number how much the price moves over time. That is the more volatility an asset exhibits, the faster and more extreme its unpredictable fluctuations are.

“That morning no one could imagine that John Appleseed would decide, instead of going to his office, to go to the mall with his AK-47 and murder for no apparent reason a dozen of his neighbors. Later, a friend of his commented in tears to the news channel: We don’t understand what happened to him, he seemed so normal, so non-volatile…”

The adjective “descriptive” here is key, as volatility only gives us observable information of past price variations. It tells us nothing about the nature and risk of the underlying process that produces it. This distinction is essential and is often ignored, mistakenly identifying risk with volatility. The adjective “descriptive” here is key, as volatility only gives us observable information of past price variations.

Risk is a difficult, complex, and multidimensional concept. Meanwhile, volatility and other descriptive statistics are a comfortable attempt to reduce their many faces to a simple number. As if the speedometer of the car gave us all the necessary information regarding the risk of driving. Even the CNMV uses a risk scale between 1 and 7 depending on volatility to classify IFs. Thus, a “1” fund has virtually no risk, and a “7” fund is very risky.

“Even the CNMV uses a risk scale between 1 and 7 depending on volatility to classify investment funds… This doesn’t make any sense.”

This doesn’t make any sense. If we imagine a fund that loses exactly -2.00% every month, its volatility according to the standard deviation formula would be zero (it has no volatility) and could be considered “risk 1” on the scale. Perhaps avoiding these contradictions, on the CNMV website they heal in health and hide saying that even if a fund is classified as “1”, it does not mean that it does not have risk. But they don’t explain why.

The Volatility of the Crocodile

Investors seized on the back of a financial product of low volatility. To better understand why it is a mistake to make equivalent risk and volatility, let’s look at the example of the pelican and crocodile. If we observe for a long time the quiet movement of a crocodile by the river, it transmits to us the information that there is no danger, that its movements are slow (little volatile) and we can predict and adapt to them easily.

So, our sympathetic pelican can ask the crocodile to take him to the other end of the shore and trust that he will continue to behave as he has done so far. In this example, the pelican is equating the very low observable volatility of the crocodile with very low risk.

Why does the pelican think there’s no danger? Because if we do not know its underlying nature and only know its volatility (which is observable), the risk of not getting safely to the other shore should be minimal. But all who know the nature of the crocodile know that there is a great and silent (unobservable) danger.

“Why does the pelican believe there is no danger? Because if we do not know its underlying nature and only know its volatility (which is observable), the risk of not getting safely to the other shore should be minimal.”

Crocodiles move most of the time very slowly (they are very few volatile), but occasionally and unpredictably, their behavior changes radically: they move extraordinarily fast (much faster than its past volatility could even make us imagine) to trap in its jaws its trusting victim. Therefore, the mere empirical observation of the behavior of an asset, product, or strategy (its track record) is not sufficient to know the risks we face when investing.

The volatility of a fund or product is not a good measure of risk because it only tells us how much it moves over time, not about the nature and risks of that movement or where the underlying strategy can take us. Risk is too complex and profound a concept to be reduced to a simple and comfortable (for clients and quantitative analysts) number.

The volatility of a fund or product is not a good measure of risk because it only tells us how much it moves over time. It is in the nature of the underlying strategy that the risk of investment funds and products lies, not in their volatility. There are very risky and non-volatile strategies (investment crocodiles). An extreme example is the sale of options out of money.

This strategy produces positive monthly returns over long periods with hardly any volatility, which makes them very easy to pack and market (its track record of continuous increases without volatility, for example of approximately +1% per month, sells very well). Eventually, a crash happens in the markets, causing the investor to lose, if not all, virtually everything previously invested and earned in the fund.

High volatility stock market investment, but harmless in the long run. On the other hand, there are very volatile strategies with little risk, which we might call the Chihuahua investment in our zoo: They move a lot and make a lot of noise, but they are totally harmless.

The trivial example is the investment in diversified stock exchange globally through ETFs or low-cost fund, considered as very risky because of its high volatility (we can temporarily lose half of the investment), but that in the long run will give us a return around double the world’s GDP growth. Paradoxically, it is the risk-averse investors who give up profitable and low-risk long-term investments, preferring low-volatility products that sometimes hide crocodiles.

The reason is more psychological than rational: they can’t bear to see that they are losing money for a while (a key point I already talked about in Volatility and Emotional Accounting). The industry knows this and gives the customer what he asks for, even if it’s not what’s best for him. That is, mostly crocodiles of low volatility instead of (noisy) chihuahuas of high profitability.

Categories
Forex Forex Psychology

What You MUST Know About Psychology In the Financial Markets

It’s cloudy. Every minute, the number of clouds doubles, and in 100 minutes the sky will be covered. How many minutes will it take the clouds to occupy half the sky? 50 minutes. It is the answer that is usually heard in this version of the riddle. However, if the clouds double every minute, when they cover the whole sky it means that the minute before they cover just half. So the correct answer is 99 minutes.

Fast and Slow Thinking

It wasn’t a complicated riddle. But to solve it you had to think slowly. In his excellent fast-thinking, slow thinking, D. Kahneman, father of behavioral finance, described the two ways we process information:

A quick, emotional and intuitive one. It gets stuck before problems that require evaluation and logic. Professionally known as System 1, colloquially Homer.

A slow and rational, requiring higher energy expenditure. Known as System 2 or Mr. Spock for friends.

We are Homer by default. It is enough for the day-to-day. With Spock in charge, it would take hours to solve simple operations, like buying food or choosing the color of the tie.

System 1 is efficient and consumes less energy. In return, it takes a series of shortcuts that cause mental traps. For example, how many times do you think you could fold a sheet of paper? It seems a simple task, but I bet with you you wouldn’t be able to do it more than 12 times. Just take the test.

In fact, it was thought impossible to fold a sheet more than 8 times until in January 2002, B. Gallivan explained how to get there at 12 in his book How to Fold a Paper in Half Twelve Times. You read it right: a book.

Incredible, isn’t it? If it wasn’t for the fact that mathematics assures you that it is, you wouldn’t believe it. It’s not something you can imagine: you have to do an exercise in faith in science.

We Are Fooled

Imagine that we found a way to bend it more than 12 times. For example, 20. What will be thicker: the pipe of a pipeline or our sheet?

A folio is about 0.1 mm thick. If we fold it in half, we will have 0.2 mm. We fold again and have 0.4 mm. At the seventh, the thickness will be similar to that of a notebook. Around 23 times we will reach 1 Km. In 42, our folded folio would reach the moon, in 52 to the sun. 86 folds later, it will be the size of the milky way and 103 folds the size of the universe. Math, son.

We can’t imagine it. Mathematics claims it’s true, but the mind resists it. Only with experience, knowledge, and the right tools will we know when System 2 needs to be implemented to reach successful conclusions.

Credit: Real Investment Advice

Confused by the Randomness

You will agree with me that any good operation is one that you would repeat time and again provided that certain conditions are met, regardless of the outcome of a particular trade. This statement implies that any operation, despite being perfectly planned, can end badly. That is to say, investment in financial markets requires us to face important doses of randomness.

And the bad news is that the deceptions of System 1 are multiplying in activities whose results are influenced by probability. Actually, Homer thinks he can influence her.

A few years ago, a BBC reporter showed that at many Manhattan traffic lights there is no connection between pressing the “green wait” button and the time it takes for the record to change color. Corroborated by the New York Times, it was noted that it occurred in other cities (e.g., London). As pedestrians feel they can control the situation, they tend to cross less in red.

This trap is known as the “illusion of control”: we believe we can influence things over which we have no power. For example, when we blow into the fist or shake the dice vigorously before throwing them. Or when we attribute to our superior analysis the winning operations and to the unlucky losers (something that also fits with another mental trap known as “attribution bias”).

In this sense, a 2003 study by Fenton-O’Creevy et al showed that traders more prone to the illusion of control had lower performance, worse analysis, and worse risk management.

Correlation, Causality, and Chance

This need for control leads us to look for cause-effect relationships to explain random phenomena. Unfortunately, Homer is not a scientist identifying patterns and there are few sites like financial markets to find ridiculous patterns. Thus, there are hundreds of published books that are authentic compendiums of false correlations.

It is important to understand that correlation does not imply causality and that it is not enough that a system has worked in order to extrapolate it to the future. The system, besides being useful, must make sense.

Chalmers, inspired by B. Russell, explained it well in his inductive turkey story. A turkey, from its first morning, received food at 9 o’clock. As it was a scientific turkey, he decided not to assume that this would always happen and waited for years until he collected enough observations. Thus, he recorded days of cold and heat, with rain and with the sun, until finally, he felt sure to infer that every day he would eat at 9 o’clock. And then, Christmas Eve arrived, and it was he who became the meal.

In 1956, Neyman (later corroborated by Hofer, Przyrembel, and Verleger in 2004) showed that there is a significant correlation between the increase in the stork population in a given area and the birth rate in that area. Cause?

Depends on the Question

Most of the decisions we make are often influenced by how we are presented with information, or how the question is asked. For example, we will be more willing to sell a share priced at EUR 50 if we buy it for EUR 40. However, if the previous day’s closure was EUR 60, we will be more reluctant to do so.

Imagine you have to choose between these options:

800 USD with security.

Do not lose anything with 50% probability or -1,600 USD with 50% probability.

Although the expected value is the same (0.5 x -1,600 + 0.5 x 0 = -800 USD), the second option is usually chosen.

Let’s put it another way:

+800 USD with security.

Do not earn anything with 50% probability or +1,600 USD with 50% probability.

Many people will now choose the first option. By showing the same exercise as a gain rather than a loss, the mental process leads to different paths.

Aversion to the Loss

The above example also demonstrates the “loss aversion bias”. We are more pained by a loss than by a gain of the same magnitude. This is one of the causes of the well-known “disposition effect”: the tendency to close profits ahead of time and let losses run away.

We cannot avoid the Disposition Effect. In fact, it is rooted in our primate nature, as demonstrated by K. Chen and L. Santos of Yale University, studying a group of capuchin monkeys.

These monkeys had been educated to exchange small coins for fruits. When they “bought” a grape, one of the researchers would throw the coin in the air, and if it came out face up he would give it two grapes, if it was a cross, then only one. Another researcher, when given the coin, showed two grapes. Then he threw the coin in the air, and if it came out expensive, he gave both grapes, and if it came out, he gave one and kept the other.

On average, they received the same number of grapes with both researchers, but one showed them as a potential gain and another as a potential loss. Soon, the monkeys began to exchange only with the investigator who did not show the two grapes. The suffering of losing a grape was greater than the satisfaction of winning it.

We can’t help it. But L. Feng and M. Seaholes showed in a 2005 study how the experience allowed for significant attenuation.

Aversion to the Losses

Perhaps because we do not know how to decide in an environment of uncertainty, we do not know how to evaluate the decisions made by others. In a 1988 study, J. Baron and J. Hershey asked a subject to choose from:

  • Get 200 USD for sure.
  • Get 300 USD with 80% probability or 0 USD with 20% probability.

A priori, the most logical thing is to take risks since its expected value is 240 USD (300 x 80% + 0 x 20%), higher than 200 USD insurance. But what was sought was not to evaluate the wisdom of the one who chose, but how others valued the choice. Therefore, once the result was known, different people were asked what they thought about the decision taken, being -30 the worst and +30 the best.

The valuation was +7.5 when the subject took risks and won and -6.5 when he lost. This implies that the subject is valued not for making the most logical decision, but for its result.

External Influences

When we make decisions, we are also influenced by what others think, by what others expect of us, and even by what others order.

Asch showed the difficulties of going against the tide. In his classic study, he showed tokens with three lines of different sizes to groups of students. They were all in cahoots except one, the subject of the study. It was asked to select the largest line. The accomplices had to say sometimes right and sometimes wrong answers. When they said the right answer, the subjects did not usually fail. But when the group gave the wrong answer, the subjects failed almost 40% of the time, even though the lines were several centimeters apart.

Stanford’s terrible prison experiment shows the influence of what others expect of us. A group of young people were selected and randomly divided between prisoners and prison guards. Prisoners were required to wear robes and were designated by numbers, not by name. The only rule of the guards is that they could not use physical violence.

On the second day, the experiment went completely out of control. The prisoners received and accepted humiliating treatment at the hands of the guards.

Even more terrible is the study of Stanley Milgram, from Yale University. This experiment used three people: a researcher, a teacher (the subject), and a student (an accomplice actor). The researcher points out to the teacher that he must ask the student questions and punish with a painful punishment every time he fails. Initially, the discharge is 15 volts and increases for each failure for several levels up to 450 volts.

The student, as the downloads rise level simulates gestures and cries of pain. From 300 volts it stops responding and simulates seizures.

Normally starting at 75 volts, teachers would get nervous and ask to stop the experiment. If this happened, the investigator refused up to four times, noting:

  • Go on, if you please.
  • The experiment requires you to continue.
  • It is absolutely essential that you continue.
  • You have no choice. You must continue.
  • On the fifth attempt, the experiment stopped. Otherwise, it continued.

All subjects asked at some point to stop the study, but none passed five attempts before the 300 volts. 65% of the participants, although uncomfortable, reached up to 450 volts.

If you think that you would never fall for something like this, keep in mind that both studies have been repeated at different times with different modifications, reaching similar results.

What Can We Do?

Now you know. Your mind deceives you and conspires against you. You can’t help it, but you can avoid falling into its traps if you understand how you are deceived. There are hundreds of resources (books, articles, etc). Use them. And remember: to be brave it is indispensable to be afraid.

Categories
Forex Forex Fundamental Analysis

How to Profit from Trading the News

News is a fundamental part of the analysis that every Forex trader must make before placing a position. There are several ways to operate based on news and not all are efficient.

Many Forex traders like to trade in the news. They review the economic calendar of major scheduled economic data, such as the famous non-agricultural payrolls, and prepare to trade these currencies shortly before or shortly after one of these key economic events for foreign exchange markets. Of course, if something unexpected happens and they’re alert at the time, they might try to jump on it and seize the opportunity. Different trading methods are usually used to deal with the news. Let us take a look at each of them and analyze the advantages and disadvantages of each, before drawing a conclusion.

Predicting the Outcome and Operating Before Publication

This might not be as naive as it sounds, depending on what you’re predicting. For example, if you believe that, after an extensive analysis of the economic data and background of the personalities involved, the Reserve Bank of Australia will almost certainly cut the interest rate tomorrow, While the market acts as if this is a very unlikely outcome, then you could have a good reason to open a short deal on the Australian dollar, i.e., sell it. Otherwise, I would simply be betting as in a game of chance, with the odds against you even below 50%.

The advantage of taking an intelligent view ahead of a key economic report is that you will most likely get a good price for your operation without a high spread or slippage. The biggest disadvantage is that you will most likely experience a period of high volatility in the minutes leading up to the announcement that will either cause your position to touch the stop-loss or force you to have a wider stop to be sure that your position will survive, which in turn limits your potential risk relationship – reward.

Operating Immediately in Publication

This sounds logical: discover what the market expects and, the instant you see that expectations have been largely exceeded or lost, place a position accordingly. This will almost never succeed, for different reasons: the liquidity will be very low, there will be a huge slippage, the spread will be very high and your broker may very well not even have been able to give you a price. Normally, when a retail trader can enter the market following the most important market news, the price is very poor. This may not matter if the event is a real game-changer, like the US non-farm payroll, but it will work only sometimes. This trading method is always very poor.

Opening Of Pending Orders Before Publication

It may seem an excellent idea to wait for some very important economic news like the US non-agricultural payroll. or the Minutes of the FOMC Meeting and just before publication place outstanding orders with your broker to acquire maybe thirty pips ahead and sell maybe 30 pips below. Actually, it is a very bad idea, as liquidity is greatly reduced in the seconds before and after a major press release, so the price and spreads may not go anywhere. You can easily see that your two operations open and close in a second or two, a very unpleasant experience! Even if you do well, it is still very likely that you will suffer a large slippage in an activated position if the result is strong.

Waiting for the Market to Digest the News

This trading method requires some discipline, intellectual work, and market analysis, but it is really the only efficient way to trade forex with the news. You should compare the outcome of the press release with market expectations and decide whether the market’s confidence in that currency has fundamentally changed. When you’ve made that decision, then you must wait a few minutes and see where the price goes.

His reasoning should then be something like this: if the market news has changed the outlook much to be much more optimistic and the price moves strongly upwards, then expect a setback and enter long. If the news is very bullish but fails to change the fundamental picture – a much more common result- and the price is fluctuating very bullish, expect a recoil and then place a reverse operation. This method avoids slippage problems, poor liquidity, spreads, and poor execution of orders.

The Secret of Trading in Forex with the News

Here’s a little secret about how to trade in Forex with the news: most of the time, the news doesn’t change the movement of the market: it just speeds it up. When you link this with the fact that the market tends to move in a price range almost all the time – very especially after a strong movement in one direction – realizes that most opportunities to trade forex with the news are actually in negotiating against the initial movement, rather than waiting for a follow-up.

Categories
Forex Risk Management

Simple Trading Advice That Can Save Your Forex Account

Are you losing control of your trading? Do you feel lost in your own analysis and despair in the markets because your trading goes nowhere? You are not alone. Many other forex traders suffer from “analysis paralysis” because they use overly-complicated trading strategies. One of our problems is that almost everything we learn in our lives shows us how to survive at work and how to survive in the “real world”. The foreign exchange market is a different world for which you are unprepared and, of course, we apply what we know about the workforce to the forex markets.

As you have probably already discovered: the two worlds do not fit together very well. Forex requires a different approach, one of mental strength, one that forces us to show iron discipline. Sometimes “doing nothing” is the most cost-effective approach. Does it sound counter-intuitive? Most things in the forex market are like that. Based on my experience, most traders do not find success until they simplify their trading strategy.

Today, I will show you some simple steps you can follow to change your trading strategy to operate with a “simple forex” method of trading. Forex requires a completely different look, one of mental strength, one that forces us to teach iron discipline.

Remove All Unnecessary “Extras” From Your Graphics

It is normal that you want to take advantage of every possible advantage to try to put the odds of success at your side. For a trader initiated, it usually means to leave on the hunt for all the “shiny new objects” as indicators, other graphics tools, and anything that seems exotic enough to offer you a “selective view” of the financial market that not everyone is aware of.

Those who pursue trading strategies that use indicators are generally satisfied with the performance provided by the system in the longer term. The natural internal workings of most forex indicators respond very slowly to the movements of the organic market. The indicator can therefore offer a sign of purchase or sale only when most of the movement is finished, thus putting you at a very bad price to enter. Indicators also don’t work very well in the markets they are consolidating, generating bad commercial signals that can cause a decrease in their balance.

Take a look at the stochastic – a popular forex indicator that comes with most graphics programs. Stochastic is simply designed to operate under specific financial market conditions. Unfortunately, it does not work properly in trend markets – it is the main requirement to make money.

What traders do then is to look for another indicator that “fixes” the problem, one that “filters” the bad signals and gets the original indicator to work better. Despite having the best intentions, this only adds more problems to the chart. Rather than offering us an easier analysis, it makes it more frustrating, as the two indicators will probably offer contradictory signals and will never coincide to offer a clear trading opportunity.

The trader will then look for more “graphical aids” to remedy this, but the situation will escape his control and the graph will end up looking like something like a nuclear power plant control panel.

This is a very frustrating work environment to operate in because you can’t even see where the real price is and the price is the most important item on your chart. Once a trader reaches this point he usually ends up cleaning the chart and starts again. Most traders will find themselves back with the flat price chart and there is nothing wrong with it. At this point, you should have your moment of inspiration.

Trading with a flat price chart is the simplest, most effective, and most commonly used trading method in today’s trading industry. If you notice that the graphics are escaping your control, then do yourself a favor and remove all unnecessary data from your chart and start learning how to trade directly with price action.

Do Not Over-Complicate with Support and Resistance

Even with a flat price chart, the trader can still get carried away and get into a frustrating mess and that’s literally what happens most of the time. Marking support and endurance levels on the chart is one of the most basic and vital skills you need to succeed in any forex trading strategy. Even the core traders, who follow and operate according to the news, need to have a good understanding of how to draw supports and resistors to “complete” their market analysis.

