Category: Advanced Forex Education

Educational Themes of Intermediate and Advanced Complexity. In this section, we include all that is needed to master technical analysis such as complete coverage of price action themes: Support-resistance, volume, volatility, breakouts, reversals, trend and range trading, candlestick and chart patterns and formations, Elliott wave and Fibonacci retracements and extensions, and harmonic patterns. It includes also a section covering all indicators from simple moving averages to the complexity of Ehlels Filters.
Another sub-section is dedicated to trading systems desing.

Categories
Forex Daily Topic Forex Price Action

Weekly High/Low Breakout Trading: The Chart You May Want to Avoid

In today’s lesson, we are going to demonstrate an example of a breakout at a weekly high. The price consolidates afterward but fails to make a breakout at consolidation resistance. Thus, the price does not head towards the North. Let us find out how that happens and what lesson it holds for us.

In today’s lesson, we are going to demonstrate an example of a breakout at a weekly high. The price consolidates afterward but fails to make a breakout at consolidation resistance. Thus, the price does not head towards the North. Let us find out how that happens and what lesson it holds for us.

In today’s lesson, we are going to demonstrate an example of a breakout at a weekly high. The price consolidates afterward but fails to make a breakout at consolidation resistance. Thus, the price does not head towards the North. Let us find out how that happens and what lesson it holds for us.

It is an H4 chart. The chart shows that the price makes a strong bearish move to start its trading week. Then, it gets choppy for the rest of the week. The chart closes its week, producing a bullish engulfing candle. Let us proceed to see how the next week goes.

The chart produces a bullish candle to start its trading week. However, it produces three consecutive bullish candles and makes a breakout at the last weekly high. The buyers are to wait for the price to consolidate and produce a bullish reversal candle closing above consolidation resistance to go long in the pair.

The chart produces two bearish candles closing within the breakout level. A bullish reversal candle closing above consolidation resistance is the signal for the buyers to trigger entry. They must keep their eyes on this chart.

The chart produces a bullish inside bar. It is a bullish reversal candle but not a very strong one. Since it closes within consolidation resistance, the buyers are to wait longer for the chart to produce a bullish candle closing above consolidation resistance.

The chart produces two more bullish candles. However, it has not made a breakout yet. It has been taking too long to produce the signal candle. Let us wait and see what it produces afterwards.

It produces a bearish inside bar at the consolidation resistance. It does not look good for the buyers. The price has a rejection at the level, and it produces a bearish inside bar. It means it is a double top resistance. A breakout at the last swing low may change the equation and attract the sellers instead. Let us proceed and see what happens next.

The price does not make a breakout at the last swing low, either. It produces a doji candle followed by a bullish engulfing candle at the last swing low. It means the chart keeps traders waiting for the next breakout. The bull holds the edge but weekly high/low breakout traders do not love to see such price action after a breakout. It is best to avoid taking entry on a chart like this.

 

Categories
Forex Signals Forex Technical Analysis

AUD/JPY Pair Failed to Gains Positive Traction – Brace for Selling!  

Today in the Asian trading session, the AUD/JPY currency pair failed to keep its early-day bullish momentum and dropped well below the 76.00 level despite the upbeat market sentiment. However, the reason for the prevalent bearish sentiment around the currency pair could be associated with the RBA’s announcement of no rate change, as well as, the RBA has a dovish view on the Australian economy, which could be considered as one of the key factors that undermine the Australian dollar and contributed to the currency pair losses. Across the pond, the currency pair declines were further bolstered after the US Secretary of State Mike Pompeo said Japan’s Prime Minister (PM) Yoshihide Suga would strengthen the relationship with the US. Thus, the Japanese yen got impressed by the above comments, which adds further downside pressure around the AUD/JPY currency pair. 

Today in the Asian trading session, the AUD/JPY currency pair failed to keep its early-day bullish momentum and dropped well below the 76.00 level despite the upbeat market sentiment. However, the reason for the prevalent bearish sentiment around the currency pair could be associated with the RBA’s announcement of no rate change, as well as, the RBA has a dovish view on the Australian economy, which could be considered as one of the key factors that undermine the Australian dollar and contributed to the currency pair losses. Across the pond, the currency pair declines were further bolstered after the US Secretary of State Mike Pompeo said Japan’s Prime Minister (PM) Yoshihide Suga would strengthen the relationship with the US. Thus, the Japanese yen got impressed by the above comments, which adds further downside pressure around the AUD/JPY currency pair. 

Today in the Asian trading session, the AUD/JPY currency pair failed to keep its early-day bullish momentum and dropped well below the 76.00 level despite the upbeat market sentiment. However, the reason for the prevalent bearish sentiment around the currency pair could be associated with the RBA’s announcement of no rate change, as well as, the RBA has a dovish view on the Australian economy, which could be considered as one of the key factors that undermine the Australian dollar and contributed to the currency pair losses. Across the pond, the currency pair declines were further bolstered after the US Secretary of State Mike Pompeo said Japan’s Prime Minister (PM) Yoshihide Suga would strengthen the relationship with the US. Thus, the Japanese yen got impressed by the above comments, which adds further downside pressure around the AUD/JPY currency pair. 

On the contrary, the upbeat market mood, backed by optimism over US President Trump’s health, could be considered one of the key factors that help the currency pair limit its deeper losses. The AUD/USD currency pair is currently trading at 75.64 and consolidating in the range between 75.60 – 76.16. As we already mentioned, the global risk sentiment got a strong boost after US President Trump leaves the hospital and feels “20-years younger”. Despite this, the doubts over Donald Trump’s remain high as a recent video from the American leader showed that he struggles while breathing. Besides, the doubts were further fueled after the White House’s recent confirmation that Trump will be under 24-hour care, and anybody nearing the President will need to wear the PPE kit. 

At the US-China front, the renewed US-China tussle also keeps challenging the market risk-on mood, adding further pessimism around the currency pair. As per the latest report, the Dragon Nation recently fueled the Sino-American tussle by criticizing the US ban on TikTok and WeChat at the World Trade Organization (WTO). 

At the AUD front, the Reserve Bank of Australia (RBA) held its cash rate, and the targeted yield on 3-year bonds unchanged at 0.25% during the latest announcement. In the meantime, the RBA has a dovish view of the Australian economy, which ten underpins the Australian dollar and contributes to the currency pair losses. It should be noted that the RBA confirmed that Unemployment and underemployment are expected to remain high for an extended period. They further added, “Wage and inflation pressures remain very depressed.”

Across the ocean, the currency pair losses got an additional boost after the US Secretary of State Mike Pompeo said Japan’s Prime Minister (PM) Yoshihide Suga is a ‘powerful force for good’, as well as Pompeo further added that he believes Suga will strengthen the relationship with the US. These positive comments tend to underpin the Japanese yen currency and drag the currency pair lower.


Daily Support and Resistance

S1 73.89

S2 74.62

S3 75.05

Pivot Point 75.36

R1 75.78

R2 76.09

R3 76.82

Looking forward, the market traders keeping their eyes on the crude oil supply data from the American Petroleum Institute (API) due later in the day. In the meantime, the updates surrounding the fresh Sino-US tussle, as well as the coronavirus (COVID-19), could not lose their importance.

Entry Price – Sell 75.862

Stop Loss – 76.262

Take Profit – 75.462

Risk to Reward – 1:1

Profit & Loss Per Standard Lot = -$400/ +$400

Profit & Loss Per Micro Lot = -$40/ +$40

Fellas, now you can check out forex trading signals via Forex Academy mobile app. Follow the links below.

iPhone Users: https://apps.apple.com/es/app/fasignals/id1521281368

Andriod Users: https://play.google.com/store/apps/details?id=academy.forex.thesignal&hl=en_US

Categories
Forex Technical Analysis

How to Trade with the “Evening Star” Pattern

I always describe markets as a battlefield… And the evening star candle pattern (also called evening star or evening star) is absolutely related to a battle. On the battlefield, preparation is key. The story begins in feudal Japan about 450 years ago. One of Japan’s three great generals, Oda Nobunaga, is attempting to wrest control […]

I always describe markets as a battlefield… And the evening star candle pattern (also called evening star or evening star) is absolutely related to a battle. On the battlefield, preparation is key. The story begins in feudal Japan about 450 years ago. One of Japan’s three great generals, Oda Nobunaga, is attempting to wrest control […]

I always describe markets as a battlefield… And the evening star candle pattern (also called evening star or evening star) is absolutely related to a battle.

On the battlefield, preparation is key. The story begins in feudal Japan about 450 years ago. One of Japan’s three great generals, Oda Nobunaga, is attempting to wrest control of the fertile rice lands from his enemy. A strong local defensive position and 3 rivers stand in your way. If Nobunaga wants to win, his army must cross the rivers. Once they do, the battle will be on their side. But if your army can’t cross the rivers, it’ll be a bad sign. The army finally manages to cross the 3 rivers and wins the battle. He gets control of new land and more rice, Japan’s strong currency at the time. His legend grows. Well, let us move on to this day…

The Battlefield of the Stock Market

The scene: A stock trader looking at his screens, looking for the perfect time to close a long position. Will the stock price continue to rise? Or will there be a bearish turn? If the bulls finally win the battle, the trader has the option to hold the position for more winnings, like Nobunaga winning the battle in ancient Japan. But if the bass players win, then it’s time to close the position and leave. A sign appears on the chart opposite the trader: the evening star candle pattern of three rivers. The trader knows that the chances of overcoming resistance are slim. Goal met. It’s time to step out of position. The merchant places a sales order. Moments pass. The order is executed and the merchant leans back, grateful for having studied the patterns. Does it seem too dramatic?

In my opinion, learning patterns are a key basis for learning to operate. The names of Japanese candle patterns hint at emotional confusion and refer many times to legends. It makes them more attractive to learn. But they go beyond names and stories. As a trader, learning these patterns will teach you about the psychology of the market. The battle between bulls and bears is psychological. Arm yourself well and you can be victorious. But not understanding the patterns could mean the end of your career as a trader or investor.

What is the Evening Star Candle Pattern?

An evening star candle is a turning pattern. This means that the momentum of a recent trend is slowing down. The evening star candle pattern is a bearish reversal. The upward momentum, controlled by the bullies, begins to lose strength. The star is a period of equilibrium between bullish and bearish with little price movement. Then the momentum changes and the bearings take over.

The first candle has a long body and is bullish: the price closes at a higher price than opened. In this case, in the pattern of stars of the night, there will be a gap until the second candle. This is the star.

The star signals a slowdown in momentum. It has a short body (called spinning top) or none (called Doji). It can be green or red. The most important thing we have to understand is that there is a balance between buyers and sellers.

The third sail is bearish: the opening price is higher than the closing price. The ideal evening star opens from the star to the third candle. The third candle ends abruptly in the body of the first candle.

Note: In the case of the evening star pattern, you should pay more attention to the candle body than to the shade. Shadows are the lines that extend above and below the body of the candle. They represent the trading range of that period. The candle body means the prices between opening and closing. A higher closed green candle that was opened. A red candle closed below the level it opened.

Knowing the Morning Star Pattern

The so-called morning star pattern is precisely the opposite of the evening star candle pattern. We’re talking about a reversal pattern that indicates the shift from a bearish to a bullish trend. As we have seen with the pattern of the evening star, we must detail the existence of three candles with the central sail with a long shadow down that has been bought by the bullies. The third candle is the confirmation candle of the upward turning pattern. Do you want to see the morning star pattern along with a higher volume? It is also a more convincing pattern if it occurs around a support level.

How does the Evening Star Pattern Work?

As I said earlier, the evening star candle pattern is an indication of a trend change. The evening star pattern acts as a visual guide to what happens in investor sentiment. The evening star candle day is the day of indecision between the bulls and the bears. If the third day is a low gap, it may be a good indication to sell a long position. Or you might want to cut short to take advantage of the downward movement.

Benefits of the Evening Star Candle Pattern

All star patterns (yes, there are others, including the morning star pattern) are spin patterns. All represent a deadlock between sellers and buyers. The benefit for you as a trader is that they are predictable. A warning before we look at an example from real life: this is not an exact science. It’s based on experience and study, but that doesn’t mean it always happens. You need to study!

One more caveat: When you look at graphs over different periods of time, you may not see the same pattern.

I used a 1-minute candle in the chart example below. When I looked at the 2-minute candle for the same chart, the pattern was different. It was a bearish wraparound pattern, another spin pattern. It confirmed what I was seeing on the 1-minute candle chart.
What we need to learn from using different periods of candles: perspective can make a big difference in action charts.

Example of Evening Star Pattern

The classic evening star candle pattern has a space between the first and second candle bodies. An ideal night star would also open between the second and third sail bodies. Steve Nison, the creator of the book “Japanese Candlestick Charting Techniques”, clarifies this point in his book. Nison brought Japanese candle graphics to the West. The book is a classic and it is well worth spending time with it if you want to better understand candle graphics.

Three White Soldiers and Black Crows

Three white or green soldiers is a bullish sail pattern. It is used as an indication of a reversal after a bearish trend on a chart. The figure of the three soldiers is a long-bodied candle attainment green or white. They open inside the body of the previous candle and close above the closure of the previous candles. There are usually no long shadows on the sails. The opposite of this pattern of candles is the three black crows. They indicate a reversal of an upward trend.

Three “Inside Up and Down”

Three “Inside Up and Down” is another turn pattern. We might be seeing the reversal of an uptrend or bearish trend. This pattern requires three candles to appear in a specific sequence. In an upward trend turning downwards will be a long green or white candle, then there will be a short red or black candle that closes and opens within the same body of the first candle. The third candle shall be a black or red candle that closes below the closure of the previous candle. In a bearish trend chart that is reversed upwards, the sails will be the opposite.

Importance of Action Indicators

Many traders use technical indicators along with patterns. Combined they can provide powerful information to set up your trading plan. One of the most popular indicators together with the evening or evening star candle is the relative force index (RSI). The RSI indicator measures the momentum to determine if a stock is overbought or oversold. Overbought or oversold conditions, measured by the RSI, indicate a likely turn. There are two reasons to use the RSI with the evening star pattern. Initially to see the daily levels of the RSI indicator in an overbought condition. Then, once you change the timeframe (step #4 below), use RSI to confirm the reversal.

The Evening Star Candle Pattern in 7 Steps

Let’s put this in perspective. If you spend time looking for evening star candle patterns to operate, you might be waiting until it runs. It’s a pattern that doesn’t always sweat. It is very positive to be able to recognize it and even have a plan prepared for those occasions when you see it.

#1 Set the correct chart timeframe: Setting the right timeframe depends largely on your trading strategy. You can (and should) change the deadlines I give you to adapt them to your strategy. You should practice paper trading to prove your thesis. For the sake of understanding the technical analysis of evening stars, imagine you are looking at a longer-term graph. Let’s think we’re talking about a one-year chart with a day candles. You are starting with the longer-term chart to get a general idea of the price action.

#2 Know the opening, maximum, minimum, and closing prices: If you look at a chart with day candles, you’re essentially doing this. You are looking at the daily opening and closing prices (the body of the candle) and the maximum and minimum prices (the shadows or wicks).

#3 Wait until the daily RSI exceeds 70: Many operators consider that a crossing of the RSI above 70 is a clear sign of over-purchase. It is a common strategy used by currency traders.

#4 Reduce the time frame: Once the overbought condition has been identified, with the RSI indicator having a value greater than 70, long-term chart, it’s time to zoom in. A common timeframe for this is the five-minute candle chart. Many traders like it because it is neither too fast nor too slow.

I want to reiterate the difference in graphics when I look at different time frames. While degrading the time frame to the five-minute graph is one way to play this, it’s not an exact science. Remember, RSI is calculated using a certain number of periods; 14 is the most common.

#5 Short sale: Short selling is the option to borrow to sell assets. You can borrow at a very high price and wait for the price to go down. Assuming the price drops, you buy shares at a lower price to return the shares to the broker. This is how some traders approach a market with a bearish trend or a stock with a bearish trend.

Warning: I do not recommend opening shorts for novice traders. It is a risky and difficult strategy. He could get caught in a short lock. That said, let’s look at how the evening star pattern can indicate a bearish reversal and a potential short play. Watch the stock price action you want to sell short. Depending on the time period you are using, watch for actions to rise and the star to appear. But don’t come in when you see the star.

Wait.

Why?

Because first, he wants to confirm the turn. Again, opening shorts is a very risky strategy. You need access to shares for short. All brokers do not have to have the shares to borrow them. You should make sure you have the knowledge action you are performing. Have a plan. Therefore, you should make sure you can find actions short. Then wait until the third candle confirms the pattern. Then the question is to sell and wait for the price to go down.

What can we do if the price reversal does not work as we expect? Follow my rule number one and cut the losses quickly. When you cut short, you lose money if the stock price goes up above the entry price. That’s because he pays more for the actions needed to close his position.

#6 Put a Stop Loss: A stop loss is your preset exit price if the operation goes wrong. You can set electronically established loss limits, but I’m not a big fan of doing this. I put a mental stop. If the price moves too fast, you can go long to your stop loss. This is called sliding. If you use a mental stop-loss, you can customize it. You can find the best price available to buy stocks and close your position. If you are in a short position, the stop-loss must be higher than the entry price. Assuming that everything is correct, at what point do you close the position? Many traders claim that it is convenient to wait until the RSI indicator drops to a level below 30. I would prefer you to have a clear negotiation plan and stick to it. That may or may not involve further use of RSI.

Now is the time to…

#7 (hopefully) Take advantage of your winnings! If your operation went well, enjoy the reward. Set your target before trading. I often aim at 10%, 20%, or 30%. Those trades add up. Remember, my results are unusual. Trading is risky. Keep in mind that you may lose money. Do your own research and never risk more than you can afford to lose.

Conclusion

The evening star pattern indicates a shift from bullish to bearish. Traders who detect this pattern can use it to determine when it is time to exit long positions or enter short trades.

Categories
Forex Technical Analysis

Filtering False Signals, TD REI, and TD POQ

TD REI indicator analysis and false signal filter TD POQ. Description, building principles, application conditions, and trading signals. Today’s learning block will focus on the study of the TD REI and TD POQ indicators, which are part of the TD Oscillators indicator group.

TD REI indicator analysis and false signal filter TD POQ. Description, building principles, application conditions, and trading signals. Today’s learning block will focus on the study of the TD REI and TD POQ indicators, which are part of the TD Oscillators indicator group.

TD REI indicator analysis and false signal filter TD POQ. Description, building principles, application conditions, and trading signals. Today’s learning block will focus on the study of the TD REI and TD POQ indicators, which are part of the TD Oscillators indicator group.

What is usually the main problem with oscillators?

The big problem that DeMark warns about using oscillators is that traditional traders tend to exaggerate the value of the indicator divergence with the price position. As a general rule, people who do not understand how an indicator works and based on which alternate principle, do not care what the composition and recommended interpretation of this indicator is. They try to interpret their vague signals that are not mainly signals and should also be confirmed by other indicators. An example very clear example of this is the famous indicator, RSI.

According to DeMark, the main problem when the interpretation of the signals is that traders do not usually realize the time that the indicator remains in the stages of oversold and overbought. DeMark points out that if the indicator is in the overbought or oversold zone for more than 6 candles, this indicates the strength of the trend, which means that this signal is false.

The number of sails can be different for other oscillators. Everything depends on the parameters of the indicator and the peculiarities of its composition. Therefore, in each particular case for each time period, one must perform a proper analysis of the number of bars in the oversold or overbought áreas.
To make the analysis of all parameters lighter, DeMark developed its own series of oscillators described below.

Introduction to the TD REI Indicator

The first DeMark indicator we will know is TD REI or Range Expansion Index (Range Expansion Index). This indicator is designed to filter false signals when the price is quoted in a strong trend, must confirm a signal only if the confidence of the market really changes. The TD REI gives us the total number of bars and, if the price is in the oversold – overbought by more than 6 bars, the indicator will show this and then indicate an important trend.

However, this indicator is more sensitive to price changes and, when the RSI is in the overbought area or remains in a neutral area, TD REI has already entered the oversold area some times, so a purchase signal is sent (in the chart above, all purchase signs on the indicator are marked with circles and with green flags on the price chart). It is logical that this indicator is much more complicated than it seems. Obviously, we can think it’s very peculiar, as I will describe later.

First, I would like to describe your mathematical model, so that you can understand the signals of the indicator…

TD REI Indicator Mathematical Model

The value of TD REI is calculated by adding the respective differences between the maximum of the current day and the maximum two days before and the minimum of the current day and the minimum two days before.

To simplify matters, the formula for the calculation would be as follows:

  • X = (L – L2) + (H – H2), where
  • H – current bar maximum
  • H2 – maximum price two days before
  • L – current bar minimum
  • L2 – at least two bars

In addition, two conditions must be met:

Condition #1

the maximum of the current bar price must be greater than or equal to the minimum of five or six bars ago, or the maximum of two previous bars must be greater than or equal to the closing of seven or eight back bars.

Condition #2

the minimum of the current bar price must be less than or equal to the maximum of five or six bars behind, or the maximum of two previous bars must be greater than or equal to the closing of seven or eight back bars.

If no conditions are met, a zero value is assigned to the bar on that day.

If both conditions are met, we will have as a result a different formula:

TD REI = 100 x (Y / (H5 – L5 ))

Where:

Y = (Sum X1 … X5)
H5 – maximum on last 5 candles,
L5 – maximum on last 5 candles,
In other words, TD REI shows the price movement, adjusted to a quotation range during the last five candles.

TD REI Signal Filter

Like most indicators, TD REI is not a Grail and also sends false signals. To filter these false signals, Thomas DeMark suggests using the TD POQ (Price Oscillator Qualifier) price oscillator. To be fair, keep in mind that this indicator can be used together with an oscillator, depending on the action of the price (e.g., MACD, RSI).

TD POQ Conditions for TD REI

Sign of purchase:

-TD REI has been in oversold condition (below -40) for six or more sails.

-The last full sail should be closed below the previous bar.

-The current open sail must be equal to or less than the maximum of the previous two sails.

The market must always trade above the price that has been opened up and breaking the highest level in the last two bars.

Signal of sale:

-TD POQ has been in overbought condition (above +40) for six or more candles.

-The last full sail should be closed above the previous bar.

-The current open sail must be equal to or greater than the lows of the previous two sails.

-The market should be trading below the open price and breaking the lowest level in the last two bars.

To explain how TD POQ can be used to filter tickets, we will analyze the buying and selling signals.

Sign of purchase:

-That price has been in the oversold area for more than 6 sails.

-The last full sail was closed below the previous bar closure.

Now we see that the current candle opens lower than the maximum of the previous two candles (the current opening price of the candle is the same as the previous candle close)
When the price crosses the zone of the maxima of the last two candles, there is a buy sign.

I must point out that the TD REI is a good complementary tool for other Thomas DeMark indicators.

Selling signal:

Now, let’s analyze the sales signal. As I said earlier, the indicator had been in the overbought area for more than 6 candles before the signal appeared. You can check the box.

The last candle was closed as a doji, the closing price is almost equal to the closing level of the previous candle. The market broke the minimum of the previous two sails and is trading downwards. Therefore, as there is no fully confirmed signal, it is important to use this indicator with other Thomas DeMark tools.

The combination of TD REI and TD POQ is a strong signal and it is not recommended to ignore it. The price is likely to pick up and continue its downward correction, according to the pessimistic scenario. After all, it does not suggest that the uptrend will necessarily end.

Categories
Forex Indicators

Negotiation Strategies on Arrow Indicators

Arrow indicators are a set of tools for the “lazy” traders. On Forex charts, possible market entry points are indicated with arrows, green means the ability to open a long position, and red means a short position. The trader’s task is to be close to the platform and when the signal appears make the decision […]

Arrow indicators are a set of tools for the “lazy” traders. On Forex charts, possible market entry points are indicated with arrows, green means the ability to open a long position, and red means a short position. The trader’s task is to be close to the platform and when the signal appears make the decision […]

Arrow indicators are a set of tools for the “lazy” traders. On Forex charts, possible market entry points are indicated with arrows, green means the ability to open a long position, and red means a short position. The trader’s task is to be close to the platform and when the signal appears make the decision to follow it or not.

Advantages of Forex arrow trend indicators:

Arrow indicators are combined indicators that are based on several tools. They are usually based on basic classical indicators such as МА, RSI, MACD, Bollinger bands, stochastic, etc. A trader does not need to put on Forex always draws different lines and adjusts each indicator independently. Arrow indicators are already well combined and have been simplified adjustments. They are visually convenient and reduce the psychological and eye strain of a trader.

Disadvantages of arrow indicators:

Slips and repaints. Indicators are hardly applicable in scalping strategies. Problems with quotation provision, price noise, indicator lag, all these factors can cause the indicator signals to be redrawn, so an open position will not be profitable. The indicators are best to be used in the medium and long term trading on the H1 timeframe. The key factors should be observed when applying the indicators.

Which is the best way to choose an optimal arrow trend indicator for Forex:

It is better to choose an indicator according to a particular strategy. There are no versatile arrows indicators. One gives you much more accurate signals when the negotiation is flat, another in trend trading, and the other in long-term trading. You should try it on the demo account with at least 100 operations (the number depends on the frequency of the signals). Efficiency should not be less than 70% of the signs of success.

The indicator must have an open-source software for a trader to understand its operating principle and make any corrections if necessary. Below I will give as an example two arrow indicator strategies that can be used even by novice traders. There are links for you to download the indicators for MT4 (you can find them on their own on the Internet). To install the template, go to the “File” menu, choose the “Data Catalog” section and move the template you downloaded to the folder called “Templates”, move the indicators to the “MQL4” – “Indicators” folder.

Trading Strategies on Forex Arrow Trend Indicators

1. Sidus

The combined indicator Sidus 2v shows the entry points by arrows: red for sale and green for purchase. The indicator is based on 2 very popular trading tools, classic RSI and EMA (exponential moving average). Sidus gives signs of purchase when the fast ЕМА is above EMA slow, RSI is above level 50. And on the contrary, the short position should be opened when RSI is less than 50 and the fast movement is below a slow one.

I recommend not trading in this strategy at the time of publishing news, choose the no lower timeframe of H1, H4 is better, apply the strategy for the currency pair EUR/USD. Optimal indicator adjustment: the rapid EMA period is 14, slow 21, the RSI period is 14.

Opening of a long position:

-When Sidus paints a green arrow we open a long position on the next sail.
We place stop-loss fixed at 20 points.

-When profit reaches 15 points, we move the stop loss to the opening point of the transaction (breakeven) and close 50% of the transaction. The remaining position must be secured by trailing stop at a distance of 15 points.

-To use a trailing stop, you need to have a VPS server, because when the connection is lost, the trailing stop does not work.

-The selling position is opened under the same conditions when a red arrow appears.

2. Point of entry

The Forex Dots arrow trend indicator points to a successful position to a trader, not with arrows, but with points, however, the essence does not change. Signals are always formed at the beginning of a price change cosine and use for calculations the current values of MA (moving averages). The advantage of the tools is extensive use: М15 timeframe (flexible enough conditions for strategies with different time periods), currency pairs are all volatile pairs (from the euro and dollar to the Swiss franc).

The Dots parameters are:

  • Length (indicator range) – 10
  • AppliedPrice (price type to use in calculations) – 0
  • Filter – 0
  • Deviation (vertical displacement of indicator) – 0
  • Shift (horizontal shift of indicator) – 0

Under different market conditions, indicator parameters can be changed as long as they have been previously tested on a demo or cents account.

Opening of a long position:

-The indicator paints a green dot that is above the minimum value of the rising sail. The distance between the minimum and the point is estimated visually (the less, the better). We open the position on the next sail.

-Stop-loss is set to the minimum value of the previous candle or to the green sign level (up to 10 points).

-We placed the trailing stop at a distance of 5 points and with it we left the market.

-The sale transaction opens the same way, but under opposite conditions: the indicator paints a red dot above the maximum of the falling candle.

If on the Forex chart the distance between the maximum sail and a red dot visually seems too large compared to previous periods, I do not recommend opening the position. For example, in the previous examples the distance was about 2 points, but in the image below the distance is about 20 points.

The advantage of this indicator is that you can build numerous strategies in markets with different volatility. But if volatility is not a feature of the market or has a fundamental reason, the position cannot be opened. The indicator is versatile and proves to be 70% effective (i.e., the number of transactions closed by stop loss is negligible).

Categories
Forex Daily Topic Forex Price Action

Weekly High/Low Breakout Trading: Count the Breakout Candle’s Attributes

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the last week’s high. However, the price does not head towards the North as it usually does. Let’s find out why that happens.

