Category: Beginners Forex Education

Educational Articles for Newcomers to the Forex and Crypto World: Forex basics, including structure, assets, a basic definition of the common terms such as lot, bid, ask, price, how prices move, leverage, spread, slippage, basic chart concepts, chart types, timeframes, ranges. Basic money management and position size techniques.

Categories
Forex Assets

Knowing The Fundamentals Of NZD/USD Currency Pair

Introduction

Introduction

Introduction

New Zealand dollar versus the US dollar, in short, is referred to as NZD/USD or NZDUSD. This currency pair is classified as a major currency pair. In NZDUSD, NZD is the base currency, and USD is the quote currency. Trading the NZDUSD is as good as saying, trading the New Zealand dollar, as NZD is the base currency.

Understanding NZD/USD

The value (currency market price) of NZDUSD represents units of USD equivalent to 1 NZD. In layman terms, it is the number of US dollars required to purchase one New Zealand dollar. For example, if the value of NZDUSD is 0.6867, then 0.6867 USD is required to buy one NZD.

NZD/USD Specification

Spread 

The algebraic difference between the bid price and the ask price is called the spread. It depends on the type of execution model provided by the broker.

Spread on ECN: 1

Spread on STP: 1.9

Fees

Similar to spreads, fees also depend on the type of execution model. Usually, there is no fee on the STP model, but there is a small fee on the ECN model. In our analysis, we shall fix the fee to 1 pip.

Slippage

Slippage is the difference between the price asked by the trader for execution and the actual price the trader was executed. Slippage occurs on market orders. It is dependent on the volatility of the market as well as the broker’s execution speed. Slippage has a decent weight on the cost of each trade. More about it shall be discussed in the coming sections.

Trading Range in NZD/USD

The volatility of a currency pair plays a vital role in trading. It is a variable that differs from timeframe to timeframe. Understanding the range (min, avg, max) is essential for a trader, as it is helpful for reducing the cost of each trade.

The volatility gives the measure of how many pips the pair has moved on a particular timeframe. This, in turn, gives the approximate profit or loss on each timeframe. For example, if the volatility of NZDUSD on the 1H timeframe is 10 pips, then one can expect to gain or lose $100 (10 pips x $10 [pip value]) within an hour or two.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

AUD/USD PIP RANGES 

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

NZD/USD Cost as a Percent of the Trading Range

With the volatility values obtained in the above table, the total cost of each trade is calculated on each timeframe. These values are represented in terms of a percentage. And these percentages will determine during what values of volatility it is ideal to trade with low costs.

The total cost is calculated by adding up the spread, slippage, and trading fee. As a default, we shall keep the slippage at 2 and the trading fee for the ECN model at 1.

ECN Model Account

Spread = 1 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 1 + 1 = 4

STP Model Account

Spread = 1.9 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.9 + 0 = 3.9

The Ideal Timeframe to Trade NZD/USD

The very first observation that can be made from the above two tables is that the total costs in both the model types are more or less the same. So trading on any one of the two accounts is a fine choice.

From the minimum, average, and maximum column, it can be ascertained that percentages (costs) are the highest on the minimum column of all the timeframes. In simpler terms, when the volatility of the currency pair is very low, the costs are usually on the higher side. Conversely, when the volatility is high, the costs are pretty low. Hence, it is ideal to trade during those times of the day when the volatility of the pair is at or above average. For example, a day trader can trade the 1H timeframe when the volatility of the currency pair is above 8.8 pips. This will hence assure that the costs are pretty low.

Another way to reduce the costs is by nullifying the slippage. This can be done by placing a limit order instead of executing them by a market order. This shall reduce the total costs by a significant percentage. An example of the same is given below.

Total cost = Slippage + Spread + Trading fee = 0 + 1 + 1 = 2

From the above table with nil slippage, it is evident that the costs have reduced by about 50%. Hence, to sum it up, to optimize the cost, it is ideal to trade when the volatility is above average and also enter & exit trades using limit orders rather than market orders.

Categories
Forex Economic Indicators Forex Fundamental Analysis

What you should know about Government Debt to GDP

What is the Government Debt to GDP?

What is the Government Debt to GDP?

What is the Government Debt to GDP?

The government Debt-to-GDP ratio is simply the ratio between the country’s total GDP (Gross Domestic Product) to its total debt. It is computed by dividing the total debt the nation has in a particular year to that of the GDP figure for that year.

As it is a ratio, this indicator is represented in percentage. The debt-to-GDP ratio indicates the country’s capability to repay its debts. If the debt-to-GDP ratio of a country is high, it means that the country might struggle to pay back the debt it has incurred. If this ratio is nominally high, then there is a high likelihood that the country is more likely to default on payments and fail to repay the debt. If the debt-to-GDP ratio is low, then the country is in a stable financial position to repay the debt.

This ratio is also useful to help determine the number of years that a country would need in order to pay back the debt if the total GDP is solely dedicated to the repayment. The debt-to-GDP ratio also measures the financial leverage of an economy.

 

What Does the Debt-to-GDP Ratio Tell You?

A financial panic in domestic and international markets is triggered when a country is unable to repay its debt. Governments will strive to lower their debt-to-GDP ratios. However, this can be difficult during periods of unrest or when the country is in an economic recession. When this occurs, governments like to increase borrowing in an attempt to stimulate economic growth.