Surprisingly, many traders – new and experienced alike-continually move the line of support and endurance and “defecate in their own nest” as they go crazy with the way they set levels on their chart.

Levels in the Chart

It is time to focus here again on the lesson and learn how to keep trading simple, which also applies to support and endurance levels. Do this and your Forex system will benefit quite a lot from it. At the time you are plotting markets in a price range, limit yourself to marking the top and bottom line of containment. You don’t need the lines to coincide fully, where all the shadows and bodies align perfectly, as this is very rarely going to happen.

Just mark the general area where the price is spinning. Everything you need to focus on the most important turning points, where the price is going to change course and create a decent price movement that you can take advantage of for profit. Operating in the center of the range is risky, the price can be very erratic, unpredictable, and volatile, as it is like a high rotation area that can make you lose a lot of money. But the traders still try to operate in that area: don’t be one of them.

Probably the best place to get into a price range is at the price range limits, so we just have to mark these limits. It’s as easy as that, if you can’t see a sign to buy or sell at these major turning points, then keep waiting. Sometimes, doing nothing is the most cost-effective strategy we can use and it is also one of the less easy decisions to take and follow.

Markets in a range are easy to negotiate, all you need is two levels. The markets in motion, however, are a little different. I work with turning levels in a trending environment.

As you can find out, even when we have good trends in the daily chart that look like they will last forever and offer clear buying/selling signals, many traders continue to lose money despite how obvious things are in that environment. Honestly, I think the main problem comes down to time. Losing traders are not getting into the trends at the right time and are being pushed out of the market by trend fixes.

Marking simple strength and support levels can protect your trading account from these errors. During the trends, I frame and concentrate on turning points, where the old resistance becomes the new support and vice versa. Time and again, the turning points of the trend will end with the counter-trend movements. This is where we will most often see the trend shift and move towards new highs or lows again. Start looking for and marking these spin levels and check them for signs of purchase or sale that align with the trend.

It is the turn levels that you must watch for to catch signs of buying or selling in forex. In this case, we have some upward rejection candles that told the trader that the lowest prices were denied by the financial market at the giro level. Just keep in mind that, with a financial market that is on a trend, you really just need to worry about spin levels.

Remember what I said before: these levels will not always align perfectly, so just mark the overall area that you anticipate will act as a main turning point on the chart. Also don’t forget to mark the main weekly turning points, as they can stop strong trends and trigger big turns in price. The same must be done: analyze the weekly graph and mark the strong and clear turning points.

I hope you’ve begun to show him the power of simple trading. There was no need for any complicated indicators or complex graphics tools. It’s just about working with a flat price chart and being very minimalist in marking levels of support and stamina.

Once you simplify the way you mark levels, technical analysis will become much clearer, less frustrating, and you will begin to learn to anticipate future price movements on a flat price chart.

Learn A Simple Forex Strategy That Keeps Your Trading Simple

If you are using a trading strategy you need to use indicators, complex math, or even one that requires spending hours and hours in front of the computer screen. I would recommend that you have the psychiatric hospital in your speed dial numbers! There are many trading strategies that allow us to use our heads only as an external observer. Most of us have busy lives and we really can’t afford to spend hours in front of the graphics by scalping or day trading.

Swing trading can be a very good alternative for those traders who want to be able to trade easily and adapt it to their lifestyle. For example, you may want to operate “full-time”, while keeping your job or studying full-time. How best we can do this is using “end-of-day trading strategies”, where you only have to analyze the market once a day and spend about 20-30 minutes analyzing the financial markets to make your trading decisions.

I use price share trading strategies combined with swing trading as part of my end-of-day trading strategy. The use of some of the examples I’ve shown in today’s tutorial can be seen in the daily chart at the close of New York to identify low-risk and high-reward business opportunities within the daily time frame. This system only takes us about 15 minutes to set up operations and forget about it.

We have a good bullish tendency and we can see that a turning level has stopped a corrective movement against the trend. This is a classic sign of “buying” stock from the end-of-the-day price, right at the hot spot where we anticipate it will act as a turning point of the wider trend. The bullish rejection candle informs the spin trader of the price share that we will probably see higher prices from here.

Actually, it’s as easy as counting 1, 2, 3. You can set your purchase order, complete it with stop and take profit levels, and then let the market follow from here alone. The best conclusion we can draw from all this is that don’t have to stand in front of the screen for hours, as you are free to move on with your life while the financial markets take care of the rest.

I hope today’s tutorial helped you remove all the complicated elements from your chart and trading system, to seal something simple. If your trading system is too “complicated” or needs too much of your day, then you should consider switching to the end-of-day trading strategy that exploits the benefits of price share and swing trading.

Even if you like intraday trading, I strongly believe that you will benefit if you remove the indicators from your chart and learn to “read” a flat price chart to anticipate price movements directly from the same candles. Once you remove all of these complications and start working with plain price charts, your trading strategy will be less stressful, will offer more clarity, and will be a more profitable enterprise.

Just trading the few major currency pairs like EUR/USD, GBP/USD, and USD/JPY and following the long-term trends when the market moves comfortably in the direction of trends is a simple and cost-effective way of trading, and doesn’t need any support or resistance or indicators at all. Give yourself a break and at least give him a chance.

If you liked some of the graphic patterns we saw in today’s lesson and would like to learn more about keeping trading simple, minimalist, and profitable, then you can take a look at my Forex trading strategies.

In my experience, currency traders don’t usually succeed until they learn to read the markets by analyzing price action. Make things simple and logical and trade with a logic that you can understand. Don’t be greedy and chase money, use your energy to become the best possible trader and money will flow naturally to you.

Categories
Forex Money Management Forex Risk Management

When Professionals Run Into Problems With Trading, This Is What They Do…

If somebody told you at the beginning of a professional forex career that you will have to bust many accounts and work for a couple of years to get it right, would you still take that road? Probably not, because in the end, you might not even get to the professional level. A lot depends on you, how much do you love trading and how much do you want to have a job most people dream about. People will settle for less, why is that so is not important, it is more about is that enough for you. At some point on this road, in case you lose a few accounts or run into obstacles, you may fall into a bad mood called desperation. So much was sacrificed only to scrap everything, you might think. Nobody will say this, but it will happen to most of the traders if not all. At any moment in a professional forex trading career, it is a possibility your mindset will take a hit, and here is what professionals have to say about this. 

The Old Problem

People that want to become forex traders do it when they want to get out of their present situation. Forex trading is much more attractive than a day job, at least for ordinary people working for XYZ company from 9 to 5. However, with all the warnings forex trading is only for the most persistent, people go in thinking they are just better than everybody else. Well, even genius traders mess it up, and mistakes are good, better make them early on. 

Desperation comes in when you pay for impatience. Rushing to forex trading just because you need alternative income so you can quit your job or drop out of college is a faster path that hits back at you. Feeling that you are missing a lot if you do not start trading now is a warning you need to take seriously. Before allowing forex to hit you financially, demo trade. Then it might hit you psychologically, your real money is safe at least. Professionals take real losses, and you have to get ready for that first. So patience is a must, you are not going to be ready in a few months and more likely not even for a few years. 

Pro Approach 

Professionals know this “trap” so they do not start panicking when they have a bad month. They play the long game and patiently wait out to see if something is really not aligned with their trading. The right mindset about this would be even when you are losing, it is good. Professionals do not get emotional to the point they lose their trading ability, but actually are very intrigued about what could take their multi-year successful strategy down. It is a great discovery because ironing out the problem makes their strategy even closer to perfection. The result of this research is also very beneficial for understanding the market and to other traders as well. What follows is looking for tools or trading measures that could evade the losses from this market situation. 

FOMO and Risk Fear

Fear Of Missing Out is also one of the most common issues beginners develop but later advanced traders may experience the paradox of “knowing too much”. FOMO is handled by having a strict rule set or a trading system. Some traders count candles until it is too late to enter a trade, some have indicators, but they all have something that prevents them from feeling that fear. There is a simple barrier in the form of a rule. 

When traders love trading they are very well informed, they digest a lot of information from various sources. This can at times affect their trading where they become risk-averse. It is hard to have a decision based on every indicator, news, or other data. Traders have to focus on a set of “decision-makers”. 

One of the ways to redirect the risk fear is gradually entering the position. This could be referred to as the Scaling-in method of money management. Older traders and investors are especially fearful of the new wave that is probably taking over currencies as we know them. We are talking about cryptocurrencies of course, and their intangible form is not really understood. The new age of currencies goes along with the new generations but veteran traders are conservative most of the time. Gold and precious metals are their choices over bitcoin and have this fear of risk (unknown). Scaling in method starting with small amounts is a good way to break this fear, gradually increasing the amount as the trade progresses. Professionals with an open mind do not have problems accepting new markets as long the asset is globally present. 

The New Problem

According to the experiences of pro traders, the journey of ironing your emotions does not easily stop. So if you are a beginner reading this article, be ready for a bumpy ride and do not ever get discouraged. Pro traders have devised a way to combat that deep but mellow feeling they have wasted many years and that they might give up trading. This feeling gets stronger when you become a pro. For clarity, a pro trader is not the one who is trading real money, it is the one who does it for a living, with his or with somebody else’s money. The feeling you are not good at what you are doing gets stronger even though you have reached the level most dream about. After every loss, it reminds you. For some, it could be a bad month after you lose sight of the long play you are actually aiming for. Desperation is there, some traders feel it more, some are more rational. According to pro traders, there is no way around it, the longer you are in trying to trade your way the more you get the feeling all was for nothing. 

The best way to get yourself on track nevertheless is by putting the work early on your strategy, plans, the whole system, and of course psychology. When you have a really tested out system with great results, you have confidence in what you are doing. The reason why pros might get desperate is that even though the system is tested out, the market is changing. Results are changing. 

It could be a motivator to find out new, better trading methods, but it is for the wrong reasons. Fear of failure should be overcome at one point, it seems only time (experience) of generally good results can make you glad you chose to be a professional forex trader. According to experts, if they could take away one thing on their road to ascension, it would be that feeling. Otherwise, it is a great profession. Having an eyeopener such as realizing you will be doing 9 to 5 jobs for most of your life will likely put you on a different track than most people. On this track, not necessarily forex trading, the same feeling will come up. Professional traders make sure they know what they are doing, the same translates to everything else.

Categories
Forex Risk Management

Hedging and Coverage: What Forex Trader’s MUST Know

If you’ve heard the word hedging or hedging mentioned and you’re not sure exactly what this is about when trading, this article can help. As is normal in my posts, an example to bring it down to earth. Imagine you have bought a car or a house. When we buy an asset of this type we usually want to protect our investment from possible accidents or situations that may occur against us.

One of the simplest ways to protect these assets is to take out an insurance policy that allows us to reduce the possible losses we might have if some unexpected situation occurs that we sometimes cannot avoid. In trading, hedging works similarly. It is simply an investment to compensate or protect our funds, reducing the risk of price movements against us. In this way and simply put, investors or traders use hedging to reduce and control their risk exposure.

A very important aspect when using a hedging strategy is the fact that as you reduce the potential risk you also reduce potential earnings. This is because, as an insurance policy, coverage is not free. Hedging can also be achieved by opening a position in another financial asset that has a negative correlation to the vulnerable asset, that is, the initial investment we want to protect. In the case of Forex, we say that two currency pairs have a high negative correlation if the correlation is negative and above 80 generally, in this case, the pairs move in opposite directions.

For example, in the foreign exchange market, the pairs with a high negative correlation are usually the EUR/USD pair and the USD/CHF pair. Anyway, I leave you a complete article that I wrote about forex correlation and how you can consult it at any time (you don’t have to do the calculation manually). It’s an important concept.

Before you continue, it’s important to know that hedging is not allowed in the United States. This is because brokers operating in that country must comply with the “no-coverage” rule known as FIFO (First in, First out. First in, first out) of the NFA (National Futures Association).

This “no cover” rule only allows for an open position on the same symbol. If, for example, we open a purchase position on an instrument and then open a short on the same instrument with the same volume, the initial position is closed because one order cancels the other. Because of this limitation, typically brokers that are regulated by NFA have international subsidiaries for their customers outside the United States.

Advantages and Disadvantages of Hedging

Like any strategy, hedging has its advantages and disadvantages. Depending on your trading system it may or may not make sense to apply it (I don’t use it, I’ll tell you later). One of the main advantages we find in having to negotiate with hedges is that they limit your losses, but as I was saying, it also erases a portion of our profits. Although it is a fairly conservative trading strategy (a priori), it allows us to have a high hit rate, although the profit/risk ratio decreases.

Hedging increases liquidity in the market because it involves the opening of new clearing operations. However, this represents a disadvantage as a trader because you will pay more commissions. Although we can do it on almost any platform, some brokers do not allow you to do it, bear in mind before applying it. A clear disadvantage that we must always bear in mind is that not all risks can be covered.

Types of Hedging Strategies in Forex

The types of hedging strategies are varied and although they all seek to reduce risks and limit losses, each of these strategies can achieve its goal in different ways. Let’s look at the most common trading strategies used:

Total Coverage: As its name indicates, when we make a total coverage we keep open the same volume in long and short operations. Full-coverage allows you to block your exposure in the market, that is, raise or lower the asset in question will not affect your account. Be careful because a trade with a fixed profit and loss level could reach its stop or take profit and close (and you can keep the contrary trade open with a negative float and no coverage).

Partial Coverage: With a partial coverage strategy you have open long and short positions, but with different volumes. Here already if there is risk (the difference between the volume of one and another position of the same asset that you have opened.

Correlated Coverage: The correlated hedging strategy is one of the best known in trading. Although I mentioned this strategy at the beginning of the post, let’s go a little deeper. It consists of covering an open operation with another operation in a correlated currency pair. The correlation between both currency pairs or assets can be positive or negative.

In Forex, an alternative is to trade “strong” currencies against “weak” currencies and thus maintain less exposure with strong ups or downs. Suppose for example you decide to go short on the pair EUR/USD. Currency pairs such as AUD/USD and GBP/USD have a high positive correlation with EUR/USD, so their price is likely to fall as well.

If you open another short in AUD/USD or GBP/USD, you are more exposed in the market because of the EUR/USD short position you already have. In the case of currency pairs with a high negative correlation as the case of EUR/USD and USD/CHF, if we open a short in EUR/USD and go long in USD/CHF we would also be incurring a higher risk.

Here, we can perform a correlated coverage. What must be vital to us is always to maintain in mind the following: if the correlation is positive, to make the coverage you must trade in opposite directions (sale – purchase or purchase – sale) and if the correlation is negative you must trade in the same direction (purchase – purchase or sale – sale).

Direct Coverage: It consists of opening positions in the same currency pair. It may seem a bit confusing or pointless, I explain it better with an example (like not):

Suppose you are long in the pair EUR/USD, the position is green but still does not reach your take profit. You’re coming up with a high-impact story (for example, NFP or GDP) and you want to partially protect your earnings without closing the position. One way to protect yourself from movements due to the high volatility this news may generate is to open a short position in the same pair and when volatility decreases close the hedging position. Minimizing in this way the potential risks of the news.

Direct coverage is also often used to leverage corrective movements in a trend. Anticipating a possible price correction in an uptrend, we can cover a long position by opening a short position. If the correction does occur, we gain in the short position while maintaining the long position.

Coverage with Futures: Hedging operations with foreign exchange futures are one of the hedging more used by the big market operators. Suppose an investment fund, based in the United States, invested in a Japanese company and generated 1 million yen in unrealized profits. Since the investment fund needs dollars instead of yen, it can buy USD/JPY futures contracts on the stock exchange for the total amount of yen it expects to receive (total coverage) or for a percentage of the total to receive (partial coverage). In this way the fund secures a fixed rate for its yen, protecting itself from the risk associated with USD/JPY torque fluctuations.

Hedging: Yes or No?

From my experience, I consider that every trader should know and know how to apply the different strategies around hedging, especially in a market as volatile as the Forex market. What we want to achieve with coverage is to minimize risks of movements against us when making an investment and at no time seeks to maximize potential profits, so we can consider it a purely defensive strategy.

It allows us to manage our positions in a calmer way, reducing the stress of the psychological factor when trading. There are many hedging strategies depending on the financial instrument you are operating.

Robots Using Hedging

We find a lot of systems on the Internet that may seem very attractive but that constantly make coverage by delaying losses and adding more and more positions. You can imagine how this ends. Run away from these kinds of robots. And you’ll wonder, how do you detect them? Easy, don’t buy a forex robot that you don’t know how it’s created, how it works, and you’ve spent time testing. That’s for not telling you straight away not to buy a robot to trade.

My Opinion

As you know, I do algorithmic trading and none of my systems apply hedging. They could tell you that psychologically this technique makes you not close with losses and… I ask you, why not take the loss and delay it by taking more commissions?

Doesn’t make any statistical sense in that case. Applying currency trading systems individually does not. Hedging can make sense in correlation strategies as we have seen between assets or in our stock portfolio to protect us from currency risk. If for example we buy shares in dollars but our account is in euros. I certainly think today it is an excellent tool, not for trading systems.

Categories
Forex Basics Forex Psychology

Weird Hobbies That’ll Make You Better at Forex

There are things that we do in our everyday lives that can actually make us better at trading. Some of them may be related, while others will have absolutely nothing to do with trading at all. Our hobbies can have the same effects, there are hobbies out there that people do that will give you the skills that you need to be a fantastic trader, in fact, they will improve aspects of your trading. We are going to be looking at some of the hobbies that people do that help to build our trading skills or develop certain aspects of us that would be beneficial to our forex trading.

Reading

This one may seem quite obvious and to be fair, it is. If you like reading then you will love Forex and trading, as there is a lot of reading to be done. Any people get bored when reading and learning, this is why there are so many video tutorials out there now, but if you actually enjoy it then you will be in a good position as there is so much information available for you to take in. There are also trading-related books out there that can be filled with relevant information and so reading those in your spare time can give you some fantastic insight into different techniques or give you ideas that you can implement into your trading. If you are not a fan of reading, there are alternatives out there, but you will find far more information in the written format than any other format when it comes to trading.

Jigsaw Puzzles

Trading can be compared to puzzles in a number of ways, the most obvious reason is the fact that when you are putting a puzzle together, you are taking lots of small things in order to make a larger overall picture. We do the exact same thing when we are trading, we are taking small bits of information from various analyses or indicators and putting it all together to give us an overall picture of what the markets may do and what we should trade. Doing puzzles helps you to take your time, to analyze each piece of information, and to have patience, afterall, some puzzles can take a long time to complete.

Playing Sports

Sport doesn’t seem like it would give you skills needed for trading, but it does. Well not exactly with your trading, but it is a fantastic way to get rid of some of the stress that can build up when trading. In fact, it gives you the perfect outlet to let off some of that steam. For anyone that sits in front of the computer for the majority of their day, it can damage your posture, can stress you out, and can ultimately make you a little bit fatter. Playing sports is a way of rectifying all three of those things. It helps you keep a good posture, it helps you to relieve stress and it can make you that little bit fitter. So even if this is not one of your current hobbies, try making it one once you start trading, especially if you are doing it full time.

Playing An Instrument

If You have learned to play an instrument in the past then you probably have a number of skills that are very desirable for a forex trader, these include things like consistent learning, patience, and being precise in your learning and implementation. It takes a lot of time and a lot of patience to learn an instrument, much in the same way that it takes time and patience to learn to trade properly. Music can also help to influence your mood or to calm you, something that is vital when it comes to trading. There are no shortcuts when it comes to trading, so being able to bring in the characteristics that were required to learn to play that instrument can be extremely beneficial to you as a forex trader.

Writing

While we don’t do much writing when it comes to trading forex apart from the little notes that we jot down in our trading journal, writing does give us a few skills that we can bring across. Firstly it teaches us to be a little more analytical, looking at what we have written in order to find and rectify any mistakes in the spelling or grammar. It also helps us to research, research is an important part of both writing and trading, so being able to do it when you are writing something means that it will be slightly easier for you to analyze different information sources when it comes to your trading.