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the last week’s high. However, the price does not head towards the North as it usually does. Let’s find out why that happens.

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the last week’s high. However, the price does not head towards the North as it usually does. Let’s find out why that happens.

The chart shows that the price after making a strong bearish move gets choppy. The H4 traders may wait for the price to make a breakout at either side. A bullish breakout may attract the buyers to go long in the pair. On the other hand, the sellers may wait for the price to make a bearish breakout.

The price produces a bearish candle to start the next week. The price finds its support, and it heads towards the North. However, the last weekly high is still intact. The buyers must wait for the breakout at the level to go long.

The price finds its intraweek resistance. It comes down. Intraweek support holds the price and produces a bullish inside bar. It is not a strong bullish reversal candle. However, it is produced at double bottom support. Let us wait and see whether it makes a breakout at the neckline or not.

The price heads towards the North and makes a breakout at the neckline. The candle closes within the last week’s high and consolidates. It then produces a bullish candle closing above the last week’s high. However, the candle has a long upper shadow. Considering its upper shadow, traders do not usually get attracted to trade upon such a breakout candle.

As anticipated, the chart produces some bullish candles with long upper shadow after the breakout. The price heads towards the North with a sluggish pace. It then produces a bearish Pin Bar and drives the price towards the breakout level again. A bullish reversal candle closing above consolidation resistance may attract the buyers to go long in the chart again. Let us find out what happens next.

The chart produces a long bearish candle with long lower shadow. The pair is trading within the last week’s range again. The H4 buyers have lost their hope. They may skip eying on the chart to concentrate on somewhere else.

If we look back, a double bottom, along with a breakout at the last week’s high, do not push the price towards the North. Most probably, this is because of the breakout candle’s attributes. We may still keep an eye on such a chart, but it would be wise to concentrate more on those charts, which makes a breakout with a commanding candle.

 

Categories
Forex Risk Management

How to Deal with Losing Streaks and Drawdowns

One of the aspects of being a professional trader for which many are unprepared is the depressing periods of drawdowns in forex. Losing streaks can shake you and wreak havoc on your emotions, levels of confidence, and feelings of self-esteem. If you’ve been operating for a while, you’ll know what we mean. Consecutive losses place […]

One of the aspects of being a professional trader for which many are unprepared is the depressing periods of drawdowns in forex. Losing streaks can shake you and wreak havoc on your emotions, levels of confidence, and feelings of self-esteem. If you’ve been operating for a while, you’ll know what we mean. Consecutive losses place […]

One of the aspects of being a professional trader for which many are unprepared is the depressing periods of drawdowns in forex. Losing streaks can shake you and wreak havoc on your emotions, levels of confidence, and feelings of self-esteem. If you’ve been operating for a while, you’ll know what we mean. Consecutive losses place you in a state of “panic,” which severely degrades your decision-making process.

So what can we do? How can you recover from a losing streak or even avoid it in the future? Forgive our frankness, but the reality is that you cannot completely avoid this kind of accumulation of lost trades, they are simply a fact in trading. That is why it is very important that you learn to prepare, anticipate, and deal with this inconvenience, so when the time comes, the mental and emotional impact will be reduced.

Don’t be one of those traders who thinks “this won’t happen to me” because the reality is that someday it will happen to you. Even the best trading system that can exist is not free from the occasional losing streak. Trading is a profession that focuses on statistics and probabilities, so it is very unhealthy to believe that you will never lose money. You should wait for the losses.

In the “heat” of a drawdowns period, your future as a forex trader will be determined by the way you handle yourself in that moment of hopelessness. Will you collapse under pressure and let your account disintegrate along with your emotions? Or will you remain strong, disciplined, and logical while maintaining a rational mindset and maximizing your chances of surviving the storm?

In today’s guide, we will share some tips to help you through those difficult times on your way to trading.

Drawdowns in Forex: Don’t Let Your Mind Fool You

Placing an operation is quite easy, perhaps excessively easy. It’s just a click on a button and in a matter of milliseconds, your operation is running. The ease of placing a transaction can make a trader act on impulse without really thinking about what he has done. This is especially true when you feel emotional, such as having had some consecutive losses.

When you plant an operation, you do it because you think the odds are in your favor, and you’re exploiting your advantage in the market. When you are suffering the effects of your emotional side due to a drawdown, it is easy to despair and have a sense of urgency to take another operation in an attempt to recover the recent losses. This happens even if there is no good operation to take. It is called revenge trading.

When you operate in despair, you make bad decisions, and the market uses those feelings against you. You will begin to convince yourself that there are good setups in front of you, like a person stranded in the desert who sees mirages in the distance. It’s just your mind playing tricks on you.

It is important that you maintain discipline, taking only high probability operations and not starting to operate setups of the 2nd or 3rd category just because you are eager to get your money back. Consistency is the key to success and will be a vital component in recovering from a losing streak.

Use a Trading Journal to Highlight Potential Problems

You must keep a diary designed not only to record your operations data but also contain the psychological components of your operations. This way you can track your “feeling” and “mental state” during the different phases of your trading.

Such psychological data can be used during losing streaks. Go back to your recent operations in your journal and compare all those that make up the drawdowns period. There’s a good chance you can do it to see a common problem or weakness in the way you felt at the time.

It’s very likely that all this escaped your attention in the heat of the moment when you pulled the trigger. Surely the only thing on your mind was the desperate thoughts of getting everything back with a big winning operation. The problem is that many traders will do almost anything to recover their losses in the market, but they are willing to do very little when it comes to improving their emotional and mental performance.

Before taking any surgery, you should check your diary and remind yourself what happens when you operate on impulse and without discipline.

Maintain Positive Risk-Benefit Ratios

Remember, forex is a business, and businesses need a return on investment. Every time you place an operation you are risking some of your capital with the intention of getting a return on the investment. You only risk that capital when your trading system tells you that the chances of getting a good return on your risk are in your favor.

Positive benefit-risk ratios are a mathematical concept that ensures you aim for a return greater than your risk in each of the positions. When you do the accounts you discover that the positive ratios allow you to have more operations with stops executed than those whose objective was reached and still maintain the ability to grow your account.

If you remain disciplined and focused, you will eventually begin to see your operations achieve their objectives. It is not uncommon for a properly planned operation to eliminate all losses from a slump. Maintaining strict money management is vital during difficult times, and positive risk-benefit ratios should be at the core of any sound money management system. If your money management strategy allows your losses to be greater than your profit goals, then discard them before they destroy your account.

Have Faith in Your Trading System

Losing streaks come and go. Operating with a system you can trust and put your faith in will be very important. Just as with a diet, if you don’t think it’s helping you, you won’t get attached to it and therefore never reverse your unhealthy habits. A trader needs confidence in his trading system to be able to stay in good mental and emotional condition. Trading is useless if you do not believe in the trading methodology you are practicing.

We know losing streaks will make you question your trading strategy and even tempt you to make those “in-flight adjustments” to your plan. Remember that the market is dynamic and goes through different phases. One or two of these phases may not work very well with your system. If you start changing your rules, you could turn your trading system into something useless during market conditions in which you would have experienced good profits.

Don’t try to fix something that isn’t broken: no strategy has a 100% success rate. One aspect that we find critical is that you understand the reasons why you take the operations that your system generates. Many traders blindly follow the alerts that come out of some “magic indicator” they have bought. The trader has no idea why he’s pulling the trigger, he only does it because the gauge tells him to.

How can you trust the system if you don’t even know where those operations come from? The focus should be on how the trading system sends the signals. It should be based on a logic that you can understand. This is one of the innumerable reasons why like price action trading. Operating with price action signals allows you to understand market movements and safely identify high probability situations in which you can pull the trigger without hesitation.

Refresh

No matter how long you’ve been trading forex, every day you face a major new psychological challenge. If a forex trader tells you he can operate without emotion, he’s lying. As a trader, you will always be struggling with your emotions, making sure they stay away from your trading decisions.

The periods of drawdowns caused by losing streaks will blow up your emotions and there is a good chance that they will start to bring out the worst in you. Most people take their trading performance personally, and these losing streaks become a reflection of how they see themselves as people, resulting in low self-esteem and periods of depression.

Whether you like it or not, you will experience emotional upheavals from time to time. The way you handle yourself in these situations will be what will strongly impact your chances of success. Sometimes a trader could bring to the trading screen the stress of his outer life, coming from a bad day at work or a family discussion.

The best thing you can do when you’re emotional is to get away from the graphics. This is so simple, but it can do wonders for you. Sitting in front of your trading screen in a negative state of mind is unhealthy.

Get up and go do something that takes your mind off trading. Go to the gym, it’s important to stay healthy; watch a movie, or organize something with your friends. Socializing with other people will be a refreshing experience of the solitude of your trading table. You will notice that once you have participated in some activity that you enjoy, you will return to the markets with a fresh and positive attitude.

Operates on Favourable Terms

One of the big problems of novice traders is that they tend to look at a single market and sometimes become obsessed with it. They tend to confuse bad price action signs with good ones, due to the lack of consideration of market conditions surrounding the signal. Trends are the place where you can make a lot of money, and consolidation periods are just “black holes” that work as traps for your money. Operating when the market is going nowhere is like whipping a dead horse and expecting it to do something.

Often traders are taken to stop loss on the first operation and then start “revenge operations” on the same market to try to recover the lost. It might be helpful to create a rule for yourself that you will stop operating for 24 or 48 hours if you have more than 2 missed operations on the same day. Market conditions should be the first check when you look at the charts; if there’s no movement, do yourself a favor and stay away from that market.

Don’t Give Up on Me!

Remember, losing streaks are not uncommon in trading. Each operation individually is completely independent of the previous one and the next one. Just because you’ve had eight losing operations doesn’t mean the next eight can’t be winners.

Don’t despair or get anxious, if you do this your money will flow into the pockets of traders who have confidence and discipline. Always keep money management positive-oriented, so your winning operations will outperform your losers, making drawdowns periods somewhat less likely.

Do not be prey to revenge trading or panic trading. You need to maintain confidence in your trading system, remain patient, disciplined, and always have realistic expectations of the forex market. If you are looking for a system that is logical and in which you can understand why you are placing each operation, then price action is our recommendation for you.

Categories
Forex Risk Management

The 4 Most Common Errors in Capital Management

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers. But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching […]

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers. But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching […]

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers.

But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching “Game of Thrones”? Probably not. The reality is that you are leaving a world in which you have been raised to survive and are entering another world for which nothing has prepared you. In the forex currency market, there is a different set of rules.

As traders we know, deep down in our minds, how important capital management is, not only for the health of our trading account but also for our mental health. The average trader’s approach makes it very difficult for him or her to ever make a profit or sustain real growth in forex.

We’ve talked to many traders, and there seem to be a few common mistakes that continue to occur. In this article, we fully intend to expose about capital management and highlight some bases on which you might be building your money management mentality, and which may be harmful to your chances of getting where you want.

Don’t orient your goals toward money.

Some of the most common questions say something like:

  • Can I do 10% a month?
  • How many signals a week can I expect?
  • How long will it take me to double my account with $1,000?

All these questions have a strong focus: the urge to make money really fast. The big problem we have with these kinds of “goal-oriented” questions is that they cannot be answered the way the trader wants to be answered.

The foreign exchange market is a dynamic environment. A month could be very productive, with many “easy prey” and lucrative trading signals. The next month could be a dead zone, where the price is consolidated and compressed with low volatility, preventing you from making money from price movements.

Don’t try to force rigid money management goals in a fluctuating environment. Pretend you are in the last week of the month; What are you going to do if you are not even close to completing your “monthly fee”? In what way you will give an answer to the pressure you put on yourself to achieve your monetary goal?

With a sense of urgency, you might need to be more aggressive and start forcing operations; operations in which you wouldn’t normally pull the trigger, but now under this pressure, you feel you need to take immediate action.

The best way to fix this is to not set any goals, but instead, concentrate on becoming an excellent trader who is a master at reading graphics and managing risks. Learn to take what the market has to offer. Take action only when the market offers you a valid signal for your trading system, which you know gives you an advantage with the odds in your favor.

We don’t like to admit that we can’t predict or control what’s going to happen every time we look at the graphics. Sometimes the market is too noisy and hostile to operate, it’s that simple. In these cases, it becomes a black hole, in which you throw money and it is consumed by consolidations.

Some months you will do well, in others you will not see profit or even suffer a loss. What you never want to do is define your possible success with absolute numbers, which will lead to self-inflicted emotional pressures, and a negative self-assessment if these are not met. If you try to make money fast, you’ll be taking an incredibly high risk.

Measure Success in Pips

If you’ve seen a forex blog, you’ll notice that traders measure the outcome of their pip operations, or “how many pips are up or down this day. This has become the social standard for forex traders, we are all used to talking to each other in this way, using pips as a benchmark for performance. But the truth is, it’s not the right way for a serious trader to assess how well an operation has gone or its risk.

Pips are only a measure of distance on a price chart. Catching a move is great, but the most important thing is how the setup has allowed us to catch that move. You see, 1 pip for us could mean something different than what it means for you, and at the same moment totally different from what it means for someone else. Pips are very relative measures and therefore have relative values. If you “win 100 pips“, but your stop loss was placed at a distance of 500 pips, it is a negative-oriented operation, which gives you no right to brag about winning those 100 pips.

You should also note that a movement of 100 pips will look very different in EUR/USD compared to the EUR/AUD pair, and in turn will be different in GOLD. If you see a movement of 100 pips in EUR/USD, it would not be uncommon to see the EUR/GBP move 250 pips on the same day. The GOLD can easily move 2,000 pips in a session, and when you compare the graphics side by side, they all look quite similar despite the drastic differences in the movements of pips.

100 pips in EUR/USD is not the same as 100 pips in GOLD, and to further expand the differences, we can say that pips also contain an “intrinsic value” that is unique for each operation.

The value of each pip is defined by the following factors:

  • Size of the position (lotion).
  • The quoted currency of the currency pair you are trading (it is the currency that appears 2º in the pair).
  • The currency in which you have your trading account.

If your trading account is in USD, then any pair whose quoted currency is USD (XXX/USD) will always have a pip value of $10 per lot. If you were using AUD in your trading account, and you operated these same pairs (XXX/USD), then the value of each pip would be determined by the AUD/USD pair exchange rate and the batch size in the pair you are operating.

Let’s say we open a transaction in GBP/USD with 5 standard lots, and the trading account is in USD. In this case, each pip would be worth $50. The operation would increase or decrease our account by $50 for each pip earned or lost. A movement of 100 pips in our favor would put us ahead by $5,000.

Compare the same situation with that of another person who takes the exact same operation but uses AUD on his account. The “pip value” will be different in this case, and this person should fix this difference by adjusting the position size to compensate. We won’t get into mathematical calculations here, the important thing is that you understand the idea.

So, when someone tells you they’ve won 200 pips on their operation, it doesn’t really mean much. If it was in EUR/USD, the movement has been pretty decent, probably a good operation, but if it was in GOLD, it’s not even an accomplishment.

Remember, the real measure of the success of an operation is how much return on investment you were able to get with it. The bottom line for trading is money, we are not exchanging magic beans, here we are looking to earn $$$$.

If you’ve had to risk $1,000 to win $100, then you’re playing to destroy your account. If instead, you risk $100 and earn $1,000, you’ve done very well! , getting a 900% return on investment. We all know that to fit into society you must speak in the classic terms of pip movements here and there, but when it comes to recording your own data, don’t be a pip counter when measuring your success.

Capital Management: Under-Capitalisation

How many accounts have you ruined or seriously compromised because you weren’t happy with the profits you were making and decided to expand your risk to compensate? A serious forex trader knows that trading should be treated as a business. One of the most common failures for small businesses is under-capitalisation, that is, not having enough money.

The ironic thing about forex is that you can start and operate with small amounts of money. Technically you can operate with initial investments as small as $100! That being said, if you want forex to generate $500 a week with a $100 investment, then you’re very undercapitalized!

The undercapitalisation affects the trader deeply at a psychological level. Undercapitalized traders want the big income they want, but they don’t have the power to make it happen in their account, so they are prone to risk more and overexposure to the market. This can lead them to clear their account quickly, and then become frustrated and angry traders.

Do not be the one who overexposes your account to a massive risk by the desperation of getting “the big win”. This is a betting mentality that provides an incorrect framework for developing the trader mentality.

Cutting Operations Too Soon

One of the fastest ways you can do harm yourself is to become a “micro forex manager“, the trader who sits down to make lots of fine micro-adjustments to their open positions. Sometimes you may feel like you should babysit your open operations until they reach a profit. When a trader makes adjustments to his stops, or does anything outside the original trading plan, this will usually result in an unfavorable outcome.

Don’t sit back and look at your floating gains and losses, because each pip of movement will generate more and more emotions. If you do this, you will therefore have a better chance than close an operation based on emotions even when there are no clear exit signs.

Think of all those times you’ve interfered with your open operations and all you’ve achieved is to deprive yourself of the potential earnings that you would otherwise have achieved.

The price will not move in the straight line you would like, but will move in “waves” or zig-zag patterns. It is logical to expect a transaction to come in and out of profits several times as the financial market gradually moves in the direction it wants to go. This is a basic principle of swing trading.

Do yourself a favor: put your operation in a logical way that you have confidence in and then just walk away from it. Close your trading terminal and don’t even look at it until the next day. This type of “prepare, forget, and collect” system will do wonders for you, financially, mentally, and emotionally.

Categories
Forex Indicators

Boost Indicators Vs. Burst Indicators in Forex

Some traders prefer to use breakpoints that signal a trend entry, while others prefer to use indicators that simply show a strong directional impulse. Who is right and what works best? Indicators of Momentum There are several different impulse indicators to calculate the price boost, allowing the indicator used to quickly see if a currency […]

Some traders prefer to use breakpoints that signal a trend entry, while others prefer to use indicators that simply show a strong directional impulse. Who is right and what works best? Indicators of Momentum There are several different impulse indicators to calculate the price boost, allowing the indicator used to quickly see if a currency […]

Some traders prefer to use breakpoints that signal a trend entry, while others prefer to use indicators that simply show a strong directional impulse. Who is right and what works best?

Indicators of Momentum

There are several different impulse indicators to calculate the price boost, allowing the indicator used to quickly see if a currency pair is showing a strong long or short boost, or if it’s just crisscrossed and in a lateral range with no impulse at all.

Technical analysts have developed a wide variety of such indicators and they are available for free on almost all Forex trading platforms. The most popular are the moving average crosses, the relative strength index (RSI), the MACD, the Bollinger bands, and the Stochastic. What indicators usually do is mainly look back a given period of time and calculate whether price movements have been more upward or downward. The internal formulas that are used individually by each indicator to make the calculation the result are conceptually similar. In my opinion, the RSI works best.

Impulse traders tend to largely ignore supports and resistors and simply check if impulse indicators show that the price is more bullish or bearish in shorter and wider time frames. When both types of time frames show the same momentum, they place an operation in the direction of the current momentum.

Another approach that can be taken, and that can replace the use of indicators or used in a complementary way, is to draw supports and key resistors and check whether they are maintained or broken. For example, if resistance levels are continually broken while support levels are maintained, that would be a sign that there is upward momentum.

Ruptures in Forex

There are different ways to achieve the same type of entry with a strong boost and it tries to place a long operation when the highest price recorded during a certain period of time breaks. It is a method of operating with the trend well known and long tradition. In effect, the known turtle traders were using an entry system based on maximum or minimum price breaks of 20 and 55 days (these prices are indicated by the Donchian channel indicator).

This type of trading method is very attractive because it is very simple and time-consuming as it is a mechanical way of “placing an operation and forgetting”. For example, at the end of each trading day, you can simply place an order to go long or short on the X and Y prices, which are the maximum and minimum prices during the given review period, and then you no longer have to worry about it for the next 24 hours or so.

It is widely believed that such mechanical strategies based on ruptures are reckless and do not produce the best results. In today’s financial markets, there are more “false” than “breaks”, especially in Forex prices, which tend to move in narrower ranges than stocks and commodities.

A key issue to remember and which could counter this perception is to clarify what constitutes a successful break, a subject open for discussion. For example, the price breaks up, moves in your favor a few pips, and then moves against you 100 pips. Is this a failed break? The answer to that question sincerely depends on where you place the stop loss. If you put it in 50 pips, the rupture was a failure, resulting in a loss. However, if you have placed a wider stop loss, that could be an essential component for a complete trading strategy based on volatility, and if the price had undone your drop of 100 pips to finally climb 1000 pips, it would have been a successful break for you.

Traditionally, trend trading uses a stop loss of 3 multiples of True Middle Range (ATR), which also often uses breaks for entries. Of course, the use of a broad stop loss will tend to produce more profits, but the size of the gains will be smaller than if tighter stops had been used.

Comparison Between Impulse and Rupture Indicators

We can try to determine which of the entry strategies described above can work best in forex trading by performing a backtest on the same currency pair using the two different trading placement methods with the same stop-loss system. Let’s take a look at the EUR/USD pair in the period from 2001 to 2014. The stop loss used in each operation is always half the True Middle Range of 20 days.

In the pulse indicator method, an operation is placed when we reach the closing of any hour.

1. The price is on the same side as where it was 1 month and 3 months ago.

2. EMA 3 is on the same side as SMA 10 in the time frames H1, H4, D1, and W1.

3. The 10-period RSI is on the same side of 50 on the H1, H4, D1, and W1 time frames.

All these indicators must be bullish or bearish at the same time before placing an operation, thus showing that there is a strong directional impulse.

The results were as follows:

-With a risk target – reward of 2 times the stop loss, there was an average positive expectation of 6.2% per operation.

-With a risk target – reward of 10 times the stop loss, there was an average positive expectation of 39.6% per operation.

So, now let’s look at the method of breaking the Donchian canal. A long transaction is placed at the first moment during the day when the price is quoted above the maximum of the last 80 days, or a short transaction when the price is quoted below the minimum during the same period of time, assuming that the stop loss level was not reached before the operation was placed. The 80-day period is widely considered as a good measure to capture the best impulse break in Forex.

-With a risk target – reward of 2 times the stop loss, there was an average positive expectation of 11.72% per operation.

-With a risk target – reward of 10 times the stop loss, there was an average positive expectation of 42.68% per operation.

Conclusion

We can see that there was not much difference at the higher end of 10:1, but that the breaks produced a better result at the lower end. Needless to say, there were far fewer rupture operations in general.

One reason for this is that it has been well established for centuries that prices tend to move more easily when they are in “blue sky”, ie in areas where the price has not been for a relatively long time.

Finally, keep in mind that it mattered little what entry strategy was used if it was decided by large moves of 10:1. This only serves to show that traders tend to worry too much about tickets, while the real challenge is to stay in the market waiting for big profits instead of closing positions that turned out premature exits. As Jesse Livermore said, I made more money by staying in business than I ever did by being right.

Categories
Forex Risk Management

The Importance of Risk-Reward Management in Forex

Trading can be fun, mentally stimulating, and beneficial in several ways. But you shouldn’t confuse it with a casino machine. There are people addicted to trading, and many of them surprisingly have some sort of structured plan. The problem is that when managing their capital, these traders tend to fix the risks of their operations based on how they feel at the time. This type of placement of transactions with random sizes causes the trader to have no control and usually to be placed in situations of extreme exposure of his capital, which is dangerous and stressful.

Trading can be fun, mentally stimulating, and beneficial in several ways. But you shouldn’t confuse it with a casino machine. There are people addicted to trading, and many of them surprisingly have some sort of structured plan. The problem is that when managing their capital, these traders tend to fix the risks of their operations based on how they feel at the time. This type of placement of transactions with random sizes causes the trader to have no control and usually to be placed in situations of extreme exposure of his capital, which is dangerous and stressful.

Trading can be fun, mentally stimulating, and beneficial in several ways. But you shouldn’t confuse it with a casino machine. There are people addicted to trading, and many of them surprisingly have some sort of structured plan. The problem is that when managing their capital, these traders tend to fix the risks of their operations based on how they feel at the time. This type of placement of transactions with random sizes causes the trader to have no control and usually to be placed in situations of extreme exposure of his capital, which is dangerous and stressful.

Traders should introduce money management in the trading plan. It is not important whether you are an intraday trader or a scalper, someone who uses many indicators or just follows the price action. The point is that all trading systems, no matter how exotic, need good money management. This management will help the trader in various ways:

Consistency

Money management plans allow you to calculate risk very accurately. This eliminates any work of “guessing” the size of a position. If you find yourself placing commands with random position sizes that cross your mind, you will surely have a fairly interesting equity curve. When applying the control of good risk management, your operations will have a consistent risk. With each operation, you will know how hard you will be hit if your stop loss is hit. There is no shame in a stop-loss execution. No one earns 100% of their operations, and your risk management plan should ensure that your winning operations are broader than your losers.

Stability

The problem with operating without a money management plan is that you don’t really know how much risk you’ve placed in each operation. You could be risking too much on an operation and take a major loss, then on the next operation risk an insufficient amount and achieve your goal, but the profits will be less than they should. This responds to consistency in risk. We don’t want to risk $500 on an A operation and then only $50 on a B operation. If we have a plan regarding the amount to risk, our equity curve will stabilize, which will allow us to sleep more peacefully at night.

Money management allows you to keep emotions on the sidelines. Operating without a money management plan is quite stressful. Every element of trading is in need of a structure, and without it, you could surely encounter an anxiety attack if an operation doesn’t go your way. With position sizes or random stop placement, you don’t really know where you’ve gotten yourself. Surely by placing the operation you anticipated that it would go your way, but what if that doesn’t happen and you start losing more than you should?

This will begin to bring dangerous emotions that should never be mixed with trading. You could move your stop loss even further to give the operation the space to turn around, or maybe you could remove all your stops, exposing 100% of your capital in the markets. Or you could prematurely close an operation when it would actually have reached your goal. You could even open a new operation to help recover the accumulated losses. These are all dangerous practices that will do great harm to your mental health, and cause you to fall into stress.

The idea of using a money management plan is to avoid intervening emotionally in your operations. This way you will have consistency: you have already calculated how much you will lose if your stop loss is reached, you know that you feel comfortable with it and you also know that if your operation reaches the goal you will get a good return on your investment.

Money management could be the difference between success and failure. A proper money management strategy could bring a trading system that is below average back to life. You could even use the popular “moving stocking crossing” strategy, apply smart money management, and achieve major improvements in the performance of this system. One of the most important features of a powerful plan is that must project a return on positive investment. This is often achieved with positive risk-reward ratios.

The Power of Risk-Reward Management

Everyone is looking for the “holy grail” of trading systems. If you ever manage to find it, we can guarantee that it has a powerful and robust risk-reward model. The risk-reward profile of a money management plan could be the difference between success and failure, so it is very important that you come to understand the concept and apply it correctly to your trading.

What is risk profit?

The risk-reward ratio represents how much you’re risking compared to how much profit you’re aiming for. Here’s an example:

-If we open an operation with a risk of $50 and target a profit target of $250, then our risk-reward would be $50/ $250, or 1:5. We’re risking $50 to get a $250 return.

-If we had risked $10 and targeted a profit of $30, our risk-reward ratio would be 1:3.

-This percentage is very important for your commercial success in the long term.

The Danger of Negative Risk-Reward Ratios

Many traders use capital management methods that can have very negative effects on their equity curves. For example, scalpers are traders who place many small trades into and out of the market quickly. They believe that being on the market for a short time has some kind of advantage, although we disagree.

Let’s look at the money management profile of a trader who uses high-frequency trading strategies. Because scalpers only target small targets, it is difficult for them to get positive returns on investment. Here’s the reason: the market is full of players who operate for different reasons. This causes vibrations in price, which constitute the “noise” generated by all transactions taking place on the market. If a scalper targets a 3-pip target it is very difficult for him to place a stop loss that gives him a positive risk-reward profile.

Let’s say that the scalper wants to get a risk-reward ratio of 1:3. This means that you will need a stop loss of 1 pip to achieve this. Similarly, if I wanted a ratio of 1:1, I would need a stop loss of 3 pips. As you can see, the size of stops loss is unrealistic, with such small stops the trader would be taken out of the market almost instantaneously due to the noise that we have spoken about. At any moment the market could vibrate up and down 5 pips. For this reason, scalpers often get around this problem using negative risk-reward ratios, meaning they risk more than they expect to gain from each operation. A typical scalper could target a 5 pip target while placing a 20 pip stop loss to “cover” from any market noise.

In this example, the risk-reward ratio would be 4:1. This is a position we do not recommend you to be in. For each lost transaction, the trader will need 4 trades that reach their goal, and that if no additional loss occurs while getting those 4 winners.
That is why it is essential that your risk-reward ratio remains positive, otherwise you will be chasing your own tail and you will not get anywhere with your trading.