Collecting

There are a lot of things out there that you can collect, stamps, pokemon cards, marvel figurines, whatever it is, it will teach you one main skill. That skill is patience, you need to be patient when collecting, finding the right item for the right place, and not jumping in too quickly and ending up out of pocket. This same skill needs to be used when trading, you don’t want to jump into a trade too early and at the wrong place, if you do that too much then you will be making losses, so patience is vital if you are looking to become a successful trader.

Buying and Selling

Some people just love to sell things, and this helps you to understand the value of exchanging one item for money or money for items. This is exactly how trading forex works. We are exchanging one asset for another. Getting an understanding of how this works beforehand and what to look for when it comes to price fluctuations can help you out as a trader. If you do this, you are basically trading already, just in a more physical form rather than online as a retail trader.

The thing with hobbies is that it really doesn’t matter what it is, a hobby is something that you enjoy, this is a great way of destressing yourself. If you have a hobby, do not give it up just because trading is taking up a lot of your time, make time for it, not only will it help your mental health, but it will also help you to develop certain skills that can come in handy when trading, no matter the hobby that you are doing, it will have some form of benefit to your overall trading ability.

Categories
Forex Indicators Forex Signals

How Do Forex Robots Actually Work?

What’s this about trading robots? Do they work? Are robots bad? Many questions are those that usually roll in the head when you hear the word “robot”. In the article I write today, I will try to expose what is this about Forex robots and everything that affects them, as well as some myths and realities. Let’s discuss…

How Do Forex Robots Work?

Before you start talking about how they work, do you know what a Forex robot is? A robot is nothing more or less than a few lines of code with clear rules of entry and exit to the market that are executed automatically. All this applied to the Forex market would simply be an automated strategy that buys and sells in the currency market. They are also called EA (Expert Advisor).

When I told you what it is, I explained how they work. But hey, can you make money with robots, or are they a scam? The performance or results of these automated strategies will depend on these previous strategies and their supervision, so if they are not profitable from the start, no matter how much they are automated they will not be. But if the strategy that is programmed is good, the result may be better.

Key Advantages

One of its great advantages is to be able to quantify the performance of the strategy that has been programmed. With a programmed strategy, you can perform a backtest and evaluate how that strategy has behaved before. If you have done discretionary or manual trading you will surely have tried different systems without having statistics or results of whether they have worked or not in the past. Come on, you’ve been playing with your money without knowing if what you were doing was profitable or not. Think for a moment, if you don’t quantify, how are you gonna know you’re making progress?

You need objectivity in making decisions when you make decisions. Otherwise, your results will be affected by your interpretation and here you have a good extra factor to make a mistake. How are you going to correct it? Systems or robots allow an objective market approach.

As you know, the accuracy of execution when trading is key. When you trade manually, you analyze wait for the moment and execute the order. When the process is automated, the order is released in less than a second without hesitation or analysis, or thoughts.

Another advantage more than considerable is that to execute the operations you do not have to leave your eyes looking at graphics for hours. You can do it uninterruptedly over time, even if you’re not in front of the screen. If you’re on a trip for a week or you have to do anything to stop you from being there, your operation may be running simultaneously. Be very clear, however, that they must be monitored and that the creation of automated systems requires time and work.

Closely related to the previous one, with robots you can trade in different assets simultaneously. Manually we are limited in this aspect. So you can diversify without problems.

And yes, the psychological approach. As you know, in this trading, psychology is important and it affects a lot. When the strategies are done in an automated way you reduce the psychological component quite a lot since your buying and selling decisions are not biased by your psychology. I say it’s reduced because you have to know that when robots have a negative or positive performance it will still affect you. But the main difference is that the results affect your psychology and not your decisions as it usually happens when operating in a discretionary manner.

Key Disadvantages

Although the advantages are clear, there are disadvantages. Most of the robots that are marketed on the Internet are based on martingales, grid. that reflect very good results and almost perfect performance curves but one day they break. Why? Because of the aggressive risk management rules they use. If you don’t think so, try downloading some for free and look at their results over a long period of time.

Why does this happen? Creating a good, cost-effective automated system is not easy. Programming a martingale or grid is not easy. So before you buy any robot, make sure they don’t use these techniques and that there’s no one hiding under a brand that can disappear tomorrow.

As for disadvantages when trading with robots something important is any technical failure that may arise and cause it not to run well. It is advisable to use VPS (a private virtual server) if this failure can affect your operation. I explain what a VPS is in this video:

Although it’s something that’s never happened to me yet, it is something that can happen. But it is as if the Internet connection fails. Also, failures or errors when programming the strategy (before executing it in real test it in demo or with very little capital).

Disadvantages are anything you might think might affect something that’s running remotely. Many such tasks already exist in different areas today.

What are the Limits of Robots?

We could say that robots do not work (always). I mean, there are systems that work perfectly for many years, but the vast majority die first. So? The solution is to have clear rules to disable these robots. If you don’t have an established plan, what are you going to do if your robot keeps losing money? Learn how to manage them.

Another limitation when using automated strategies is the over-optimization of parameters. What is that? Adjust your variables so that past results are very good. What’s the problem here? That we don’t know what’s going to happen on the market tomorrow, so it’s very likely that that robot won’t work well with new data when you apply it. Solution? Create a strategy and then validate it. Not the other way around. Remember that it is not about looking for perfect results, it is about getting real results.

Robots do not do magic, they have an added value with respect to manual trading that is quite clear, but it is something that you connect and you sit down to see how you drop the money. To take advantage of them is to be intelligent, but to ignore limitations is to be naive.

How to Choose A Forex Robot?

We talked about an important point earlier. Avoid using robots that apply aggressive risk management. If you’re going to choose a robot, spend some time contacting the person who created it, their background.

Don’t buy on pages you don’t know, in fact, I would tell you not to buy a robot as such but have expert supervision. As we’ve already seen, robots need to be managed. Be sure that you are able to learn to do all this by yourself in a simple way. You also have other alternatives in portals like Darwinex.

How to Program a Forex Robot

Today there are many tools to do so. From my experience, don’t get complicated and use those that allow you to start with a short learning curve. Some tips to create a good robot:

Set clear market entries and exits.

These things have to be made as easy as possible. You don’t need a thousand lines to make it work. Use the rule that your logic fits in a post it.

  • Always use stop-loss unless you don’t use any leverage.
  • Do it on assets that have liquidity so as not to pay a surcharge.
  • Schedule them to run in hours where there is volume on the market.

The Best Account Types

The most suitable accounts for trading with robots are the same as for manual trading. Accounts with low spreads, direct market execution, and adjusted swaps. Forex brokers are many, but with these features no longer so many. It is important that no use standard accounts or the behavior on the outcome curve you are going to get will be very different.

The Best Forex Robots

The best robots are the ones you know and create. Those that you can build in a simple way and also do different tests of robustness to know first hand their weaknesses and strengths.

For me, there are no good robots or bad robots. There are robots that work and there are robots that don’t work. I try to apply those who do and discard those who stop. I use more than a hundred strategies that I monitor daily and follow up. In this way everything is dynamic and although there are always strategies that do not work over a limited period of time, which is involved is that there are others that generate more than those.

Manual Trading or Robots?

Within the world of investment and trading, there are defenders of manual trading versus robots and vice versa. To say that manual trading doesn’t work seems very bold to me. In case a person hasn’t worked, why won’t it work?

After all, a robot can be a manual trading system that runs automatically. Provided that there are clear rules and a methodology, it is clear that both can be valid. Now, a forex robot has a number of advantages over manual trading that it doesn’t have. If we have the ability and the judgment that a person can have and the means to carry it out through robots, why not use both?

Categories
Forex Risk Management

How Do I Know if My Risk Appetite is Reasonable?

Risk is something that is present in pretty much everything that we do when it comes to trading forex, each trade that we put on is a risk, each time we increase our lot sizes or trade a new currency pair, it is a risk, risks are everywhere. While risks are present, and there are ways to monitor and reduce the risks, there is one thing that we are not able to change, and that is our own tolerance or appetite for risks.

Risk tolerance is basically your ability to deal with risks, it is an emotional state where you are either tolerant of the risk, able to deal with it with a clear mind and an objective view, intolerance is where you are not able to handle it quite as well, it will cause you to stress, it will cause you anxiety and it can even cause you to place trades that you otherwise would not have.

Your risk appetite is about how much risk you actually want, for many wanting risks would seem like a strange thing to want, but for others, it is something that they get their buzz and thrill out of it. In fact, this lust for risk can cause people to trade too much, to trade too large and to trade at a level that puts their accounts at risk. For others with very little risk appetite, they may not want to trade at all once they have experienced the risks that are involved.

With that being said, how do you know whether your own appetite for risk is appropriate and reasonable? Firstly, if you are getting severe anxiety or stress from trading, you don’t really want to press that trade button due to worry that you may lose something then your risk tolerance and appetite is on the low side, if it is really bad, then this can be a sign that trading is simply not for you, there will be risks and to trade is to accept those risks. For some it is possible to work through it and to develop a better tolerance to the trades, for others it is simply not possible and so trading will simply be a stressful situation for you.

On the other end of the spectrum are those that like a little too much risk, they want to place huge trades, they want to be trading at all times regardless of their strategy or how the markets are. The more volatile the markets the more they will want to trade as the risk and rewards are both far higher. This can be a dangerous situation to be in as very little risk management will be put in place, these sorts of thrill-seekers will either become rich very quickly or lose everything in a matter of days, sometimes both, getting some wins, getting the confidence and then losing it due to risking too much.

Those are the two extremes when it comes to risk tolerance and appetite, what we need to remember is that there are in fact things that we can do to help maintain a safer trading environment. If of course, you are right in the middle of the tolerance and appetite levels, then you are in a great place when it comes to trading as you are able to tolerate the risks and are also not afraid to take a few.

So let’s assume that you are either high or low on the appetite level, what can we do to help? The first thing is to create a trading plan, within this plan you will have set out some rules, these rules are there for one important thing. They are there to ensure that you are in line with your plan and that your risks are limited. These rules will help someone with a low appetite for risk to understand that they are still in charge and that trading along these rules gives them the essence of safety, a way of controlling the risks that they are being put under.

For those that are on the high end, it will enable them to reign in the risks that they are taking. Trading to the rules will basically ensure that you are not putting on any additional trades that you shouldn’t be and that you are not placing trades that are simply too large for your account. Of course, it is up to the person whether they continue to follow it, but some discipline will enable you to manage your risks a little better.

Your risk management plan must also be in place. This plan sets out all of the risks that you will be putting yourself under, it will give you a good understanding of what risks there are and also how you will be reducing them. Ensure that you understand where your stop losses will be, what your risk to reward ratio is along other aspects of your trading. Much like mentioned above will enable you to maintain your risks and to help you stay at the right level. When we trade to the plan, we are making good trades, regardless of win or a loss, and with taking good trades we will ultimately profit at the end of the day. The issue of course is sticking to that plan, which is often easier said than done.

So what level of risk appetite is reasonable? There isn’t really one. There are some people who are in the middle which is perfect for them, but for many others, you are in a situation where you either like the risk or you hate it, but wherever you are on the line, you need to ensure that you have everything that you can in place in order to manage and reduce the risks that you are putting your account under. Stick to those plans and you will be in a great situation.

Categories
Forex Psychology

Maybe Emotions are Actually Good for Forex Trading?

In the last 20 years, advances in brain imaging technology and other methods of analysis of neurological activity have produced important advances that allow us to better understand the complex functioning and biology of the human brain. This discipline, neuroscience, is closely related to neuroeconomics, which in the last decade has combined knowledge of the brain with biology, physiology, psychology, behavioral finance, and economic theory to improve understanding of decision-making in competitive market environments, where risks and benefits are taken.

For Colin Camerer, Professor of Behavioral Economics and Finance at the California Institute of Technology, neuroeconomics involves opening the “black box” of the brain to inform economic theory and, potentially, for a better understanding to mitigate risky behaviors such as rogue traders. Denise Shull, president and founder of ReThink Group, a New York-based firm that advises professional traders, defines it as the study of “what happens in the brain when we face risk and other decisions that are made under conditions of uncertainty.

When using brain imaging, neuroeconomics also measures heart rate, blood pressure, and facial expressions to evaluate physiological reactions. And it uses games-like tests and experiments to study decision-making, make inferences about how the brain works, and build predictive models about human behavior. These efforts are aimed at advancing and enriching our thinking about economic theory, financial decision-making, or public policy decisions.

Science has advanced in parallel with recent studies of bubbles and crises and how decision-making and risk-taking, at the micro and macro levels, contribute to these events. Andrew Lo, professor of finance and director of the Financial Engineering Laboratory at MIT’s Sloan School of Management, has focused on this area of study. Collaborating with Dmitry Repin of Boston University, Lo has conducted neuroscientific tests on professional traders, looking at how the complex interaction of rational thinking, emotions, and stress can affect risk-taking and the profitability of investments. In his 2011 article, Fear, Greed and Financial Crises: A Cognitive Neurosciences Perspective “by investigating the neuroscientific bases of knowledge and behavior we can identify keys to financial crises and improve our models and methods of dealing with them”.

And watch out because this doesn’t just stay in the financial markets but goes further: President Obama has invested $100 million last year in the Brain Research through Advancing Innovative Neurotechnologies (BRAIN) project, in order to create a map of the brain.

Brain Photos

Functional magnetic resonance imaging (fMRI) is the fundamental tool that has allowed a great boost to neuroscience in the last two decades, making it possible to obtain more information about the experiments performed.

With fMRI, scientists are able to scan brains “in action” in a safe, non-invasive way. They are able to obtain empirical data on which specific parts of the brain are active during a given activity. Though there’s still a long way to go in terms of image quality and accuracy, the technology has produced amazing images and scientific findings.

Coates’ case is striking: he currently works as a researcher at the University of Cambridge but is a former operator of the derivative tables of Goldman Sachs and Deutsche Bank so he knows both worlds well. According to Coates, the way risk is assessed has changed in the last 20 years. Thus, in the nineties “the head of the trading table asked what your position was and how you felt about it, so you could decide if a trader could handle a certain position”. But over time, Coates points out, “this approach was replaced by statistical indicators and risk managers who carried out stress tests and made instantaneous assessments of risk levels.”

However, this change has not allowed us to detect “hidden changes” – those moments that Coates calls “the time between the dog and the wolf” – when people become very risky or very averse to the risk of the normal. Coates says statistical-based methods, which do not take into account biology or neuroscience, are not able to capture the behavioral changes in traders.

In any case, what Coates’ book highlights are that neuroscience and physiology have shown that financial decision-making is not a purely cognitive activity, but that physical components also intervene. Human beings do not manage information without passion, we are not computers; on the contrary, we react to information physically, our bodies and brains move in tune.

Research also shows that much thought is normally carried out automatically and involuntarily, in contrast to controlled thinking that is voluntary, conscious, and open to introspection. Daniel Kahneman himself, a psychologist who won the 2002 Nobel Prize in economics, referred to these modes in 2011 in the title of his book Thinking Fast and Slow, that is, what some authors describe as cold and hot decision-making.

Hot decisions include hunches, instinct, or intuition, which are a way for the body to record critical information that has been received. They hardly affect consciousness, but they are essential to rational choice. Some scientists question the reliability of intuition but experts in neuroscience consider intuition a form of pattern recognition that can help traders identify patterns in complex markets and create algorithms for the exploitation of these patterns. In Coates’ words, “the common sense of a winning trader may be due in part to his ability to produce body signals and listen to them”.

Coates has also deepened the impact of natural hormones on economic agents and markets and in particular the “winning effect” on male traders. The biological evaluation of groups of traders in the City has led him to the conclusion that testosterone and cortisol are chemical messengers that point out risks and economic rewards.

Moderate testosterone levels, says Coates, prepare male traders to take moderate risks, but higher levels occur when traders make winning trades and continue to win. The resulting hormonal imbalance can lead to excessive risk-taking (i.e., the winning effect). What’s more, Coates points out that during bullish markets testosterone is likely to increase, causing risk levels to rise altogether which in turn exaggerates the rally. In contrast, cortisol, a hormone associated with stress and anxiety, can rise during a stock market crack, so traders become irrationally risk-averse. Finally, Coates takes his theory to the extreme: “episodes of irrational exuberance and pessimism that destabilize financial markets can be caused simply by hormones.”

Evidence of the Emotional Component

Another point of view is that of Denise Shull of ReThink Group. This specialist in trader psychology and experienced futures trader claims that much of what we know and have been taught about rational vs. emotional thinking is wrong. Neuroscience has shown that we perceive, judge, and decide in a totally opposite way to that proposed by the prevailing theories in the field of psychology and economics, in which above all the benefits of rational thought stand out.

In particular, Shull cites a 1992 study by Antonio Damasio and Antoine Bechara, professors of neurology and cognitive neuroscience at the College of Medicine at the University of Iowa and creators of the Iowa Gambling Task, a simulator that attempts to represent the decision-making process in real life. In this study, the patients who participated had suffered damage to the orbitofrontal cortex section of the brain, which had been confirmed by fMRI. By studying patients, they found that this area is part of a broader neural system involved in decision-making. Although these patients retained their cognitive abilities despite brain damage, they also showed a dramatic loss of emotional feeling, having begun to make destructive and wrong decisions for their lives.

One patient, for example, had lost all sense of proportion, spending hours obsessed with trivial details and ignoring more important matters. These data led to the conclusion that emotion or feeling is an integral component of the machinery of reason. Another interesting study cited by Shull is the 2007 study by Myeong-Gu Seo of the Robert Smith College of Business at the University of Maryland and Lisa Feldman Barrett of Northeastern University, on the impact of emotions on the decision-making process of buying shares. They selected 101 investors to record their feelings while making investment decisions every day for 20 consecutive business days.

Seo and Barrett found that individuals who experienced more intense feelings during operations made better decisions and made more money, just the opposite of what one would expect! The purpose of the study is that the common prescription of “ignoring your emotions” seems to be wrong for an effective regulation of feelings and their influence on decision-making. Rather, it seems to be the opposite: that people who are in the best position to identify and distinguish their feelings can better control the biases induced by those feelings and, as a result, achieve better trading results.

So, according to Shull, “in risk management what we’re trying to do is extract emotion and come up with a mathematical model, but neuroscience research shows that that takes us the wrong way. ” Moreover, in his paper The Art of Algorithmic War, Shull states that “after most of the non-scientific debate about feelings and emotions there lies the assumption that a feeling or emotion automatically becomes an action. This is simply false… In their purest form, feelings and emotions are designed to give us information. Without realizing it, Wall Street adds emotional information to analysis reports”.

The Biological Factor

Another author who has much to say in this field is Peter Bossaerts of the Caltech Laboratory for Experimental Finance. Bossaerts has applied neuroscience methods to a variety of risk-related topics, including how individuals process risk in a given situation and make risk-related mistakes.

In the tests conducted by Kerstin Preuschoff, a researcher at the Laboratory of Computational Neuroscience at the Swiss Federal Institute of Technology in Lausanne, and Steven Quartz, professor of philosophy and researcher of neuroscience at Caltech, subjects participating in the study were asked to play cards while observing the brain areas activated during risk management using fMRI. The collected data suggest that the anterior insula section of the brain, considered the seat of feelings and emotional awareness, transmits this information in a fairly precise way – essentially in the form of mathematical signals.

For Bossaerts, this means the ability to process risks is encoded in the brain in the form of an algorithm, similar to any mathematical model that quants like so much. Bossaerts has further concluded that while a person may receive new information, the brain’s “processing algorithm” for risk remains constant.

That is, Bossaert claims to have discovered mathematical measurements in an essentially emotional area of the brain so that the processing of emotions in the human being is not something that is done raw, but something that is reported in a reasoned way.”

Conclusion

It is clear that the application of neuroscience to trading opens up a whole new field of research to explore. While the applicability of neuroscience findings to trading is still in its infancy, it is not out of the question that in the future we will be able to reprogram ourselves to trade or act in a certain way to prevent our stress from affecting our performance or even take medications that modify the production of certain hormones to control imbalances in our character that affect trading.

Categories
Forex Psychology

Five Reasons You Need to Stop Stressing About Forex

Forex can be stressful, it’s one of the things that are told to us over and over again especially when things are going the wrong way, but does it need to be stressful? There are things that we can do that help us to reduce the amount of stress that we are put under and ultimately to show us that forex trading really isn’t anything to be stressed about.

Why can it be stressful?

It is important that we understand why trading can be stressful and in the right situation, it can be very stressful. Each and every person will have different feelings and will have different reactions to how the markets are going and also how their individual trading is going. Stress often comes from losses, when we lose it is not a nice feeling, as soon as we take a loss we have lost a bit of our money, money that we like. If that money is money that we actually could not afford to lose, then the stress levels will continue to rise further. For many stress can also come upon us when a trade is in the red, we can see it going the wrong way and this can cause us to worry that we will lose some additional money. Stress can come at any time and so we need to work out how we can work through it and help to reduce it.

Use proper risk management.

Risk management is the cornerstone of any strategy, it is the foundation that is there to basically protect your account. It is there to ensure that you do not lose more than you want to with each trade and ensures that you do not blow your account. When you have it in place it can help to take out a lot of the stress from your trading. Of course, the opposite is also true, if you do not have proper risk management in place then every single trade that you make will have the chance of blowing your account. If You are in that situation every trade then you will be under constant stress every time that you trade. This is why you need things like trading rules, dictating how and when you trade, stop losses to help protect your accounts, and a proper risk to reward ratio, that dictates the maximum loss and profits that you will make with each trade. Knowing the maximum that you can lose on each trade can really help you to stop stressing about them, as you already know how much you could lose.

Take regular breaks.

At times it will be impossible to prevent any stress from building up, so then we will need to try and deal with it. One of the best ways to do this is to simply take a break, breaks are a fantastic way for us to reduce our stress levels. Getting away from what is causing the stress is the first step, it will prevent any new thoughts or new stresses from being added to the equation. Secondly, being away and doing something else will help to take our minds off of things that are already causing us stress. This way we think about something rose, something else that gives us enjoyment or at least doesn’t add to the stress. Doing this regularly can help you to regulate the stress that you are under. Do this regularly, multiple times a day, it is even a good idea to do it even if you aren’t currently experiencing stress. Just ensure that you are not sitting in front of the computer for hours and hours without any breaks. Coming back with a clear and calm mind can really help you to improve your productivity and trading results.

Ensure we trade with money we can afford to lose.

The golden rule of trading and investing, only to trade with money that you can afford to lose. It remains true in this situation too and is certainly a way to help prevent certain stresses that you would otherwise experience. Think about it, you deposit some money that you actually need for your rent as an example, how would you feel as a trade goes into the red? You will be in a constant state of stress and panic, you are about to lose the money that you need for your rent and you won’t be able to say it this month. Why would you put yourself under that? Reduce or completely remove that level of stress by only trading with what you can afford to lose. If it will affect your life, do not trade with it. Also do not borrow money or take a loan in order to trade, that just puts you in debt and you will end up owing a lot of money should things go the wrong way.

Understand that losses are a part of trading.

Losses are a  part of trading, a big part of them, every single person that has ever traded (apart from those that only do a single trade) will have experienced losses, all of the most successful traders in the world have experienced losses and a lot of them. In fact, they are so much a part of trading that we factor them into our trading through our trading strategies and risk management. Ever heard of the risk to reward ratio? This is where we decide how much we will risk with each trade and how much we want to win. Knowing this means that we know exactly how much we might lose with each trade and that each trade is actually a fantastic way for us to learn from what we have done and for us to improve. Look at why the trade lost and what we can do differently. 

Those are five of the reasons why you should stop stressing about your trading. We understand that trading can be stressful, of course, it can, anything to do with money can be. It is important that we do what we can to reduce those stresses, if things get too stressful it can make us want to quit entirely, so try and include and think about the things that we mentioned above, it will help you to be calmer when trading and in the long run will enable you to be a much more successful trader.

Categories
Forex Indicators

The True Benefits of the ATR Indicator

Instead of using your own judgment, some statistical measures of price volatility are available. One of the most popular is the ATR indicator (Average True Range), which measures the average movement for a given exchange torque ( or action, raw material, etc.) for a given period.

What Is the ATR Indicator?

The ATR indicator moves down and up as the price of an asset becomes larger or smaller. This indicator is based on price developments, so the reading is in dollars. For example, in share trading, a reading of 0.23 of the ATR means the price ranges from $0.23 on each price bar. In the currency market, the ATR will show you pips, then 0.0025 is the same as 25 pips.

A new reading of the ATR indicator is calculated as each period passes. On a one-minute graph, a new ATR reading is calculated every minute. In a daily graph, a new ATR reading is calculated every day. All these readings are plotted as a line continues, so traders can see how the volatility has changed as time goes on.

Since the ATR is based on how much an asset moves, the reading of an asset is not comparable with other isolation assets. To better understand the indicator, here is how we calculated it.

Finding the A, or average first requires finding the true range (True Range TR).

The TR is the largest of the following:

  • The current maximum less previous closure
  • Current minimum minus previous closure
  • Current maximum minus the current minimum

Whether the number is positive or negative, it doesn’t matter. The highest absolute value is the one used in the calculation.

The values are recorded every day, and then you get an average. If the ATR is averaged over the previous 14 periods, then the formula is as follows:

ATR = [( ATR Previous x 13) [ TR Current] / 14

Continue reading about the ATR or start playing a little with a risk-free demo account and see for yourself how the ATR indicator works in real-time.

Setting the ATR Indicator

Typically, the default parameter is 14 periods, that is, 14 days on the daily graph, 14 hours on the hour graph, and so on, but as time goes on you want to experiment with the parameters. Knowing the ATR for a certain period, traders can choose to place a stop loss at a certain percentage of that range, based on the entry point. Let’s take an example, traders with confidence in the trend direction who want to prevent their stop loss from being reached would place the stop loss at 80 or 100 percent of the ATR away from the entry point near strong support. They will accept the long loss if that stop is reached because they believe that the probability of that happening is slim.

Traders with lower confidence and greater risk aversion that they want less loss (even if there are more of them because the stop is reached) can place their stop closer, perhaps 50 percent or less from the ATR indicator outside the point of entry. When you know the usual volatility for a given period of time through ATR, you have a better idea of how far you want your stop loss fixed or dynamic to prevent a random movement from reaching it.

Let’s use an example of how to use the ATR indicator to measure volatility and place a fixed or dynamic stop loss command.

Measuring Volatility

We refer to the example above. In the figure below, we show the same daily graph EURUSD showing the daily candles for the transaction’s entry date on August 11, but this time we include the ATR, which shows that for the past 14 days or candles daily, The average price range was around 210 pips. Those interested in how the ATR is calculated can view it online.

However, if we wanted to decrease the chances of reaching a stop loss in exchange for a risk of further loss if the transaction turned against us, we could have established the stop loss at a distance of 50 percent or more from the ATR, 105 pips, below the point of entry or some different percentage of the ATR.

The point here is that there are two different ways to determine how far you are going to establish your stop loss. In this example of fórex trading, we use the most recent minimums as a guide while we could have used the ATR. Much depends on factors such as your appetite for risk, market conditions, and confidence in the transaction. For example, if you caught a retraction to strong support in a strong general trend, you may be more confident that that upward trend will return and allow a wider stop loss to prevent it from being triggered by random price movements. When you have less confidence, you can keep the stops tighter.

Setting an ATR Indicator in MetaTrader 4/5

This section shows how to configure the ATR indicator in MT5. Assume that you have opened a graph.

Adds an ATR indicator and sets the parameter for this indicator:

  • Click on Insert and move your mouse over Indicators and Trend
  • Click ATR indicator
  • Configuring the common parameters

After you have completed the above step, the settings menu appears. Most indicators can be controlled by many common parameters.

There are two types of parameters:

  1. Indicator calculations: e.g. the number of periods used by the ATR indicator (you don’t need to worry about this much in the beginning)
  2. Display of an indicator: e.g. How will it look? The thickness and colour of the lines, etc.

To change the indicator settings directly on the graph a while later: Right-click on the ATR indicator (you will have to be very exact on the indicator line to see the menu below)

Choose the ATR Properties: The menu parameter appears again where you can change the indicator.

To delete the ATR indicator: Right-click on the indicator you want to delete (you will have to be very exact on the indicator line to get the menu below). Click ‘Delete Indicator’ and the indicator will disappear from your chart.

Final Words

The ATR indicator is not directional like the MACD or RSI, rather as a unique indicator of volatility that reflects the degree of interest or disinterest in a movement. Strong movements, in either direction, are usually accompanied by long ranges, or long and true ranges. This is really true at the beginning of a movement. Not-so-inspiring movements can be accompanied by relatively narrow ranks. As such, the ATR can be used to validate the enthusiasm behind a movement or a rupture. An upward reversal with an increase in ATR would show a strong buying pressure and the reinforcement of a reversal. A break in bearish support with an increase in the ATR would show strong downward pressure on sales and reinforce the break-up of the support.

Understanding how to read the ATR indicator is important, but if you want some help, Metatrader offers a very useful indicator toolkit. Play a little on a demo fórex account and see for yourself how the ATR indicator can give you a lot of money.

Categories
Crypto Forex Psychology

The Impact of Psychology On Cryptocurrency Trading

The cryptocurrency market does not follow the rules of technical and fundamental analysis. Only psychology works here. Who will be the strongest: institutional investors, agitating markets with capital, or private investors, who know how to generate profits from these short-term price changes. The psychological patterns of cryptocurrency movements can form the basis for successful strategies. You will learn from this article how to develop a psychological strategy for operating cryptocurrencies.

Psychology of Operation

Cryptocurrencies make up a market that grows day by day. Following the announcement of BTC futures to begin trading at CBOE and CME, bitcoin increased from $12,000 to $17,000, breaking the 60% level of capital in the entire market. Other cryptocurrencies are also growing fast; total market capital grew more than 30% over two weeks, reaching the level of $500 billion. Such a rise attracts more and more traders to this market, who immediately face the need to choose a correct strategy.

It is possibly difficult to make predictions for cryptocurrency with technical analysis, so trading strategy indicators are not relevant here. The market is today immature to use indicators in historical periods. Sometimes it is possible to follow the formation of graphic figures (patterns), but quotes are often unpredictable. One can apply fundamental analysis, but even so, the movement of price is difficult to predict. For example, bitcoin, following news about the futures release, is constantly rising with moderate fixes. IOTA, following positive news from developers in late November, grew 2.5 times over a week, but then fell 40% in just one day, from $5.48 to $3.11.

Operating with fundamental analysis is complicated by several factors. First, there is no economic calendar. Second, there is no knowledge about how the news will influence quotes. Example: deep drop followed by a rise in the price of bitcoin after canceling Segwit2x; investors did not understand at first how to interpret the news. The cryptocurrency market is driven by private and institutional investor psychology. That’s what used to be used to develop a trading strategy.

Psychological Strategy

Most cryptocurrencies continue to increase the price fast, fewer and fewer investors want to set the profits. More and more traders invest in cryptocurrencies, but reserves are declining. In some markets, the margin is 20-25% and transaction fees make trading flat. First, it seems to be one more bubble. Institutional investors deliberately push the price up, aiming at a market explosion after setting positions.

Some considerations about how to make money with cryptocurrencies:

Study the amount of market demand and provisions. Don’t do long-term operations as you can reverse the market trend. If we have an order that will cover more than 20% of the total market volume it is better not to invest. A trader’s goal is not to create profits in the temporary growth of an unpopular currency with low liquidity. The trader’s goal is to minimize risks. Diversify risks. Fiduciary inflow is not as significant as it used to be. Money flows from one cryptocurrency to another.

There is a similar situation when Segwit2x was canceled. Then, after the collapse of the BTC, the BCH ratio immediately increased. Analyze the correlation of cryptocurrencies and study the currencies with inverse relation (e.g., BTC and ECH). If we find a growing market, you will win anyway; if you transfer from one currency to another, you will insure against potential losses.

Buy cheap. The cryptocurrency market is highly volatile. A 20%-25% asset drop is considered normal, so buy when the price is being corrected. If a currency falls more than 30%, then investors will not trust it. Study the volume of trading in markets. You can do it in market sections on the Coin Market Cup website. If trading is not equally assigned, there is a significant excess of trading volume in a single market, which could indicate that someone is deliberately raising the price of a cryptocurrency by creating an expectation around a currency to raise its price and then sell the asset at a higher price.

Don’t go into the market that’s going too high. A rapid rise (20%-25% per day) compared to the previous day may indicate that the rise is speculative and is likely to be followed by a prompt correction. The same was with IOTA and Ripple. Don’t get carried away by ordinary emotions. Communication forums are useful for Forex but not for the cryptocurrency market, where everything is unpredictable. By joining the overview you can get caught by big investors, who use rumors as a tool to manipulate.

Ignore the time corrections. However, cryptocurrency price charts seem like a Ponzi scheme and the goal of traders is to withdraw money in due time, there is no reason for the cryptocurrency market to collapse. For example, analysts predict that bitcoin will break the $20,000 level and grow more.

Categories
Forex Indicators

Everything You Need to Know About Using MACD (Moving Average Convergence Divergence)

Moving averages identify trends when filtering price fluctuations. Under this idea, Gerald Appel, an analyst and portfolio manager from New York, developed a more advanced indicator. He called it Moving Average Convergence Divergence indicator MACD, which consists of not one but three exponential moving averages. It is seen in the graphs as two lines, whose intersections between them provide trading signals. One is called a MACD line and the other is called a signal line.

This oscillator has been involved in some controversy as to its classification. Mainly because there are analysts who classify it as a trend tracking indicator and others who consider it a follower of the cycle. We can be sure of the following: we are talking about the most effective oscillator after long-term cycles, hence the fact that it can be considered a follower of short- and medium-term trends.

Creating MACD

The MACD indicator originally consists of two lines: a solid line (called a MACD line) and a “strokes” line (called a signal line or signal). The MACD line develops from two exponential moving averages. It responds to price changes quite quickly. The signal line is developed from the MACD line, smoothed with another exponential moving average that responds to price changes in a slower way.

Buying and selling signals are given when the MACD line crosses above or below the signal line. The MACD indicator is included in most technical analysis software and is also on the DIF platform. Nowadays, no analyst needs to calculate it by hand as did its creator, Gerard Appel, because computers do this work faster and with greater precision. The MACD indicator is included in most technical analysis software.

Creation of the MACD:

  1. Calculate an exponential 12-day moving average at closing prices.
  2. Calculate an exponential moving average of 26 days of closing prices.
  3. Subtract the 26-day MME from the 12-day MME and draw its difference, as a continuous line. This is the MACD line.
  4. Calculate an exponential 9-day moving average of the MACD hotline and draw the result as a dashed line. This is the signal line.

Additional MACD Applications

Many operators try to optimize MACD by using other moving averages instead of the more commonly used MME for 12-26 and 9 days. Another option is to use MME 5-37 and 7 days. Some traders try to establish MACD links with market cycles. In the case of using cycles, the first MME should be one-quarter of the duration of the dominant cycle and the second MME should be half of the cycle. The third MME is a smoothing instrument, the length of which does not need to be connected to a cycle.

MACD Trading Rules

The intersections or intersections between the MACD and the signal lines identify changes in the market trend. Trading in the direction of crossing these lines means following the flow of the market. This system generates fewer operations and signal investments than an automatic system, based on an MMS.

  • When the MACD indicator passes the signal line, it gives a buy sign. Enter long and place a stop loss below the last minimum.
  • When the MACD indicator passes below the signal line, it gives a sell signal. Enter short and place a stop loss above the last maximum.

This type of oscillator has two uses. It helps to point out divergences. It also helps to identify short- and long-term variations, not only when the short average moves far above or below the larger average, but also by crossing the two.

MACD Histogram

The MACD histogram offers a deeper understanding of the balance of power between buyers and sellers than the original MACD. It shows not only who controls the market, buyers or sellers, but also whether they are strong or weak.

MACD histogram = MACD line – Signal line

The histogram of the MACD indicator shows the difference between the signal line and the MACD line. It graphically represents that difference as a histogram, a series of vertical bars.

When the MACD fast line is above the slow signal line, the MACD histogram is positive and is represented above the zero line. When the MACD fast line is below the slow signal line, the MACD histogram is negative and is represented below the zero line. When the two lines are touched, the MACD histogram is equal to zero.

Each time the distance between MACD and the signal lines increases, the MACD histogram expands. Each time the two lines join, the MACD histogram is shortened. The slope of the MACD histogram identifies the dominant market group. A growing MACD histogram shows that buyers are starting to strengthen. A decreasing MACD histogram shows that vendors are starting to strengthen.

The slope of the MACD histogram is more important than its position above or below the center line. The best-selling signals are when the MACD histogram is above zero but its address is bearish, showing that buyers are starting to sell out. The best buy signals occur when the MACD histogram is below the zero center line and its slope is bullish, showing that vendors are starting to tire.

However, there are systems that consider buying and selling signals at points where the MACD histogram cuts the zero line. In this case, the buy signal is given when the oscillator crosses from the bottom up, while the sell signal is given when the oscillator crosses the reference line from the top down.

Categories
Forex Psychology

Top 10 Forex Trading Psychological Mistakes

It is said that the personal psychological challenge constitutes 90% of the struggle to achieve consistent success as a forex trader. Can it be true? Yes and no. Many great traders who have written about their experiences have recognized how their own inner psychological struggles have caused them heavy losses, even when they “knew” they were doing it wrong. There can be no doubt that the psychological factors are of great importance in the game of Forex or when speculating in any market.

Mastering your negotiating psychology isn’t going to offer you money by itself but, if you’re not aware of the tricks your own head is trying to reproduce, you are very likely to be losing even if you are a good trader and have been successful in your trading decisions. There are hundreds of ways a trader can sabotage himself. There is a “physical” aspect to trading.

We want you to find it useful in your journey as a trader to be aware of the various psychological traps that traders usually fall into. Sometimes you have to experience something for yourself to learn from it: nothing teaches us better than direct experience. We want some of these points to give you a new understanding of the trading errors you have already made or warn you beforehand of mistakes you have not yet made. Make the effort not to blame yourself when you make a mistake while operating: get your “revenge” by learning the lesson and not by making the same mistake.

#1 – Not Believing In Your Methods

It is surprising how many people operate in the markets without being convinced that they can make money or at least make sure that they have a good chance to do so. Even if you think you believe in what you’re doing, are you sure you don’t have big doubts under that surface? The answer to this problem is to prove its methodology. For example, if you follow trends, take time to review much historical data. Does it show profitable results most of the time? It’s based on a solid concept, like a reversion to mean or impulse? If the answer to all these questions is yes, you should be sure of what you are doing and not forget that you believe in it.

#2 – Not Having a Plan and Sticking To It

This sounds very obvious. It’s not just about having a plan, it’s about having several plans and leaving some flexibility. For example, if you are doing day trading, you must have a method to decide in each session which currency pair or pairs to trade. But, if the pair that choose goes nowhere, while another pair shoots up, you may want to reconsider your decision rather than just “stick with the plan”, for example, allowing you the option to modify your opinion hourly. It is a “plan”, but a plan may also include some structured flexibility.

#3 – Not Knowing the Difference Between Planning and Living

It’s pretty easy to make a plan that works on paper, but living that plan in real-time can be something completely different. A good example is to make a plan to do hundreds of trades in a year or so and expect your account to suffer a 20% reduction as it suffers a streak of 20 consecutive trades with losses. You can make the review in a day or two and decide if such losses are acceptable. You will probably feel very different when you spend weeks or even months losing real money over and over while your balance shrinks. There is no optimal answer to this dilemma, just keep in mind that spending months of time in an hour or so is not necessarily a good psychological practice for bad negotiating times.

#4 – Being Afraid Of Placing A Position

These are the opposite sides of the same problem. The best way to overcome this is to tell yourself every day that you are willing to place several positions in one day or none at all, and that what you do will depend entirely on the market situation rather than the condition of your wallet or your mood. There will be days without action and days with lots of action. You have to adapt to the circumstances.