How a Positive Risk-Reward Ratio Gives You an Advantage

Now that we understand the concept of risk-reward ratios, let’s take a look at how a positive ratio can make you shine as a trader. Remember, positive risk-reward ratios mean you’re aiming to get more than you risk every time you plant an operation. A positive risk-reward ratio means more return on your investment, the advantage here is that you can tolerate more stop loss executions than you think. In fact, it is possible to lose more than half of your operations and still make a profit. This is because your winning operations recover all the losing operations you have accumulated plus a bonus. This way you’re able to grow your equity curve.

Losing trades hardly make a dent in a trader’s account that uses a positive risk-reward ratio. The higher the risk-reward profile, the trader can endure losing more trades without receiving damage to his account. We must stress that the higher the profit target, the more difficult or time-consuming it will be. Risk-reward 1:6 operations are not as easy to achieve as 1:2. We only have to earn 25% of all our operations to maintain the breakeven and with at least 26% we can already think of a long-term gain. We are confident that you now understand the benefits of including a robust money management system in your trading and can even further improve performance by introducing positive risk-reward profiles.

Categories
Forex Daily Topic Forex Price Action

Breakout at Weekly High/Low, Wait for Consolidation

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the weekly low. The chart produces a strong bearish candle to make the breakout. The Bear looks good to make a strong move towards the South. However, the price does not head towards the downside. It rather gets choppy. Let us find out the reason behind it.

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the weekly low. The chart produces a strong bearish candle to make the breakout. The Bear looks good to make a strong move towards the South. However, the price does not head towards the downside. It rather gets choppy. Let us find out the reason behind it.

In today’s lesson, we are going to demonstrate an example of an H4 breakout at the weekly low. The chart produces a strong bearish candle to make the breakout. The Bear looks good to make a strong move towards the South. However, the price does not head towards the downside. It rather gets choppy. Let us find out the reason behind it.

It is an H4 chart. The chart shows that the price makes a strong bearish move. It has a bounce at a level of support twice. If the price makes a breakout at the neckline, the buyers may look to go long in the pair upon bearish correction. On the other hand, the sellers may wait for the price to make a breakout at the week’s low to go short upon consolidation and getting a bearish reversal candle.

The chart produces a strong bearish candle breaching through the last week’s low. The breakout length is good as well. It means that the sellers may wait for the price to consolidate and to get a bearish reversal candle to go short in the pair. It seems that the sellers may dominate in the pair in this week as well.

The chart produces another bearish candle followed by a bullish engulfing candle. Producing a bullish engulfing candle to consolidate is not a good sign for the sellers. However, if the next candle comes out as a bearish engulfing candle closing below consolidation support, the sellers will be right on the track.

The chart does not produce a bearish engulfing candle. It rather produces another bullish candle. It seems that the price is having a bullish correction. When the H4 chart makes a breakout at the weekly low/high, the price is supposed to consolidate and produce a reversal candle to offer entry. If it makes a long bullish/bearish correction, it is assumed that the traders are not confident to take the price towards the trend. The chart shows that the price is obeying the level of support, where it has its first bounce.

The choppy price action continues. The H4 traders may wait for the price to make a breakout in the next week. The level of support becomes daily support now. Thus, weekly-H4 traders must wait to find the next direction.

We must remember when a pair trades within last week’s high and low, the price usually makes a correction. When it makes a breakout, it consolidates. If it takes too long or too many candles to make a breakout, traders may skip taking entry on that chart.

Categories
Forex Indicators

Indicator Testing Pitfall – Repainters

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path? Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need […]

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path? Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need […]

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path?

Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need it to work. Typically, that will mean backtesting it over a certain timeframe – up to and even over a year back in time if you’re trading on the daily chart – as well as forward testing it through a demo account. Now, for several reasons backtesting is your first go-to method of figuring out whether an indicator performs as advertised and as you need it to.

The main reason why backtesting is important and why you want to run that first is that it is so much quicker than forward testing – which you, of course, should also do. When backtesting you don’t need to wait for time to unfold at its natural rate – you can make things a great deal quicker.

Testing Trap

One potential pitfall or trap that an indicator testing process can lure you into – and that can be potentially dangerous if your testing regimen is not sufficiently robust – is the repainting indicator. What is a repainting indicator and why is it dangerous? Well, the short answer is that a repainting indicator is an indicator that moves the goalposts after the fact. It keeps changing its past values based on new candles and therefore makes it seem like it was more successful historically than it really was. This will, however, clearly be much easier through the use of a concrete example.

Backtesting an Indicator

So, let’s say you’re taking apart a combination indicator (like, for example, the Traders Dynamic Index) in order to have a better look at its constituent elements. Combination indicators, like the TDI, are made up of a number of separate indicators that work in concert together to provide what is hopefully a more accurate picture. You can, of course, test combination indicators as though they are one unit simply by treating them as a whole made up of constituent parts. But with combination indicators, there is also another possible approach and that is to examine each of the elements that make them up as a separate indicator. In fact, this is a very important way to test combination indicators – because if someone has gone to all the trouble to wrap up what amounts to a whole trading system into one downloadable tool, you’re going to want to know that all the parts of that tool work, right? Whenever you encounter a combination indicator, make sure you take it apart and test all of its components separately, as you would any other indicator. You can, afterward, always go back and test the whole combination as one tool.

The way to isolate those elements you want to test is to turn off or blank out those parts that you’re not looking at. Sticking with the example of the TDI, you might want to focus on one of the moving averages and temporarily (for the purposes of the test) turn off the other moving average, the Bollinger Bands, and the RSI. If you do this with the TDI, for example, you might notice as other traders have too that there’s something kind of special about the yellow line indicator. It seems that every time the line changes direction it is indicating a price trend. Indeed, it seems to be predicting price trends with an astounding level of accuracy that goes far beyond anything most indicators are able to achieve. Sure, you can’t use that as a trade entry signal but boy is it useful to have an indicator able to predict trends with a level of accuracy that exceeds 80 or even 90 percent. That’s astounding!

Too Good to be True?

How often is it that you find an indicator that you can add to your system that can achieve such levels of accuracy? Just imagine how many bad trades that will cut down on and how many winners it could help you to find. Well, if an indicator does come around and it looks like that, that’s your first red flag. Consider it a shot across your bows that sets alarm bells ringing.

If you’re being thorough and backtesting across multiple currency pairs and over a significant time period and you still come across something that is this accurate, that’s your first warning sign that you could be dealing with a repainting indicator.

As we said before, a repainter is an indicator that will draw you into thinking you’ve found the holy grail of indicators but could be truly dangerous if you start using it without taking the proper precautions. For a start, if you don’t put it through a comprehensive forward test and just rely on your results from backtesting, you could end up losing serious money.

Recognition and Identification

So, how do you know if what you’re dealing with is a repainter? Well, the first part of the problem is to recognise that you have a problem. The first clue should be, as above, that it performs so well in backtesting that you begin to suspect it isn’t quite what it seems. That’s step one. The second step is to identify it as a repainter.

What a repainter will do is basically change shape once a few candles have passed to show an outcome that better reflects what happened with price movements. In other words, the indicator will go back in time and repaint itself to show signals where there were no signals. That is a huge problem you’re your backtesting process and will mess with your results. An indicator that doesn’t repaint will stay the same as the chart moves on and will faithfully record what it showed you as the candles close but a repainter won’t.

The way to see that is to run the indicator through a fast timeframe and essentially catch it in the act. Go to a fast chart, like the five-minute chart or the one-minute chart, and run it through to see if it changes the data. Here you might want to even grab screenshots along the way because those changes might be quite subtle as time rolls forward and you may not want to wait long enough for it to give off false signals. If not, then those false signals will be a sure-fire sign that something is off. A false signal, in this case, is where the indicator initially does not show up a signal but as the candles move on it repaints itself in hindsight and shows up a signal. 

Another quick way of testing if an indicator is a repainter is using the MT4 Strategy tester module. Just set to work on a fast timeframe and look at how it behaves on the closed candles. Just bear in mind about the scale for that indicator. Sometimes when the value of the indicator pushes the window limits, or better to say higher or lower values which are not on the scale, the scale itself resizes to fit the representation. This can lead you into thinking the lines or historic values of the indicator repaints, but it is just because extreme values resize the scale and it may seem as indicator lines are reshaping. 

Catching a repainter in the act is the best and surest way to know that this is an indicator to steer clear of. The reason to use a fast chart in order to do this is because things will happen quickly enough for you to catch it and also because you don’t want to waste your own time waiting for a slower chart to unfold. Part of the purpose of backtesting is to eliminate indicators that would otherwise be a waste of your time to forward test through your demo account so making the process unnecessarily long would kind of defeat its purpose.

If you’re running an indicator through this repainter test on a fast chart and you see any kind of movement at all a few candles back, in the region where the data is supposed to be fixed, that is already too much movement. This is why it is a good idea to shoot off a few screenshots as you’re doing this because even the tiniest amount of alteration of data that is supposed to be fixed because it’s in the past is too much.

In addition to screenshots, another thing that will help you to identify a repainter is larger price movements. If you’re running an indicator through a one-minute chart but the price is not moving much, you will have a hard time catching any unwanted changes to the indicator’s history but if the price is moving up and down more drastically, those changes are likely to be more visible. Also, make use of the drawing tools in your platform to mark signals the indicator gives off as you go along. If you look back and signals you marked turn into non-signals or if new signals appear where you didn’t mark them, then you’re dealing with a repainting indicator.

Repainter Alert

So what can you do if you run a repainter check and the indicator you had such high hopes for because it looked so good in backtesting turns out to be repainting? The short answer is there is nothing you can do. Just steer clear of it like it’s the plague. Bin it and never think another thing about it.

The long answer is also there is nothing you can do. To change the indicator you would have to break into the code and start messing around in there to reprogram it. Now, some of you may feel that this is something you’d be good at and that’s fine as far as it goes. Just be aware that the reprogrammed indicator is going to essentially be a whole brand new indicator that you have to run through the full gamut of testing from scratch. None of the backtesting you’ve done on it so far will apply. However, even if you reprogram an indicator so that it no longer repaints, you now have to start wondering what else might be wrong with it.

Therefore, the best option remains scrapping it and continuing your search for indicators elsewhere.

Protecting Yourself

So, what can you do about repainters if you can’t fix them? Well, you can identify them and avoid them. Expand your testing regime to include a repainter check as described above – especially for indicators that seem to be too good to be true. Although you should really do this with every indicator before you introduce it into your system.

The second thing to do is to make sure you run proper forward testing and cross-reference this with results you expected to get on the back of backtesting you did. These will never precisely match up, of course, but there is a chance that this will help you catch out a repainter.

The last thing you want to do is introduce a repainting indicator into your system and use it to trade in the real world. It will throw your results off and it will require time and effort to identify the problem – hopefully before you lose too much money.

Finally, never get so hopeful or sentimental about any aspect of your trading system – whether it’s an indicator, a process or an approach – that you can’t ditch it the moment you discover it isn’t working for you.

Categories
Forex Indicators

Everything About ‘Treasury Bill Auction’ Macro Economic Indicator

Introduction

Introduction

Introduction

One of the primary ways any government funds its budget is through debt – borrowing. When borrowing, a government can do this from the international markets or locally, from its citizens and businesses. When taking debt locally, a government uses treasury bills and bonds. As is with any form of debt, borrowing using treasury bills, the government is obligated to pay interest upon the maturity date.

The interest rate that the government offers for its treasury bills gives an invaluable insight into the confidence investors have in the economy. Therefore, to understand the borrowing patterns of the government, the interest rates it is obligated to pay, we need to understand treasury bill auctions.

Understanding Treasury Bill Auction

To better understand how the treasury bid auction works, we first need to understand a few terms.

Treasury bill is a short-term debt instrument used by governments to borrow money over a short period – usually less than one year. Because the central banks back the treasury bill, they are considered to be of lower risk and secure form of investment.

Treasury bill auction is a weekly public offering of treasury bills by the central government with maturities ranging from one month to one year. The auction is the official avenue through which central banks issue their treasury bills.

Maturity is the maximum time that a treasury bill holder can hold it before they are eligible for redemption. Treasury bills have maturities ranging from days up to one year. Note that the longer the maturity period of a treasury bill, the higher the interest rate will be.

Discount is the difference between the price at which the treasury bills are issued and the face value of the treasury bills. It is customary for the treasury bills to be issued at a discount and be redeemed at face value upon maturity.

During the auctions, participants are generally divided into two categories – competitive and non-competitive bidders. Before the auctioning process begins, the central banks make public the following information about the treasury bills: the date of the auction; the day of the treasury bill issue; eligibility of auction participants; the amount of the bills being auctioned; and the time when the bidding ends.

When the auction begins, the competitive bids are accepted first to determine the discount rate for the treasury bills. These competitive bills are submitted on a pro-rata share of every Treasury bill auction. It is worth noting that the winning bid determines the interest rate that will be paid out on each issue of a treasury bill. Furthermore, the demand for treasury bills is determined by the prevailing market and economic conditions and sentiment. It is this demand and the interest rate that will be of importance in our subsequent analyses.

Since the pricing of the treasury bills is done through a bidding process, the winning bid is usually one that has the lowest discount rate. Such bids are preferred to ensure that the interest rate the government pays investors is kept as low as possible.

After investors have purchased the treasury bills, they are then free to sell, trade them, or hold until maturity.

How can treasury bills auction be used for analysis?

Using the auction of the treasury bills in the analysis is relatively straightforward. The biggest draw of the treasury bills is because of the presumed zero risks of default since the government backs them. As we mentioned earlier, the primary determinant of the discount rate at the treasury bill auction is the demand. This demand is driven by factors such as macroeconomics, market risks, and monetary policies.

When other markets such as equity markets appear to be less risky or offer better returns, investors in the treasury bills will demand higher discounts. The higher discount translates to a higher interest rate attached to the treasury bills. Furthermore, when the rate of inflation is rising, investors will demand a higher discount rate for the treasury bills to offset the effects of inflation.

Source: St. Louis FRED

When there is rapid economic growth, investors have several options that could earn them higher returns. Therefore, they will demand a higher discount from the government, which results in a higher rate. Similarly, when the economy is heading towards a recession, investors deem treasury bills as safe-haven investments. The resulting excess demand for the treasury bills leads to lower discounts received by the investors.

Thus, the change in the yield attached to the treasury bills gives us significant insight into the state of the economy.

Impact on currency

We have seen that the rate of the treasury bills being auctioned is a reflection of the prevailing market conditions or anticipated economic performance.

When the rate received at auction is higher, it signals that the economy is performing well. Furthermore, higher rates for the treasury bills imply that there will be increased interest in investment opportunities in the country, which results in increased demand for the local currency. Higher rates could also translate to the increasing rate of inflation, which forestalls contractionary monetary and fiscal policies. For the forex market, this translates to a well-performing economy hence the appreciation of the currency relative to other currencies.

Conversely, when the rate of treasury bills at auction are falling, it implies that the economic fundamentals are performing poorly. There will be a net outflow of capital and investment. Furthermore, the forex market would anticipate expansionary monetary policies, which result in the depreciation of the currency relative to others.

Sources of Data

In the U.S., the treasury bills are auctioned by the U.S. Department of Treasury. You can access the latest data on the auction of treasury bills here. The data on the upcoming auction of the U.S. treasury bills can be accessed from TreasuryDirect, which allows you to buy and redeem securities directly from the U.S. Department of the Treasury in paperless electronic form. You can access the in-depth review of the current and historical data on the U.S. treasury bills from St. Louis FRED. You can access the global data on Treasury bills from Trading Economics.

That’s about Treasury Bill Auction and the respective details related to this fundamental indicator. We did not see any reaction at all on the Forex price charts related to this indicator, but as explained above, we know the relative impact. We hope you have found this article informative. Cheers!

Categories
Forex Daily Topic Forex System Design

Designing a Trading Strategy – Part 5

Introduction

Introduction

Introduction

In a previous article, we presented the effect of incorporating additional rules in a trading strategy during the design process. In particular, we intuitively proposed a rule that opens a position using a size considering a percentage level of equity in the trading account.

In this educational article, corresponding to the last part of the series dedicated to designing trading strategies, we will expand position sizing concepts.

Position Sizing

The determination of the position size in each trade corresponds to the third element of a trading strategy. This decision will determine the capital that the investor will risk in each trade.

The position sizing corresponds to the volume committed in each trade. This volume can be the number of contracts, shares, lots, or another unit associated with the asset to be traded. The complexity of the position sizing is based on the efficient determination of the position to ensure maximum profitability with an acceptable risk level for the investor.

Programming the Position Sizing

To visualize the difference between some methods of position sizing, we will apply the criteria to the strategy of crossing moving averages analyzed in previous articles:

Fixed Size: This method is probably the most typical when developing a trading strategy. The rule consists of applying a fixed volume per trade. For example, consider the position size of 0.1 lot per trade, the code for our strategy is as follows:

extern double TradeSize = 0.1;

   //Open Buy Order, instant signal is tested first
   if(Cross(0, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) >
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0))
 //Moving Average crosses above Moving Average
   )
     {
      RefreshRates();
      price = Ask;
      SL = SL_Pips * myPoint; //Stop Loss = value in points (relative to price)   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_BUY, price, TradeSize, "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
      myOrderModifyRel(ticket, SL, 0);
     }
   
   //Open Sell Order, instant signal is tested first
   if(Cross(1, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) <
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0))
 //Moving Average crosses below Moving Average
   )
     {
      RefreshRates();
      price = Bid;
      SL = SL_Pips * myPoint; //Stop Loss = value in points (relative to price)   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_SELL, price, TradeSize, "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
      myOrderModifyRel(ticket, SL, 0);

Percentage of Risk per Trade: this criterion considers the account’s size given the account’s capital and estimates the stop loss distance needed to execute the trade according to the devised strategy. The common practice is to risk 1% of the equity currently available in the trading account. In this case, the implementation of the strategy is as follows:

double MM_Percent = 1;
double MM_Size(double SL) //Risk % per trade, SL = relative Stop Loss to
 calculate risk
  {
   double MaxLot = MarketInfo(Symbol(), MODE_MAXLOT);
   double MinLot = MarketInfo(Symbol(), MODE_MINLOT);
   double tickvalue = MarketInfo(Symbol(), MODE_TICKVALUE);
   double ticksize = MarketInfo(Symbol(), MODE_TICKSIZE);
   double lots = MM_Percent * 1.0 / 100 * AccountBalance() /
 (SL / ticksize * tickvalue);
   if(lots > MaxLot) lots = MaxLot;
   if(lots < MinLot) lots = MinLot;
   return(lots);
  }

Position Sizing to Equity: this method executes the trading order according to the trading account’s equity. For example, the developer could place one lot per $100,000 in the trading account. This method will increase or reduce each transaction’s volume as the capital of the trading account evolves.

extern double MM_PositionSizing = 100000;
double MM_Size() //position sizing
  {
   double MaxLot = MarketInfo(Symbol(), MODE_MAXLOT);
   double MinLot = MarketInfo(Symbol(), MODE_MINLOT);
   double lots = AccountBalance() / MM_PositionSizing;
   if(lots > MaxLot) lots = MaxLot;
   if(lots < MinLot) lots = MinLot;
   return(lots);
  }

There are other methods, such as martingale and anti-martingale, discussed in a forthcoming educational article. For now, we present your definition.

  • Martingale: this rule is based on the money management of gambling. This method doubles the position size after each losing trade and starts at one position after each win. This method is extremely dangerous and should be avoided.
  • Anti-Martingale: this method opposes martingale, that is, doubles the position size after each winning trade and starts with a position after a losing trade. This method plays with what the trader considers to be “market’s money.” It is advisable to reset the size after a determined number of steps since the logic bets on a winning streak, which will end at some point. A 3-step is good enough to increase profits substantially. 4-step may be an absolute maximum on most trading strategies.

Conclusions

Position sizing is one of the critical decisions that the trading strategy developer must make. This choice will influence both the trading account’s growth and the capital risk to be exposed in each trade.

On the other hand, we have seen three examples of position sizing, representing a criteria guide that the trading strategy developer can use.

Finally, the developer of the trading strategy should explore and evaluate which is the best option of position sizing to use, taking into account the benefits of each of the impacts on the strategy’s execution.

Suggested Readings

  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
  • Pardo, R.; The Evaluation and Optimization of Trading Strategies; John Wiley & Sons; 2nd Edition (2008).
Categories
Forex Indicators

Overview of Forex Indicator Types and Uses

Indicators are a tool that Forex’s technical analysis, traders, and statisticians use in financial markets to take a statistical approach rather than a subjective approach to trading. They will use things like money flow, volatility, timing, and trends to get a better picture of the potential price movement. Thousands of indicators currently available, which means […]

Indicators are a tool that Forex’s technical analysis, traders, and statisticians use in financial markets to take a statistical approach rather than a subjective approach to trading. They will use things like money flow, volatility, timing, and trends to get a better picture of the potential price movement. Thousands of indicators currently available, which means […]

Indicators are a tool that Forex’s technical analysis, traders, and statisticians use in financial markets to take a statistical approach rather than a subjective approach to trading. They will use things like money flow, volatility, timing, and trends to get a better picture of the potential price movement. Thousands of indicators currently available, which means there is a lot of debate about which are the best.

Advanced Indicators 

Advanced indicators are one of the two main types that are available to traders. They tend to anticipate any price movement and predict the future. They tend to be used for trading in ranges, as they may give signs of a potential break, which of course is very powerful information to have.

Some of the most popular forward indicators are the stochastic oscillator, and the relative force index RSI. The worst part of these indicators is that can pre-empt events and perhaps give false signals occasionally. This is because most people will use something more than an advanced indicator, using it as a secondary indicator in addition to simple price action. Just as with most indicators, there is a complex mathematical formula that shows the moment and where the market will go.

Back Indicators

In contrast, retrospective indicators tend to follow the movement of prices. They are much more useful in the course of a well-defined trend, as they tend to give signals after the most popular indicators. This, unfortunately, comes with the disadvantage of being less profitable, even though they are more reliable. Retrospective indicators have been popular for years and are still one of the most basic indicators that traders will use.

Two retrospective indicators would be Bollinger bands and moving averages. As an example, the moving average is the estimate of the average price of the last “N” candles, which by virtue of its definition excludes the current price. However, in a trend, this information can be very useful, as it shows that the average price is going up or down. Again, as we mentioned earlier, these indicators are typically part of a larger trading system.

There are several types of indicators:

Oscillators

Oscillators are by far the most used technical indicator, usually subject to some sort of range. Generally, there is a complete range between two values that represent respectively the overplayed and over-bought conditions. Typically, there is some kind of line or indicator that lets you know when the market is going too far in one area or the other. A couple of examples could include the stochastic oscillator, the moving average convergence divergence, and the feedstock channel index. Even though these could measure the condition of over-bought and overbought with different formulas, in the end, they work in the same way.

Indicators with No Range

The non-rank indicator is much less common, but will usually be used to form signals in a trading system to show strength or weakness in a trend. Unlike oscillators, they generally do not have a set range. For example, the accumulation/distribution line indicator that measures the flow of money to a value is an example of an indicator without a range. However, in the world of Forex, you will realize that this is almost impossible to measure, however, some volume variations are going to be offered by forex brokers, using information from their own servers, which is only a part of the market.

The Use of Indicators

While there are some trading systems that use indicators only, these do not tend to be commonly used today. One of the most common systems that only use indicators is the system of crossed moving averages. This consists simply of graphing two moving averages on a graph, which (if you remember), are simply a mathematical average of a specific amount of prices over a certain amount of time, being one of the moving averages the slowest, and the other the fastest. The quickest is the one with the fewest candles, which will make you change direction faster. The less rapid one represents a more stable environment because it takes much more information to move around.

But if the fastest line crosses over the slowest line, this can mean that the moment is moving up, which is a sign of a buying opportunity. Otherwise, if the moving average falls below the fastest line, this is typically a signal to sell. With the system of crossed moving stockings, you are constantly on the market, buying and selling when these lines intersect. The biggest problem is that you need a strong trend to make profits. In a market that is not very active, you could be crushed.

As a general rule, the most beneficial thing is to combine support and strength with those indicators as it gives you different types of confirmation for your trade. A typical example would be to look for support, a particularly encouraging candle, and then buy a signal formed on the stochastic oscillator. The typical system will have a certain number of steps to go through to put money to work. Beyond that, you begin to pay attention to money management, and then before you realize you will have an entire system set up. You should think of the indicators as a tool, not the “holy grail” that so many traders are always looking for. As these increase your chances of success, nothing is perfect, and you should learn how they work and when they work if you are going to use them in your trades.

Since there are literally hundreds of indicators that can be used, preferences play an important role in selecting those who have more security for you. For what it’s worth, the more I trade, the less I use indicators to make decisions. When I use them, they are usually secondary and tertiary reasons.

Categories
Forex Daily Topic Forex Price Action

Count the Breakout Length

In today’s lesson, we are going to demonstrate an example of a chart where the price makes an H4 breakout at the last week’s low. However, the chart does not offer entries. It rather gets choppy. We will try to find out the reason behind that. Let us get started.

In today’s lesson, we are going to demonstrate an example of a chart where the price makes an H4 breakout at the last week’s low. However, the chart does not offer entries. It rather gets choppy. We will try to find out the reason behind that. Let us get started.

In today’s lesson, we are going to demonstrate an example of a chart where the price makes an H4 breakout at the last week’s low. However, the chart does not offer entries. It rather gets choppy. We will try to find out the reason behind that. Let us get started.

It is an H4 chart. The chart shows that the price makes a bearish move and had a bullish correction. Upon producing a bearish engulfing candle, it heads towards the South again. The market is about to close for the weekend, and the sellers are going to wait for the H4 chart to make a bearish breakout and go short in the pair.

The chart produces a Doji candle to start its trading week. The next candle comes out as a bearish engulfing candle. It seems that the pair is going to make an H4 breakout at the week’s low soon.

The chart produces a long bearish candle closing well below the week’s low. It does not consolidate but produces a spinning top with a bearish body. The chart looks bearish, and the sellers may love to wait for the price to consolidate and to offer them a short entry. The question is whether they should wait to go short in the pair or not.

Look at those two drawn lines. One at the above indicates the highest high of the current week. The other one at the bottom indicates the lowest low of the last week. The difference between these two lines is vital. It determines the length of the next move. Usually, the price travels twice the distance of that length with good momentum. Once it travels three times that distance, the price usually makes longer consolidation or correction. The price travels three times that distance here. Thus, it may make a long bullish correction.

The chart produces a bullish engulfing candle followed by another bullish candle closing within the last week’s lowest low. The chart then creates an inverted hammer and drives the price towards the South. Look at the pace of that bearish move. It has been sluggish, and it suggests that the sellers are not interested in going short in this chart. The price has been roaming around the last swing low for quite a while. In a word, the H4 traders must wait for the price to give them the next direction. Meanwhile, it is a chart not to invest money and time in.

Categories
Forex Fundamental Analysis

What Should You Know About ‘Social Security Rate For Companies’ Forex Fundamental Indicator?

Introduction

Introduction

Introduction

Social Security Program is one of the most extensive Government programs in the world that pays out billions of dollars to its citizens each year. Social Security is a macroeconomic program intended to act as a safe-net for active workers of the United States. Changes related to this program tends to affect the majority of the population. Hence, understanding its role and impact on the living conditions of people can give us a better insight into how such programs work.

What is Social Security Rate For Companies?

Social Security Program: The Social Security Program is designed to facilitate retirement benefits, survivor benefits, and disability income for the citizens of the United States. It is run by the federal agency known as Social Security Administration. Social Security is the word used for the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The program was born on August 14, 1935, where President Franklin D. Roosevelt signed the Social Security Act into law of the United States. Since then, the program has continuously evolved and changed significantly over the years. It is a government insurance program designed to act as a safety net for the working population in the United States.

To be eligible for the Social Security retirement benefits, the worker must have an age of 62 at a minimum and should have enrolled and paid into the program for ten years or more. Workers who wait till later ages like 66 or 70 receive higher and higher benefits accordingly.

Apart from the worker himself, a divorced spouse can also be eligible for benefits provided she has not remarried, and their marriage lasted over ten years. Similarly, children of retirees can also be eligible until the age of 18, which can be longer in the case of disability or child being a student.

Social Security Tax: It is the tax levied upon both the employer and employee to fund the Social Security Program (SSP). It is collected as a payroll tax as mandated by the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA).