#5 – Making “Agreements” with the Market

Tell yourself that, if the price goes up another 10 pips or if it doesn’t go up in the next hour, you will close the position. This is simply your mind subjected to your anxiety. Ignore it, stand firm, and just step out of positions according to your plan.

#6 – Being Too Anxious To Take Profit

You see a benefit on the table and think how nice it would be to take it and stop operating that day, thus missing what could be a more profitable day. This is laziness and self-indulgence and must be controlled. The only reason to take profit must be that you have a real reason to believe that you will probably not go much further in the desired direction. Let the market point it out, not anticipate it.

#7 – Protecting Yourself From Losses

This is really the same as an appetite for profit. You may need to rethink your risk management strategy.

#8 – Letting Positions With Losses Run

There is a simple way to avoid this: always use a strict stop-loss and do not constantly expand it.

#9 – Not Taking Responsibility for Your Trading

It’s very easy to make excuses. If I hadn’t missed the bus/been distracted/in a bad mood then I would have handled the position better and made money instead of losing it. It’s your duty to make sure that that you do not miss the bus or get distracted or be in a bad mood. Once you take responsibility for your trading activity, your mood can improve as you see that there’s a way to make things better. It’s a marathon, not a sprint.

#10 – Endless Search of the “Holy Grail”

You test and design a strategy that offers an average of 20% profit per year. But wait! Try something else to earn even more, say 25%. Is there anything better out there? Maybe, but this process of searching and testing can take a long time. Consider this: If you spend 6 months testing instead of operating in a committed way to find a way to earn 25% instead of 20%, you will simply lose 10% and it will take you another year to make up for it. Keep searching by all means, but don’t let that affect your trading. Even if you have a pretty solid methodology, it doesn’t have to be perfect!

Categories
Forex Technical Analysis

Monte Carlo Simulation Testing in Forex Trading

As a trader, when you need to calculate the risk or consistency of your trading system you need to test your trading systems. The Monte Carlo test is a good tool for this. The Monte Carlo method is based on a simulation where all possibilities are evaluated by a random number generation and all possible scenarios are simulated.

What we want is to generate so many random numbers as possible, in order to simulate as many of our trading scenarios as possible. It is something like saying what would happen if some variables like spread, input, and output or the price itself are altered. You will see how each option evolves over time in our trading system, whether it is viable in the long and short term, and what other variables may influence its course.

In this article, I will show you how this test can help you in your trading, some practical examples, and we will also know how to use it in a practical way.

How Can Monte Carlo Simulation Be Used?

You probably don’t know what this method is used for. The Monte-Carlo simulation is about the economy, both in companies and in investment, the latter being where it is mostly seen in action. Some situations where this type of simulation is made in investment are to create, value, and analyze investment portfolios. It also serves to value complex financial products, such as financial options or risk management models.

Since the return on investment is unpredictable, this type of method is used to assess different types of scenarios. A simple example is found in trading. As you know, movements in prices cannot be predicted. They can be approximated, but it is impossible to do so accurately. This is where the Monte Carlo simulation comes into play, where you try to mimic the behavior of a trading system or a set of them to analyze how these might evolve. Once the simulation is done, a very large number of possible scenarios are extracted.

Origin of the Name

Monte Carlo cites the name of a famous casino located in the Monaco Match. It is known to be the “gambling capital” as roulette is a simple random number generator. The system was first devised in 1946 when mathematician Stanislaw Ulam thought of an efficient method to improve his solo game.

It was on that occasion that he realized that would be easier to approximate the overall result of the solo match by making multiple tests with the cards and counting the proportions of the results than to calculate one by one all the combinations possibilities. He presented this idea to another mathematician, John Von Neumann, in its most rudimentary form. He was so impressed with the system that he put his efforts into refining the formula.

The technological advances, together with the computer and the theories of Alan Turing, allowed the advance of the investigation of this particular financial simulation to be facilitated. A letter from Neumann to the lab in Los Alamos was instrumental in spreading the formula to everyone. The use of the Monte Carlo model as a research tool comes from the work carried out in the development of the atomic bomb during the Second World War at the Los Alamos National Laboratory in the United States. 

This work involved the simulation of probabilistic hydrodynamic problems concerning neutron diffusion in the fission material. This diffusion has an eminently random behavior. Today, it is a fundamental part of raytracing algorithms for the generation of 3D images. In principle, it was idealized by Neumann to evaluate multiple integrals. Today, it is used in the labour market for all kinds of statistics, and very curiously, for high-risk administrative decisions, where it would be difficult to verify the validity of a variant.

Understanding Monte Carlo

The most essential data to keep in mind when doing your calculation is that you have to generate a good amount of random numbers. How can you generate random numbers? While at the Monte Carlo casino, this is used with a roulette wheel, this could take you longer than you have. The right thing for you is to make use of Software.

If we want to generate 10,000 random numbers, to give you an example, imagine how much time we would need to calculate each probability. Computer programs that generate these numbers are used. They are not considered purely random numbers, as they are created by the program with a formula. However, they are very similar to the random variables of reality. They are called pseudo-random numbers. Having said all this, it only remains to see a correct application of the method.

A practical example:

Computer-aided design (CAD) programs can quickly determine the volume of very complex models. Such software, in general, is not capable of determining volume (for example, for a prism, base area multiplied by height). So one of the things we’ll be able to do is divide the model into a set of small sub-models with which the volume can be determined. However, this consumes many resources for the calculation of the volume of each of the elements.

For this, they use Monte-Carlo simulations, which are more robust and efficient. The software knows the analytic expression of the model geometry (position of nodes, edges, and surfaces) and can approximate a point that is inside the model or outside at a much lower cost.

First, the software places the model within a known volume (for example, within a 1 m3 volume cube). It then generates a random point inside the known volume and records whether the point “has fallen” inside or outside the model. This process is repeated several times (thousands or millions), getting a very large record of how many points have been left inside and how many outside.

The probability of it falling in is proportional to the volume of the model, so the proportion of points that have fallen in, with respect to the total of points generated, is the same proportion of volume that the model occupies within the cube of 1 m3. If 50% of the points have fallen within, the model occupies 50% of the total volume, i.e., 0.5 m3. Obviously, the more points the software generates, the smaller the volume estimation error will be.

Excel Spreadsheet

One of the many ways to perform a Monte Carlo simulation is to make a random order of operations. For this, we can perform a simple simulation using a spreadsheet. First, start with the data from the next sample. They are trading operations, so you can make a list of the results of the backtest operations.

Now, assign the results to different ranges. Create result groups and attribute each result to your corresponding group. In LibreOffice, it can be done with:

Functions Category Frequency Matrix.

Continuing with the example, there is only one operation with a loss greater than -600, 3 operations with results between -300 and -200, and so on, until distributing the entire sample.

Calculate the relative frequency or probability with which each range is given (frequency is the equivalent of the total of operations). It also calculates the accumulated frequencies, then you can get the random number intervals associated with each operation.

So, the next thing to do is change the order of the random operations, we seek to generate random sequences of operations. How do you do this? Use the SEARCH function, where we select the array between groups and intervals as the RANDOM search criteria. (Between 0.9999). That’s what a Monte Carlo simulation would look like on a spreadsheet.

Each random number shall be linked to a range with a probability less than or equal to the random number obtained. Thus, if, for example, the generated number is 0.35, this will correspond to the range of 100. From the operating sequences, you can draw the different profit curves. By randomizing the order of operations, the capital curves yield completely different results. Based on the curves, you can calculate the trading system’s hope, scatter results, the maximum drawdown level you can expect, and any other ratio you need.

Applying Monte Carlo to Your Trading

The Monte Carlo test is ideal for you to stress your trading systems and see how they behave in different scenarios. Remember that every day the market changes. As we’re not entirely sure what’s going to happen tomorrow, we change the variables that affect our trading such as volatility, spread, prices. and see how our trading strategies react.

Those that despite varying the whole scenario still yield good results are those that will surely remain profitable. If on the contrary, a strategy with each simulation varies considerably the best thing is to discard it since in practice it can result in losses with any variation in market circumstances.

Use With Darwins

It is possible to either use the method to choose between different traders. We already know that thanks to the formula explained, it is possible to make random operations to generate new scenarios equally likely in each of them.

With the analysis that concerns the article, we will be able to know if a strategy or a darwin works and is robust and in what degree of reliability. To calculate the different curves, we will first need a sequence of results generated by a certain darwin, that is, we will need that the darwin has performed as many operations as possible.

The more I’ve done and the longer I’ve been operating, the better. To get this data, access the risk profile of the darwin you want to analyze, there we will have a histogram of all its operations. Once you have the table, you will have to generate a series of random numbers between 0 and 100 (or between 0 and 1, depending on how you have it set up), and depending on the one that comes out, we will assign a result to each operation. So, if our spreadsheet makes the random number 55, the result of that operation will be +2%.

How do you know this? Because the cumulative frequency of the +2% result is 68.90% and the cumulative frequency of -2% is 30.53, so any random number that comes out between 30.53 and 68.9 will have a result of +2%. You generate this for each operation on each curve, so you can choose the number of operations and the number of curves you intend to simulate.

A darwin with a positive mean means that, in the long run, he has a good chance of winning. Also, the standard deviation gives us an idea of the variability of the possible results of this darwin, the smaller it is, the better. These parameters depend on the number of curves you are going to simulate (the number of curves we have taken as an example is not enough, we have to simulate more, usually 1000 capital curves are simulated) and the number of operations we want to simulate. To analyze data from different darwins, you can do so through the Darwinex website.

Analysis of Monte Carlo

Monte Carlo analysis is one of the largest methods of analysis. Currently, he is one of the major players in high-risk stock calculations. Implementing this model in your trading means having more objective knowledge than you do. Although it seems like a method that throws a coin into the air, the formula used leaves little margin for error and will increase the reality of any fact you make.

Multinational companies, such as Google, have shared their successes in using the Monte Carlo analytical method. They bet large amounts of money on buying social networks and other digital services and are now at the top of the internet world. This type of analysis avoids possible failures when performing operations. In the same way, thanks to it, you can have more robust and consistent trading strategies.

Categories
Forex Daily Topic Forex System Design

Trading Algorithms IX – RSI Failures System

Trading the naked RSI system depicted in this series’s previous video as an overbought/oversold signal generator is too risky, and its long-term results questionable. The system is profitable only in sideways movements. Thus, a trending filter or a detrending step will be needed to avoid the numerous fake signals.

Divergences and Failure swings

Welles Wilder remarks on two ways to trade the RSI: Divergences and Top/Bottom failure swings.

Divergences

A divergence forms when the price makes higher highs (or lower lows), and the RSI makes the opposite move: lower highs (or higher lows). RSI divergences from the oversold area show the market action starts to strengthen, an indication of a potential swing up. In contrast, RSI divergences in the overbought area show weakness and a likely retracement from the current upward movement.

Failures

An RSI Top failure occurs with the following sequence of events:

  1. The RSI forms a pivot high in the overbought area.
  2. An RSI pullback occurs, and an RSI pivot low forms.
  3. A new RSI pivot high forms, which is lower than the previous pivot high

Fig 1 – RSI TOP failures in the EURUSD 4H 2H Chart

An RSI Bottom failure occurs with the following sequence of events:

  1. The RSI forms a pivot low below the oversold area.
  2. An RSI pullback occurs, and an RSI pivot high forms.
  3. A new RSI pivot low forms, which is higher than the previous pivot high.

Fig 2 – RSI Bottom failures in the ETHUSD 1H Chart.

According to Welles Wilder, trading the RSI failure swings can be more profitable than trading the RSI overbought-oversold system. Thus, we will test it.

The RSI Failure algorithm

To create the RSI Failure algorithm, we will need to use the Finite State Machine concept, presented in this series’s seventh video.

The Easylanguage code of the RSI system failure is the following:

inputs:  Price( Close ), Length( 14 ), OverSold( 30 ), Overbought( 70 ), 
takeprofit( 3 ), stoploss( 1 ) ;
variables: state(0), state1 (0), state2(0), state5 (0), state6(0), rsiValue(0),
 var0( 0 ), rsi_Pivot_Hi(0), rsiPivotHiFound(False), 
rsiPivotLoFound (False),rsi_Pivot_Lo(0)  ;

rsiValue = RSI(C,Length);

If rsiValue[1] > rsiValue and rsiValue[1] > rsiValue[2] then
      begin
         rsiPivotHiFound = true;
         rsi_Pivot_Hi= rsiValue[1];
     end

else
     rsiPivotHiFound = False;

If rsiValue[1] < rsiValue and rsiValue[1] < rsiValue[2] then
      begin
         rsiPivotLoFound = true;
        rsi_Pivot_Lo = rsiValue[1];
     end

else
     rsiPivotLoFound = False;

If state = 0 then
      begin
        if rsiPivotHiFound = true and rsi_Pivot_Hi> Overbought then
             state = 1    {a bearih setup begins}
     else
           if rsiPivotLoFound = True and rsi_Pivot_Lo < OverSold then
                 state = 5; {a bullish Setup begins}
     end;

{The Bearish setup}    

If state = 1 then
      begin
         state1 = rsi_Pivot_Hi;
         if rsiValue > state1 then state = 0;
         if rsiPivotLoFound = true then
             state = 2;
     end;
    
If state = 2 then
      begin
         state2 = rsi_Pivot_Lo ;
         if rsiValue > state1 then state = 0;
         if rsiPivotHiFound = true then
         if rsi_Pivot_Hi< 70 then state = 3;
     end;

If state = 3 then
     if rsiValue < state2 then state = 4;

If state = 4 then
      begin
        sellShort this bar on close;
        state = 0;
     end;


{The bullish setup}

If state = 5 then
      begin
       state5 = rsi_Pivot_Lo;
       if rsiValue < state5 then state = 0;
       if rsiPivotHiFound = true then
             state = 6;
     end;


If state = 6 then
      begin
         state6 = rsi_Pivot_Hi;
         if rsiValue < state5 then state = 0;
         if rsiPivotLoFound = true then
             if rsi_Pivot_Lo > OverSold then state = 7;

     end;
           

If state = 7 then
     if rsiValue > state6 then state = 8;

 If state = 8 then
      begin
         buy this bar on close;
         state = 0;
     end;
   

If state > 0 and rsiValue < OverSold then state = 0;
If state > 0 and rsiValue > Overbought then state = 0;    

{The Long position management section}

If marketPosition =1 and close < entryprice - stoploss* avgTrueRange(10) then
    sell this bar on close;

If marketPosition =1 and close < entryPrice + takeprofit* avgTrueRange(10) then
    sell this bar on close;


{The Short position management section}


If marketPosition =-1 and close > entryprice + stoploss* avgTrueRange(10) then
     BuyToCover this bar on close;

If marketPosition =-1 and close < entryPrice - takeprofit* avgTrueRange(10) then
     BuyToCover this bar on close;

The results, measured on the EURUSD, are not as brilliant as Mr. Welles Wilder stated.

The trade analysis shows that the RSI Failures system, as is, is a losing system. This fact is quite common. It takes time to uncover good ideas for a profitable trading system. In the meantime, we have developed a practical exercise using the finite state machine concept, handy for the future development of our own trading ideas.

Categories
Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 3

GBP/CAD Exogenous Analysis

The UK and Canada Current Account Differential

The current account differential between the UK and Canada can determine if the GBP/CAD pair is bullish or bearish. If the differential is positive, it means that the UK has a higher current account balance than Canada. This would imply that the GBP is in higher demand in the forex market than the CAD; hence, it is a bullish trend for the pair. Conversely, if the current account differential is negative, it means that the UK has a lesser current balance than Canada. It would imply that the GBP has a lower demand than the CAD in the forex market; hence, a bearish trend for the pair.

In Q3 of 2020, the UK had a current account deficit of $20.97 billion while Canada had a $5.83 billion deficit. Thus, the current account differential is -$15.14 billion. We assign a score of -2.

The interest rate differential between the UK and Canada

The interest rate differential is the difference between the Bank of England’s interest rate and that by the Bank of Canada. In the forex market, carry traders use the interest rate differential to decide whether to buy or short a currency pair. When the interest rate differential is positive, traders will earn the differential by going long. If the differential is negative, traders can earn the differential by shorting the currency pair.

Therefore, if the GBP/CAD pair’s interest rate differential is positive, the pair is bound to adopt a bullish trend. Conversely, if negative, the pair is bound to be bearish.

In 2020, the interest rate in the UK dropped from 0.75% to 0.1%. In Canada, the BOC cut interest rates from 1.75% to 0.25%. Therefore, the interest rate differential is -0.15%. The interest rate differential between the UK and Canada has a score of -1.

The differential in GDP growth rate between the UK and Canada

This differential measures the changes in the growth rate between the two economies. It is a preferred method of comparison since economies are of different sizes. Naturally, the economy with a higher GDP growth rate will have its currency appreciate more. Therefore, if the GDP growth rate differential is positive, it means that the GBP/CAD pair is bullish. If negative, then the pair is bearish.

During the first three quarters of 2020, the UK economy has contracted by 5.8%, while the Canadian economy has contracted by 3.3%. This makes the GDP growth rate differential -2.5%. Hence, a score of -1.

Conclusion

Indicator Score Total State Comment
The UK and Canada Current Account Differential -2 10 A differential of – $15.14 The UK has a higher deficit than Canada
The interest rate differential between the UK and Canada -1 10 -0.15% Expected to remain at -0.15% until either economy have recovered
The differential in GDP growth rate between the UK and Canada -1 10 3.30% The Canadian economy contracted at a slower pace than the UK economy
TOTAL SCORE -4

The cumulative score for the exogenous factors is -4. This means that we can expect the GBP/CAD pair to trade in a downtrend in the short term.

However, technical analysis shows the pair adopting a bullish trend with the weekly chart trading above the 200-period MA. More so, the pair is seen bouncing off the lower Bollinger band. Keep an eye on the near-term changes in the exogenous factors.

Categories
Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 1 & 2

Introduction

This analysis will evaluate the endogenous factors that affect the domestic economy in both the UK and Canada. We’ll also cover exogenous factors that influence the price of the GBP/CAD pair.

Ranking Scale

After analysis, we will rank both the exogenous and the endogenous factors on a scale from -10 to +10.

Endogenous factors will be ranked after a correlation analysis with the GDP growth rate. If negative, it means that either the GBP or the CAD have depreciated. If positive, it means that the domestic currency has appreciated.

The exogenous factors are ranked based on their correlation with the GBP/CAD pair’s exchange rate. When negative, it means that the price will drop. The price will be expected to increase if the exogenous analysis is positive.

Summary – GBP Endogenous Analysis

-15 score on Pound’s Endogenous Analysis indicates that this currency has depreciated since the beginning of 2020.

Summary – CAD Endogenous Analysis

  • Canada Employment Rate

The Canadian employment rate measures the percentage of the labor force that is employed during a particular period. The developments in the labor market are a leading indicator of overall economic growth. When the economy is expanding, there are more job openings, hence a higher employment rate. Conversely, when the economy is going through a recession, businesses close down, leading to a dropping employment rate.

In November 2020, the employment rate in Canada rose to 59.5% from 59.4% in October. Although the employment rate has been steadily increasing from the lows of 52.1% in April, it is still lower than in January. Canada’s employment rate has a score of -6.

  • Canada Core Consumer Prices

This index measures the overall change in Canada’s inflation rate based on a survey of price changes for a basket of consumer goods. The rate of inflation gauges the increase in economic activity. Typically, when demand is depressed in an economy, prices drop, resulting in lower inflation. Conversely, when demand increases, prices tend to increase, resulting in a higher rate of inflation.

In November 2020, Canada’s core consumer prices rose to 136.6 points from 136.3 in October. Between January and November, the index has increased by 2 points. It has a score of 3.

  • Canada Manufacturing Production

This index measures the YoY change in the value of the output from the Canadian manufacturing sector. Canadian manufacturing is a significant contributor to the labor market and economic growth. In the age of the coronavirus disruption, changes in manufacturing production show how faster the economy is bouncing back.

In September 2020, the YoY manufacturing production in Canada dropped by 4.24%. This is an improvement compared to the 5.34% drop recorded in August. Canadian manufacturing production has a score of -2.