Social Security Rate: For the year 2020, the Social Security Rate is 12.4% that is evenly divided between the employee and the employer. It implies the Social Security Rate for Companies is 6.2%.  Social Security Tax is levied on the earned income of employees and self-employed taxpayers. Employers generally withhold this tax from the employee’s paycheck and forward it to the Government.

It is also worth mentioning that there is a tax cap to the Social Security Fund. For 2020, the Social Security tax cap is $137,700, meaning any income earned above 137,700 is not subject to the Social Security tax.

How can the Social Security Rate For Companies numbers be used for analysis?

Social Security is regressive, meaning it takes a more significant percentage of income from low-income earners than their higher-income counterparts. It occurs because of the tax cap, as mentioned earlier, due to which higher-income earner’s portion of income is not subject to this tax deduction.

The collected funds are not stored for the currently paying employee; instead, they are used for the retirees currently eligible for collection. Some have raised concerns on this way of approach when the baby boomer generation starts to collect its benefits, then the ratio of paying to the collecting people would be tipped off. It would mean that more people are collecting benefits than the people paying into it.

Hence, a common worry in the 21st century is the insolvency of the Social Security Funds due to the increased life expectancy of people and decreasing worker-retiree ratio. Proposed solutions to this from analysts were to increase the current rate to keep the program funded. Still, politicians are hesitant to endorse it due to fear of backlash or negative sentiment outburst from the public.

The 2020 report from the OASDI trustees projects that the retirement funds would be depleted by 2035 and disability funds in 2065. When that occurs, the taxes would not be enough to fund the entire Social Security program, and the Government needs to fill this gap. It may result in higher taxes on workers, fewer benefits, higher age requirements, or a combination of these.

For companies, an increase in Social Security Taxes directly cut down their profit margin, and hiring is more expensive. As a result, companies would be forced to keep employees only when required to avoid losses. Hence, Tax rates have a cascading effect on business profitability for companies as well as employment rates for the United States. When Social Security Taxes increase, the income offered to the employees is also affected, which can discourage personal consumption and spending for the working citizens.

Impact on Currency

The Social Security Rate for the Companies and the employees are revised every year. For consecutive years it tends to remain constant and tends to change in small incremental steps over a few years at a time. Hence, the volatility induced in the currency markets is almost zero to negligible most of the time unless significant changes occur. The changes also would be priced in through news updates into the market long before we receive official statistics.

Hence, Social Security Rate is a low-impact indicator and can be overlooked for more frequent statistics for the FOREX markets.

Economic Reports

The U.S. Social Security Administration provides the complete historical data of the Social Security tax rates for both the employee and employer on its official website. The Organization for Economic Co-operation and Development (OECD) also maintains the same for its member countries on its official website.

Sources of Social Security Rate For Companies

Social Security Rates for companies can be found on the Social Security Administration website.

Social Security Rates for employees can be found on the OECD’s official website.

Social Security Rates for companies (similar policies with different names) across the world can be found on Trading Economics.

How Social Security Rate for Companies News Release Affects Forex Price Charts

By law, companies are required to contribute half of the social security rate that their employees contribute. In the U.S., this rate for companies in 7.65% for each employee on the payroll for up to $ 137,700 per employee. This rate is reviewed annually and has remained unchanged in the U.S. for the past 25 years. For forex traders, this release of this rate in the U.S. is considered a non-news event since it is not expected to impact the forex market.

The screen capture below shows the current social security rate for companies in the U.S. taken from Trading Economics.

The latest review of the U.S. social security rate was on October 10, 2020, at 4.00 PM ET, and the press release can be accessed here.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

As can be seen on the above 15-minute EUR/USD chart, the pair is on a weak downtrend before the news release. This downtrend is evidenced by the candles forming slightly below the 20-period Moving Average between 12.00 PM and 3.45 PM ET. Furthermore, the Moving Average appears to be flattening.

EUR/USD: After social security rate release October 10, 2020,
at 4.00 PM ET

As expected, there was no market volatility after the news release about the social security rate for 2020. The chart above shows a 15-minute “Doji” candle forming after the news is released. The pair later traded on a neutral pattern as the 20-period Moving Average flattened. The news release about the social security rate for companies did not have any impact on the price action of the EUR/USD pair.

Let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

Before the news release, the GBP/USD pair is on a steady uptrend, as shown by the chart above. An hour to the release, the uptrend became subdued, and the pair adopted a neutral pattern.

GBP/USD: After social security rate release October 10, 2020, 
at 4.00 PM ET

After the news release, the pair forms a 15-minute “Doji” candle. It continues to trade in the neutral pattern observed earlier.

AUD/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

 AUD/USD: After social security rate release October 10, 2020, 
 at 4.00 PM ET

The AUD/USD pair shows a similar neutral trading patter as the EUR/USD and GBP/USD pairs before the news release. This trend is evidenced by the 15-minute candlesticks forming around a flattening 20-period Moving Average between 1.00 PM and 3.45 PM ET. After the news release, the pair forms a 15-minute “Shooting star” candle and continues to trade in the same neutral pattern as before.

From the above analyses, it can be seen that the news release of the social security rate for companies does not have any impact on the price action.

Categories
Forex Psychology

Avoid Psychological Mistakes that First-Time Traders Make

Psychology can affect one’s success as a trader in many ways, some of which may be more obvious than others. After all, forex traders can feel happy and overconfident when they’re up, sad or angry when they’re down, and everything in between. If you’re new to trading, it’s important to be aware of all the […]

Psychology can affect one’s success as a trader in many ways, some of which may be more obvious than others. After all, forex traders can feel happy and overconfident when they’re up, sad or angry when they’re down, and everything in between. If you’re new to trading, it’s important to be aware of all the […]

Psychology can affect one’s success as a trader in many ways, some of which may be more obvious than others. After all, forex traders can feel happy and overconfident when they’re up, sad or angry when they’re down, and everything in between. If you’re new to trading, it’s important to be aware of all the ways that emotions can affect your thought process in order to help or hinder your trading decisions. Start by taking a look at these 5 common psychology mistakes below to make sure that you aren’t making them.

Mistake #1: Being Overly Confident

Some traders start out with the idea that trading is an easy and quick way to make money. Of course, if that were true, everyone would do it. Trading can be profitable, but it takes a lot of time and dedication to learn everything you need to know and to develop a solid trading strategy. You need to be disciplined and will probably spend some time learning how to control your emotions. Traders that start out feeling overly confident are also more apt to make certain mistakes, like overtrading, taking larger position sizes than they should, risking too much, and so on. An overly confident trader is also likely to start out with heightened expectations and might want to quit if they can’t meet those goals. These mistakes can put you on the fast track to wiping out your trading account. 

Mistake #2: Being too Emotional

In order to be a successful forex trader, one needs to learn to be disciplined and control their emotions. This is easier said than done. You’re bound to feel upset when you lose money, happy when you make money, and so on. However, these emotions can affect your trades more than you realize. For example, a trader that loses a few times in a row might become angry and take up revenge trading, which involves risking more money out of desperation to get back their losses. Or the same trader could become fearful or anxious and might overthink their trades or be too afraid to enter trades at all. If you’re feeling emotional, the best thing to do is step away, even if only for a few minutes. 

Mistake #3: Overthinking your Trades

An anxious trader might place their stop loss and then overthink it to the point that they pull out too early before the stop loss has been triggered. At this point, you might find that the trade goes on to make more money. Pulling out of trades too early is a common psychology issue that is based on fear and anxiety and is even more common after a trader has experienced bad luck. The final outcome of your trade should be a stop loss triggered, breakeven, or profit taken. Once you enter the trade, the best thing to do in this situation is to leave it alone.

Mistake #4: Jumping into a Trade too Soon

Traders usually make this mistake because they are eager to enter a trade due to the fear that they are going to miss out. This is especially true at market turning points. Experts say that it’s better to miss the beginning of the move if you can’t predict that it will be a winner. If you’re able to confirm that the last 50% of the move is a winner, you’ll get much better results than you would if you jump the gun on these types of moves. 

Mistake #5: Taking Losses Personally

One of the first things you need to accept as a trader is that losses are inevitable. Even the best forex traders out there have lost at some point or another. Some traders fixate on their losses and allow themselves to become resentful. Others might beat themselves up because they failed. The best way to deal with losses is to remain calm and remember that they are normal. Then, you can examine what went wrong to see if it was something you did or an unavoidable loss. If you did something wrong, simply learn from your mistake and move on without making yourself sick over it.  

Categories
Forex Daily Topic Forex Price Action

Weekly High/Low Offers a Better Reward in the H4 Chart Trading

We are going to demonstrate an example of a trade setup on the H4 chart. The price, after breaches the last week’s low; it consolidates and produces a strong bearish reversal candle. It then heads towards the South with extreme bearish momentum. Let us find out how that happens.

We are going to demonstrate an example of a trade setup on the H4 chart. The price, after breaches the last week’s low; it consolidates and produces a strong bearish reversal candle. It then heads towards the South with extreme bearish momentum. Let us find out how that happens.

We are going to demonstrate an example of a trade setup on the H4 chart. The price, after breaches the last week’s low; it consolidates and produces a strong bearish reversal candle. It then heads towards the South with extreme bearish momentum. Let us find out how that happens.

It is an H4 chart. Look at the vertical line on the left. It is the beginning of the week. The chart shows that the price gets trapped within two horizontal levels. The pair is about to finish its trading week. The chart suggests that both the sellers and the buyers are going to keep their eyes on the chart next week to get the breakout and trade.

The pair produces two bullish candles consecutively to start its trading week. However, it produces a bearish engulfing candle and drives the price towards the South. Do you see anything here? Yes, the pair makes a breakout at the last week’s low. It means that the Bear may dominate on the H4 chart. Ideally, traders are to wait for the price to consolidate or make a bullish correction followed by a bearish breakout to go short in the pair.

The price consolidates. It produces some bearish reversal candles such as spinning top, hammer, Doji candle. However, it does not make a breakout at the last swing low. The sellers must wait for an H4 candle to close below consolidation support. Let us wait for more and see what the price does.

The chart produces a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the last candle closes. They may set their stop loss above consolidation resistance and set their take profit with 2R. This is the beauty of using weekly high/low and the H4 chart. It offers an excellent reward. Let us now proceed and find out how the entry goes.

The price heads towards the South with good bearish momentum. It produces three bullish inside bars in this move. The last candle comes out as a bullish engulfing candle. The sellers may consider closing their entry and come out with the profit. If we count, we find that the entry offers more than 2R reward. This is what usually happens when the price makes an H4 breakout at the last week’s high/low. Deep consolidation and a strong reversal candle add more fuel to its journey as usual. In our fore coming lessons, we will learn to integrate Fibonacci levels in this strategy to determine our target with better accuracy. Stay tuned.

Categories
Forex System Design

Designing a Trading Strategy – Part 4

Introduction

Introduction

Introduction

In our previous article, we presented diverse types of filters, which work as additional rules. We also showed how to incorporate these filters into a trading strategy so that they can help improve its performance. 

In this educational article, the fourth section of the series dedicated to developing a trading strategy, we will discuss the profit management.

Profit Management

Profit management is an aspect of risk management that characterizes by its high level of complexity. The difficulty lies in that profit management seeks to preserve the profits obtained during the trade and also to prevent a premature exit from a market that still moves in a trend not over yet.

There are two available methods with which the trading strategist may manage the profits realized in an opened position. These are the trailing stop and the profit target order.

Trailing Stop

This type of order is dynamic. It moves only in the same direction of the position as it moves in the direction of the trend. In other words, a trailing stop will move upward in a buy positioning and downward in a sell trade. 

Another characteristic of the trailing stop is that it steadily advances during the life of the trade. It will never retrace when the price develops a movement against the trade’s direction.

The trailing stop has two components, which are detailed as follows:

  • Trailing stop: corresponds to the number of pips in which the stop loss order will move once the price moves in the trade direction. For example, if an order has set a 40-pip stop-loss, and the price advances 30 pips in favor of the trend, the new stop-loss will shift to 10 pips below the opening price. In general, there are several ways to establish a trailing stop: by fixed pip variation and by volatility using the Average True Range (ATR) indicator, or using SAR (Stop and reverse) stops. 
  • Step: this corresponds to the variation in pips that the dynamic stop will move behind the price when it has been activated.

Profit Target Order

The second mechanism to manage profits is by using a profit target order. This type of order is conditioned to the prince advance to a predetermined level. Likewise, compared with the trailing stop case, this order is not affected by the price decrease. However, its activation is subjected to the price reaching a specific level.

 A profit target order can be set using a specific number of pips, by a multiple of the Average True Range (ATR), a percentage of price increase ( or decrease), specific levels of resistance or support, or a specific dollar gain.

Using the Trailing Stop in a Trading Strategy

This example illustrates the impact of using a trailing stop with a two moving averages crossover strategy, corresponding to LWMA(5) and SMA(55) periods using the EURUSD pair.

 We have evaluated the performance of a 40-pip trailing stop with a variable step from 1 to 15 pips. The results are as follows.

In the table above, we distinguish the impact on drawdown reduction with respect to the base scenario, after the incorporation of a trailing stop rule to the MA crossover strategy. The base case, on which the exit rule is the MA cross in the opposite direction to the opening of the position, exhibits a 22.66% drawdown. However, the addition of trailing stops led to a reduced 10.44% drawdown and a net profit of -525.88 (USD).

Each trailing stop step variation scenario, including the base exit scenario of the trading strategy, is shown in the following figure.

Finally, we observe that a 7-pip step provides the lowest losses. We also highlight that as the step increases, the drawdown also increases, confirming the growing losses.

Conclusions

The application of Profit Management represents a significant challenge for the developer of the trading strategy. This complexity arises due to a wide variety of combinations that can be used to ensure the strategy’s gains as each trade moves in the trend direction.

In this context, as we have seen, the parameter setting to be considered, the trailing stop, profit target orders, or its combination, should be carefully evaluated before applying them to the trading strategy, to ensure the optimal settings.

In the next educational article, we will present the fifth and last part of the series dedicated to developing trading strategies that will explain the position sizing process.

Suggested Readings

  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
  • Pardo, R.; The Evaluation and Optimization of Trading Strategies; John Wiley & Sons; 2nd Edition (2008).
Categories
Forex Fundamental Analysis

Understanding ‘Social Security Rate For Employees’ Forex Fundamental Driver

Introduction

Introduction

Introduction

The Social Security Program of the United States is the government insurance program for retirees, disabled, and survivors. It is one of the most extensive Government Spending programs and affects the majority of its population. Hence, it is a macroeconomic statistic, and changes in the same results a significant impact on its citizens. An insight into the Social Security Rates and how it affects the individual and the economy as a whole can help us understand the monetary structure of the United States.

What is Social Security Rate For Employees?

The Social Security Program (SSP) is managed by the Social Security Administration (SSA) of the United States. The SSA is a federal agency and defines the SSP as a protection program against income loss due to retirement, disability, or death. The Social Security Program is officially called the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The funds collected by the SSP are divided between two funds, namely the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds. Retired workers and their families, or survivors (ex: wife of an expired husband) receive benefits from the OASI funds. The DI trust funds provide benefits to the disabled and their families. The benefits are paid out monthly to the eligible people.

The Social Security Programs receives its funds primarily from the currently active employees enrolled in the program, employers, and as well as self-employed citizens. The funds received at present are not stored for the future, instead, they are utilized to pay out for the currently eligible retirees. The cycle goes on, and it means the current employee pays out for the already retired people, and when the employee himself retires would be paid out through funds collected from the paying employees at that time.

Apart from the employee, employer, and self-employed, funds receive income from investments and interests on investments, and taxations of benefits. For the year 2020, the Social Security Rate is 12.4%, which is evenly divided amongst the employer and the employee. Hence, the employee pays 6.2% of their income. Generally, It is deducted monthly from their income. On the other hand, the self-employed people like small shop owners or freelancers are subject to pay the full 12.4% themselves.

The benefits apply to people who have enrolled and have paid for a minimum of ten years. The retirement age at which they are eligible for collecting their pension is 62, while people who wait longer, like the age of 66 or 70, receive higher and better benefits accordingly. The Social Security Tax has a cap limit of $137,700, above which the earned income is not subject to the tax deduction.

How can the Social Security Rate For Employees numbers be used for analysis?

Since the Social Security deductions are directly taken out from the gross salary, it directly affects the Personal Consumption Expenditure (PCE) and thereby Consumer Spending. Both of these are macroeconomic indicators bearing high significance in terms of currency market volatility. Suppose the taxes increase, Consumer Spending decreases, which can drive the economy into a recession. Consumer spending makes up two-thirds of the United State’s GDP.

The program collects from millions of people and pays out to millions of people. The transactions are in billions of dollars every year. Any change in the percentage is bound to affect a large chunk of the country’s population directly. Hence, the changes in the rates are less frequent over the years and change only during significant policy reforms.

The regressive nature is often criticized, meaning the more affluent section of the society ends up paying lesser than the lower-income bracket people due to the tax cap limit. Also, the model of the Social Security Program is a cause of worry for many as the increased life expectancy and the diminishing worker-to-retiree ratio will ultimately result in depletion of funds soon.

As the population stops to grow, and more people retire than the number of people actively working will ultimately force the Government to either raise taxes or retirement age-limit or decrease benefits. None of those above options is favorable, and the Government needs to plug this gap in funds sooner than later.

 Impact on Currency

The Social Security Rate for the employees is revised every year. Most of the time, it tends to remain constant and changes only in small incremental steps over a few years at a time. Therefore, the volatility induced in the currency markets is negligible unless significant changes occur. Above all, the changes would be priced into the market through news updates long before official statistics are published. Hence, Social Security Rate for employees is a low-impact indicator and can be overlooked for more frequent statistics in the currency markets.

Economic Reports

The Social Security tax rates for both the employee and employer are provided by the Social Security Administration of the United States on its official website. The historical figures of the same are also available. The OECD (Organization for Economic Co-operation and Development) also maintains the tax rates for employees of its member countries on its official website.

Sources of Social Security Rate For Employees

Social Security Rates for employees is available on the Social Security Administration website.

Social Security Rates for employees is also available on the OECD’s official website.

Social Security Rates for employees (similar policies with different names) across the world can be found in Trading Economics.

How Social Security Rate For Employees Announcement Affects The Price Charts

For employees, the social security tax is deducted through payroll withholding by the employer. This rate is split in half between the employee and the employer. Since the social security rate in the US is 15.3 %, an employee contributes 7.65% of their earnings up to $137,700.

The screengrab below shows the current social security rate for companies in the US from Trading Economics.

The latest review of the US social security rate was on October 10, 2019, at 4.00 PM ET, and the press release can be accessed here.

USD/CAD: Before Employee Social Security Rate Release October 
10, 2019, just before 4.00 PM ET

As can be seen on the above 15-minute chart, the USD/CAD pair was trading on a neutral trend before the news release. This trend is shown by the candles forming around an already flat 20-period Moving Average. This trend signifies relative market inactivity at this time.

USD/CAD: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

After the news release, no market volatility is observed. The US/CAD pair forms a 15-minute “Shooting Star” candle. Afterward, the pair struggled to alter the trading pattern with the candles attempting to cross below the 20-period Moving Average but subsequently continued trading in the previously observed neutral pattern.

USD/JPY: Before Employee Social Security Rate Release October 
10, 2020, just before 4.00 PM ET

Before the news release, the USD/JPY market is on a weak uptrend. The pair can be seen struggling to maintain this trend as observed by multiple bearish spikes. The pair adopts a downtrend 30 minutes before the news release.

USD/JPY: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

After the news release, the pair forms a 15-minute bearish candle. However, the news is not significant enough to maintain the earlier observed downtrend.

USD/CHF: Before Employee Social Security Rate Release October 
10, 2020, just before 4.00 PM ET

USD/CHF: After Employee Social Security Rate Release October 
10, 2019, at 4.00 PM ET

Before the news release, the USD/CHF pair shows a similar trading pattern as the USD/CAD pair. The pair was trading on a neutral trend with 15-minute candles forming around a flattening 20-period Moving Average. As the USD/JPY, the pair showed signs of reversing into a downtrend 30 minutes before the news release. After the release, USD/CHF formed a 15-minute “Shooting Star” candle. It later continued trading in a downtrend with subsequent candles forming below the 20-period Moving Average.

Bottom Line

On October 10, 2019, the US effectively increased the social security rate. Theoretically, this is supposed to be positive for the USD. However, as shown by our analyses, this news release had no significant price action impact on any currency paired with the US dollar.

Categories
Forex Price Action

It is Not over until It’s Over

In today’s lesson, we are going to demonstrate an example of a trendline trade setup. The price heads towards the North, and upon finding its support, it keeps moving towards the upside. At some point, it seems that the price is about to make a breakout at the trendline. However, the trendline works as a level of support and produces a beautiful bullish engulfing candle ending up offering a long entry. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an example of a trendline trade setup. The price heads towards the North, and upon finding its support, it keeps moving towards the upside. At some point, it seems that the price is about to make a breakout at the trendline. However, the trendline works as a level of support and produces a beautiful bullish engulfing candle ending up offering a long entry. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an example of a trendline trade setup. The price heads towards the North, and upon finding its support, it keeps moving towards the upside. At some point, it seems that the price is about to make a breakout at the trendline. However, the trendline works as a level of support and produces a beautiful bullish engulfing candle ending up offering a long entry. Let us find out how that happens.

The chart shows that the price makes a bullish move and comes down to make a bearish correction. It makes a bullish move again but finds its resistance around the same level. At the moment, the chart suggests that the bears have the upper hand.

The chart produces a Doji candle having a long lower spike. It pushes the price towards the North, and the price makes a breakout at the highest high. The last move confirms that the bull has taken control. The buyers may look for buying opportunities. Assume you are a trendline trader. Do you see anything?

Yes, you can draw an up-trending trendline. The last candle comes out as a bearish engulfing candle. It suggests that the price may make a bearish correction. As a trendline trader, you are to wait for the price to produce a bullish reversal candle at the trendline’s support to go long on the chart.

The chart produces two more candles that are bearish. The last candle closes just below the trendline’s support. It seems that the price is about to make a breakout at the trendline. The next candle is going to be very crucial for both. If the next candle comes out as a bullish reversal candle, the buyers are going to push the price towards the North. On the other hand, if the next candle comes out as a bearish candle closing below the trendline’s support, the sellers may push the price towards the South. Let us find out what happens next.

The chart produces a copybook bullish engulfing candle. Traders love to get this kind of reversal candle. The buyers may trigger a long entry right after the last candle closes. Let us proceed to find out how the trade goes.

The price heads towards the North with good bullish momentum. It makes a breakout at the last swing high as well. It means the trendline is still valid for the buyers. The chart produces a bearish reversal candle. Thus, the buyers may consider taking their profit out here.

If we look back, we find that the trendline’s support produces an excellent bullish reversal candle, which some buyers may not expect. This is what often happens in the market. Thus, never give up until its really over.

Categories
Forex Fundamental Analysis

Everything You Should Know About ‘Government Budget Value’ Fundamental Indicator

Introduction

Introduction

Introduction

Regardless of the country, the respective governments have a pivotal role to play in economic growth for a given year. The vast resources at the disposal of the nation and state’s government, when combined with effective planning and action, has yielded phenomenal results for many countries’ growth. Understanding the government budget and its role in economic growth helps us to predict how conducive the market place will be for economic growth for the fiscal year.

What is Government Budget Value?

Budget: A budget is a periodic estimation of revenue and expenses for a specified period. The time-frame can be monthly, quarterly, or even yearly. A budget can be drafted for an individual, a group, a business, the government, or anything else that has cash in-flow and out-flow.

Government Budget: When we refer to the term budget, it is generally associated with the local or central government. The Government Budget refers to the estimated or forecast of its expenditures and revenue for a particular period. The time-frame generally for which it is estimated is for a financial year, which may or may not coincide with the calendar year. The combined income and outlays of a government for a fiscal year make up the government budget.

Government Budget Value: Here, the government budget value refers to the actual dollar value of the entire budget. We are referring here to the raw or direct numerical dollar value of the total budget. The budget is drafted as per the plans and obligations of the government for the fiscal year. The government has obligations like paying out social security funds, interests, and principal on its debts, purchasing military equipment for national security, and other mandatory spending programs. The government receives incomes from interests on its investments, revenue from taxes, fees collected from government services offered, etc.

All these income sources, outlays are all detailed in the government budget report. It is analogous to a bank statement of an individual except that it is for the entire government as a single entity, and the transaction values would be in millions and billions of dollars.

How can the Government Budget Value numbers be used for analysis?

In the budget report, if the revenues exceed the expenditures, then it is called a budget surplus. When the expenditures exceed the revenue, it is called a budget deficit. When both the revenue and expenditure level off and are equal, it is called a budget balance. All three scenarios have different meanings and implications.

When there is a budget surplus, the government has additional funds to create new infrastructure, improve the living conditions, raise salaries of government officials, and even provide support for new businesses to improve business growth. In developed economies, when the government experiences prolonged periods of excessive budget surplus, there may be outbursts from the public to reduce taxes levied on them to make sure money stays with the people who earned and not the government. Ideally, a budget surplus is preferred.

The budget balance is an ideal situation for any government where all their outlays are met through the revenues received, although any change of plans or additional programs, if needed to be taken up, would push them to a deficit. In general, all the expected expenditures would be factored in. A balanced budget would indicate every penny is accounted for and is very hard to achieve in real-world scenarios. There would always be some differences in income and outlays.

When the income does not suffice the expenditures, we have a budget deficit. It is the less preferred and more commonly occurring scenario, especially for developed economies like the United States. However, some arguments can be made where a deficit is not always bad, as the government can borrow extra funds from investors to set up the infrastructure for future returns. Temporary deficits for future surplus are acceptable. Deficits arising out of sustainable expenses, meaning expenses that will pay off in the future more than what they cost now, are seen as good signs for the economy.

On the other hand, when the deficit arises out of unsustainable expenses, which are likely to continue due to increasing debt, interest payments, inflation, etc. all are warning signs for the economy. The government plugs in the deficit by issuing securities and treasury bonds. Corporations and investors buy these bonds. A budget deficit can arise out of a multitude of reasons. When the economic growth of the native country is slower than its trading partners, it would spend more and earn less, leading to a deficit. High unemployment rates, recessions, tight lending environments, increased government spending, etc. all add to the deficit.

The United States has been facing a deficit crisis for many years in succession now. Things are only getting worse as the baby boomer generation is retiring, further increasing the weight on the social security program adding to wider deficits in the budget. An ideal government should maintain a surplus or at least a balance to be safe. Still, like any real-world scenario, a surplus or balanced budget does not ensure or indicate high economic growth. It just makes economic growth more conducive and likely for the nation or state.

The nation’s growth depends on many factors, and one amongst them is through government budget planning and allocation of funds. When it is played right, many things fall in order, and a significant boost for the economy can be induced.

Impact on Currency

The Government Budget values are useful for analysts to ascertain what proportion of funds will be allocated to each of the listed programs. The raw value of the budget in itself is not useful for traders as it is just a number and does not bear significance until there is something to compare. In general, budget or government spending as a percentage of GDP offers a more relative picture to forecast whether stimulus from the government side is relatively more or less. Through it, we can forecast the growth rate and market environment.

The government budget value alone is not enough to bring forth any significant economic conclusions or make an investment decision. Hence, it is a low-impact lagging indicator that does not bring much volatility in the currency markets.

Economic Reports

The Treasury Department and Office of Management and Budget of the United States maintain the government budget reports on their official websites. Internationally, the World Bank and International Monetary Fund maintain the budget data for most countries.

Sources of Government Budget Value

Treasury department of the United States – Budget Reports and Office of Management and Budget – USA detail the budget reports

Government budget values for most countries are available on Trading Economics.

How Government Budget Value Release Affects The Price Charts

In the US, the Department of the Treasury is responsible for the release of the Monthly Treasury Statement. This statement contains the Federal Budget Balance, which is synonymous to the Government Budget Value. It measures the difference in value between the federal government’s income and spending during the previous month. The most recent release was on August 12, 2020, at 2.00 PM ET and can be accessed from Investing.com here. A more in-depth review of the Monthly Treasury Statement can be accessed at the US the Department of the Treasury here.

The screengrab below is of the monthly government budget value from Investing.com. On the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, the government budget value data is expected to have a medium impact on the USD upon its release.

The image below shows the recent changes in the monthly government budget value in the US. In July 2020, the government budget value changed from a deficit of $864 billion to $63 billion, beating analysts’ expectations of a $193 billion deficit. This change is positive and, in theory, should make the USD stronger compared to other currencies.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the Monthly Government Budget Value Release 
on August 12, 2020, Just Before 2.00 PM ET

Before the budget data release, the EUR/USD pair was trading in a subdued uptrend. As seen in the above chart, the 15-minute candles are forming closer to the 20-period Moving Average, whose steepness is decreasing.

EUR/USD: After the Monthly Government Budget Value Release 
on August 12, 2020, at 2.00 PM ET

After the data release, the pair formed a 15-minute bullish candle, indicating that the USD weakened against the EUR contrary to the expectation. However, the data release was not significant enough to cause a shift in the trading pattern. The pair traded in a neutral trend with candles forming around a flat 20-period Moving Average.

AUD/USD: Before the Monthly Government Budget Value Release 
on August 12, 2020, Just Before 2.00 PM ET

Before the data release, the AUD/USD pair traded in a steady uptrend with candles forming above a rising 20-period MA.

AUD/USD: After the Monthly Government Budget Value Release 
on August 12, 2020, at 2.00 PM ET

The pair formed a 15-minute bearish “hammer” candle after the data release. Similar to the EUR/USD, AUD/USD subsequently traded in a neutral trend with the 20-period MA flattening.

NZD/USD: Before the Monthly Government Budget Value Release 
on August 12, 2020, Just Before 2.00 PM ET

NZD/USD: After the Monthly Government Budget Value Release 
on August 12, 2020, at 2.00 PM ET

NZD/USD pair showed a similar steady uptrend as observed with the AUD/USD before the data release. The pair formed a 15-minute bearish candle. It subsequently traded in the neutral pattern observed with the other pairs.

Bottom Line

For economists, the monthly government budget value is an invaluable indicator showing the trends in government budget deficit, revenue, and expenditures. However, in the forex market, this fundamental indicator does not produce significant price action changes, as observed in the above analyses.

Categories
Forex Education Forex Indicators Forex System Design

Designing a Trading Strategy – Part 3

Introduction

Introduction

Introduction

In our previous article, we presented the first component of a trading strategy, which corresponds to the market entry and exit rules. Likewise, we exposed the case of a basic trading system based on the crossing of two moving averages.

In this educational article, we will present the filters and how they can help the trader refine a trading strategy.

Setting Additional Filters in Trading Strategy

Signals originated in a trading strategy can use filters to improve the entry or exit signals that the system generates. The purpose of incorporating filters is to improve both the accuracy and reliability of the strategy. 

A filter can be an indicator’s level or additional instructions to the initial entry, or exit rules. Some examples of filters can be:

  1. Avoid buy entries if the reading of the 60-period RSI oscillator is less than 49. 
  2. Allow Buy entries if the price closes above the high of the previous day or allow sell-short signals if the price closes below the last day’s low.

Also, rules can be established to control the strategy’s risk, and preserve the trading account’s capital. In this context, two elements that can help to manage the risk are:

  1. Initial stop-loss, which can be a fixed amount of pips or depending on some previous periods’ volatility. In turn, this rule can be fixed or dynamic, its level moving as the trade progresses through time.
  2. limiting the number of simultaneously opened trades. This rule can be useful, mainly when the market moves in a sideways path.

Measuring the Risk of Strategy

The risk of trading strategy corresponds to the amount of capital that the investor risks with the expectation of a possible return on the financial market by applying a set of rules with positive expectations.

One way to measure the risk of trading strategy is through the maximum drawdown, which corresponds to the maximum drop in equity from the peak of the equity value to the subsequent equity low.

The developer can obtain this measure as well as other strategy performance indicators by running a historical simulation.

Incorporating Additional Rules into Trading Strategy

The following example corresponds to the addition of rules to the trading strategy formulated and developed in the previous article, based on  moving averages crossovers with 5 and 55 periods. 

Before incorporating additional rules and evaluating their subsequent impact on the trading strategy, we will display the results of a historical simulation, developed using the EURUSD pair in its hourly timeframe. Likewise, the size of each trade position corresponded to 0.1 lot in a $10,000 account.

The following figure illustrates the strategy’s performance in its initial condition, which executed 652 trades providing a drawdown level of 22.66% and a net profit of -$716.93.

The additional proposed filter rules are as follows:

  • The strategy must have an initial stop loss of 30 pips. This stop will limit the possible maximum amount of loss per trade.
extern double SL_Pips = 30;
  • We propose using a Break-Even rule to ensure the opened trades’ profits, which will be used when the price advances 40 pips. Likewise, the strategy will apply a Trailing Stop of 40 pips of advance and a 3-pips step
extern double BreakEven_Pips = 40;
extern double Trail_Pips = 40;
extern double Trail_Step = 3;

The function that computes the Trailing Stop is as follows:

void TrailingStopTrail(int type, double TS, double step, bool aboveBE, double 
aboveBEval) //set Stop Loss to "TS" if price is going your way with "step"
  {
   int total = OrdersTotal();
   TS = NormalizeDouble(TS, Digits());
   step = NormalizeDouble(step, Digits());
   for(int i = total-1; i >= 0; i--)
     {
      while(IsTradeContextBusy()) Sleep(100);
      if(!OrderSelect(i, SELECT_BY_POS, MODE_TRADES)) continue;
      if(OrderMagicNumber() != MagicNumber || OrderSymbol() != 
Symbol() || OrderType() != type) continue;
	  RefreshRates();
      if(type == OP_BUY && (!aboveBE || Bid > OrderOpenPrice() + TS + aboveBEval)
 && (NormalizeDouble(OrderStopLoss(), Digits()) <= 0 ||
 Bid > OrderStopLoss() + TS + step))
         myOrderModify(OrderTicket(), Bid - TS, 0);
      else if(type == OP_SELL && (!aboveBE || Ask < OrderOpenPrice()
 - TS - aboveBEval) && (NormalizeDouble(OrderStopLoss(), Digits()) <= 0 ||
 Ask < OrderStopLoss() - TS - step))
         myOrderModify(OrderTicket(), Ask + TS, 0);
     }
  }
  • Also, the strategy must allow a maximum limit of one trade at a time.
extern int MaxOpenTrades = 1;

In this context, the code that will determined the limit reached will be as follows:

   //test maximum trades
   if((type % 2 == 0 && long_trades >= MaxLongTrades)
   || (type % 2 == 1 && short_trades >= MaxShortTrades)
   || (long_trades + short_trades >= MaxOpenTrades)
   || (type > 1 && type % 2 == 0 && long_pending >= MaxLongPendingOrders)
   || (type > 1 && type % 2 == 1 && short_pending >= MaxShortPendingOrders)
   || (type > 1 && long_pending + short_pending >= MaxPendingOrders)
   )
     {
      myAlert("print", "Order"+ordername_+" not sent, maximum reached");
      return(-1);
     }
  • The trading strategy must preserve the account equity using a position size that should be proportional to 1 lot per $100,000 of equity.
extern double MM_PositionSizing = 100000;
double MM_Size() //position sizing
  {
   double MaxLot = MarketInfo(Symbol(), MODE_MAXLOT);
   double MinLot = MarketInfo(Symbol(), MODE_MINLOT);
   double lots = AccountBalance() / MM_PositionSizing;
   if(lots > MaxLot) lots = MaxLot;
   if(lots < MinLot) lots = MinLot;
   return(lots);
  }

Now, the entry rules with the Stop-Loss rule will be as follows:

   //Open Buy Order, instant signal is tested first
   if(Cross(0, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) >
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0)) 
//Moving Average crosses above Moving Average
   )
     {
      RefreshRates();
      price = Ask;
      SL = SL_Pips * myPoint; //Stop Loss = value in points (relative to price)   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_BUY, price, MM_Size(), "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
      myOrderModifyRel(ticket, SL, 0);
     }
   
   //Open Sell Order, instant signal is tested first
   if(Cross(1, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) <
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0))
 //Moving Average crosses below Moving Average
   )
     {
      RefreshRates();
      price = Bid;
      SL = SL_Pips * myPoint; //Stop Loss = value in points (relative to price)   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_SELL, price, MM_Size(), "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
      myOrderModifyRel(ticket, SL, 0);
     }
  }

Finally, the position’s closing code including the trailing stop will be as follows:

  {
   int ticket = -1;
   double price;   
   double SL;
   
   TrailingStopTrail(OP_BUY, Trail_Pips * myPoint, Trail_Step * myPoint, false,
 0); //Trailing Stop = trail
   TrailingStopTrail(OP_SELL, Trail_Pips * myPoint, Trail_Step * myPoint, false,
 0); //Trailing Stop = trail
   
   //Close Long Positions
   if(iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) <
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0)
 //Moving Average < Moving Average
   )
     {   
      if(IsTradeAllowed())
         myOrderClose(OP_BUY, 100, "");
      else //not autotrading => only send alert
         myAlert("order", "");
     }
   
   //Close Short Positions
   if(iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) >
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0)
 //Moving Average > Moving Average
   )
     {   
      if(IsTradeAllowed())
         myOrderClose(OP_SELL, 100, "");
      else //not autotrading => only send alert
         myAlert("order", "");
     }

The historical simulation with the inclusion of the additional rules to the trading strategy  is illustrated in the next figure and reveals a reduction in the Drawdown from 22.66% to 10.49%. Likewise, we distinguish a variation in the Total Net Profit from -$716.93 to -$413.76.

Although the trading strategy continues having a negative expectation, This exercise shows the importance of including additional rules to improve the trading strategy’s performance.

Conclusions

This educational article presented how the inclussion of filters into a trading strategy can improve the performance of two key indicators such as the Drawdown and the Total Net Profit.

On the other hand, we did not consider the parameters optimization during this step. Optimization will be discussed in a future article.

In the next educational article, we will extend the concepts of Profits Management and Position Sizing.

Suggested Readings

  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
  • Pardo, R.; The Evaluation and Optimization of Trading Strategies; John Wiley & Sons; 2nd Edition (2008).
Categories
Forex Fundamental Analysis

What Should You Know About ‘Asylum Applications’ Fundamental Indicator

Introduction

Introduction

Introduction

People from war-ravaged countries seek refuge in neighboring countries for their protection and survival. There are countries where military conflicts, wars, and political tensions were so adverse that people had to leave their homeland to go to an entirely different country to protect their life and survive barely. An understanding of the refugee movements, the price neighboring countries pay, and the corresponding economic impacts for the host countries is worth knowing.

What are Asylum Applications?

It is essential that we first clarify the fundamental differences between the terms refugee, migrant, asylum seeker before we understand asylum applications.

Refugee: They are the people fleeing from their home country to neighboring countries due to armed conflict, political wars, and persecution. Their conditions are so adverse that the only way to save their life is to seek shelter in neighboring countries. The prospect of a career, financial independence are out of the question, and it is just a matter of survival for these people.

Migrants: These are the people who move out of their country of origin in pursuit of a better standard of living and to improve life quality. The reasons can include better education, finding work, or reuniting with families. Unlike refugees, migrants can return to their native safely. Migrants are subject to the immigration laws of the recipient countries.

Asylum seekers: Asylum seekers are people who have claimed to be a refugee, but their status has not been yet evaluated. This individual would have applied for asylum (place to stay) because he/she will be persecuted if returned to their homeland. Not all applicants will qualify as a refugee but will have to go through the due process to become one. Asylum applications refer to the number of people who have come from other countries to seek asylum in the host country.

How can the Asylum Applications numbers be used for analysis?

War-ravaged countries primarily produce refugees in such large numbers that the neighboring countries would need to provide aid by providing protection, shelter, food, clothing, and water. The provisions for these asylum applicants would have to be provided by the local and central Government. Based on the available resources that can be dispensed to provide aid, countries may choose to close their gates and refuse entry too.

It is difficult to give accurate estimates of the effect of asylum applications on the economy due to lack of before and after data estimates. Some researches have shown poorer host countries have had a negative impact while developed nations have had zero or some positive impact. It has also been found that the applicants have actively sought work to improve their living conditions in the host country.

It is worth noting that the countries from which people flee are often surrounded by countries of similar economic strength, meaning the host countries are also underdeveloped nations. For such countries hosting a large influx of asylum seekers would also be burdensome and negatively impact their economic conditions. Only in a few cases, there are scenarios that people have sought asylum in a developed nation. Most of the time, people move to a developed nation as migrants to seek better work and not as a refugee.

Some researches have also shown that the funds received through the relief providing organizations and programs like the World Food Program (WFP), which provide in cash or directly food, add to the income of the host country, thus boosting the economy. Adding people into the host country also increases consumer demand, as well as revenue generated through the refugees who have found work also boosts the economy.

The influx of the refugee is generally small and lies on the border sides of the country. The overall impact on the economy is many a time negligible and is significant only when the host country is a small economy in itself and is underdeveloped. The way the host country’s Government manages refugee situations also determines whether they lose or benefit out of it.

Only when the influx of asylum seekers increases suddenly due to an overnight development of some critical situations is the effect felt on the host country. Under such circumstances, the host country may need to allocate resources to provide aid, which would impact the Government spending budget. The more the funds allocated for such rescue programs, the lesser the funds available for the Government to spend on economy-boosting activities.

Large scale influx of asylum seekers can also add to unemployment in either the refugee camps or the jobs taken away from host country citizens by the refugees. Refugees are desperate for work and would offer their labor at a very minimum rate compared to the citizens of the host country. All these effects come into play during extreme war-like situations in neighboring countries; otherwise, the economy comes to a natural equilibrium in due time with negligible impact.

Impact on Currency

The impact of Asylum applications on economy and currency is not always clear due to lack of sufficient before and after scenario data. Asylum application data comes into use during critical times when we are trying to trade currencies of the host or the crisis countries. Any volatility in the market created would be through the general market sentiment reacting to the news and not from the statistics.

Hence, asylum applications are a low-impact indicator that is only useful in critical times for data gathering and analysis. Therefore, the currency markets overlook it as they would have priced in any economic shocks presented through media ahead of the statistics.

Economic Reports

The United Nations Refugee Agency (UNHCR) publishes monthly reports on asylum application count as and when they receive reports from the Government authorities of different countries. The consolidated data of the same reports are also available on Trading Economics.

Sources of Asylum Applications

We can find refugee briefs on UNHCR official website for reference and latest updates on refugee migration. Asylum Applications for available countries are consolidated and available on Trading Economics.

That’s about Asylum Applications and their importance. We hope you find this article informative and useful. Let us know if you have any questions in the comments below. Cheers!

Categories
Forex Daily Topic Forex Price Action

What Does A Combination of Double Top and Evening Star Do?

We know a double top is a strong bearish reversal pattern. When the price trends with a double top, it usually creates strong bearish momentum. At consolidation, if it produces an evening star, it creates more momentum that is more bearish since the evening star is a strong bearish reversal pattern as well. In today’s lesson, we are going to demonstrate an example of that.

We know a double top is a strong bearish reversal pattern. When the price trends with a double top, it usually creates strong bearish momentum. At consolidation, if it produces an evening star, it creates more momentum that is more bearish since the evening star is a strong bearish reversal pattern as well. In today’s lesson, we are going to demonstrate an example of that.

We know a double top is a strong bearish reversal pattern. When the price trends with a double top, it usually creates strong bearish momentum. At consolidation, if it produces an evening star, it creates more momentum that is more bearish since the evening star is a strong bearish reversal pattern as well. In today’s lesson, we are going to demonstrate an example of that.

The chart shows that the price has been roaming around within two horizontal levels. It has several rejections at the resistance zone. At the last two rejections, it produces two bearish engulfing candles. Moreover, the last candle breaches through the level of support or the neckline. It means the chart may get bearish since it produces a double top.

As expected, the price heads towards the South with good bearish momentum. The sellers are to wait for the price to consolidate and a bearish reversal candle/pattern to go short in the pair.

It seems that the price may have found its support. It produces a bullish inside bar followed by a Doji candle. If the price makes a breakout at the level of consolidation support, the sellers may go short in the pair and drive the price towards the South.

The chart produces a bearish engulfing candle closing well below consolidation support. It is a strong bearish reversal candle itself. The combination of the last three candles is called the evening star, which is a very strong bearish reversal pattern. It suggests that the price may get very bearish soon. The sellers may trigger a short entry right after the last candle closes by setting stop-loss above the last candle’s highest high. We talk about the take-profit level in a minute. Let us find out how the trade goes.

The price heads towards the South with extreme bearish momentum. The last candle comes out as a bullish engulfing candle. It may make a bullish correction or reversal now. However, before producing the bullish engulfing candle, the price travels 2R. Even if the sellers close the entry at the last candle close, they make 1R profit.

When a trend starts with a strong reversal pattern such as the double top/double bottom, morning star, evening star, and it produces a strong reversal pattern at consolidation as well, the price usually produces a longer wave. Trade management is to immaculate, though. Thus, make sure that the trade is made relatively on a bigger time frame such as the H4, the daily, the weekly, etc.

Categories
Forex Fundamental Analysis

Do You Know That ‘IP Addresses’ of A Nation Is Also Considered A Macro Economic Indicator?

Introduction

Introduction

Introduction

The advent of the Internet and the rapid growth of technology over the years has dramatically changed the way we define development and living standards. The number of literate people nowadays do own an electronic gadget with access to the Internet. It was not the case long before, but now access to the Internet is seen as a growth measure for countries. Understanding the IP addresses count as a means to assess how developed a nation is fascinating to acknowledge and look back on how the Internet changed the world.

What is an IP Address?

Each electronic gadget with internet access has a unique identifier called its IP address. An analogy would be like the “from” address in a post letter. Successful transfer of to-and-fro of data from mailer to recipient is possible when “from” and “to” addresses are clear. The unique address of your computer machine is used to relay data across a network in either direction.

The majority of the networks today use TCP/IP (Transmission Control Protocol/Internet Protocol) as a means to communicate with other machines over a network. The unique identifier for a computer is known as its IP address.

There are two standards for IP address: IPv4 and IPv6 (v stands for version). All computers have the IPv4 address, and it is the prior version consisting of (24 =32 bit binary digits). At the same time, it will soon exhaust all possible combinations as more people start accessing the Internet. A sample IP address would look like “138.23.45.23” this. The IPv6 (26 = 128-bit binary digits) is the later implementation that came into the picture when we realized the limitation of IPv4 as the Internet was not an immediate trendsetter during its initial launch. The IPv6 will have six numbers as part of the address and would look something like “12.158.23.61.3.23” this.

How can the IP Addresses numbers be used for analysis?

Ten-twenty years ago, this article would be invalid as the Internet’s popularity grew exponentially until today to become an indispensable part of most economies. The Internet is now the primary source of information and communication. In today’s world countries, where the majority of people do not have access to the Internet are seen as third-world countries. It is a meaningful inference, though. Countries that have high literacy rates are bound to be aware of the Internet, computers, and similar electronic gadgets. People are rapidly incorporating technology all across the world and, through the Internet, are more connected than ever before.

Even if we look at the statistics and see the countries with one of the highest number of IP addresses are generally the most developed nations. Likewise, countries with the least number of IP addresses are generally underdeveloped nations. As more people are educated, have enough money to own a computer or electronic gadget, and have access to the Internet are likely to have a better living standard than those who do not.

One likely drawback of this type of inference would be that the IP address count is also a function of the population. Countries like India or China that have a large population count would easily surpass those who have a relatively small area of land and population. In that case, a percentage of the total population could be used to compare how many people have access to the Internet. In this digital age, the Internet is a powerful tool to incorporate new technologies, take advantage of access to external resources, and rapidly grow.

Businesses that do not have a “.com” are typically seen as not an established brand themselves. A digital presence of a business is almost mandatory as it has become one of the primary sources through which people know about the company. People, businesses, corporations, and governments are all accessible to us via the Internet. Hence, IP addresses count can give us more insight into how developed a country is than we think.

For instance, Bangalore, a city in India, is nowadays referred to as the Indian Silicon Valley due to a massive number of IT and Software companies operating as a primary business center there. With India incorporating electronic gadgets and the Internet (3G, 4G, and now 5G soon) boosted the economy, providing rapid growth and for consecutive years had one of the highest GDP growth rates globally. In this sense, the IP address count trend can be used to forecast growth trends in other developing countries.

Internet is a gold mine, companies like Facebook, Google have a net worth in billions, and the traditional definitions of large businesses do not apply to internet giants. Making proper use of the Internet and the available resources can potentially help in earning huge revenues. Even currency or stock trading are all done online for which we need internet access. Even this very article you are reading requires an internet connection and a computer (or a mobile) to begin-with.

Impact on Currency

The IP address count of countries serves as a general measure of prosperity. The relative growth of countries by the count and percentage share can be used to understand how open and adaptive countries are to the latest technologies. The countries with increasing IP addresses are likely to undergo a transformation and achieve high economic growth. We can forecast long-term trends through these statistics due to which it is a low-impact leading economic indicator as currency markets focus on current economic trends.

Economic Reports

The global count of IP addresses across countries is available through an internet company known as Akamai. However, the quarterly consolidated and graph plots of these statistics of most countries are available on Trading Economics.

That’s everything about IP Address Forex fundamental driver. It is obvious that there won’t be any impact on the price charts after the news release of this economic indicator. Cheers!

Categories
Forex Daily Topic Forex Price Action

Using Weekly High or Weekly Low in the H4 Chart Trading

The Weekly high or Weekly low plays a significant part in the H4 chart traders. In today’s lesson, we will demonstrate an example of how last week’s high works as a level of support and pushes the price towards the upside by offering a long entry to the buyers. Let us get started.

The Weekly high or Weekly low plays a significant part in the H4 chart traders. In today’s lesson, we will demonstrate an example of how last week’s high works as a level of support and pushes the price towards the upside by offering a long entry to the buyers. Let us get started.

The Weekly high or Weekly low plays a significant part in the H4 chart traders. In today’s lesson, we will demonstrate an example of how last week’s high works as a level of support and pushes the price towards the upside by offering a long entry to the buyers. Let us get started.

It is an H4 chart. Look at the vertical dotted line. The price starts its week with a spinning top having a bullish body. The price then heads towards the North and come down again. In the end, the price closes its week around the level where it starts its trading week.

The pair starts its week with a spinning top having a bearish body this time. The price heads towards the North and makes a breakout at the last week’s high. The price usually comes back at the breakout level to have consolidation and ends up offering entry upon producing a reversal candle. Let us draw the breakout level to have a clearer picture.

The drawn line indicates the last week’s high. Now, the H4 chart suggests that the price made a breakout, and the pair is trading above the level currently. The buyers are to wait for the price to consolidate and produce a bullish reversal candle to go long in the pair.

The chart produces a bearish candle closing within the breakout level first. The next candle comes out as a Doji candle. The buyers are to wait for a breakout at consolidation resistance to go long in the pair. Let us proceed to the next chart to find out what the price does next.

The chart produces three more bullish candles. One of the candles breaches through the level of resistance closing above it. The buyers may trigger a long entry right after the last candle closes. The buyers may set their stop loss below the breakout level. To set the take-profit level, the buyers may set their take profit with 2R. It is the best thing about this trading strategy. It offers at least 2R. Sometimes the price travels even more than 2R. Let us find out how the trade goes.

The price heads towards the North with good bullish momentum. Before hitting 2R, it produces a bearish inside bar. It continues its journey towards the North and travels more than 2R. The last candle comes out as a bearish engulfing candle. It suggests that the price may get bearish now.

The best things about using the strategy are

  1. Traders know where the price is going to consolidate.
  2. Which level is going to produce the signal candle.
  3. It offers an excellent risk-reward.
Categories
Forex System Design

Designing a Trading Strategy – Part 2

Introduction

Introduction

Introduction

Our previous article presented the three key elements of a trading strategy, which is the base of a trading system. In this second part of the designing process of a trading strategy, we will present the first component of a trading strategy corresponding to the entry and exit.

Trade Positioning and Trading Strategy

A trade is made of at least by a buy order and a sell order. In other words, when, for example, the trader places a long position (buy), he should close it using a sell (cover) order.

On the other hand, a trading strategy with a positive expectation can identify and provide both long and short trading opportunities under a specific condition. Similarly, the strategy must be able to determine when to close the trading position and exit the market.

Generating Trading Opportunities

As we have seen in previous articles, a trading strategy is born from an idea that we believe might generate profits in any financial market. In this regard, the entry signals can vary from the simplest to the most complex requirement.

A buy position will arise when the price meets a condition for a bull market. On the contrary, a short position will activate if the market accomplishes the conditions for a bear leg. Some examples of long entries are:

  1. The 5-period fast moving average crosses over the 55-period slow moving average.
  2. The 65-period RSI oscillator closes above a reading of the 52-level.
  3. The price surpasses and closes above the high of the previous day.
  4. The price breaks and closes above the high of the 55-day range.

The definition of the exit rule of the trade must be considered from the basis that an open position in one direction must be closed with a position of equal size and opposite direction. For example, if the trader has opened a long trade, it will be closed with a selling trade. In this way, the developer should define a set of criteria that allow the execution of the closing of the trade. For example:

1) Closing the trade if the price advances 1.5 times the risk of the transaction.
2) The price reaches 3 times the ATR of 14 periods.
3) The rolling average of 5 periods crosses the average of 21 periods.

An example of Trading Signals using Metatrader 4

Metatrader 4 is one of the most popular trading platforms in the retail trading segment. Despite other trading platforms, such as TradeStation, Multicharts, or VisualChart, we will use Metatrader for our example. This platform includes the MetaEditor application, with which the creation of trading strategies can be developed through the programming of custom indicators.

In the following example, we show the creation of a custom indicator based on the crossing of two moving averages. This trading strategy uses a 5-period Weighted Linear Moving Average (Fast LWMA) and a 55-period Simple Moving Average (Slow SMA). 

Now it is time to define the entry and exit rules of our trading strategy as ideas and code rules for MetaEditor of MetaTrader 4.

The setting of each moving average period is as follows:

extern int Period1 = 5;
extern int Period2 = 55;

The entry criterion will occur as follows:

  • A buy position will be activated when the LWMA(5) crosses above the SMA(55).
//Open Buy Order, instant signal is tested first
   if(Cross(0, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) >
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0)) 
//Moving Average crosses above Moving Average
   )
     {
      RefreshRates();
      price = Ask;   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_BUY, price, TradeSize, "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
     }
  • A sell position will trigger when the LWMA(5) crosses below the SMA(55).
//Open Sell Order, instant signal is tested first
   if(Cross(1, iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) <
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0)) 
//Moving Average crosses below Moving Average
   )
     {
      RefreshRates();
      price = Bid;   
      if(IsTradeAllowed())
        {
         ticket = myOrderSend(OP_SELL, price, TradeSize, "");
         if(ticket <= 0) return;
        }
      else //not autotrading => only send alert
         myAlert("order", "");
     }
  }

The exit criterion will occur as follows:

  • A buy position will be closed if the LWMA(5) crosses below the SMA(55).
//Close Long Positions
   if(iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) <
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0) 
//Moving Average < Moving Average
   )
     {   
      if(IsTradeAllowed())
         myOrderClose(OP_BUY, 100, "");
      else //not autotrading => only send alert
         myAlert("order", "");
     }
  • A sell position will be closed if the LWMA(5) crosses above the SMA(55).
//Close Short Positions
   if(iMA(NULL, PERIOD_CURRENT, Period1, 0, MODE_LWMA, PRICE_CLOSE, 0) >
 iMA(NULL, PERIOD_CURRENT, Period2, 0, MODE_SMA, PRICE_CLOSE, 0) 
//Moving Average > Moving Average
   )
     {   
      if(IsTradeAllowed())
         myOrderClose(OP_SELL, 100, "");
      else //not autotrading => only send alert
         myAlert("order", "");
     }

Until now, we have not defined a money management rule or the position size for our trading strategy, just entries, and exits.

Conclusions

Entry and exit criteria are the basis of a trading strategy, which arises from an idea. The trading strategy’s essential objective is to obtain an economic profit from applying specific rules in both long and short positioning in the financial market.

In this educational article, we presented the case of a trading strategy based on two moving averages crossovers. In particular, we used the LWMA(5) as the signal moving average with an SMA(55) as the slow m.a.

In the following article, we will present some filters to avoid false signals.

Suggested Readings

  • Pardo, R.; The Evaluation and Optimization of Trading Strategies; John Wiley & Sons; 2nd Edition (2008).
  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
Categories
Forex Fundamental Analysis

The Impact Of ‘Total Vehicle Sales’ Data On The Forex Market

Introduction

Introduction

Introduction

Vehicle sales figures offer us much insight into the consumer demand and overall health of the economy. Changes in vehicle sales figures could also be used for predicting the near-future direction of economic growth. Understanding how vehicle sales figures can be used to infer upcoming trends in crucial economic indicators could always give us the advantage of being ahead of the market trend.