  • Canada Business Confidence

The Ivey Purchasing Managers Index (PMI) measures monthly business confidence in Canada. In the survey, private and public companies rate whether the current business activity is higher or lower than the previous month. The index survey aspects including inventories, purchases, deliveries from suppliers, output prices, and employment.

When the index is over 50, it means that purchases have increased from the preceding month. Reading of below 50 shows a decrease in purchases.

In November 2020, Canadian business confidence dropped to 52.7 from 54.5 in October. This was the lowest reading since May, when the economy began rebounding from the shocks of  COVID-19. Consequently, Canada’s business confidence has a score of 1.

  • Canada Consumer Spending

This measures the final market value of all household expenditures on goods and services. It also includes expenditure by non-profit organizations that serve households in Canada but excludes purchases of homes. Consumer spending plays a critical role in economic growth.

In Q3 of 2020, consumer spending in Canada rose to CAD 1.13 trillion from CAD 1 trillion in Q2. However, it is still lower than consumer spending recorded in Q1. Thus, Canada’s consumer spending has a score of -4.

  • Canada New Housing Price Index

The Canadian NHPI measures the changes in the selling price of newly built residential houses. The price measured is that paid by the home buyers to the contractors. Note that the price comparison is strictly between houses of the same specification. The NHPI shows the construction sector’s growth trends; hence, it corresponds to changes in the labor market and GDP growth.

In November 2020, the Canadian NHPI rose to 107.9 from 107.3 in October. Thus, we assign a score of 3.

  • Canada Government Budget Value

This indicator tracks the changes in the difference between the Canadian government revenues and expenditures. It shows whether the government is running a surplus or a deficit. It also breaks down the changes in the receipts by the government. This helps to show how the overall economy is fairing.

In October 2020, the Canadian government budget had a deficit of CAD 18.51 billion compared to CAD 27.59 billion in September. Throughout the year, the budget deficits have been due to the economic shocks brought on by the coronavirus pandemic. The Canadian government had to ramp up expenditure through its Economic Response Plan, while revenues dropped in the same period. We assign it a score of -5.

Conclusion

Indicator Score Total State Comment
Canada Employment Rate -6 10 59.5% in November 2020 The employment rate is steadily increasing. It is, however, still below January levels
Canada Core Consumer Prices 3 10 136.6 points in November 2020 Since January, it has increased by 2 points. That shows demand in the economy has kept prices higher
Canada Manufacturing Production -2 10 YoY dropped by 4.24% in September 2020 A slight increase from -5.34% recorded in August. This shows that the manufacturing production is returning to the pre-pandemic levels
Canada Business Confidence 1 10 52.7 in November November level was the lowest since the economy began to recover in May. It’s expected to improve as mass vaccinations against COVID-19 rolls out
Canada Consumer Spending -4 10 Was CAD 1.13 trillion Q3 2020 Recovered from CAD 1 trillion in Q2 but still lower than Q1. This shows that demand is increasing in the economy
Canada New Housing Price Index 3 10 November NHPI was 107.9 It has been increasing, which shows that output in the construction industry is improving
Canada Government Budget Value -5 10 a budget deficit of CAD 18.51 billion in October The deficit widened in 2020, driven by unprecedented fiscal policies to curb recessionary pressure from the pandemic
TOTAL SCORE -10

A score of -10 indicates that the CAD has depreciated since the beginning of the year 2020.

In the next article, you can find the exogenous analysis of GBP/CAD where we have forecasted this pair’s future price movements. Cheers.

GBP/CAD Exogenous Analysis

  • The UK and Canada Current Account Differential

The current account differential between the UK and Canada can determine if the GBP/CAD pair is bullish or bearish. If the differential is positive, it means that the UK has a higher current account balance than Canada. This would imply that the GBP is in higher demand in the forex market than the CAD; hence, it is a bullish trend for the pair. Conversely, if the current account differential is negative, it means that the UK has a lesser current balance than Canada. It would imply that the GBP has a lower demand than the CAD in the forex market; hence, a bearish trend for the pair.

In Q3 of 2020, the UK had a current account deficit of $20.97 billion while Canada had a $5.83 billion deficit. Thus, the current account differential is -$15.14 billion. We assign a score of -2.

The interest rate differential is the difference between the Bank of England’s interest rate and that by the Bank of Canada. In the forex market, carry traders use the interest rate differential to decide whether to buy or short a currency pair. When the interest rate differential is positive, traders will earn the differential by going long. If the differential is negative, traders can earn the differential by shorting the currency pair.

Therefore, if the GBP/CAD pair’s interest rate differential is positive, the pair is bound to adopt a bullish trend. Conversely, if negative, the pair is bound to be bearish.

In 2020, the interest rate in the UK dropped from 0.75% to 0.1%. In Canada, the BOC cut the interest rate from 1.75% to 0.25%. Therefore, the interest rate differential is -0.15%. The interest rate differential between the UK and Canada has a score of -1.

  • The differential in GDP growth rate between the UK and Canada

This differential measures the changes in the growth rate between the two economies. It is a preferred method of comparison since economies are of different sizes. Naturally, the economy with a higher GDP growth rate will have its currency appreciate more. Therefore, if the GDP growth rate differential is positive, it means that the GBP/CAD pair is bullish. If negative, then the pair is bearish.

During the first three quarters of 2020, the UK economy has contracted by 5.8%, while the Canadian economy has contracted by 3.3%. This makes the GDP growth rate differential -2.5%. Hence, a score of -1.

Conclusion

Indicator Score Total State Comment
The UK and Canada Current Account Differential -2 10 A differential of – $15.14 The UK has a higher deficit than Canada
The interest rate differential between the UK and Canada -1 10 -0.15% Expected to remain at -0.15% until either economy have recovered
The differential in GDP growth rate between the UK and Canada -1 10 3.30% The Canadian economy contracted at a slower pace than the UK economy
TOTAL SCORE -4

 

The cumulative score for the exogenous factors is -4. This means that we can expect the GBP/CAD pair to trade in a downtrend in the short term. However, technical analysis shows the pair adopting a bullish trend with the weekly chart trading above the 200-period MA. More so, the pair is seen bouncing off the lower Bollinger band.

Keep an eye on the near-term changes in the exogenous factors.

 

Categories
Forex Indicators

How To Use the ADX for Forex Day Trading

All that glitters is not gold, they say. The same often applies to everything that is popular. And, if nothing else, ADX is one of the more popular indicators on the market.

Still, is there a way for us to use this tool effectively?

Traditional ADX Indicator

The average directional index (ADX) was developed more than 40 years ago. Nowadays, this tool is typically used by technical traders to measure volume. 

ADX consists of two main components – the ADX line and Directional Index (DI). The indicator aims to show trend strength and trend direction.

ADX line

The ADX line is a single line with a range of 0—100.

As this line is non-directional, it can only show trend strength. Therefore, while it measures the strength of the trend, it cannot distinguish between uptrends and downtrends.

So, the ADX line will rise during both a strong uptrend and a strong downtrend.

When the ADX is above 25 (like in the image below), the trend is strong enough to apply trend following strategies. However, traders who want to get faster signals often use the 20 ADX threshold as well.

When ADX is below 25, the market is in the consolidation stage. The image below portrays this well and, as we can see, there is a lack of a trend. With trends involving ADX below 25, we can no longer apply trend trading strategies but the strategies for ranging markets.

Directional Index

When the ADX is above 25 and the positive directional indicator (+DI) is above the negative one (-DI), the ADX measures the strength of an uptrend. The cross between the two DIs, together with the ADX line that is higher than 25, resulted in an excellent bullish move.

When the ADX is above 25 and +DI is below -DI, the ADX measures the strength of a downtrend. 

Values higher than 50 ADX indicate a very strong trend.

Important Facts

ADX should only be used with higher time frames because it tends to give false information on lower time frames. 

The ADX has a tendency to lag and the volume meter is generally very slow, which can lead you to enter the market too late.

The strategies used with the traditional ADX alone are insufficient and can offer a lot of false signals, but the ADX indicator can be used with other tools to obtain better signals.

Alternative ADX Uses

ADX + MA

ADX can serve as an example of how you can apply the moving average (MA) to a volume indicator

In the example below, we removed the ADX line (25) and added the MA, keeping the period at 10.

As ADX does not perform well during market consolidation, it would take a lot of time to go below that line and inform the trader that it is not a good time to trade. That is why traders take many losses with ADX alone when the market goes sideways.

Although this combination is not the best tool you can use, ADX has proved to perform better after the changes have been made.

ADX DMI + OBV + MA (100)

OBV (on-balance volume) shows whether the volume in the market is flowing in or out of the instrument.

The moving average (MA) of 100 is applied to determine is the momentum in the market is bullish or bearish.

A signal to enter appears when the two indicators indicate the same thing.

This strategy, however, always requires higher time frames as well as an instrument with some volatility and a high ATR.

Needless to say, traders must always use risk and money management skills to protect their trades from false signals and limit any potential losses.

ADX + RSI

Wait for the reading to get the ADX of 25 to know you are in a strong trend and that the trend is likely to develop. 

Use the last 50 candlesticks to determine the trend. Therefore, if the price is heading lower during the last 50 candlesticks, you are in a bearish trend. 

We will ignore the typical rule for using the Relative Strength Index (RSI) as we normally interpret the RSI reading below 30 as an oversold market and a reversal zone. To get an entry signal, use the same settings for both RSI and ADX.

Sell when the RSI indicator breaks, showing a reading below 30.

We will also add a stop loss for maximum protection. To determine the best location for your stop loss, find the last high of ADX before the entry. Then, identify the corresponding high on the price chart from the ADX high and place your stop-loss point there.

We will take profit after the ADX indicator breaks back below 25, which tells us that the strength of the prevailing trend is decreasing. You can also consider RSI going back into the normal zone as the exit point.

For a buy strategy, apply the exact opposite.

Non-Traditional ADX Indicators

ADXm

Unlike the traditional ADX indicator, which makes it hard to see where the market is headed, ADXm clearly shows both positive and negative ADX half-waves (colored parts of the line in the chart below).

ADXm uses the same method as the traditional ADX. We will use a reading of 20 to 25, depending on the time frame.

The original and this improved version differ with regard to price options. While the traditional ADX offers no price options (i.e. it uses fixed close, high, and low for circulation), ADXm allows traders to use three prices – the price for close, high, and low. 

Still, there are also many similarities between the two (e.g. the results, if default parameters are used).

DMI Oscillator

The original ADX uses SMMA (i.e. running MA or Wilders EMA), while DMI Oscillator allows traders to experiment with the other types of averages as well. 

The improved version also lets traders smooth the results of the oscillator. Moreover, it offers three different color options – on levels cross, zero cross, and slope. Change alerts are triggered according to the trader’s choice of color.

Traders seem to love DMI Oscillator because they can apply different strategies (scalping, swing trading, short term trading, binary trading, etc.) on different time frames and regardless of candle behavior.

Conclusion

The ADX indicator is great for determining trend strength – both bulls and bears at the same time. 

While it is good for identifying trending conditions, the traditional version of this tool may lag quite a lot. Not only does it often cause traders to enter trades too late but it also gives too many false signals, which then result in losses.

The daily time frame is the best option for using the ADX because it offers the least amount of inconsistency and incorrectness. 

The best profits come from catching strong trends and, with the right ADX strategy, you can accomplish your trading goals.

Since the standard version of ADX does not contain all data for the analysis of price action, it must be either used with other tools/indicators or simply replaced by a more recent, modified version.

It is extremely important to note that ADX (in particular) requires traders to rely on money management and risk management – especially with the original version. As Peter Borish says, we want to perceive ourselves as winners, but successful traders are always focusing on their losses. We cannot let the possibility of getting a false trend stand in the way of our (and our account’s) growth.

Finally, all indicators are just tools. We should use them only if they benefit us. Test ADX as well as all other ADX versions and tool combinations, and leave out anything that you feel you cannot use optimally.

 

Categories
Forex Daily Topic Forex System Design

Trading System design -Creating Your Strategy with Tradingview’s Pine Script – Part 2

In part 1 of this article series, we have created the Stochastic RSI indicator as part of our idea for a scalping strategy. Now that we have it functional, we will make the bull/bear phases and visually inspect whether it captures the turning market’s turning points.

Possible ways to create bull/bear slices

Our Stochastic RSI consists of two lines, k and d, and two trigger lines, ob and os. Therefore we can use multiple variants that may allow the creation of bull/bear price legs. Let’s consider the following 3

Variant 1 – The transition occurs at the SRSI entrance of the oversold or overbought regions.

Bull: The d-line crosses under the ob-line, which indicates it is into the overbought area
Bear: The d-line crosses over the os-line, indicating d‘s entry into the oversold area.

Code:
if crossunder (d, os)
    SRSI_Long := true
    SRSI_Short := false
else if crossover (d, ob)
    SRSI_Long := false
    SRSI_Short := true 
else
    SRSI_Long := SRSI_Long[1]
    SRSI_Short := SRSI_Short[1]

This code creates a condition SRSI_Long at the cross of d under os, which holds until d crosses over ob and reverses it, creating an SRSI_Short state. This condition is only modified by d crossing under os.
The else statement ensures the condition does not change from the previous bar.

Once we have defined the bull and bear segments, we can color-shade them to visualize them in the chart. To do it, we will use the bgcolor() function.

bgcolor(SRSI_Long ? color.green: na)
bgcolor(SRSI_Short ? color.red: na)

The first statement asks the condition of SRI-Long ( the ? sign). If true, the background color changes to green. Otherwise, no change (an). The second statement behaves similarly for SRSI_Short.

Let’s see how this piece of code behaves in the BTCUSD chart.

Variant 1 triggers the transitions too early. We see that on many occasions when the stochastic RSI enters the overbought or oversold region, it is more a signal of trend strength than a turning point.


Variant 2 – The transition occurs at D and K’s crossovers if in the overbought/oversold regions.

Bull: the k-line crosses over the d-line, if below os ( inside the oversold region. We ignore crosses in the mid-area)
Bear: the k-line crosses under the d-line, if above ob ( in the overbought area. We ignore crosses in the mid-area)

Code:

// creating the long and short conditions for case 2

if crossover(k,d) and d < os
     SRSI_Long := true
     SRSI_Short := false

else if crossunder(k,d) and d > ob
     SRSI_Long := false
     SRSI_Short := true
else
     SRSI_Long := SRSI_Long[1]
     SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na) 
bgcolor(SRSI_Short ? color.red: na)

The last section for the background change is similar to Variant 1.

Let’s see how it behaves in the chart.

Variant 2 is an improvement. We see that the bull and bear phases match the actual movements of the market, although entries are still a bit early, and in some cases, it missed the right direction. It can be useful as a trigger signal, provided we can filter out the faulty signals.


Variant 3 – the transition occurs when d moved to the overbought or oversold region and, later, crosses to the mid-area.

Bull: the d-line crosses over the os-line
Bear: the d-line crosses under the ob-line.

if crossover (d, os)
    SRSI_Long := true
    SRSI_Short := false
else if crossunder (d, ob)
    SRSI_Long := false
    SRSI_Short := true 
else
    SRSI_Long := SRSI_Long[1]
    SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na) 
bgcolor(SRSI_Short ? color.red: na)

 

And this is how it behaves in the chart.


Variant 3 lags the turning points slightly, but this quality makes it more robust, as, on most occasions, it’s right about the market direction. This signal, combined with the right take-profit, may create a high-probability trade strategy.

Let’s try this one. But this will be resolved in our next and last article of this series.

Stay tuned!

Categories
Forex Elliott Wave Forex Market Analysis

USDJPY: Be Ready for this Flag Pattern Breakout

The USDJPY pair presents the breakout of a flag pattern corresponding to the third wave of Subminuette degree identified in green, triggered after the flag pattern breakout observed in Wednesday 26th session. Examine with us what’s next for the coming trading sessions.

Our Previous Analysis

Our previous Elliott wave analysis of the USDJPY pair commented on the complex corrective formation developed by USDJPY since the price topped at 111.715 in March 2020. Also, we recognized the internal structure as an incomplete triple-three pattern. 

As illustrated in the previous daily chart released in late December 2020, the USDJPY pair moved in an incomplete wave (c) of Minuette degree labeled in blue. Likewise, the lower degree sequence revealed the progress in an ending diagonal pattern, suggesting the corrective formation’s exhaustion, which belongs to wave B of Minor degree in green.

Likewise, the breakout of the trendline that connects the end of waves ii and iv of Subminuette degree labeled in green would confirm the end of wave B of Minor degree. In this context, once the USDJPY surpassed the upper-line of the ending diagonal pattern, the pair confirmed the end of wave B and the beginning of wave C of the same degree.

What’s Next?

The USDJPY surpassing the upper guideline of the ending diagonal pattern on January 07th confirmed the completion of wave B of Minor degree and the beginning of wave C of the same degree.

In this context, the first breakout the USDJPY formed in early January corresponds to wave i in green. Likewise, the consolidation sequence recognized as a flag pattern corresponds to wave ii. Both waves belong to wave C of Minor degree labeled in green.

The last breakout developed by the USDJPY activates wave iii that belongs to wave C in green. Its potential advance could strike the psychological barrier of level 106.

Summarizing, the mid-term Elliott wave view for the USDJPY pair suggests that the price action may advance in its wave iii of Subminuette degree, which belongs to the first segment of the internal structure of wave C of Minor degree identified in green. The upward wave iii in progress could exceed the psychological barrier of 106. It even could strike the supply zone between 106.561 and 107.050. Finally, the bullish scenario’s invalidation level is at the beginning of wave i in green, at 102.591.

Categories
Forex Daily Topic Forex System Design

Trading System design -Creating Your Strategy with Tradingview’s Pine Script – Part 1

As promised, in this article, we will go through the steps to create a custom strategy, from the initial idea to the implementation of signals, stops, and targets.

The skeleton of a trading Strategy

To create a strategy programmatically is relatively simple. We need to define the Parameters and the trade rules first, followed by the position sizing algorithm, the entry commands, and the stop-loss and take-profit settings.

Visualizing the idea

Human beings are visual. We may think our trading idea is fantastic, but translating it into code may not be straightforward. It is much easier to detect the errors if we see our rules depicted on a chart.

With the parameter declarations and trade rules, we can create an indicator first, so we can see how it appears. After we are happy with the visual 

The idea

For our example, we will use a simple yet quite exciting indicator called Stochastic RSI, which applies the Stochastic study to the RSI values. This operation smoothes the RSI, and it reveals much better the turning points on mean-reverting markets, such as in Forex. Let’s see how it behaves as a naked strategy.

Diving into the process

First, you need to open an account with Tradingview. Once we are in, we create a new layout.

Then we open the Pine Editor.

It appears in the bottom left of your layout. Click on it… and it shows with a basic skeleton code.

The Stochastic RSI code.

As said, to create the Stochastic RSI indicator, we will make the RSI and then apply the stochastic algorithm to it.

1 study(title="Stochastic-RSI", format=format.price, overlay = false)

This first line declares the code to be a study, called Stochastic-RSI.  

format = format.price is used for selecting the formatting of output as prices in the study function.

Overlay = false means we desire the RSI lines to appear in a separate section. If it were a moving average to be plotted with the prices, overlay should be set to true.

RSIlength = input(14, "RSI-Length", minval=1)

We define the RSI length as an input parameter called RSI-Length.

src = input(close, title="RSI Source")

The variable src will collect the input values on every bar. The default is the bar close, but it may be modified by other values such as (o+c)/2.

myrsi = rsi(src, RSIlength)

This line creates the variable myrsi that stores the time series of the rsi.

This completes the calculation of the RSI. 

smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)

These two lines create the smoothing values of the stochastic %K and %D. Since it comes from input, they can be changed at will.

Stochlength = input(14, "Stochastic Length", minval=1)

This code defined the variable lengthStoch, computed from the input parameter.

k = sma(stoch(rsi1, rsi1, rsi1, Stochlength), smooth_K)
d = sma(k, smooth_D)

These two lines completes the calculation of the stochastic rsi.

plot(k, "K", color=color.white) - Plot a white k line 
plot(d, "D", color=color.red) - Plot a red d line.