What is Total Vehicle Sales?

Total Vehicle Sales represent the overall number of domestically produced vehicles that have been sold. The reports could be monthly, quarterly, or even yearly, depending on the reporting vehicle manufacturing companies. In other words, Total Vehicle Sales is the annualized new vehicles sold count for a given month.

The automotive industry represents a vital component of the United States economy. It makes up about 3% of the total GDP and remains the largest industry in the manufacturing sector. It is responsible for employing lakhs of people in the United States and transacts in billions each year.

How can the Total Vehicle Sales numbers be used for analysis?

At first, the importance of the vehicle sales figure may not be apparent, but vehicle sales serve useful for economic analysis. A vehicle is a significant purchase for people. People buy vehicles when they are confident about their ability to make payments. It is possible only when they have considerable disposable income or procure loans at lower interest rates.

When people’s disposable income is considerable, it means the people are affluent financially and reflects the good health of the economy. On the other hand, when loans are available to more people at lower interest rates, it means there is sufficient monetary stimulus from Central Banks to promote economic growth and money is easy to come by. Such inflationary pressures stimulate economic growth and indicate that the economy is likely to grow steadily.

The increase in vehicle sales figures reinforces the positive affirmations forecasted by other economic indicators like consumer spending or interest rates. As consumer spending comprises more than two-thirds of the GDP, an increase in vehicle sales likely indicates a healthy two or three quarters that are going to continue in the economy.

Equity markets respond and perform exceptionally well around the Total Vehicle Sales figures, as the increasing figures in sales imply increasing profits for the related companies. The increase in profits due to sales is doubled down by the stock prices soaring higher, and vice-versa also holds. Hence, the vehicle sales figures are given much-deserved attention every month by the equity traders and the media. To some degree, currency markets feed off from the equity markets, but the effect is noticeable only when the changes are significant.

Vehicle purchases are considered to be discretionary spending, and when people are paying for such items, it indicates the economy is flourishing. The relation between vehicle sales and economic growth also becomes more apparent during recessions, where vehicle sales drop significantly. During the Great recession of 2007-2009, vehicle sales fell by 3 million.

With rapid development in the automobile industry, more durable vehicles that last longer, unlike older models, are coming into the market.  It means people need not buy new vehicles as frequently as before. Hence, recent trends should incorporate this factor also into the statistics.

Alongside this, there is a shift in the industry due to disruptive brands like Tesla introducing electric cars as a contrast to combustion engines. It affects the industry and the dependent oil and gasoline industries as well. Self-driving and Artificial Intelligence equipped automobiles are catching up with the people, and this could soon invalidate many traditional jobs that came as a result of the regular gasoline cars and trucks.

The current COVID-19 pandemic already cost the economies of most countries much than they could handle, and many industries suffered heavy losses. The silver lining for the automotive industry is coming from the fact that as people resume their regular life by going back to their work require a safe commute. Things are looking brighter for the automobile industry as more people are considering the safety assured through private commute over the risk involved in the public transportation system.

Impact on Currency

Vehicle Sales acts as a coincident indicator that reflects the health of the economy at the current state. The currency markets are focused more on the leading indicators before the trends pick up. Total vehicle sales prove to be more useful for the equity markets for trading on the automobile and other related industries, but currencies require more than just vehicle sales.

Hence, overall Total Vehicle Sales are a low-impact indicator for the FOREX market and are useful in double-checking or reaffirming our leading indicator predictions. Economists and business analysts will use total vehicle sales data to report current economic health, but currency traders can overlook this indicator for other macroeconomic leading indicators.

Economic Reports

The Bureau of Economic Analysis (BEA) provides monthly reports on total vehicle sales on its official website. Apart from this, the St. Louis FRED website also details the same figures historically in a more comprehensive and visually depictive way.

Sources of Total Vehicle Sales

We can obtain Total Vehicle Sales figures for the United States from BEA.

For analysis purposes, the St. Louis FRED website offers better resources and ease of access for Vehicle Sales figures.

We can obtain Global Total Vehicle Sales figures for the majority of the countries from Trading Economics.

How Total Vehicle Sales Data Release Affects The Price Charts

In the US economy, total vehicle sales data is an important leading indicator of consumer spending and consumer confidence. It measures the annualized number of new vehicles sold domestically in the reported month. The most recent data related to this was released on August 3, 2020, at 7.00 PM ET. The total vehicle sales is a combination of all car sales and all truck sales data and can be accessed from Investing.com here. The historical data of total vehicle sales can be accessed from Trading Economics here.

The screengrab below is of the monthly total vehicle sales from Investing.com.

As can be seen, the total vehicle sales data is expected to have a low impact on the USD upon its release.

The screengrab below shows the most recent changes in the monthly total vehicle sales data in the US. In July 2020, the monthly total vehicle sales were 14.5 million compared to 13.1 million in June 2020. This increase is expected to be positive for the USD.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before Monthly Total Vehicle Sales Release on August 
2020, Just Before 7.30 PM ET

From the above 15-min EUR/USD chart, the pair can be seen to be trading on a neutral trend before the release of the total vehicle sales data. This trend represents a period of relative market inactivity with candles forming near a flattening 20-period Moving Average.

EUR/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

After the data release, this Forex pair formed a 15-minute bearish candle, indicating that the USD became stronger as expected due to the increase in total vehicle sales. The data release was, however, not significant enough to cause any market volatility as the pair continued to trade in a neutral trend with the 20-period Moving Average flattening.

GBP/USD: Before Monthly Total Vehicle Sales Release on August 
2020, Just Before 7.30 PM ET

Similar to the trend that we have observed with the EUR/USD pair, the GBP/USD was trading in a neutral pattern before the data release with candles forming around a flattening 20-period MA.

GBP/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

After the news announcement, this pair formed a 15-min bearish candle but continued trading in the neutral trend observed before the data release.

AUD/USD: Before Monthly Total Vehicle Sales Release on August
2020, Just Before 7.30 PM ET

AUD/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

As observed with the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a subdued neutral trend before the data release. The pair formed a 15-minute bearish candle after the news release, but unlike the other pairs, it continued trading in a weak uptrend.

Although it plays a vital role as an indicator within the economy, it is evident that the total vehicle sales indicator does not cause any significant impact on the price action in the forex markets.

Categories
Forex Daily Topic Forex Price Action

Keep an Eye at the Last Daily Candle’s Closing

In today’s lesson, we are going to demonstrate an example of the daily-H4 chart combination trading. In the daily-H4 chart combination trading, the daily chart plays a very significant role. As long as the price in the daily chart heads towards the trend, the traders may find the opportunities to take entry. Let us now proceed and find out what that means.

In today’s lesson, we are going to demonstrate an example of the daily-H4 chart combination trading. In the daily-H4 chart combination trading, the daily chart plays a very significant role. As long as the price in the daily chart heads towards the trend, the traders may find the opportunities to take entry. Let us now proceed and find out what that means.

In today’s lesson, we are going to demonstrate an example of the daily-H4 chart combination trading. In the daily-H4 chart combination trading, the daily chart plays a very significant role. As long as the price in the daily chart heads towards the trend, the traders may find the opportunities to take entry. Let us now proceed and find out what that means.

It is a daily chart. The chart shows that the price heads towards the North with good bullish momentum. The last candle comes out as an inverted hammer with a tiny bullish body. The long upper shadow suggests that the price has a strong rejection at a level of resistance. Nevertheless, the candle has a bullish body, and the candle closes above its last candle’s highest high. Thus, the daily-H4 combination traders may flip over to the H4 chart to go long in the pair.

This is how the H4 chart looks. It produces a bearish engulfing candle followed by a spinning top. It seems that the price may have found its support. If the price makes a breakout at the last swing high, the buyers may go long in the pair.

The chart produces two more bullish candles. The last candle comes out as a hammer with a bearish body. It seems that the price does not know where to go. Traders must be patient here.

The chart produces a bullish engulfing candle closing well above the last swing high. The buyers may trigger a long entry right after the last candle closes. It seems that the bull may make another strong move towards the North. Let us find out how the trade goes.

As expected, the price heads towards the trend with extreme bullish pressure. It hits 1R by the next candle. The candle closes with a thick bullish body. It means that the buyers still have control in the chart. Thus, the buyers may wait for the price to consolidate and get a bullish reversal candle followed by a bullish breakout to go long and drive the price towards the North further.

If we concentrate on the daily chart, we see that the last daily candle is not a strong bullish candle. However, consolidation and a bullish engulfing candle in the H4 chart attract the buyers to go long in the pair. As long as the daily candle closes above/below the last candles highest high/lowest low, the daily-H4 chart combination traders shall keep their eyes in the H4 chart for finding trading opportunities.

Categories
Forex Fundamental Analysis

Understanding What ‘GDP Deflator’ Is & Its Relative Impact On The Forex Market

Introduction

Introduction

Introduction

Investors and traders are continuously trying to determine which country is growing relatively faster to make currency investment decisions. Assessing growth for capitalist economies that use inflation as fuel can be tricky to understand. The differentiation between nominal and real growth, effects of inflation, and the role of a deflator are necessary to understand to arrive at correct conclusions from statistics.

What is GDP Deflator?

Most of the economies that we have today are capitalist economies and use inflation as the primary fuel for growth. Currency traders want to go “long” on currencies of countries that are experiencing relatively higher growth than other countries. Hence, a correct assessment of growth is crucial.

The broadest and most widely used measure of the growth of economies is the Gross Domestic Product (GDP). The GDP is the monetary measure of all goods and services produced within a country for a given period (quarter or year). Although, before GDP, Gross National Product (GNP) was widely used to compare growth amongst economies. GNP measures growth beyond borders and has certain limitations in its usage as a growth measure.

GDP Deflator

It is also known as GDP Price Deflator or Implicit price deflator. It measures the price changes in all goods and services produced within an economy. It measures inflation at the macroeconomic (or national) level. As prices of commodities increase over time, the GDP values are “inflated” over time.

For instance, a country that has a GDP of 10 million dollars for the year 2019 and 12 million dollars for the year 2020 would appear to have grown 20%. If the inflation rate for the duration was 10%, meaning the prices rose by 10% for all the commodities, then 1 million dollars out of 12 million dollars came purely through increased prices and not increased production. Hence, in 2020, the real GDP was only 11 million dollars. Therefore, real growth was only 10% instead of 20%.

The Nominal and Real GDP figures are vital to understand and measure the level of inflation by calculating the GDP deflator. The following formula gives the GDP deflator:

Here, the nominal GDP is the total dollar value of all commodities produced in an economy without accounting for inflation. It is a direct monetary measure of goods and services. Real GDP is the inflation-adjusted value of GDP. It strips away the effect of inflation from Nominal GDP to show real growth.

Deflators like the Real GDP also have a base year against which all other years’ figures are compared. For the United States, 2012 is the base year, meaning GDP deflator value for the year 2012 would be 100 (as nominal and real GDP would be equal due to zero inflation). Subsequent years will have higher or lower values accordingly to indicate inflation and deflation, respectively. The base year varies from country to country.

How can the GDP Deflator numbers be used for analysis?

It is essential to understand how inflation masks the real growth and leads us to make the wrong conclusions. As seen in the above example, countries may show higher and higher GDP figures, but in reality, they may have only achieved little or no growth at all. When comparing growth over several years, the GDP deflator is key to the analysis to strip away the effects of inflation. By employing the equation above, if we get a deflator score of say 110, it would indicate there is a 10 percent inflation during the observed period.

The Consumer Price Index (CPI) is the most popular and widely used indicator to measure inflation. The GDP deflator has some advantages over the CPI. As the CPI measures inflation for a fixed basket of goods and services, which does not change frequently, the GDP is a macroeconomic aggregate measure of inflation. The GDP deflator factors in any change in economic output and investment patterns. Any new change in the goods produced or change in the consumption patterns of people is accounted in by the GDP deflator, unlike CPI. The CPI basket is static and cannot account for commodities price changes that are not in the basket, whereas the deflator is all-inclusive in this regard.

It is also necessary to know that CPI includes the most commonly used goods and services that have an impact on the economy. It updates its basket as patterns change over the years. Hence, over time the GDP deflator and the CPI have similar trends and can be used interchangeably.

Impact on Currency

The GDP deflator is a basic measure of inflation that erodes currency value. It is an inversely proportional lagging indicator. High values of the deflator are bad for the currency value and vice-versa. Since it is one of the measures of inflation, it is a low-impact lagging indicator as it is not as popular and as frequent as the CPI. It is a quarterly statistic, whose effects are already priced in through more frequent inflation measuring statistics.

Economic Reports

The Bureau of EA releases quarterly reports of the GDP price deflator alongside the quarterly GDP figures on its official website for the United States. GDP and deflators are essential macroeconomic indicators, and therefore are available on the World Bank and many other international organizations like the OECD, IMF, etc.

Sources of GDP Deflator

The BEA releases its quarterly GDP deflator statistics on its official website for the public.

The World Bank also maintains GDP and GDP deflator statistics for most countries on its official website.

Deflator figures for most countries can be easily found on the Trading Economics website.

How GDP Deflator Data Release Affects The Price Charts

In the US, the GDP deflator is released by the Bureau of Economic Analysis quarterly, about 30 days after the quarter ends. It measures the annualized change in the price of all goods and services included in gross domestic product; and is the broadest inflationary indicator. The most recent data was released on July 30, 2020, at 8.30 AM ET can be accessed at Investing.com here. An in-depth review of the GDP deflator data release can be accessed at the Bureau of Economic Analysis website.

The screengrab below is of the GDP deflator from Investing.com. On the right, a legend indicates the level of impact the fundamental indicator has on the USD.

As can be seen, GDP deflator data is expected to have a medium impact on the USD after its release.

The screenshot below shows the most recent changes in the GDP deflator in the US. The GDP deflator changed by -2.1%, worse than analysts’ expectations of a 1.1% change. This change is expected to the negative for the USD.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

Before the news release, the EUR/USD pair traded in a neutral pattern. This trend is evidenced by the 15-minute candles forming on an already flattened 20-period Moving Average, as shown in the above chart.

EUR/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

After the data release, the pair formed a 15-minute “hammer” candle. This trend is as expected since the USD weakened against the EUR. The data release was significant enough to cause a change in the market trend. The market adopted a steady bullish stance as the pair traded in an uptrend with the 20-period Moving Average steeply rising.

GBP/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

Unlike the EUR/USD pair, the GBP/USD pair was trading in a steady uptrend before the data release.

GBP/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

After the data release, the pair formed a bullish 15-minute candle. It subsequently traded in a renewed uptrend with the 20-period Moving Average steeply rising similar to the EUR/USD pair.

NZD/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

NZD/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

The NZD/USD pair was trading in a similar neutral pattern as the EUR/USD pair before the data release. Similar to the EUR/USD and the GBP/USD pairs, the NZD/USD pair formed a 15-minute bullish candle after the data release. Subsequently, the pair adopted an uptrend with the 20-period Moving Average steadily rising.

Bottom Line

As observed in this analysis, the GDP deflator has a strong impact on the price action, enough to alter the prevailing market trend upon its release. Forex traders should avoid having any significant open positions before the GDP deflator data release to avoid being caught on the wrong side of the news release.

Categories
Forex Education Forex System Design

Designing a Trading Strategy – Part 1

Introduction

Introduction

Introduction

In a previous article, we introduced the basic concepts that should include a trading strategy. In this context, a trading strategy tends to be confused with a trading system. In this educational article, we start to present a series focused on developing a trading strategy that could end as a trading system.

The Trading Strategy Concept

Before advancing in designing a trading strategy, it is necessary to explain the difference between a trading strategy and a trading system.

A trading strategy is a set of objective and formalized rules, such as parameters from a mathematical formula; these values can vary in different types of markets. Additionally, this set of rules are characterized by being independent of the emotional trader’s behavior. 

A trading system is a systematic application of a trading strategy designed to achieve a profitable return by positioning in long or short financial markets. The main advantage of using a tested and validated trading system is significant confidence in producing profits.

Trading strategies can vary from the simplest to the complex rules criteria. Some classical trading strategies are moving average crosses, channel breakouts, bar patterns, candlestick patterns, and strategies based on oscillators such as MACD or RSI.

According to the complexity level of the trading strategy, as complexity increases, the construction, testing, optimization, and evaluation process will become more difficult. In this context, if the system developer does not control the trading strategy complexity, the optimization process results can become challenging, even could lead to the over-fit of the trading strategy.

The Basic Components

Each trading strategy must contain three essential components identified as follows:

Entry and Exit: Both entry and exit are the core of a trading strategy. The entry and exit criterion can vary in its complexity level. Similarly, the strategy could consider an entry in a specific price as a pending order (limit or stop), a market entry, open, or the closing price. On the other hand, the exit criteria could use a broad kind of methods such as percentage of price advancement or key support/resistance levels. As the reader may realize, the possibilities on entries and exits are unlimited.

Risk Management: It is a fact that any trading strategy will generate losing trades. In this regard, all trading strategies must contain a set of objective rules to reduce the risk. Risk management’s main objective is to limit losses in the trading account while allowing the trader to continue trading despite losing streaks.

Position Sizing: The third element a trading strategy must include is the amount to be traded. The position size may correspond to a fixed number of units, such as contracts, lots, shares, etc. The problem of position sizing becomes critical, especially when the trading strategy is profitable. In this context, Pardo suggests that it is more effective to allocate resources to improve the strategy’s entries and exits.

Conclusions

In this educational article, we have introduced the difference between a trading strategy and a trading system. In this regard, we can understand a trading strategy as the basis of a trading system.

A trading strategy can be based on the simplest or the most sophisticated criteria. However, as the complexity level of the strategy increases, the level of complexity in the trading system’s development will also increase.

On the other hand, a trading strategy must contain three elements, which are as follows:

  1. Entry and Exit.
  2. Risk Management.
  3. Position Sizing.

Finally, in the next educational article, we will expand the concepts of inputs and outputs in a trading strategy.

Suggested Readings

  • Pardo, R.; The Evaluation and Optimization of Trading Strategies; John Wiley & Sons; 2nd Edition (2008).
  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
Categories
Forex Daily Topic Forex Price Action

Double Top and Evening Star Drive the Price Far Down to Consolidate

In today’s lesson, we are going to demonstrate an example of a double top offering an entry, not right after the breakout. It rather offers an entry upon finding its resistance, which is well below the neckline level. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an example of a double top offering an entry, not right after the breakout. It rather offers an entry upon finding its resistance, which is well below the neckline level. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an example of a double top offering an entry, not right after the breakout. It rather offers an entry upon finding its resistance, which is well below the neckline level. Let us find out how that happens.

The chart shows that the price gets trapped within two horizontal levels. It produces a bearish engulfing candle but heads towards the North upon having a bounce at the level of support. The last candle comes out as a Doji candle around the resistance zone. Let us find out what happens next.

The chart produces a bearish engulfing candle closing well below the neckline. The chart produces an evening star to make the breakout. It suggests that the price may head towards the South with good bearish momentum.

The price heads towards the South with three more candles. However, the price does not consolidate around the neckline. Thus the sellers in the chart may find it difficult to go short in the pair. Let us wait and see whether it consolidates or not.

The chart produces two bullish corrective candles. If the price finds its resistance and produces a bearish reversal candle, the sellers may go short below the last swing low.

The chart produces a bearish engulfing candle closing well below the last swing low. The sellers may trigger a short entry right after the last candle closes by setting stop-loss above the candle’s highest high and by setting take profit with 1R.

The price travels a long way towards the South. The last candle comes out as a bullish inside bar. It is a weak bullish reversal candle. However, the way the price has been heading towards the South; it suggests that the price may continue its bearish move. However, many sellers may want to close their entries and come out with the profit after the last candle.

Usually, traders wait for the price to consolidate and produce a reversal candle at the breakout level. However, when a trend starts with a strong reversal pattern, such as the morning star/evening star, the price may not consolidate around the neckline level. Nevertheless, if the chart allows the price space to travel, traders may wait for the price to consolidate and to get a reversal candle to trade. This is what happens here. The price finds its resistance, not at the neckline but somewhere else, and produces a strong bearish engulfing candle offering an entry.

Categories
Forex Psychology

Avoiding Burnout While Trading Forex

Forex trading can be stressful. Anyone that tells you otherwise just won’t have come across one of their bad patches yet. Every single time you trade you are being put in front of a number of different stressful situations, as they begin to build up it can cause stress, frustration, and ultimately causes burnout. I […]

Forex trading can be stressful. Anyone that tells you otherwise just won’t have come across one of their bad patches yet. Every single time you trade you are being put in front of a number of different stressful situations, as they begin to build up it can cause stress, frustration, and ultimately causes burnout. I […]

Forex trading can be stressful. Anyone that tells you otherwise just won’t have come across one of their bad patches yet. Every single time you trade you are being put in front of a number of different stressful situations, as they begin to build up it can cause stress, frustration, and ultimately causes burnout.

I am sure that there have been times in your life when you have been doing something repeatedly and you end up thinking that you can’t really be bothered to do this or that it is incredibly boring. This is often referred to as burnout and it is quite common amongst forex traders, especially if things haven’t quite been going the way you intended it to.

The good news is that there are ways to avoid or at least reduce the effect that it can have on you, it is important to recognise the signs and put into place some things that can help you to relax and unwind, otherwise, a burnout could cause a complete loss of motivation or even trading mistakes that could cost you money.

Spot the Signs Early

It is often quite hard to spot when you are going through a tough spot, a lot of the time it is normal for you, so it is important that you are able to recognise the signs of burnout coming up so you can quickly do something to help alleviate the issues. You can spot these early signs by asking yourself a few questions, they are quite straight forward but the more that you answer yes to, the more likely you are on your way to burnout.

  • Do you have feelings of self-doubt?
  • Do you question why you are trading?
  • Are you suffering from headaches?
  • Are you still sticking to your strategy?
  • Are you eating more or less?
  • Are you drinking alcohol more often than usual?

Ask yourself, if just one is yes, then take a break, if more than one is yes, then you may be on your way to mental burnout.

Take a Break

This is a simple step to take, simply step away from trading, for a day, 2 days, a week, whatever you think is necessary for you to alleviate some of that stress or thoughts of self-doubt, use this time away from trading to exercise eat healthily and simply clear your mind of trading and the stresses that come with it.

Think Back to the Start

What we mean by this, is to think back to when you started trading, the excitement that it brought, the new experiences, and the feeling of learning something new and being able to implement that into your trading strategies. Use that feeling that you had, use it to help kickstart your own passion for trading, this will help you to focus on some of the better and more positive sides of trading rather than the stressful ones that have put you into your current situation.

Find a Friend

This can be taken in two ways, you could look for someone outside of trading to speak to or to simply spend time with, time with others is a great way to get rid of stress, as long as you like them that is. Then there are trader buddies, these are people who also trade that can be there to discuss what is going on, the good thing about having a friend that also trades is that they will have also experienced the exact same things that you are now going through, they will be understanding and may even have tips on how they avoided or got out of a burnout situation.

Get Pampered

Complete relaxation and clearing of your mind, a little similar to taking a break, but this time it is all about you, you need to do something that you enjoy, whether that is a massage or a game of tennis. Think about you, cater to your own needs and loves, this is a fantastic way to reduce the risk of burnout as it clears your mind of the issue and you gain that adrenaline and euphoria of doing something that you truly enjoy.

Ask for Help

Do not be afraid to ask for help, if you go into burnout and still try to stick with it, it can be damaging not only for your trading account but for your overall physical and mental health. The worst thing you can do is try and push yourself through it. There are people around, both friends and professionals who have been trained for this sort of thing, there is no harm or shame in asking them for a little bit of help, in fact, it is strongly encouraged. The good thing about talking to professionals is that they know all the signs and they also know a lot of things that could be causing them, in fact, you may discover that your burnout is nothing to do with trading at all and is instead something that you have locked away inside or didn’t even think of as stressful.

Being able to recognise the signs and then take control of them is the key to avoiding and getting out of burnouts, it is not a good place to be but there are things that you can do to help avoid them and there is also help available out there should you need it. It is something that we all go through so it is nothing to be ashamed of, look after yourself and then you will be able to look after your trading.

Categories
Forex Psychology

How to Approach Trading Changes Positively

Change, something that you either love or absolutely loathe. Whichever approach is relevant to you, you are going to need to embrace change in life and especially when trading forex. There isn’t a moment that goes by where your single trading strategy or plan will be 100% correct. The markets change, you need to change […]

Change, something that you either love or absolutely loathe. Whichever approach is relevant to you, you are going to need to embrace change in life and especially when trading forex. There isn’t a moment that goes by where your single trading strategy or plan will be 100% correct. The markets change, you need to change […]

Change, something that you either love or absolutely loathe. Whichever approach is relevant to you, you are going to need to embrace change in life and especially when trading forex. There isn’t a moment that goes by where your single trading strategy or plan will be 100% correct. The markets change, you need to change with them, adapting to whatever is being thrown at you. It is a challenging thing to do, but a vital skill to learn.

If we take a little look at people who really excel in their field, people who do a fantastic job of getting to the top and then staying there. Let’s take a look at Taylor Swift, nothing to do with trading but bear with us. When she started out she was shy, her music was based around country themes, all about love and romance. However the generation of people who grew up with her started to get older, their taste in music began to change and so then Taylor had to change also, if she remained the same, she would have lost a lot of fans. So instead, she adapted, she changed her music, constantly, there were never more than two songs with a similar theme in a row, this enabled her to keep her fans interested and engaged in her music. She did this and it worked, she is now more popular than ever.

This same way of changing to the needs around you can be seen with many other successful people. Warren Buffett had to adjust his style when the first few investments didn’t go the right way, Michae Jordan had to change his style of play early on in his life after being dropped by his high school team. The thing that all of these people have in common is the ability to change and adapt. If you wish to become a successful trader, then you are going to need to learn how to do this yourself because lets be honest, the markets will change, they can change hour to hour, if you are not ready to change with it, then you will be making some mistakes and you will be making some losses.

One of the things that makes a lot of traders fail is either their inability to introduce some of the much-needed changes or simply that they are unwilling to do it. Traders can very easily get stuck in their own ways, they have been successful in the past so the way that they see it, is that their strategy will be successful again in the future. This is a mentality that a lot of people get, but it is also one of the most dangerous as it will only lead to losses, potentially major losses when the markets have changed.

So let’s look at things in a way that is probably more familiar to you. Let’s assume that you have a scalping strategy, your strategy relies on the markets to be going sideways, ranging up and down between particular ranges. This works fantastically when the markets are doing what you want them to do, the problems arise when the markets begin to shift, they begin to trend. You’re now trying to scalping the opposite direction to a trending market, this will lead to either a large loss or a lot of little losses, neither of which are great. If you are not able to adapt to this situation, to change your trading style, or to completely step back, then you are going to end up losing out, so we need to work out a way that you can alter your current strategy to better suit the current situation that the markets are in.

So we have an understanding that we need to make changes, that is the first step and is certainly a good step. So we make a change and of course, we test it out on a demo account. We have done that and it has worked, so we jump straight back into a live account to put the changes to practice. This unfortunately may bring in new challenges, every change that you made on the demo account will have a subsequent effect on other aspects of your trading such as your risk management plan, so simply making that single change may well have messed up the rest of your trading plan, making things a little more complicated and it may not actually improve your overall results.

It is easy to change things with your strategy, but not every change is a good change. You can very easily make a change which makes things even worse. You need to have an understanding of what changes are needed to be made and also to have both the fortitude and the discipline in order to practice with the new changes and to gain the necessary information and knowledge that comes with them in order to effectively work out whether the new results are actually positive or negative. Many people simply stop halfway through their new testing because they do not feel like it is worth the time, or they do not have the understanding that these changes take time and will often need additional tweaks to them in order for them to be fully effective.

So in order to ensure that you are able to make these changes and to make them in an environment where you are safe and more importantly your account is safe, we do this in a number of different ways. The first is of course on a demo account, every single time that you make a change to your strategy, no matter how big or small, you need to look to test it out on a demo account. This allows you to try it over an extended period of time, in an almost live environment. You need to test it out for a long period of time, not just 4 or 5 trades. Use this opportunity to tweak things. The longer you practice with it, the better your understanding of how these changes have affected your overall trading plan.

The second is to simply review charts, this does not give you the hands-on and true trading feel, but it is vitally important. By reviewing the charts, it enables you to figure out what you could have done during the day and what you could have done differently. This is invaluable as it means that the next time that a similar setup appears, you will know exactly what it is that you need to do. It’s like a sports game, they watch back over the game afterward to find out what went wrong and what could be done differently, so the next time they come up against that opposition, they will be able to deal with the threats and the team a lot better. Do not be afraid to spend some time looking for what you need to do differently, your future self will thank you for it.

So those are two methods that you can use to help implement some change. Remember that change needs to happen slowly, but the most important thing is that change needs to happen. Do not sit there hoping the markets will come back, they won’t, they will simply punish you further. So think about what you need to change, get an understanding of it, and then implement it.

Categories
Forex Daily Topic Forex Price Action

Trendline Trading: A Trendline forming with a Tiny Slope

In today’s lesson, we are going to demonstrate the formation of a down-trending Trendline. A trendline can be formed with a double top or double bottom as well. However, double top’s resistance or double bottom’s support may not be horizontal. Let us find out how they may look in the chart.

In today’s lesson, we are going to demonstrate the formation of a down-trending Trendline. A trendline can be formed with a double top or double bottom as well. However, double top’s resistance or double bottom’s support may not be horizontal. Let us find out how they may look in the chart.

In today’s lesson, we are going to demonstrate the formation of a down-trending Trendline. A trendline can be formed with a double top or double bottom as well. However, double top’s resistance or double bottom’s support may not be horizontal. Let us find out how they may look in the chart.

The chart shows that the price heads towards the South with moderate bearish pressure. The last candle comes out as a bearish engulfing candle closing well below the last swing low. The sellers may wait for the price to consolidate or make a bullish correction to go short.

The chart produces two bullish candles. The price has a rejection from the zone where it had a rejection earlier. The last rejection does not come from horizontal support, but it looks adjacent to that. Thus, it can be considered as a double top’s resistance zone.

The price heads towards the South by making a breakout at the last swing low. It produces a bullish inside bar. If the chart produces a bearish reversal candle, the sellers may go short below the last swing low. Let us proceed to find out what happens next.

The price gets bearish by making a breakout at the last swing low. Look at the last three candles. The combination of these three candles is called Morning Star. It seems that the price may make a long bullish correction. Can you guess where the price may find its next resistance?

We can draw a down-trending trendline here by using those points of the double top. Look at the price action around the trendline’s resistance. The last candle comes out as a bullish candle with an upper shadow. A bearish reversal candle at the trendline’s resistance may drive the price towards the South again.

The trendline’s resistance produces a bearish engulfing candle. It has a long lower shadow, though. The sellers may go short below the last candle’s lowest low. Let us find out what the price does.

As expected, the price makes a strong bearish move and makes a new lower low. Thus, the sellers may wait again for the price to go towards the trendline’s resistance and get a bearish reversal candle to go short in the pair. In a word, a very valid trendline is in play in this chart. Do you remember how it has started? It has started from a point that does not seem to form a trendline. The slope has been tiny, making it difficult to spot out. However, the market often produces such a trendline with a tiny slope, which shall be taken into account by the trendline traders.

Categories
Forex Risk Management

What is Your Actual Trade Risk Tolerance?

While there are many possible pieces of the puzzle that you can put together to earn money, certainly the most important general area is money management. The most important thing for money management is to understand its role regarding risk tolerance in Forex trading. What is Risk Tolerance in Trading? So, before we continue, we […]

While there are many possible pieces of the puzzle that you can put together to earn money, certainly the most important general area is money management. The most important thing for money management is to understand its role regarding risk tolerance in Forex trading. What is Risk Tolerance in Trading? So, before we continue, we […]

While there are many possible pieces of the puzzle that you can put together to earn money, certainly the most important general area is money management. The most important thing for money management is to understand its role regarding risk tolerance in Forex trading.

What is Risk Tolerance in Trading?

So, before we continue, we need to understand what risk tolerance is when we talk about transactions. It simply means the amount of risk you can tolerate per trade. It is a little different from money management, as money management focuses on your ability to survive a continuous series of losses. However, risk tolerance is more in line with the psychological ability to take a loss.

What is intended to make understand with this is that various traders are very comfortable risking 3in a trade, while others will risk 0.5% in the same setting. In general, it is a personal problem, as each individual person and trader will, of course, be different. However, knowing your risk tolerance will ultimately be crucial to your success, as if you are not comfortable in a position, you may be leaving too soon. What will be even worse is that many times when you are in that position, your startup analysis can be successful and you are jumping off the market based on fear, and not on anything substantial. There are some worse things to see a position go your way after you’ve been a little scared.

How to Know Your Risk Tolerance Level

Knowing your risk tolerance is a lot less than complicated than you realize. As a start, you should know that understanding money management is critical, so we’ll use two examples that are realistic:

Suppose you take a setting and risk 1% of your total account at the loss limit. If you feel very comfortable with this position, then you know that it is within your risk tolerance. A very simple exercise could be to get up and get away from the computer. Continue with your day and see if you are too concerned about how the position is working. If you can go to the park, work, or spend time with your friends or family without checking your position often, you are most likely within your risk tolerance.

In another trade, maybe you risk 2%. In this scenario, you are more concerned about trade and analyze how it works quite often. If it causes stress, it is above your risk tolerance. It is really so simple. I can’t tell you how many times I’ve found myself above my own risk tolerance, I had a bargaining chip against me, and then I turned in my direction just to get out of the balance point just to get rid of the uncomfortable feeling. Of course, trade continues to work in my favor and I would have cleaned it up. Psychological stress can have a big influence on how trade works.

An Exercise to Measure Your Risk Tolerance

I leave you with a simple exercise. Place an operation with a total risk of 0.5% in the stop loss. Watch how it feels when you walk away from the computer and let the market do what it wants. The next transaction should be 0.75%, with the same parameters and the same observations. From there, it simply rises by 0.25% every time you make an exchange until you find it too difficult to leave the market alone.

Some people will feel comfortable risking insane amounts of money, like 20%. That’s a completely different conversation as you approach money management. Money management dictates that you shouldn’t risk that kind of financial impact, but at the end of the day, working at a reasonable range to find where you can leave the trade just to decide which way it’s going, will be one of the main steps forward to become a much more professional trader. For what it’s worth, I’ve found that in many traders the risk tolerance is about 1%. Their tolerance may be different, but in the long run, these types of operations can be converted into good returns.

Categories
Forex Psychology

Dealing with Trader Frustrations

Frustration is a part of life, often it occurs when something we didn’t want to happen happens, or more work is created, frustration is also quite prevalent when Forex trading due to the nature of the markets, and things can easily turn against you. Frustration can lead to further psychological doubts in yourself or your […]

Frustration is a part of life, often it occurs when something we didn’t want to happen happens, or more work is created, frustration is also quite prevalent when Forex trading due to the nature of the markets, and things can easily turn against you. Frustration can lead to further psychological doubts in yourself or your […]

Frustration is a part of life, often it occurs when something we didn’t want to happen happens, or more work is created, frustration is also quite prevalent when Forex trading due to the nature of the markets, and things can easily turn against you.

Frustration can lead to further psychological doubts in yourself or your abilities to successfully trade, it can put a hit on the confidence that you have in your trading plan and can also lead to rash decisions being made in an attempt to alleviate any frustrations that maybe there. Nobody likes things going against them so this feeling is natural everyone experiences it, what is important is finding ways to reduce the levels of frustration that are benign felt.

Do Not Blame Yourself

This is probably one of the more powerful ways, but unfortunately, it is also the hardest. When you have had a couple losing trades on a row, self-doubt will begin to creep into the mind of even the most experienced trader. ‘I must have done something wrong’, ‘I am not any good at this’, those are some of the thoughts that may start moving through your head.

The thing is, there is no point in blaming yourself, how would that help resolve the current situation? No one is able to predict upcoming news events, sudden turns in the markets and so everyone experiences losses, that is simply part of trading. Even the biggest corporations in the world make bad trades, you need to use this as an experience to learn from what went wrong, not as a self-loathing exercise which doesn’t help you or your trading.

Don’t Change Your Strategy

Just because something went wrong, it does not mean that your strategy is useless or wrong. Many traders after a couple of losses get rid of their strategy and start looking for a new one that is currently working. This is not a good strategy to take, this will have you jumping around different strategies every could days or weeks, you will not get a chance to actually learn anything from them.

Instead, look at what went wrong, which part of the strategy let you down, then you are also to work out ways to adapt it to be more successful, not only does this give you a better understanding of how your strategy and also the markets work, but it also helps you to prevent any future frustrations that may come from a new strategy also taking some losses.

Check Your Routine

Sometimes a bad trade can come down to something as simple as missing a little bit of analysis, when something goes wrong, use your trading journal to find out what may have caused it, often traders get themselves into a routine, while this is great, it can also lead to serial mistakes being made if your routine misses out a certain bit of analysis, something as simple as checking the upcoming economic news events, then you will forget to do this every single time, and then you will potentially lose every single time a news event takes place during your trade. Sit down and go through your routine on paper, you can then analyse what you have done and whether you have missed anything. You would be surprised how many times people look at their routine and realise that some of the most obvious things are missing.

So when you start to feel frustrated, just know that every other person that has ever traded has felt the same thing, even those that are now professional and making full-time livings from it. Don’t jump into any rash decisions on your strategy, or begin to doubt your own abilities, you are able to be a successful trader, it is all about making small adjustments with each loss until you start to become profitable. Stick at it, believe in yourself and you will be on your way to being a better trader.

Categories
Forex Psychology

Common Psychological Mistakes For Newbies

There are psychological mistakes that you can make at any time during your trading career, and many people do, even those that have been trading for years. However, when you are just starting out, there are certain holes that are very easy to fall into, if you have traded then you have probably experienced some […]

There are psychological mistakes that you can make at any time during your trading career, and many people do, even those that have been trading for years. However, when you are just starting out, there are certain holes that are very easy to fall into, if you have traded then you have probably experienced some […]

There are psychological mistakes that you can make at any time during your trading career, and many people do, even those that have been trading for years. However, when you are just starting out, there are certain holes that are very easy to fall into, if you have traded then you have probably experienced some of them, so let’s take a little look at what they are.

Being Overconfident

This is quite a straightforward one and something that you can very easily fall into, especially when starting out. Let’s say you have just started, you have placed three different trades and each of them has ended up in profit. This trading thing is easy, right? Well no, it’s not, yes your first three trades won but the markets moved with you, or in some cases you got lucky. Some who are in this situation feel that it is easy and will then put in larger trades, or more trades, thus increasing risk, and inevitably when that loss comes, your confidence will be hit and so will your account balance. It is important that as a new trader, you understand the dangers of being overconfident.

Too Many Emotions

Trading can be incredibly exciting, don’t get us wrong, it is hard to keep all of those emotions in check as things start to move up and down, however, a problem that a lot of newer traders get into is allowing those emotions to take over the decision-making process. Think back to when you started, when something started going the wrong way, how did you feel? There was no doubt an element of fear, disappointment, or even regret at making the trade, what you do not want to do is to allow those emotions to take over, do not start closing or opening trades based on these feelings, you are doing that based on analysis and your strategy, not how you feel. 

Guessing

Trading is all about probabilities, yes there is sometimes an element of luck when an unannounced news event comes out and the markets move with or against you, however, the majority of things are known and are called probabilities. Someone completely new to trading will look at the markets, it’s a 50/50 as to whether the markets will go up or down right? Wrong. The markets are full of probabilities and new traders often do not understand this, but getting to learn about them can help to stack things in your favour.

Wanting a Little More

Most strategies have set entry and exit points, as well as set risk management for those trades. When you are new and you have a trade going the right way, it is easy to try and stick with it in the hope that it will make you a little bit extra. You should be coming out at the designated position at the take profit levels, but many newer traders have the habit of moving those take profit levels a little higher in the hope to earn some more, but the markets can turn at any moment, moving them can actually cause your trade to miss the TP level and then reverse to less profit or even back down to a  loss. Stick to what was planned. This can also work with making larger trades that go against the risk management, just because you want a little bit extra is a huge no that a lot of new traders can do.

Doubting Yourself

We have all done this at some time in life, and it is incredibly easy to do. You have made a trade, as soon as it has been placed, you suddenly wonder whether it was the right trade, should you have made it? Should we now get out of it? No, you made that trade for a reason, so stick with it. This also is relevant once a trade has finished, if it lost, you can question that maybe you aren’t good enough and that is why it lost, or if it won, you consider it luck, nothing to do with the work you put in before. Be confident in what you are doing, trust that the strategy that you used works and stick with it, accept the outcomes, and move on to the next one.

So those are a few little psychological pitfalls that newer traders can fall into, it is all about having an understanding of what you are doing, why you are doing it, and that the markets are their own beast, not something that can be tamed. Have confidence, trust your strategy but most importantly, stay humble and stick to the plan.

Categories
Forex Fundamental Analysis

The Importance of ‘Wages’ In Determining The Economic Condition of a Nation

Introduction It is completely fair to say that it would be difficult to sustain a country’s economy in the absence of households’ consumption. The amount of money that employees are typically paid determines their purchasing power and their level of demand. Wages can, therefore, be said to be the best leading indicators of consumer inflation. […]

Introduction It is completely fair to say that it would be difficult to sustain a country’s economy in the absence of households’ consumption. The amount of money that employees are typically paid determines their purchasing power and their level of demand. Wages can, therefore, be said to be the best leading indicators of consumer inflation. […]

Introduction

It is completely fair to say that it would be difficult to sustain a country’s economy in the absence of households’ consumption. The amount of money that employees are typically paid determines their purchasing power and their level of demand. Wages can, therefore, be said to be the best leading indicators of consumer inflation. More so, we can establish a direct correlation between the wages paid and the growth of the economy. For this reason, forex traders need to understand how wages drive the economy and the currency.

Understanding Wages

Wages are compensation that an employer pays their employees over a predefined period. It is the price of labour for the contribution to the production of goods and services. Thus, wages can be regarded as anything of value an employer gives an employee in exchange for their services. Wages include salaries, hourly wages, commissions, benefits and bonuses.

There are two categories of wages: nominal and real wages.

Nominal wages: are the amount of money that an employee is paid for the work done. Nominal wages are expressed in terms of pure monetary value.

Real wages: are the wages received by the employees adjusted for the rate of inflation. Real wages show the purchasing power of money. They are meant to guide on how the overall living standards have changed over time.

Therefore, Real wages = nominal wages – inflation

How Wages can be used for analysis

Their levels of disposable income determine the purchasing power of the households. The disposable income is directly proportional to the wages received. Therefore, the amount of wages paid for labour affects not only the quality of life of the households but also economic growth.

Growth in the wages received can be considered as a source of demand. Wages contribute a significant proportion of income for the middle- and low-class households who do not have other sources of income from investments. Assuming no corresponding increase in taxation, an increase in the wages corresponds to an increase in the amount of disposable income. Higher wages also give households the capacity to borrow more from financial institutions at competitive rates. The cheaper loans significantly contribute to increased aggregate demand. In this case, more goods and services will be demanded. The increase in aggregate demand compels producers to increase their scale of production to match the supply and demand. Consequently, the employment levels increase while the economy expands.

Source: St. Louis FRED

Conversely, decreasing wage growth implies that a decrease in disposable income. A reduction in the aggregate demand and supply will follow. Producers will be forced to scale back their operations, increasing the unemployment rate and consequently a slow-down in the economic growth.

Investments and savings rate rise with the growth in wages. These investments create employment opportunities and spur innovation within the economy. Contrary to this, the decrease in wages forces households to prioritise consumption over investments and saving. The resultant effect is fewer new job opportunities and stifled innovation. As can be seen, changes in the level of wages have a multiplier effect on the economy.

A rise in the rate of inflation is primarily driven by a disproportionate increase in demand driven by a rise in wages. Rising wages lead to a wage push inflation. This particular type of inflation is a result of an increase in prices of goods and services by producers to maintain corporate profits after an increase in the wages. Furthermore, since the responsiveness of supply to an increase in demand is not instant, increasing wages results in inflation since more money will be chasing the same amount of goods.

Impact of Wages on Currency

Forex traders monitor the fundamental indicators to gauge economic growth and speculate on the central banks’ policies. Central banks set their average inflation targets which guide their monetary policies. In the US, the inflation rate target is 2%.

When the wages increase, it forestalls a growth in the economy due to increased investments, aggregate demand and supply. An increase in employment levels also accompanies it. Since the value of a country’s currency is directly proportionate to its economic performance and outlook, wages growth leads to the appreciation of the currency. More so, consistent growth in wages is accompanied by wage push inflation. To keep this inflation under control, the central banks may implement contractionary policies to increase the cost of borrowing money and encourage savings and investments. These policies appreciate the currency.

A decrease in wages implies that the economy could be contracting due to declining aggregate demand and supply within the economy. If the central banks fear that this might result in a recession, they will implement expansionary monetary policies such as lowering interest rates. These policies tend to depreciate the currency.

Sources of Data

This analysis will focus on Australian wages. The comprehensive indicator of wages is Australian Wage Price Index which measures Wages, salaries, and other earnings, corrected for inflation overtime to produce a measure of actual changes in purchasing power. Thus, it measures the change in the price businesses, and the government pay for labour, excluding bonuses.

The real earnings data is released quarterly by the Australian Bureau of Statistics. The statistics can be accessed here.

Statistics on the global wages by country can be accessed at Trading Economics.

How Real Earnings Data Release Affects The Forex Price Charts

The most recent real earnings data in Australia was released on August 12, 2020, at 1.30 AM GMT. A summary review of the data release can be accessed at the Australian Bureau of Statistics website. The screengrab below is of the monthly real earnings from Investing.com.

As can be seen, the release of the real earnings data is expected to have a moderate volatility impact on the AUD

The screengrab below shows the most recent change in the Australian wage price index. In the second quarter of 2020, the wage price index grew by 0.2%. This growth is slower than the 0.5% increase in the first quarter of 2020. More so, the change in the second quarter was lower than analysts’ expectations of a 0.3% increase.

In theory, this improvement should lead to depreciation of the AUD relative to other currencies.

Now, let’s see how this release made an impact on the Forex price charts of a few selected pairs

AUD/USD: Before the Wage Price Index QoQ Data Release on 
August 12, 2020, Just Before 1.30 AM GMT

From the above 15-minute chart of AUD/USD, the pair can be seen trading in a subdued downtrend before the data release. This trend is evidenced by candles forming just below an almost flattening 20-period Moving Average.

AUD/USD: After the Wage Price Index QoQ Data Release

After the data release, the pair formed a long 15-minute bearish candle indicating the weakening of the AUD as expected. The weak wages price index data resulted in the selloff of the AUD, which led to the pair adopting a steady trend. This downtrend is shown by the steeply falling the 20-period MA with subsequent candles forming further below it.

Now let’s see how this news release impacted other major currency pairs.

GBP/AUD: Before the Wage Price Index QoQ Data Release on 
August 12, 2020, Just Before 1.30 AM GMT

The GBP/AUD pair traded in a neutral trend before the wages data release. As shown above, the 15-minute candles are forming just around an already flat 20-period MA. This trend indicates that traders were inactive waiting for the data release.

GBP/AUD: After the Wage Price Index QoQ Data Release

As expected, the GBP/AUD pair formed a long 15-minute bullish candle indicating the selloff of the AUD due to the weaker than expected data. Subsequently, the pair adopted a bullish trend as the 20-period MA steadily rising with candles forming further above it.

EUR/AUD: Before the Wage Price Index QoQ Data Release on 
August 12, 2020, Just Before 1.30 AM GMT

EUR/AUD: After the Wage Price Index QoQ Data Release

The EUR/AUD pair traded in a similar neutral pattern as the GBP/AUD pair before the wages data release. 15-minute candles can be seen forming just around a flattened 20-period MA. Similar to the GBP/AUD pair, the EUR/AUD formed a long 15-minute bullish candle immediately after the wages data release. Subsequently, the pair adopted a strong bullish trend as the 20-period MA rose steeply with candles forming further above it.

Bottom Line

From the above analyses, it is evident that the wages data has a significant effect on price action. Although the wage price index is categorised as a medium-impact indicator, its impact was amplified by the ongoing effects of the coronavirus pandemic. The worse than expected wages data indicated that the Australian labour industry is yet to recover from the economic shocks of Covid-19.

Therefore, traders should avoid having significant positions open with pairs involving the AUD before the release of the quarterly wage price index.

Categories
Forex Price Action

An Interesting Fact about Equidistant Channel

In today’s lesson, we are going to demonstrate an example of the formation of an up-trending equidistant channel. Usually, the price forms an up-trending equidistant channel by having two bounces and one rejection. However, the price sometimes determines the upper band first by having two rejections. In today’s lesson, this is what we are going to demonstrate.

In today’s lesson, we are going to demonstrate an example of the formation of an up-trending equidistant channel. Usually, the price forms an up-trending equidistant channel by having two bounces and one rejection. However, the price sometimes determines the upper band first by having two rejections. In today’s lesson, this is what we are going to demonstrate.

In today’s lesson, we are going to demonstrate an example of the formation of an up-trending equidistant channel. Usually, the price forms an up-trending equidistant channel by having two bounces and one rejection. However, the price sometimes determines the upper band first by having two rejections. In today’s lesson, this is what we are going to demonstrate.

The chart shows that the price makes a bullish move and produces a bearish engulfing candle. The last candle in the chart comes out as a doji candle with a long lower shadow. It suggests that the price finds a strong level of support in the minor charts.

The price heads towards the North and has a strong rejection. The last candle comes out as a bearish engulfing candle again. A candle with a long upper shadow followed by a bearish engulfing candle may drive the price towards the South.

It does not. It produces a bullish engulfing candle and pushes the price towards the North. The chart produces an inverted hammer. The long upper shadow suggests that the price has a rejection from a strong level of support. So far, we have noticed that the price is up-trending by making new higher highs. Do you notice anything else? Let us proceed.

After making a bearish correction, the price finds its support. It produces a bullish engulfing candle and pushes the price towards the North. The last candle comes out as a bullish candle with a long upper shadow though. It is more evident now that the price is up-trending by obeying an equidistant channel.

Upon finding its support, it produces a bullish inside bar. It seems that the buyers based on the equidistant channel may go long in the pair. We have not drawn the channel yet. The reason is we have to be able to spot out the channel by looking at the price action. Let us now draw an equidistant channel and see how the price has been obeying it.

It looks like a copybook equidistant channel. It offers two good long entries. Do you notice one thing here? The price gives a clear sign that it may form an up-trending equidistant channel at the very outset. When it has its second rejection, it does not trend from the lower band. However, it determines its upper band, which helps traders sniff about a potential up trending equidistant channel. This is what happens so often. The price may determine its upper band first not by bouncing off at the lower band or it may determine its lower band by not having rejection from the upper band.

Categories
Forex Risk Management

Where Do Forex Trading Risks Actually Come From?

Have you ever wondered where trading risks are actually rooted? What causes risk, and even more importantly, what is causing losses? Spend a few minutes learning more about where the main risks of Forex trading actually come from. Error in analysis and prognosis. Any publication of statistical information, the publication of the results of the […]

Have you ever wondered where trading risks are actually rooted? What causes risk, and even more importantly, what is causing losses? Spend a few minutes learning more about where the main risks of Forex trading actually come from. Error in analysis and prognosis. Any publication of statistical information, the publication of the results of the […]

Have you ever wondered where trading risks are actually rooted? What causes risk, and even more importantly, what is causing losses? Spend a few minutes learning more about where the main risks of Forex trading actually come from.

Error in analysis and prognosis. Any publication of statistical information, the publication of the results of the Fed meeting, and meetings of other central banks have their effects. What we’d better find out is whether the trader correctly assessed the importance of this or that news item. And the forecasts, made by the majority, were justified? Traders should consider these and other factors in the forecast. And there can often be mistakes. Traders often ignore or lose something important, which can result in an incorrect forecast.

Force majeure. It can come in many ways: human disaster, unexpected political decision, terrorist misfortune, the discovery of new mineral deposits, release to the market of a new product that has not been previously announced, sudden bankruptcy. Force majeure often has both long-term and immediate consequences. Examples of long-term force majeure include the collapse of “dotcom” and the mortgage crisis in the United States, which has become a global crisis. It should be noted that there are investors who managed to make a profit from the crisis. (I recommend watching the American film “The Big Short”, which describes this situation quite well).

Human factor. Incorrect interpretation of patterns, signs due to fatigue, lack of attention, stress, etc.

Another classification is the simplified division of the causes of trading risks into forecasting errors in technical, fundamental, and human analysis. I have already commented on the main reasons for the main risks in the section “Force Majeure”, and I will dwell on more details on the risks resulting from errors in technical analysis.

  1. High volatility at the time of opening the transaction. The greater the volatility, the greater the breadth of price changes and, therefore, the more and faster you can gain from it. It seems reasonable, but the risk lies in assessing this volatility because if the price going to your detriment, you can lose even more than you earn. The data of the indicators are relative, as well as the data of the volatility calculators.

TIP: Identify volatility visually. The price range is often identified as the distance between opposite fractal ends or candle accumulation. For starters, you can trade on the history. At first, it will be difficult for beginner traders (know from experience). Second tip: greater volatility, different from the daily average, is observed at the time of the appearance of fundamental factors. Just don’t open any transaction at this time.

  1. Level of trading. The trading strategy of trading by levels individually: someone opens positions expecting a level rebound, someone tries at breakup. For someone that’s a loss limiter. There is the so-called zone of turbulence around fractal levels in short-term time frames, where the price moves in different directions with a narrow amplitude. Predicting price movements in this area is inefficient.

TIP: Use the levels only as a guide. Open transactions out of levels and try to avoid staging at levels of resistance and stop support, as it can be used by large traders (market makers, which will be discussed below). If the transaction is already open in the direction of levels, then it is better to leave before reaching the level. Otherwise, there could be a rebound with the possible slip, which will worsen performance. Basically, the analysis is reduced to determine whether the break/rebound of a level is true (the trend) or false (the correction). Does it make any sense to risk it?

  1. Opening of transactions in overbought and oversold areas. This is the risk of opening a position at the end of a final trend. A classic mistake is trying to enter when the trend is already underway. At the peak of growth, large traders abandon trading, reaping some less intelligent traders.

It seems reasonable to employ RSI or stochastic, but they are not efficient at minimizing risks. They are often lagging behind, they invest in extreme price zones, and so on. So even if you use the indicators to determine the zones, you can still make a mistake.

TIP: You can identify signs of trend depletion as follows. The amplitudes in the three fractal sections are compared side by side in the time frame M1 (the exhaustion of the trend is clear there before). If the amplitude is shrinking (the amplitude of each subsequent fractal is shrinking), this suggests that the trend is exhausting.

And the wisest and simplest advice is to know how to get into an operation right at the beginning of the trend, not to imitate most. Be careful when interpreting the signals of the indicators, there are no perfect and impeccable indicators.

  1. Opening of transactions where there is no clear trend. There are situations where a trader makes a correction or a local price change for a new trend, which often occurs on the flat. It is difficult, especially when inexperienced to identify the flat end, as it often does not have a clear beginning or end.

TIP: I suggest again to use the comparison of price amplitude within the flat trend. If in the short term, there is a price movement whose amplitude deviates sharply from the average value, you should be alert. Do not enter an operation immediately, the first price change could be a correction. Analyze multiple time periods at a time: the signal period is М1-М5, confirming longer periods.

  1. Incorrect indicator parameters. This will result in an incorrect interpretation of the signals.

Council. Before starting to use an indicator with adjusted parameters in trading on a real account, try the system (tester МТ4, FxBlue). More detailed information about testing and optimization strategies in this summary.

  1. Application of pending orders. Outstanding orders are used in trading strategies based on the opening of transactions when the price exceeds the consolidation area. Orders are placed in opposite directions, betting that one of them will work. The risk arises from the fact that outstanding orders are set on the basis of intuition, rather than actual price movements. The distance is calculated, for example, in percentages of the average value of the price movement in the consolidation area. There is always the risk that the price will be positioned outside the area, order, and go in the opposite direction.

TIP: To reduce risk, avoid using pending orders.

  1. Abrupt reduction of contributions when a long position is opened. There are many examples of when the price fluctuated by 500-1000 points in just a few minutes. Of course, hardly anyone could react, make a decision, and make a compromise.

TIP: Always use stop loss.

  1. Market makers. A particular trader is just a token of a bigger game. Market makers are big players, and they can influence price through their huge capitals. They can create a necessary repository of information by manipulating media, forums, and other resources through forecasting, analysis, and information.

But this is not his only means. They could see levels where purchase and sale orders are concentrated, that is, stop losses and pending orders established in advance. As practice shows, most traders set stop loss in the area of the local ends, being tied to strong or rounded levels of support/resistance. Pending commands can be configured the same way. The market makers oppose the majority, bring the price to the levels at which orders accumulate, and therefore, even if we are forward-thinking, most traders are activated to stop.