To end this study, we will plot the overbought and oversold limits of 80 and 20, filling the mid-band with a distinctive color.

t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.purple, transp=80, title="Background")

The complete code ends as:

 

// This source code is subject to the terms of 
// the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © forex-academy
//@version=4
study(title="Stochastic-RSI", format=format.price, overlay = false)

RSIlength = input(14, "RSI-Length", minval=1)
src = input(close, title="RSI Source")
myrsi = rsi(src, RSIlength)

smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)
Stochlength = input(14, "Stochastic Length", minval=1)

k = sma(stoch(myrsi, myrsi, myrsi, Stochlength), smooth_K)
d = sma(k, smooth_D)

plot(k, "K", color=color.white)
plot(d, "D", color=color.red)

t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.teal, transp=80, title="Background")

This code is shown in our layout as

Stay tuned for the second part of this article, where we will evolve the Stochastic RSI into a viable strategy.

 

Categories
Forex Price Action

How to Deal with Saturation of Sideway Market Movements

The market you are in is experiencing capital outflows, that is what is going on. Pull up your plan B. You noticed how the market has changed. It may not be trending as unusual and the opportunities have been scarce for a while. What do you do now? 

First, we need to acknowledge that the market never remains exactly the same. Sometimes the market will trend for a while after which we may see equally long (or longer) periods of consolidation. In fact, the market can be so devoid of any action that you may wonder if you are ever going to get a trade opportunity that is not a fake breakout.

From time to time, we will not be able to see any definitive upward or downward movement and the prices may not get to make your take profit targets, making traders insecure about the overall market direction.

So, how do you know that you are in a dead market?

Even though we can determine market volume with the help of ATR, ADX, and Bollinger Bands, among other tools, the $EVZ volatility index has proved to be extremely useful and easy to use. When you open the full chart, you will be able to see a number under the heading “Euro FX VIX.” 

If this number is lower than seven (7), for example, this means that volume and volatility are low. Also, the lower the $EVZ index is, the lower the chance of winning a trend following trade is as well.

If we need volume to trade effectively, how should we then approach long market dry spells?

There are a few ways to deal with unfavorable markets. First of all, dead markets are not the markets we want to trade, especially as beginners. However, we can still be productive! As a beginner trader, you are probably developing your system and trying to see if your tools are giving you valid information on the market.

If you are backtesting or forward testing your system, you should be getting a clear sign not to engage in trading at the moment. If you are still getting signals that it is ok to proceed, you need to change the volume/volatility indicator you are using.

Still, low volume/volatility is a normal part of market oscillations, as these constantly fluctuate. Even if you are getting a lot of losing trades, do not get discouraged. Your time will come.

You may be wondering if you can still trade despite sideways market movements, and the answer is…

…YES and NO.

You should not trade at this time because the price direction guesswork is extremely hard to get right and you can easily lose a lot of money. If you aren’t getting any signals, there is no reason for you to push it. Just stay put.

If you are, however, getting signals to enter a few trades please choose wisely! For example, forex traders may not want to trade pairs whose currencies are heavily monitored by big banking institutions. Any strange news event will also be a reason strong enough to avoid certain currency pairs altogether at this time.

Also, be careful with your money management!

We cannot scale out when the market is unresponsive. Therefore, we should in such cases take the entire trade-off at the first take-profit point. While we may be getting wins that are smaller than usual, we know that these are safer wins after all. It is far better to have minor wins than major losses. Even if the trade you exited seems to be heading somewhere, do not be regretful. Cut your take profit targets.

If the market happens to be extremely low in volume and volatility, you should also manage your risk differently!

We usually cannot have a standard 2% risk on trades encumbered by sideways market movement. Reduce your risk to 1%, for example, if you see that the $EVZ index is reaching incredible lows, like in 2019. 

What you can also do in times like these is use a smaller time frame to pick up your wins more easily. Again, dead markets do not necessitate that you forsake your daily time frame by default, but it can be a good opportunity for you to see if there are any changes between different time frames. 

This is a reminder not to forget the power of your mind!

If you are not prepared mentally or emotionally, your account will suffer no matter the conditions. If you start panicking the first moment you spot any sideways market movement, the likelihood of you making a good decision will start to decrease exponentially.

There is also a major prejudice concerning market volume and volatility. What we need is balance – in the market and in our approach to it. Therefore, if we enter trades with high volatility or volume, we are also adding unnecessary risk, which can be detrimental to our accounts.

Looking for an ideal trading scenario to start trading is as futile as is failing to recognize the potential of dead markets. When we are faced with the saturation of sideways market movements, we should perceive the market as our fertile land. It is those moments that give us perfect room for improving our systems. Reflect on your past trades and decisions, and see what you can do better. Focus your attention on your trading and test, test, test. If you find a strategy that is working well in these conditions, this is your plan B, switch to it.

Unfavorable market conditions affect us all. Do not think that experts are making a ton of money under any circumstances. You may have even had plans to leave your current job and turn to trading only, but now is not the time. Make no rash decisions, keep all of your sources of income active, and just wait for everything to go back to normal. Even when it does, you may still need a few months or years for everything to work out as you planned.

What happens when the market finally comes back to us?

Well, no matter how well-developed your system is, most volume indicators cannot record the first big move as quickly as it occurs. So, now that you know that it isn’t your fault, do not give in to any doubts or regrets and just move on. 

Finally, there is no way for you to “trick the system” and evade the sideway market movements. It is a perfect time to develop a strategy that can work in dead markets, it will stay with you when the markets are dead again. Do not go looking for a volume indicator that would tell you what you want to hear. Instead of feeling sorrowful about your fate, look where you have the power to initiate change. Trading is not about making wins only. Protecting your account and making smart money is far more important. 

Categories
Forex Daily Topic Forex System Design

Trading System design – A Summary of your Best Options to Code your Strategy

In our latest article, we have seen that manually backtesting our strategy is cumbersome if performed correctly. Also, It is usually subjected to errors and the interpretation of the trader. Therefore, a basic knowledge of trading algorithm development and computer coding is a desirable task for any trader. The good news is, nowadays, there are many easy ways to do it since high-level languages are very close to natural language.

High-level languages to quickly build your Forex strategies.

MetaQuotes Language (MQL4/5) 

In this respect, the primary language we could think of to build your strategy in Forex is MetaQuotes Language 4 (MQL4). This language is a specialized subset of C++ , holding an extensive built-in library of indicators and trading signals.

Spending your time and efforts to master MQL4/5 is worthwhile because Metatrader 4 includes a suitable trading strategy tester and optimizer.

If you are new to programming, you could start by analyzing and modifying existing free-available EA’s. Starting with simple strategies is excellent because they will be easier to understand and change. Also, in trading, simple usually is much better than complex.

Python

Python is the reference language for data science. Its popularity and its extensive library on data science are well-known. What is less known is, Python also has comprehensive packages dedicated to trading.

As an example, you can have a look at this list taken from Open Source Python frameworks:

With Python, you can go as easy as backtest your strategy with three simple lines of code using the fastquant package.

from fastquant import backtest, get_stock_data
jfc = get_stock_data("JFC", "2018-01-01", "2019-01-01")
backtest('smac', jfc, fast_period=15, slow_period=40) 

source: Backtest Your Trading Strategy with Only 3 Lines of Python

Of course, first, you have to create the code for your strategy.

Market Data 

For backtesting purposes, you will need to download your historical market data with the necessary timeframe. The file, in CSV or Excel format, can be easily read by your Python code.

If, later on, you are going to apply your EA live, you will need a real-time streaming data feed. If this is the case, you will need to create an interface to your broker through an MT5 TradeStation (MT4 is not equipped with it).

Easylanguage and Tradestation / Multicharts

Tradestation and Multicharts are dedicated high-level trade stations. Easylanguage, a specialized subset of Pascal, was developed by the Tradestation team to create indicators and trading signals. Both platforms are terrific places to develop trading algorithms, and backtesting is straightforward.

Easylanguage, as its name indicates, was designed to make it as close to natural language as possible. The ample set of its built-in library makes coding simple, so the developer’s primary focus is the trading algorithm.

As this example, please read the code of an adjustable weighting percent blended moving average.

inputs: period1(50),period(20),factor(0.5);

variables: slow(0),fast(0), blended(0), var1(0), var2(0);

slow= average(close,period1);
fast= average(close,period2);

var1 = factor;

if var1<0 then var1=0;
if var1>1 then var1=1;

var2= 1-factor;
blended= (slow*var1)+(fast*var2);

plot1(blended,"blended");

 

You will see it is relatively easy to understand and follow. Anyway, it would be best if you dedicated some time to really master the language, to avoid or at least minimize coding errors.

Pine Script and Tradingview

Pine script is another specialized language to easily program your own studies and trading strategies if you have an account on Tradingview (which you may open for free). As in the case of Easylanguage, Pinescript is designed to be easily understood. 

Pine studies are used to display indicator information and graphs on a chart. It is preceded by the study() declaration. If you wished to create a strategy for backtesting, you have to use the strategy() declaration.

As with other languages, the best way to begin is by reading other people’s code and modifying it for your own purposes.

Coding strategies in pine script is similar to Easylanguage or MQL5. You create a code taking in mind that it will cycle on each bar in the chosen timeframe. 

We took this example of a MACD indicator from the Pine script quick start guide:

//@version=4

study("MACD")

fast = 12, slow = 26
fastMA = ema(close, fast)
slowMA = ema(close, slow)

macd = fastMA - slowMA
signal = sma(macd, 9)

plot(macd, color=color.blue)
plot(signal, color=color.orange)

Backtesting in Pine script is easy. But, there is no way to perform automated optimization. You will have to do it manually. You should go to the performance summary and the list of trades to find the causes of the lack of performance, apply parameter changes, and see if you get any improvement of that adjustment.

In our next article, we will go through the steps to develop a strategy using the Pine script.

Categories
Forex Elliott Wave Forex Market Analysis

USDCHF: Examine These Three Charts Before Taking any Trade

 

Last week, the USDCHF pair developed a sideways movement pattern that looks like an inverted head and shoulder pattern. However, the primary mid-term trend remains dominated by bearish sentiment. Examine with us these three charts to help you foresee the pair’s potential movements in the coming sessions.

Inverted Head and Shoulder Pattern?

The USDCHF pair illustrated in the following 12-hour chart seems to develop a sideways formation after the accelerated decline observed during the second half of November 2020. After easing from the psychological support of 0.89, the price began to consolidate in a range between 0.8917 and 0.8757.

In the previous chart, the USDCHF seems to be forming an inverse head and shoulder (iH&S) pattern, suggesting a likely bullish reversal movement. According to chartist analysis, the iH&S formation will be confirmed if the price breaks and closes above the neckline located at 0.89171. 

For this reversal scenario, the invalidation level is located below the head, which holds its lowest level at 0.87576, corresponding to the low touched last January 06th.

Elliott Wave View Suggests Exhaustion

The big picture of the USDCHF pair exposed in its daily chart reveals the incomplete bearish impulsive sequence of Minute degree labeled in black, suggesting a limited decline.

As illustrated in the last chart, the USDCHF began a downward impulsive sequence of Minute degree on March 23rd when the price found fresh sellers at 0.99017. The price action reveals the completion of its third extended wave bearish move, which found support at 0.89986 in late August 2020, starting to advance mostly sideways in its wave ((iv)) in black. 

Once the sideways corrective formation corresponding to the fourth wave in black finished, the pair began to continue its declines in the wave ((v)) of Minute degree, which currently seems developing its wave (iv) of Minuette degree identified in blue. 

On the other hand, the timing and momentum oscillator reveals that the bearish pressure still controls the price action. In this context, the price would see a further decline, confirming Elliott Wave’s outlook of a pending fifth wave of Minuette degree.

This bearish continuation scenario’s invalidation level stays at 0.8979, which corresponds to the end of wave (i).

Price Action Reveals Indecision

The USDCHF pair in its daily chart unfolded in the bellow chart shows an indecision candle corresponding to the last Friday’s session, leaving a narrow body and long-tailed candlestick pattern. This market context carries us to expect a pause in the downward movement developed in previous trading sessions.

The confirmation of the bearish scenario will occur if the price closes below the LOD at 0.88385. Conversely, a reversal signal could be established by a Monday 25th session’s close if it exceeds Friday’s high of 0.88662.

In summary, the USDCHF pair develops a sideways formation that looks like an incomplete inverse head and shoulders pattern suggesting the potential bullish reversal sequence if the price soars above the neckline located at 0.89171. However, the Elliott wave outlook suggests further declines, corresponding to a possible wave (v) of Minuette degree labeled in blue. In this context, the price action reveals the indecision of the next direction. If the price decides to continue its decline, the USDCHF could re-test January’s 06 low zone.

Categories
Forex Indicators

The Application of the Moving Average on Indicators

Traders worldwide have shown interest in the Moving Average Convergence/Divergence indicator that we all know as MACD. Praised as a two-line indicator that has generated quite a few pips to many content creators, MACD can certainly point us toward the direction of discovering other amazing tools that we can incorporate into our trading systems. Since traders are constantly in search of the best components to help build their own algorithms, they inevitably come across a number of low-performing indicators from which their trades can hardly benefit. As a result, these traders immediately cast off the tools that they believe cannot make it to their favorites’ list, which may not be the approach that you will always want to take. Today, we are going to see how adding a moving average on various MT4 indicators can not only improve a tool’s performance but also prove to be the right move towards lucrative trades. 

Many beginners fail to acknowledge the importance of adjusting settings and learning about the ways to make some changes to the existing indicators in order to gain more profit. While MACD indicators’ fame grew due to the diversity of its functions, few actually know how using the moving average on other indicators can truly generate new and unexpected possibilities in many cases. If you are keen on growing a unique system and testing different options, then the use of moving averages can really become one of your favored solutions down the line. By adding a moving average on some of the less efficient indicators, you can have an entirely different experience with tools that you once defined as utterly futile for trading. Naturally, in some cases this approach will not seem to be applicable or useful; however, by incorporating moving averages in your system, you are introducing an additional layer of protection, as all traders look forward to finding indicators to prevent them from making bad decisions while trading in the forex market.

Today’s selection of indicators is meant to serve as a lesson on how you can improve some of the tools which overall do not provide desired results, rather than tell you which tools you should use in your everyday trading. You can later go back to the indicators you saved on a flash after you had stopped using them, as we will show you how some of the indicators that are already built on MT4 miraculously change after the moving average has been added. You can also open the MT4 while you are reading this article and make the same adjustments as we do while you are reading. Be prepared to take notes on some specific settings as well as remember a few key pieces of advice you should follow when you are attempting to carry out this process yourself. 

Accumulation

Accumulation is one of the indicators that are generally considered as bad in the forex trading community, especially due to the fact that traders cannot make any adjustments that could improve its performance. As you can see from the first image below, Accumulation is essentially a one-line indicator, which barely appears to be able to give any relevant information. However, once we apply the moving average, although you cannot expect drastic changes, the overall performance of this tool immediately improves.

In order to make the most of this, you will need to follow a few rules. Firstly, you should not alter the moving average of oscillators, yet expand the Trend tab in your Navigator window inside Indicators. Once you find the moving average there, you will need to drag it down to the indicator window you wish to apply it on. Then, a new window will pop out where you will be able to make further adjustments. What we did is we left the period where it was (10) and changed the settings from Close to First Indicator’s Data. If you, however, decide to apply the changes at Close, you will not see the line in the same place as in the right picture above, it will simply be applied to the price chart. Therefore, the two essential steps to take are to drag the moving average down and apply it to First Indicator’s Data.

The results these steps can deliver are much better than what you can hope to achieve without. The moving average is mostly going to tell you where the trend is, and after we applied this to Accumulation, we discovered five to six entry signals just by glancing over the chart. A better indicator would naturally offer more quality entry signals and, consequently, serve you better. However, the idea behind this is to change a one-line indicator to a two-line-cross one, which is believed to be one of the best confirmation indicators you can use. Even though these changes prevented you from quite a few problematic points, Accumulation is still not recommended to be used for everyday trading purposes. Some professional traders even claim to have tested this tool and every possible variation only to discover that it is not a viable, long-term option for them.

i-BandsPrice

Similar to the Accumulation indicator, i-BandsPrice is also a single line that does not perform very well in general. You can change this tool into a zero-cross indicator by following the steps we previously described. Although it does not truly get to zero, you can still see some benefits from these changes. What you should first do is alter the period and see the results this solution provides. Naturally, you will not go after every opportunity in the chart because you will want to avoid reversal trading. Nonetheless, what you do gain from making these adjustments, in this case, is the ability to discover when you can enter a trade. As with any other zero-cross indicator, i-BandsPrice can now also tell you to start trading when the indicator crosses over the zero line towards the negative or the positive.

Rate of Change (ROC)

In order to see more benefits from using the Rate of Change indicator, we first moved the period to 70. Then we added the zero line because it will tell us to go long if the line crosses the zero upward and vice versa. However, to make the most of it, you will need to add the moving average and look for the places when the lines are already both below zero: when the indicator crosses down again, you will have the opportunity to enter a continuation trade, which some experts see as their most lucrative trades. As ROC is one of the lower options on the performance spectrum, you will not be able to get many good trades despite the changes. Nevertheless, you can alter the period, moving it from 8 to 10 as we did, and see how it begins to resemble the MACD indicator is thought to successfully provide the greatest number of signals to enter continuation trades. Therefore, if you happen to come across a zero-line-cross indicator that seems to have a lot of potential, you can actually grant yourself more lucrative opportunities just by adding the moving average.

Average Directional Movement Index (ADX)

ADX can serve as an example of how you can apply the moving average to a volume indicator. Whenever the line goes above, trend traders receive the signal that they have enough volume to enter the trade. Likewise, whenever the line plunges, it is a signal to stay out of the market. In the example below, we kept the period of 14 and added another line (like we did before) at level 25. ADX has proved to be performing better once the changes have been applied, although it has also proved to give a lot of false signals as well. Another reason why professional traders typically dislike this tool is that it often lags. However, despite the opportunity to test how this tool performs after adding the moving average, we still have some other better options we can use to trade in this market. 

Once you remove the additional line and add the moving average, you will naturally not bring about some unforeseen, alchemical-like change, but you will be able to improve almost any volume or volatility indicator. Drag the moving average down as you did before and change the option from Close to First Indicator’s Data (we kept the period at 10), and you will see how fruitful the results your volume/volatility indicator gives are. If you kept the line we had before, you would have potentially taken a great number of losses because ADX would need too much time to go below. This way, however, you are improving the overall condition because the moving average always adjusts to the volume indicator. Therefore, you could get a signal to take a break at some point in the chart and another one to resume after a while, which is by far better than what the original, unchanged version of this indicator can provide.

As a forex trader, you will naturally be experiencing passing moments of consolidation and stagnation after trading for a period of time. You will then want your indicator to let you know when and how to avoid these troublesome points in the chart. Since the moving average can limit the negative effect a poorly performing tool can have on your trade and expand its functions in terms of quality, you can immediately start testing the indicators you discovered before but for which you could not find the right use. Now the indicators which could not help you seem to have a newfound potential to help you trade more successfully. What is more, the moving average can be applied in such a vast number of cases that it immediately increases the opportunity to win. You only need to take time to test and find a way to use a specific indicator after the changes have been made. Some indicators can only be improved to a certain degree with the MA, yet some others can truly illustrate a distinct difference in your trading.

Many traders are having a hard time finding the right exit indicator, for example. However, an exit indicator that a professional trader would find to be really good is typically a two-line-cross indicator. Luckily, with the help of the moving average, any one-line oscillator can become a two-line-cross indicator and, therefore, also an exit indicator that you can discover to be a really good solution for you. Improvement sometimes implies tweaking the settings, whereas it may also entail adding the moving average so as to give the tools that have not worked well in the past the chance to make a positive difference. The moving average can be applied to almost anything, as we said before, so it does bring a new sense of hope to traders who have had difficulty finding the right elements to complete their technical toolbox. This knowledge simply opens up a number of tremendous possibilities, as a single oscillator changed to a two-line-cross indicator is the proof that tools that were not very useful can be adjusted so that traders can actually make use of them. Whatsmore, indicators with two lines have first and second indicator data. In this case, you can apply MAs to both and have a kind of momentum gauge in an already established trend, for example, on line cross.