For example. Market makers will always want to sell a currency at the best price. You see multiple stop loss higher than the current rates (green horizontal line at the bottom of the screen), which are basically the orders requested. On the other hand, market makers see many orders pending in the same price area, which does not allow the price to rise (volume equilibrium).

The price is pushed with small orders to the necessary level, after which it satisfies your sales volumes through purchase requests (stop loss). Given the number of short requests, it is unlikely that the price will go further.

TIP: There is no point in fighting with market makers. Therefore, you should learn to identify potential areas of command concentration and try to avoid them. It should also bear in mind that indicators cannot anticipate the possible actions of market makers. Therefore, it makes sense to rely less on indicators and pay more attention to levels, patterns, and exchange of information (trading volumes, order table). You can suggest any other risk of technical analysis, write in the comments. Let’s look for more ways to minimize and optimize trading risks together.

With regard to reducing the risks of erroneous forecasts based on fundamental analysis, there are few recommendations:

-Do not blindly trust everything that is reported in the media and be especially careful with “expert” forecasts. Check the official data reported by news agencies and official resources.

-Use complementary analytical tools: economic calendar, action analyzers.

-Evaluate dynamics statistics, comparing them with analysts’ expectations and previous reports.

-And lastly, prepare to react instantly to a force majeure.

Categories
Forex Daily Topic Forex Price Action

Double Top/Double Bottom and Intraday Trading

In today’s lesson, we are going to demonstrate an example of a double top that drives the price towards the downside in an intraday chart. The double top/double bottom usually makes the price bearish if they are formed in a major chart. However, they work in the same way in minor charts as well. Let us find out how it drives the price in an H1 chart. Let us get started.

In today’s lesson, we are going to demonstrate an example of a double top that drives the price towards the downside in an intraday chart. The double top/double bottom usually makes the price bearish if they are formed in a major chart. However, they work in the same way in minor charts as well. Let us find out how it drives the price in an H1 chart. Let us get started.

In today’s lesson, we are going to demonstrate an example of a double top that drives the price towards the downside in an intraday chart. The double top/double bottom usually makes the price bearish if they are formed in a major chart. However, they work in the same way in minor charts as well. Let us find out how it drives the price in an H1 chart. Let us get started.

It is an H1 chart. The chart shows that the price makes a long bearish move. The chart belongs to the sellers. The sellers may wait for the price to make a bullish correction and produce a bearish reversal candle at flipped resistance to go short in the pair.

The chart makes a strong bullish move instead, upon producing a bullish engulfing candle. The last candle comes out as a bullish engulfing candle after consolidation. It seems that the buyers are dominating the minor charts.

The price does not continue its bullish move. It has been in long consolidation. The price is roaming around the level of resistance, where it has had a bounce. A bullish breakout may attract the buyers to go long in the pair. On the other hand, a bearish reversal candle at a double top resistance may make the sellers wait to go short in the pair below the neckline.

The chart produces a long bearish candle closing below the neckline. It suggests that the Bear may dominate in the pair. The sellers are to wait for the price to consolidate and produce a bearish reversal candle to go short in the pair. Let us find out what happens.

The next candle comes out as a spinning top closing within the breakout level. It seems that the pair is getting ready to get bearish. The sellers are to keep their close eyes in the pair to get a bearish reversal candle and a breakout at the lowest low to trigger a short entry.

Here it comes. The pair produces a bearish engulfing candle. The candle’s body engulfs the last candle’s body. However, the sellers may wait for the price to make a breakout at the lowest low of the last candle (wick’s lowest low). It is very important as far as intraday trading is concerned.

The price breaches the wick’s lowest low and heads towards the South with good bearish momentum. It travels a long way by offering 1:2 risk-reward. It’s a good thing about intraday trading that it offers good risk-reward.

We have demonstrated an example of a double top driving the price towards the downside in the H1 chart. They work in any time frame from 1M to 1Month. However, it is better not to use it in too minor time frames such as the 1M, 5M, 15M.

Categories
Forex Psychology

Dealing With the Stress of Forex Trading

Stress is a powerful emotion and it is not one that will shy away from forex traders or any other traders, in fact, it can take a hold of us no matter what it is that we are doing, even something as simple as making a sandwich. You sometimes see those people who never experience […]

Stress is a powerful emotion and it is not one that will shy away from forex traders or any other traders, in fact, it can take a hold of us no matter what it is that we are doing, even something as simple as making a sandwich. You sometimes see those people who never experience […]

Stress is a powerful emotion and it is not one that will shy away from forex traders or any other traders, in fact, it can take a hold of us no matter what it is that we are doing, even something as simple as making a sandwich. You sometimes see those people who never experience it, and generally, we hate it, but what we see is not always the truth, just because we do not see them reacting to stress in the way that we expect, it does not mean that they are not experiencing it.

People can develop ways to deal with stress, so while it may not seem like they are experiencing any, they actually are, they just are able to deal with it. It is important that you are able to deal with your stress levels, if they manage to get too high it can potentially cause you to make rash and irrational decisions which could then be detrimental to your overall trading strategy and profitability. Everyone deals with stress in different ways so it is important that you work out the way that you will be able to deal with it. 

We are going to be looking at a number of different ways that people can help deal with their stress, some may work for you, some may not, but they are certainly effective for some.

The first thing that you need to be able to do is to acknowledge and accept that you are experiencing some stress, the earlier that you are able to do this the better. Admit to yourself that you are feeling stressed, anxious, or that things are just simply too much for you. Once you are able to accept that you are experiencing stress, you will then be able to begin to work on getting over it or controlling it. Think about the last time you felt stress, what did you experience? Some people have a faster heart rate, some people get headaches and some people begin to sweat. You need to understand your signs and how they manifest themselves if you are going to be able to recognise stress and then acknowledge it.

You then need to accept that you are experiencing these emotions, just because people have seen the signs, does not mean that they want to accept that they are going through it. Some people like to suggest that they do not experience stress, they never have before but that is simply not true, some people like to believe that they do not, they like to allow others to believe what they do not, but they most certainly do. Accept that you are going through it and you will be able to offer a better deal with it instead of keeping things inside and letting them grow.

If you feel that you are going through some stress or can feel in building, then it is important that you stop trading when going through these emotions can lead to some very rash decisions that could potentially put your account in danger. Stress can make you throw whatever risk management that you have out of the window and to put on larger, more risky trades, not something that anyone should be doing.

Take a step back, there is no harm in stepping away from the computer or your trading station when you are feeling these emotions. In fact, it would be recommended. Take a break, be it 5 minutes, 10 minutes, an hour, or until the next day. Go outside, go for a walk, all of these things will help you to clear your mind and to get a fresher look at the markets. Taking your mind away from the thing that is causing you the stress is the best way of reducing it, of course, then simply coming back can simply bring on the stress again, so there need to be ways for you to be able to control them and to know exactly what it is that is causing the stress.

The next and one of the most important things that you need to be able to do is to identify what it is that is causing you to stress, the sources of your stress. The sooner that you are able to work out what it is that is causing you the stress, the sooner that you will be able to avoid it or to eliminate it completely.

The problem is that it can be quite hard to actually work out what it is that is causing you the stress, due to this it is important that you take a journal. You were probably told to create a trading journal, what you need to do is add a little section to it where you can indicate your current feelings, every time that you are feeling a little stressed, write it down, you will then be able to use this to see any patterns. Maybe you are feeling it each time you have a loss, each time the markets go against you, or if a certain someone comes over to visit and distracts you from your trading.

If you are able to notice and pinpoint a trend or a reason as to why you are getting stressed, you can then look at ways to reduce or avoid it. Some things like losses cannot be avoided, but you are able to train yourself to have a better understanding of your overall strategy, losses should be a part of that and how to deal with them. If it’s a person interrupting your trading, then, ask them to not come during your trading times. There are little things that you will be able to do, and it is important that you understand what they are.

You won’t be able to remove every source of stress, that would be impossible, and some levels of stress can actually be good for you and can help you to concentrate more, but the most important thing is that you get an understanding of what the sources of your stress are, this way you can manage yourself to not allow those stresses to take over your trading. Try to avoid trading stress and you will be able to be a calmer and ultimately more successful trader.

Categories
Forex Psychology

Positive Thinking = Positive Trading: The Power of Positivity

Staying positive can be difficult, especially when things are no longer going your way, and when trading in the markets, there are countless things going on that can cause you to have a slightly more negative attitude. With currency trading, the markets like to go on trends and when these trends go against you it […]

Staying positive can be difficult, especially when things are no longer going your way, and when trading in the markets, there are countless things going on that can cause you to have a slightly more negative attitude. With currency trading, the markets like to go on trends and when these trends go against you it […]

Staying positive can be difficult, especially when things are no longer going your way, and when trading in the markets, there are countless things going on that can cause you to have a slightly more negative attitude. With currency trading, the markets like to go on trends and when these trends go against you it could lead to potentially weeks of things not going your way.

Positive thinking and personal development are incredibly important things, not just when trading but in anything in life, your job, your family life, it all requires personal development and certain levels of positive thinking in order to be successful, trading the markets is no different in this regard.

So we want to be in a positive mindset when we go into trading, but how do we get into this mindset? Well, there are a  few things that we can do, and they are important to get right. Going into trading with a positive mind will give us extra motivation and confidence within the markets and our own strategies and trading plans.

Start your day on a positive note:

This may seem obvious, but being able to start your day on a positive note will give you a good starting position, you will begin the day motivated, confident, and ready to trade and learn. Prompt yourself and remind yourself as soon as you get up that the day will be a good one. You may look strange talking to yourself, but this sort of self-motivation can work wonders on our daily outlook and productivity.

Use constant self-assurance:

Throughout the day, things will happen that will put a dent into our positivity, especially when trading and a trade does not go our way. You need to be able to keep self-motivating yourself by telling yourself that things will turn around and that your next trades are going to go well. It is good to remember that losses are a part of trading, your strategy and trading plan has taken them into account so they should give you any negative thoughts, instead, chalk them off as part of the ride and try to keep that positivity up.

Positive environments:

One thing you could change is the environment that you trade in, what brings you more happiness, a plane grey room with a desk and a window, or a colourful room with plants, colours, pictures, and other things? I am assuming the second, this is the sort of environment that you want to trade in, a room that makes you happy and makes you feel positive. Trading in a depressing room will not only prevent certain levels of inspiration, but it will potentially make you feel bored or other negative thoughts. Of course, don’t just stuff the room full of all your favourite things, this could cause unwanted distractions, just make sure it is a nice room to be in,

Spread positivity to others:

When you are feeling positive, it is important to pass those feelings onto others, not only to help them but to also help yourself. Talking to others can bring up their positivity levels, doing so will help to cement the positive vibes into your own mind. Once others are positive, there is a good chance that they will be able to lift you back up should your positivity begin to fall. It can become a positivity circle and can be beneficial for everyone involved.

The currency markets can be depressing and stressful places, but they can offer a lot of fantastic things too. In order to get the most out of them, you will need to go in with a positive mind and a positive attitude, doing so will make it far easier to both learn and develop our own trading techniques as well as motivating you to actually trade.

Categories
Forex Fundamental Analysis

Everything You Should Know About ‘Retail Sales YoY’ Macro Economic Indicator

Introduction

Introduction

Introduction

The computation of gross domestic product takes into account the consumption by households. In the households’ consumption, the retail sales data is considered to be the best leading indicator. Retail sales account for the majority of consumption by households. Retail sales are estimated to account for up to 70% of the US economy. It is, therefore, important for forex traders to understand how it affects the economy and the currency.

Understanding Retail Sales YoY

Retail Sales: the definition of retail sales is the purchase of finished goods and services by the end consumers. As an economic indicator, retail sales are used to measure the changes in the value of the goods and services bought at the retail level. This change can be monthly (retail sales MoM) or over the previous twelve months (retail sales YoY).

Retail Sales YoY: covers the retail sales made to consumers for the preceding 12 calendar months. It measures the rate of change in the value of purchases made by households.

How Retail Sales YoY is Measured

The data collected for the YoY retail sales cover all retail outlets from physical stores to e-commerce. It also includes data from the services sector, such as hotels and restaurants. According to the US Census Bureau, retail sales are divided into 13 categories, which include: e-commerce retailers, department stores, food and beverage stores, health and beauty stores; furniture stores; hospitality, apparel, building stores, auto dealers, and gas stations.

In the US, the measurement of the annual retail sales is done using the Annual Retail Trade Survey (ARTS). The ARTS is aimed at giving the estimates of the national total annual sales, sales taxes, e-commerce sales, end-of-year inventories, purchases, total operating expenses, gross margins, and end-of-year accounts receivable for retail businesses. This survey is conducted annually.

The retail sales YoY tends to be influenced by the seasonality of the economic activities since it covers more extended periods. These seasons including the holiday shopping seasons account for about 20% of the retail sales YoY. As a result, retail sales YoY cannot be expected to provide the most current and up-to-date retail data.

How Retail Sales YoY can be used in Analysis

As aforementioned, the retail sales account for about 70% of the GDP, making it a vital leading indicator.

Consumer spending drives the economy. An increase in retail sales implies that more money is circulating in the economy. This increase could be a result of increased wages, which increases the disposable income, increase in the rate of employment; and accessibility to loans and credit. All these factors increase the aggregate demand within an economy. The increase in demand leads to an increase in aggregate supply. This increase leads to the creation of more employment opportunities due to the expansion of businesses. Therefore, a steady increase in the retail sales YoY signifies that the economy has been steadily expanding over the long term.

Source: St. Louis FRED

Declining retail sales YoY is an indicator that the economy might be contracting. The decrease in retail sales implies that there is less disposable income within the economy, either as a result of low wages or job cuts. Subsequently, there will be reduced demand for the finished goods and services in the economy, which will, in turn, compel producers to cut the output to avoid price distortion. The reduction in the production will force them to scale down their operations, leading to more unemployment. Thus, a continually decreasing retail sales YoY could be an indicator of a looming economic recession.

Since the retail sales YoY are spread out over 12 calendar months, it provides a comprehensive outlook for the central banks to monitor the effectiveness of their monetary policies. In the US, the Federal Reserve Board uses the accounts receivable data in monitoring retail credit lending.

Monitoring the retail sale YoY enables the Federal Reserve to keep an eye on the rate of inflation. A continually increasing retail sales YoY, if left unchecked, could lead to an increased rate of inflation beyond the target rate. Thus, to ensure this does not happen, the central banks consider this data when making the interest rate decision.

Conversely, since a continually decreasing retail sales YoY forebode a possibility of a recession, this data encourages governments and central banks to implement expansionary fiscal and monetary policies. These policies, such as cutting the interest rates, are meant to reduce the cost of borrowing and increase access to credit hence spurring demand within the economy.

Impact on Currency

As established, an increase in the retail sales YoY is synonymous with an increase in economic activities and an expanding economy. A country’s economic growth leads to an increase in the value of its currency. Thus, increasing retail sales YoY results in currency appreciation.

Conversely, the declining retail sales YoY forebodes a looming recession and a possible interest rate cut in the future. More so, this decline signifies an increase in the unemployment levels and a contracting economy. All these factors contribute to the depreciating of a country’s currency.

In the forex market, the retail sales YoY is a low-level economic indicator. It is overshadowed by the MoM retail sales data, which represents the more recent changes observed within the economy.

Sources of Retail Sales YoY Data

In the US, the retail sales YoY data is released monthly by the United States Census Bureau, along with the monthly updates. A comprehensive breakdown of the US retail sales YoY can be accessed at St. Louis FRED website. Statistics on the global retail sales YoY can be accessed at Trading Economics.

How Retail Sales YoY Data Release Affects The Forex Price Charts

The most recent retail sales YoY data was released on August 14, 2020, at 8.30 AM ET. A more in-depth review of the data release can be accessed at the US Census Bureau website.

The screengrab below is of the retail sales YoY from Investing.com. On the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, the retail sales YoY data release is expected to cause low volatility on the USD.

In the 12 months to July 2020, the retail sales YoY in the US increased by 2.74%. This increase is higher compared to the previous increase of 2.12%. In theory, this increase should appreciate the USD relative to other currencies.

The screengrab above shows the simultaneous release of the monthly retail sales data and the retail sales YoY data. It is to be expected that the monthly retail sales data will dampen any impact that the retail sales YoY would have had on the price action.

EUR/USD: Before the Retail Sales, YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

As we can see from the above 15-minute EUR/USD chart, the pair was trading in a weak uptrend. This trend is proved by the 15-minute candles crossing above the slightly rising 20-period Moving Average.

EUR/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

After the news announcement, the pair formed a 15-minute bullish candle. This candle indicates that the USD weakened against the EUR. Subsequently, the pair continued trading in a renewed uptrend as the 20-period MA rose steeply.

GBP/USD: Before the Retail Sales YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

Before the data release, the GBP/USD pair was trading in a steady uptrend. This trend is evidenced by a steeply rising 20-period MA, with bullish candles forming further above it.

GBP/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

Similar to the EUR/USD, the GBP/USD pair formed a long 15-minute bullish candle after the news release. The pair continued to trade in the previously observed uptrend before peaking and slowly flattening.

NZD/USD: Before the Retail Sales, YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

NZD/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

Before the retail sales YoY data release, the NZD/USD pair was trading in a similar trend as the EUR/USD pair. The 15-minute candles were crossing above a flattening 20-period Moving Average. After the news announcement, the pair formed a  long 15-minute bullish candle as did the EUR/USD and GBP/USD pairs. Subsequently, the pair traded in a renewed uptrend as the 20-period MA rose steeply with candles forming further above it.

Bottom Line

The retail sales YoY provides vital long-term data about the economic outlook of the households and their consumption patterns. In the forex markets, however, the retail sales YoY data is overshadowed by the retail sales MoM data, which is release concurrently. From this analysis, the increase of the retail sales YoY data for July 2020 had no impact on the price action since the markets reacted to the negative monthly retail sales data.

Categories
Forex Psychology

Is It Important that You Actually Enjoy Forex Trading?

It’s a very simple question as to whether you enjoy trading or not, however even some of the simplest questions can be quite hard to answer if you look into things in a little more detail, with a little more depth, you can find out exactly how you feel about something, and for many, it […]

It’s a very simple question as to whether you enjoy trading or not, however even some of the simplest questions can be quite hard to answer if you look into things in a little more detail, with a little more depth, you can find out exactly how you feel about something, and for many, it […]

It’s a very simple question as to whether you enjoy trading or not, however even some of the simplest questions can be quite hard to answer if you look into things in a little more detail, with a little more depth, you can find out exactly how you feel about something, and for many, it may not actually be how it seems on the outside. There are a lot of aspects to Forex trading. Some people will enjoy some of them, like the wining, and others will find it absolutely tedious, such as all the numbers. It really comes down to your personality and your likes and dislikes as to whether you will enjoy your trading journey.

Trading is tough and trading takes a lot of deduction and discipline, if you believe that you are a free spirit, someone who cannot be held down, then trading can seem from the outside like it would be perfect for you, no boss, no set working time, however, in reality, the markets will ultimately control you and will be in charge of you. You will be forced to work certain hours, you will be punished when you do things wrong and you will unfortunately have all of that without the stability of a guaranteed monthly wage.

Trading can be incredibly exciting and incredibly rewarding, especially when you are on a roll of positive trades. Each and every win will give you a little bit of excitement and a little confirmation that you are doing something correctly. What about when things go wrong? When you make a loss, it is of course not an enjoyable situation to be in. What you need to think about is how you deal with that loss, how are you coping with losses? Do they stress you out, do they cause frustration? If they do, then you may not find trading to be very enjoyable in the long run.

There will be a lot of losses along your trading journey, if you are not able to deal with them without stress or to be able to move those loose out of your mind in order to move on then there is a good chance that you may begin to find trading stressful and not all that enjoyable once the losses begin to build up, and they most certainly will begin to build up. Being able to deal with those losses and being able to clear your mind will really help you remain positive. Just remember that those losses are coming, there will always be losses, so dealing with them is paramount. Just remember to consider your overall enjoyment when deciding to trade, if you get caught up on losses, then this may not be the hobby or career for you.

Numbers, lots of numbers, do you like numbers? If not then trading won’t be an enjoyable thing for you. The Majority of trading, the analysing, the planing, and the actual trading is all based around numbers, be it the value of a currency or the current Fibonacci levels. Numbers will be involved in everything that you do. For those that like maths and statistics, trading will be an amazing experience, it allows you to analyse all sorts of things and will keep you busy pretty much every day. However, if you are not a fan of numbers and performing mathematical sums, then trading could be a little boring and a little tedious as you begin to realise that it is pretty much all based around those pesky numbers.

How are you when being by yourself for an extended period of time? If you struggle to keep yourself company, then it can be a difficult journey. The majority of trading is not a highly social event, in fact, the majority of the time you will be sat by yourself in front of the computer, reading, trading, and keeping yourself entertained. Of course, there are times where you will take to others there are forums and other message boards available to talk to other like-minded people, but this is still all digital and many other traders do not actually come into physical contact with any other active traders.

Are you able to keep yourself occupied, do you feel lonely when alone, and do you cope well with isolation? These are pretty big questions that you need to ask yourself, there are those that are able to entertain themselves or in fact enjoy the aspect of isolation. If that is you then you could really start to enjoy trading, you are in total control, but that also means control of your moods and your interactions with others. If it starts to get too much, then you may need to look at trading in smaller chunks and using the time between to get outside and interact with others. However, if you like the isolation, like a lot of people do, then not needing to deal with other people and the issues that come with people management, then this could certainly be the career for you, it will be just you, your computer, and the markets.

Do you need direction? One thing that a lot of people hate about their job is receiving instructions on what they need to do, but it isn’t until you have left that job that you come to realise that you actually needed that direction and those instructions. Many people find it hard to prioritise and to plan their days, and without some there to help you through it can often feel a little lost. Being a trader, full time or part-time, requires a certain amount of self-direction and planning. You need to plan your day, you need to ensure that you are motivated to do it and you need to be able to evaluate your own performance on it. If you are not able to plan your days properly then you may find trading an extremely stressful experience. Those able to work well by themselves will find relief in the fact that they do not have someone above them managing them, of course, the markets will still be in charge.

How are you with self-motivation and self-discipline? If you notice that you are doing something wrong are you able to correct yourself? Being a trader means being able to motivate yourself to do the work and being able to tell yourself when you are doing something badly. In terms of your enjoyment of trading, motivation will go a lot way, if you are not motivated and not able to self motivate yourself then you will struggle to enjoy it. The most common reason for losing motivation is boredom, and that is something that you will potentially experience a lot during a solo trading career, so being able to give yourself that boost is paramount to any form of success.

The same can be said for discipline, if you are not able to discipline yourself to give yourself some honest feedback on your trading abilities and performance, then you will only continue to make mistakes These mistakes will lead to a loss in motivation and will diminish your overall enjoyment of trading. So if you are able to self reflect on your performance, you may well enjoy it, but if you are not, then it could be a difficult and demoralising journey for you.

So those are some of the things that you need to be able to think about. Trading can be very enjoyable for some, but others it can be a real mood and motivation killer. It will ultimately come down to your personality and the way that you are able to deal with boredom, stress, and all the other emotions that come along with trading.

Categories
Forex Psychology

Should You Trust Your Instincts While Trading?

Your instincts are powerful things, they can take hold of us when we are doing pretty much anything in life, out in the wild, our fight or flight reactions, playing sports and it most certainly rears its head when we are trading, in fact, everything that we do when trading has an aspect of our […]

Your instincts are powerful things, they can take hold of us when we are doing pretty much anything in life, out in the wild, our fight or flight reactions, playing sports and it most certainly rears its head when we are trading, in fact, everything that we do when trading has an aspect of our […]

Your instincts are powerful things, they can take hold of us when we are doing pretty much anything in life, out in the wild, our fight or flight reactions, playing sports and it most certainly rears its head when we are trading, in fact, everything that we do when trading has an aspect of our instincts in them, or at least in the back of our minds. We have often been taught when trading that we need to go with facts and not our instincts, but is this really the case? We are going to look into your instincts and how they can actually help with your trading.

We are going to go against that trend and state that you should indeed listen to your trading instincts, there are a few catches, we, of course, are not referring to simply ignoring all the research and then just trade whatever it is that you think is right.

We are sure that there have been times when you are trading where you have done all the analysis, it all looks right and good for a trade, but there is something at the bottom of your stomach or the back of your head that is telling you not to take that trade, but why? Everything seems to be pointing to it being a good trade, so why shouldn’t we take that trade?

More often than not, you would have read something or heard something somewhere which you did not register at the time, so are not entirely sure what it was, but you did, and now your mind and body are telling you not to take this trade due to that. Seems silly not to take the trade still, but how many times in life have you just had a bad feeling about something and so did not do something, only to then later find out that it went wrong and should you have done it, you would have been in trouble.

So in this regard, it is good to listen to your instincts when you feel that you should not enter a trade, after all, there is no harm in not taking a trade based on it, the worst that can happen is that you miss out on a profitable trade, but you can always get the next one that comes along, so in reality there is very little harm in it.

There are also times when we can look to our instinct when putting on trades too, sometimes you simply feel that something will go up and down, but this does not mean that you should then put on the trade. Instead, it should be an indication that you should then do the analysis and check on that trade, if everything you analyse and look at confirms your feelings then you should by all means put on the trade after all the analysis confirms it.

What you should not do is put on a trade simply because you think it will work without doing the subsequent work to confirm it. This is basically gambling, the same as betting on a sports team because you think they will win. Listen to your instinct but do not act on it solely by itself.

People will always tell you that your instinct has no place in trading, this is simply not true, listen to it, use it as a tool, just make sure that you are not using it to choose your trades without doing the rest of the work that is required.

Categories
Forex Daily Topic Forex Price Action

Intraday Trading: Watch Out for Highest High/Lowest Low

In today’s lesson, we are going to demonstrate an intraday chart that ends up offering an entry. Intraday trading can be prolific if it is done in the right way. In today’s example, the price heads towards the North by making a good bullish move. It seems that the bull is in control. However, the price gets bearish later and ends up offering entry to the sellers. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an intraday chart that ends up offering an entry. Intraday trading can be prolific if it is done in the right way. In today’s example, the price heads towards the North by making a good bullish move. It seems that the bull is in control. However, the price gets bearish later and ends up offering entry to the sellers. Let us find out how that happens.

In today’s lesson, we are going to demonstrate an intraday chart that ends up offering an entry. Intraday trading can be prolific if it is done in the right way. In today’s example, the price heads towards the North by making a good bullish move. It seems that the bull is in control. However, the price gets bearish later and ends up offering entry to the sellers. Let us find out how that happens.

It is an H1 chart. The chart shows that the price makes a good bullish move. The last candle comes out as a hanging man. The price does not make any bearish correction, so the daily candle closes without having an upper shadow. It suggests that the bull may dominate in the pair the next day.

The next day, the price makes a bullish breakout at the last day’s highest high. The pair is trading above the level. Ideally, the price above the last day’s highest high means the bull is in control. However, in this chart, the price does not make any bearish correction before making the breakout. Thus, the buyers are to wait for the price to consolidate and produce a bullish reversal candle to go long in the pair.

The next candle comes out as a bearish engulfing candle. The candle closes below the breakout level. If the level works as a level of resistance, the sellers may come into play and go short in the pair. Let us find out what happens next.

The next candle comes out as a hammer closing within the breakout level. It looks good for the sellers. The sellers may wait for the price to produce a bearish reversal candle and go short below the hammer’s lowest low.

The chart produces a bearish engulfing candle closing below the hammer’s body. The sellers may trigger a short entry below the hammer’s lower shadow. The last day’s lowest low offers the price to travel towards the North with a good reward.

One of the candles comes out as a bearish Marubozu candle closing well below the hammer’s lowest low. The entry may be triggered earlier just by using price breakout. Some traders may wait for a 15M breakout to trigger the entry, and some even wait for an H1 breakout. Ideally, a 15M breakout is good enough to trigger such entry. Traders may set their stop loss above the breakout level since it is the new resistance and Take profit with 2R. If they set the stop loss above the trend’s highest high, they may set take profit at the previous day’s lowest low. Let us find out how the entry goes.

The price heads towards the South with good bearish momentum. It hits 2R in a hurry. The way it has been going, it may hit the previous day’s lowest low soon as well.

To do intraday trading, pay attention to the last day’s highest high and lowest low, breakout, breakout confirmation, and reversal candle. Do some backtesting and then try live trading with a tiny lot at the beginning. Once you have mastered this, it can make your hand full.