Go to your list of indicators that you considered as poor samples and start testing this solution to find out just how much the moving average can improve your trading. At least then you will know that you can write off a tool for good without having to go through periods of hesitation or doubt. Luckily, sometimes the improvement comes just after adding this second line, so you will never again need to question a decision you made with regard to indicators. According to professional traders, some of their most lucrative deals stemmed from continuation trades which these changes made possible. Hence, just by making these adjustments, you can turn a below-average indicator is a tool that is similar to MACD and experience numerous benefits long term. There are many variations and improved versions of MACD, RSI, and others, with a different type of calculations. Playing with MAs on these tools is a definitive winning combo. All you have to do is try it out.

Categories
Forex Daily Topic Forex System Design

Trading System design – Manual Backtesting your Trade Idea

We have a potential trading idea, and we would like to see if it is worthwhile. Is it really critical to code it? No. But very convenient? Yes.

Manual historical backtesting

There is no need to code the strategy to do an initial validation test. All we have to do is pick a chart, go back in time and start performing trades manually. But how to do it properly?

  1.  Use a trading log spreadsheet, as the one forex.academy provides.
  2. Thoroughly describe the methodology, including the rules for entry, stop-loss, and take-profit settings. 
  3. Use a standard 1 unit trade size ( 1 lot, for example) in all the trades.

Once the rules of the game have been set, we position the chart, start moving the action one bar at a time, and trade the chart’s right side. It is critical to take all the signals the strategy offers. Cherrypicking spoils the test.

Market Condition

The financial markets move in phases. We should think it has two main phases and three directions.

 

 

The two main phases are impulses and corrections.

The three movements are Upward (Bullish), downward (bearish), and sideways (consolidations).

Bear and bull directions are mostly similar in the Forex market because currencies are traded in pairs, so the quote currency’s bear market is the base currency’s bull market and vice-versa. 

With commodities, precious metals, and cryptocurrencies against fiat, this does not hold.

To properly test your strategy, you should apply it in all market directions and phases. Even better is performing a different evaluation for each market state. That way, your evaluation will tell you in which market conditions it works best and in which is not acceptable to apply it; thus, you could create a complementary rule to filter out the market phases in which the strategy fails.

Different markets

You must apply the strategy to all markets you intend to trade using it. As with the market conditions, you should test each market separately. After having all markets tested, you will find useful information regarding how markets the strategy works best and the correlations among markets when using it. That applies, of course, if you use the same timeframes and periods in all markets, which is advisable.

If you do it as said, you can also perform the summation of all markers date by date and assess the overall performance, its main parameters, and system quality.

Pros & Cons of manually backtesting 


 

  • No programming skills are required.
  • It helps you perceive how a real market evolves trade by trade.
  • You will find the potential logic errors, such as stop-loss wrongly set, take profits too close to the opening, thus 
  • You will be able to correct most of the gross mistakes of the strategy.

 

 

  • Cherrypicking. Discipline is key. If you start cherrypicking, you no longer are testing your original idea.
  • Most people doing manual backtesting do not properly trade all phases and markets. Not always thoroughly test all markets and their conditions, as it would require a lot of time. Thus the test is incomplete.
  • Time-consuming. A complete manual backtest takes much longer than a computer-generated backtest.
  • Awkward optimization. Optimization is also tricky and time-consuming. That is so because a parameter change would need another backtesting.

Final words

Manual backtesting allows us to have a first impression of how a new trade idea would fare in real trading, but a thoroughly manual backtest and optimization are time-consuming. Therefore, serious traders should start developing basic programming skills to automate both processes.

Categories
Forex Indicators

Incorporating the Right Indicators Into Your Trading System

Technical traders are not making decisions on any other input but their set of indicators and rules. As a holistic approach, it is a trading system that combines position or risk management, chart analysis, and volatility/volume parameters, producing three types of signals: enter a trade, exit a trade and do not trade. Technical traders’ decisions are therefore based on a black and white mindset. In other words, their mind is not different than the trading systems they have made.

On a professional level, their mind is just thinking about testing out more to improve the system effectiveness on the forex market. This article will reveal an important view of how to add on an element or an indicator to a system that already has a few synergetic elements, each playing their role, and measure various categories from the market numbers. Using an example from one professional prop trader system structure, we can give an understanding of what to look for when improving your own trading system. 

Technical traders may follow a certain theory, using just John Ehlers’s indicators, for example, but it is proven that risk is mitigated by diversification. Even though the indicators from this researcher are somewhat predictive in nature, having another indicator from other theories that base on historic confirmation might be not only risk-mitigating but also create special chemistry when combined. Traders that are advanced already have a system and are probably familiar with the theories or how their indicators are made. Beginner traders are not familiar with this, and actually, they do not have to be to create effective systems. We will present you with a few shortcuts to finding this special indicator combination.

As an example, a trading system can have a volatility indicator based on which position size and risk management are based on. Having such a variable and adaptive way of controlling risk is imperative as discussed in other articles. ATR indicator is one such volatility measure. The next element in the system is a specialized volume or volatility indicator whose role is to tell us when there is not enough momentum in the market or trend and to just ignore signals from other indicators as the risk of price changing direction is increased. We are looking for quality trends to follow, a scientifically proven method of trading with the best results. When we are looking to exit a position, technical traders also make decisions after an indicator. This type of indicator should be great for finding points when trends exhaust and some think oscillators and reversal indicators are a good pick for this role.

A separate article also explains this in more detail. At the core of the system is the confirmation indicator, when to enter a trade is a starting point when we look at charts. Finding an indicator that proves to be very effective at finding emerging trends is a precious element but we all agree none is close to being right even 70% of the time. As this is the core of the system, why not make it better by adding an additional confirmation indicator? Having two different experts will generate better solutions than just one. Now, if we go on we might think more is better, but there is a thin line after which adding more indicators creates a detrimental effect on the system. It is too complicated. So adding just one additional confirmation indicator is enough. The point here is to make sure that the first trend confirmation signal is not a fake market move that just a whipsaw, so add another one that needs to produce a signal in the same direction before we make a trade. Eliminating losses from these fake moves has the same effect on our account as when we win. 

Confirmation indicators have various calculations, formulas, and ideas behind them, and that is great. As an analogy let’s say your system is a team of players. Each player has its role but we have all witnessed a magic bond between two or more players that are just extremely effective when combined. Of course, having a bad player and another bad player is going to be better but it is no-brainer because we want to have two greats. Finding great indicators is a long and tedious work, once we have one with the best backtesting and forward testing results, it is priceless. The ones that got to the top 10 of your list might be the ultimate additions to your number one. The good thing about these indicators is that they are abundant, unlike the volume indicators, and they are easy to test. 

Trend confirmation indicators can be categorized to make this process beginner-friendly. Starting with the Zero Cross indicators, they are generating signals based on a line crossing a horizontal zero value line. A typical example of this is the Chaikin Money Flow (CMF), an indicator using volume and other market values in its formula. After all, traders are interested in how good it is for their system after backtesting and forward testing. When the main signal line is crossing the zero line it means a new trend or continuation is starting. If your main confirmation indicator is from the same category, you will need to change one to get the diversification effect.

The second category is the Line Cross-type. These are probably the most common type of indicators. MACD can be one example of this, although MACD also has a zero line. If you want to diversify, you will need to pay attention to different signals even the  MACD, for example, belongs to the Zero Line and the Line Cross category. The third category is the on chart indicators. Now, these indicators are the ones when applied are represented on the MT4 chart itself, not in a separate window below it. Moving Averages are a simple example of this type of indicator, and there are many ways you can classify a trade signal with them. Many systems have them and they can be an extremely effective tool. Finding the right Moving Average indicator is surely going to be worth the time. 

Now when we understand how to combine and diversify indicators, understand that the second confirmation indicator is there to filter losses made from the main one. Since cutting losses is the same as generating wins, we are looking for synergy results where the second indicator is filtering the losses but not filtering the wins. Volume indicators have a similar role here but know it is hard to find a volume indicator that does not filter a win in the way. The nature of measuring volatility or volume simply needs more data to be effective, consequently, they lag. Lagging may cause your system to miss the right moment to enter a trade and therefore a possible big win but this is just something we have to accept.

Additional confirmation indicators are not necessarily like this but they still add value to your system. Traders’ focus should be on cutting the losses, it is the main problem once you make your first system. When we find and adjust our second indicator, aim to cut a lot of losses. If a winner is filtered, try to adjust settings a bit but not at the cost of letting the losers in. As we have discussed in previous articles, your indicators should be recent, do not latch on to the popular ones, you will soon find others have better results in your testing. Combining different type indicators with great results is the way to go but know that sometimes the synergy might not be there. Similar to sports, you may collect the best players together in a team but the result can be disappointing. On other occasions, two great players that understand each other can beat the opposition alone. Interestingly, case studies have shown each had a different specialized skillset that adds value to the other. The goal is the same but the formula is based on different measures and the representation is different. 

You will find many times that your two confirmation indicators do not align, and this is good. Pay attention to the main setting adjustment you can make, the period. By having one faster and one slower confirmation indicator, you may find that sweet spot of filtering losses and keeping the winners. Whatever confirmation indicators you find, only testing will show you if this combo is worth keeping. The more pairs you test, the better the odds you will find a golden team. Other elements in your trading system should not be messed with during testing, you need to have control and compare only this confirmation indicator combination.

Here is an example provided by one prop trader demonstrating how this idea works in practice. We are going to use the EUR/USD currency pair. It is the most traded pair with many news, reports, and event that could push the trend the other way. As such it is considered the riskiest pair you can pick and should provide a lot of losses and wins. Losses we should cut by introducing a second confirmation indicator. From the picture below we can see our Aroon indicator is really having a hard time finding a winner. This chart is very nasty for trading trends with many whipsaws.

Red and green vertical lines are added once the indicator gives a signal to go short or long. Aroon was able to give us approximately 3 wins and 8 losing trades. We can see Aroon is a line cross indicator type, signals are generated once the red line crosses above the blue for short and vice versa. Let’s see what happens when we add a second confirmation indicator not belonging to the line cross-type. 

We have added an Exponential Moving Average for 20 periods as the on chart type indicator. Now if you use the EMA for generating signals only when the price crosses it, you will find many conflicting signals with the Aroon. When they are in conflict, we do not take that trade. When we take this rule to the chart, many of the losses are filtered. 

Now we have kept the winners and have only 6 losses. EMA might not give us great loss reduction but the end result is still better than before. Let’s try to find a better indicator. 

We have added the Force Index indicator and adjusted its period to 26 from the default 13. Additionally, a horizontal line is added at zero effectively making this indicator a zero line cross type! The result is we still have 3 winners and now only 2 losses. Before all this, we had 8 losing trades. So we have transformed our system from a 27% success rate to 60%. Note that your system still has a volume filter and other elements that boost this rate to a much better percentage. With good position sizing, money management, you should be profitable. You now have better odds than a 50-50 coin flip.

By the way, having proper money management and using a 50% success rate system can still yield profits. Just pay attention, what is presented is just a couple of trades on a single currency pair. What you need to do is test your indicator combinations on longer periods and other assets. We are aiming to create a system that works on every currency pair, without adjustments. The final product is a universal system you can use professionally for a long, long time. 

To conclude, the hard work you have to put in is necessary to find that perfect combo. Treat it like a treasure hunt, a game with real treasures behind. If this is exciting to you then it is just a matter of time when you complete your trading system and just trade as it says, consistently providing you with treasures. Your score list of tested indicators is useful, you can pick up your second confirmation indicator from there without searching through the forums and indicator websites. Use the tricks described here, add a line, test different periods and settings, add an MA to the indicator. Finally, the synergetic effect is easy to test, as demonstrated, you will not spend too much time to figure out you have a high % combo in front of you.

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 3

GBP/AUD Exogenous Analysis

  1. The UK and Australia Current Account Differential

In this case, the current account differential is derived by subtracting Australia’s current account balance from that of the UK. The current account shows the net value of a country’s exports. Remember that the value of a currency is determined by its demand. Theoretically, the country’s domestic currency with a higher current account balance will have a higher demand. Therefore, its value will be higher in the forex market than in currencies with lower current account balances.

In this case, if the current account differential is positive, it means that the GBP is in higher demand than the AUD, hence a bullish trend for the GBP/AUD pair. Conversely, if the differential is negative, the GBP/AUD pair will have a bearish trend.

Australia had a $7.5 billion current account surplus in Q3 2020, while the UK had a $20.97 billion deficit. The current account differential is -$28.47 billion. Consequently, the current account differential between the UK and Australia has a score of -4.

  1. The interest rate differential between the UK and Australia

This interest rate differential is the difference between the interest rate in the UK and Australia. Typically, investors prefer to buy currencies with a higher interest rate. Therefore, if the interest rate differential for the GBP/AUD pair is positive, it means that the UK offers higher interest rates than Australia. Traders would then sell AUD and buy the GBP, which implies that the GBP/AUD pair will have a bullish trend. Conversely, if the interest rate differential is negative, Australia offers a higher interest rate. Thus, traders would sell the GBP and buy the AUD, which will force the GBP/AUD pair into a downtrend.

In 2020, the Reserve Bank of Australia cut interest rates from 0.75% to 0.25% and finally to 0.1% in December. The BOE cut interest rates from 0.75% to 0.1%. As of December 2020, the interest rate differential for the GBP/AUD pair is 0%. Thus, we assign a score of -1.

  1. The differential in GDP growth rate between the UK and Australia

The differential in GDP growth rate measures the difference in domestic economic growth in the UK and Australia. It is expected that the domestic currency of the country whose GDP is expanding at a faster pace will appreciate faster. Therefore, if the GDP growth differential between the UK and Australia is positive, we should expect a bullish trend for the GBP/AUD pair. Conversely, we should expect a downtrend in the pair if the differential is negative.

The Australian economy has contracted by 4% in the first three quarters of 2020, while the UK has contracted by 5.8%. Thus, the GDP growth rate differential is -1.8%. Hence, the score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Australia Current Account Differential -4 10 A differential of – $28.47 Australia has a current account surplus while the UK is running a deficit. The differential is expected to increase as COVID-19 restrictions ease
The interest rate differential between the UK and Australia -1 10 0.00% Neither the RBA nor the BOE intends to change the interest rate policy in the near term. The differential of 0% is expected to persist in the near term
The differential in GDP growth rate between the UK and Australia -3 10 -1.80% The Australian economy contracted slower than the UK’s
TOTAL SCORE -8

Since the cumulative exogenous score for the GBP/AUD pair is -8, we can expect the pair to continue a bearish trend.

According to the above picture’s technical analysis, this pair is trading below the 200-period MA and attempting to breach the lower Bollinger band, supporting our fundamental analysis. Cheers.

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 1 & 2

Introduction

This analysis will look into endogenous factors that influence economic growth both in the UK and Australia. We will also analyze the exogenous factors that impact the exchange rate of the GBP/AUD pair.

Ranking Scale

We will conduct correlation analysis, which we will use to rank the endogenous and exogenous factors on a scale of -10 to 10.

In ranking the endogenous factors, we will conduct a correlation analysis against the GDP growth rate. If the score is negative, the endogenous factor has resulted in depreciation of either the GBP of the AUD. Conversely, if the score is positive, then the factor has resulted in an appreciation of the local currency.

When the exogenous analysis is negative, the factor has resulted in a decline of the GBP/AUD exchange rate. If the score is positive, then the factor has led to an increase in the exchange rate.

Summary – GBP Endogenous Analysis

-15 score indicates that the Pound has depreciated since the starting of 2020.

Summary – AUD Endogenous Analysis

A score of -8 indicates that the Australian dollar has depreciated as well since the beginning of 2020.

Indicator Score Total State Comment
Australia Employment Rate -3 10 61.2% in October The employment rate hit 20-year lows during the pandemic. It’s expected to continue recovery as the economy recovers
Australia Core Consumer Prices 2 10 117.49 in Q3 2020 The inflation rate still lower than Q1, but the demand is increasing in the economy
Australia Manufacturing Production -3 10 Q3 projected to drop by 3.5% Q2 dropped by 6.2%. Production expected to improve in Q3 as business operation resume some normalcy
Australia Business Confidence 6 10 NAB business confidence was 12 in November It’s the highest level since April 2018. This shows that businesses are highly optimistic about their future operations
Australia Consumer Spending -3 10 Was 253.648 billion AUD in Q3 2020 Q3 levels still lower than Q1 domestic expenditure. Expected to increase further when the economy recovers to pre-pandemic levels
Australia Construction Output -3 10 Q3 output dropped by 2.6% Q3 drop caused by a reduction in residential and non-residential construction, engineering, and building works
Australia Government Budget Value -4 10 a budget deficit of 10.974 billion AUD in October The government budget deficit is improving. This shows that the revenue stream is improving as businesses resume operations
TOTAL SCORE -8
  1. Australia Employment Rate

This indicator shows the number of working-age Australians who are employed during a particular period. As an indicator of growth in the labor market, the employment rate shows if the economy is adding or shedding jobs. Thus, it is used to show periods of economic growth and contractions.

The Australian labor market has been recovering from the coronavirus pandemic shocks when the employment rate hit a 20-year low of 58.2%. In October 2020, Australia had an employment rate of 61.2%, up from 60.4% in September. However, it is still lower than January’s 62.6%. Australia’s employment rate has a score of -3.

  1. Australia Trimmed Mean Consumer Prices

This indicator is also called core consumer prices. It measures the price changes of goods and services that are frequently purchased by Australian households. The computation of the trimmed mean consumer prices excludes goods and services whose prices are volatile.

In Q3 2020, the core consumer prices in Australia rose to 117.49 from 117.04 in Q2. Q3 levels are also higher than the 117.17 points recorded in Q1. This shows that the economy is recovering since an increase in prices implies an increase in domestic demand for goods and services. We assign a score of 2.

  1. Australia Manufacturing Production

This indicator shows the YoY change in the value of output from the manufacturing sector. The Australian economy is heavily dependent on industrial production; hence, manufacturing production changes provides invaluable insights into the domestic economic growth. It also shows how the economy is recovering from the impact of COVID-19.

In Q2 2020, the YoY manufacturing production in Australia dropped by 6.2%, compared to 2.7% growth in Q1. Q3 YoY manufacturing production is expected to drop by 3.5%. Consequently, Australian manufacturing production has a score of -3.

  1. Australia Business Confidence

Business confidence in Australia is measured by conducting a monthly survey of about 600 businesses. They include small, medium, and large companies operating in non-agricultural sectors. The survey gauges the businesses’ expectations in terms of profitability, trading volume, and employees. The index is derived by considering the percentage of respondents who have good and very good expectations and those who have a bad and very bad outlook.

In November 2020, the NAB business confidence increased to 12 from 3 in October, which has been the highest since April 2018. Australia’s business confidence has a score of 6.

  1. Australia Consumer Spending

The indicator records the quarterly change in the value of goods and services consumed by domestic households. It includes expenditure by non-profit organizations that provide goods and services to Australian households and the value of backyard productions.

In Q3 of 2020, consumer spending in Australia rose to AUD 253.648 billion from AUD 235.131 billion in Q2. Although it’s lower than Q1 expenditure, domestic demand in the economy is rebounding from the slump of COVID-19. Consequently, Australian consumer spending has a score of -3.

  1. Australia Construction Output

This indicator shows the quarterly change in the value of construction work in Australia. The total value involves both private and public sector building and engineering work.

In the third quarter of 2020, Australia’s construction output dropped by 2.6% from a 0.5% growth in Q2. This drop was caused by output drop in residential and non-residential construction, engineering, and building works. Thus, we assign a score of -3.

  1. Australia Government Budget Value

The government budget value measures whether the Australian government has a budget surplus or deficit. A budget surplus implies that the government’s expenditure is less than its revenue. Similarly, a budget deficit means that the government spends more than it collects in terms of revenue.

In October 2020, Australia had a budget deficit of AUD 10.974 billion, up from a deficit of 33.613 billion in September. We assign a score of -4.

In the next article, you can find the Exogenous analysis of the GBP/AUD currency pair and also our forecast on its price movement in the near future. Cheers.