Some economists adhere to the modern monetary theory (MMT), which argues that sovereign nations that are capable of printing their own money can’t go bankrupt as they can simply print more fiat currency to cover their debts. However, the nations of European Union (EU), who have to rely on the European Central Bank (ECB) to issue euros, do not apply to this rule because they do not control their own monetary policies.

A  recent study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for extended periods will experience a slowdown in economic growth. It is important to note that every percentage point of debt above this level costs countries 1.7% in economic growth and is even more pronounced in the emerging markets, where each additional percentage point of debt over 64%, annually slows growth by 2%.

Sources of information on ‘Debt to GDP Ratio’ for Major currencies:

In the sources below, there is a lot of information with respect to the Debt to GDP ratio. You can acquaint yourself with the Debt to GDP ratio for the respective country in addition to the historical data related to that country’s Debt to GDP ratio. This graphical representation of the historical Debt to GDP ratio data will leave you with a clearer understanding of how these ratios can change over time.

World Bank – https://datacatalog.worldbank.org/dataset/quarterly-public-sector-debt

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/government-debt-to-gdp

AUD – https://tradingeconomics.com/australia/government-debt-to-gdp

USD – https://tradingeconomics.com/united-states/government-debt-to-gdp

CHF – https://tradingeconomics.com/switzerland/government-debt-to-gdp

EUR – https://tradingeconomics.com/euro-area/government-debt-to-gdp

CAD – https://tradingeconomics.com/canada/government-debt-to-gdp

NZD – https://tradingeconomics.com/new-zealand/government-debt-to-gdp

JPY – https://tradingeconomics.com/japan/government-debt-to-gdp

 

Frequency of release

Public Debt figures are released quarterly by the World Bank and the International Monetary Fund (IMF), therefore, investors and agency ratings are able to compute this ratio on a quarterly basis.

What do traders care about the Debt to GDP ratio and its impact on the currency?

As we already know, the government debt to GDP ratio indicates the ability of a country to repay its debt, and a higher Debt to GDP ratio for an extended period of time means that the country is more likely to get default on its debt. This leads the foreign banks and governments to lend more money to these countries, and they increase their interest rates to mitigate the high risk involved. Aa a result, the economy of the country will slow down when there is a high debt to GDP ratio. A weak economy can indicate that there may be depreciation of that currency. This is why this ratio will be an essential factor for forex traders to consider when they trade on the Forex market.

The bottom line

If a country has a high debt-to-GDP ratio for an extended amount of time, it can indicate a recession as a country’s GDP will go down in a recession. This will also affect the people living in that country as governments tend to increase taxes to keep up the revenue. The lending governments will have more faith in the county to repay their debts if there is a high return on the debt that is borrowed. If there is a high risk involved due to less return on the debt that is acquired, this will question the lenders. Another important factor to consider is that the lending institutions earn a high rate of interest on the debt that is provided, So they won’t mind the country in question not paying back their debt, as the lending country can earn high interest from the debts they have provided.

From a traders’ point of view, it is better to have an overall view on what the country’s debt to GDP ratio is and to forecast if the specific country is likely to repay their debts or default on payments. If this fundamental analysis indicator factor is ignored when doing your due diligence for long term trades, then there is a high probability of the specific currency to depreciate in the long run, if that country defaults on its debt.

 

 

Categories
Forex Assets

What Should You Know About AUD/USD Forex Pair

Firstly, the abbreviation of the AUDUSD currency pair is the Australian dollar and the US dollar. AUDUSD is a major currency pair. It is considered a major pair because it is AUD is paired with the US dollar, and also, this is one of the pairs where a huge volume of trading takes place. In AUDUSD, AUD is the base currency, and USD is the quote currency.

Firstly, the abbreviation of the AUDUSD currency pair is the Australian dollar and the US dollar. AUDUSD is a major currency pair. It is considered a major pair because it is AUD is paired with the US dollar, and also, this is one of the pairs where a huge volume of trading takes place. In AUDUSD, AUD is the base currency, and USD is the quote currency.

Firstly, the abbreviation of the AUDUSD currency pair is the Australian dollar and the US dollar. AUDUSD is a major currency pair. It is considered a major pair because it is AUD is paired with the US dollar, and also, this is one of the pairs where a huge volume of trading takes place. In AUDUSD, AUD is the base currency, and USD is the quote currency.

Understanding AUD/USD

The exchange value of AUDUSD represents the units of USD equivalent to one unit of AUD. In technical terms, it is the value of AUD against USD. For example, if the current market price of AUDUSD is 0.6960, then it means that it takes 0.6960 US dollars to buy 1 Australian dollar. Trading the AUDUSD currency pair is basically trading the Aussie (Australian dollar).

AUD/USD Specification

Spread

Spread is the difference between the bid price and the ask price. The spread usually varies based on account type. The spread on an ECN account and an STP account is as follows:

ECN: 0.7 | STP: 1.4

Fee

There is charged by brokers for every trade a trader takes. However, this depends on the type of forex account. Typically there is a fee in ECN accounts and zero-fee in STP accounts. Also, there is no exact value of fee on a single trade, as it differs from broker to broker.

Slippage

Slippage is the difference between the trader’s requested price and the real executed price. Slippage happens when the volatility of the market is quite high. It happens for market orders. Slippage can be in favor of the trader or against him. If entering and closing of the trade is done by market execution, then slippage happens twice. The slippage is usually between 0.5 and 3 pips. However, it depends on the broker’s execution speed as well.

Trading Range in AUD/USD

There are several timeframes to trade this currency pair. A day trader may pick the 1H, 4H, or the 1D timeframe, while a positional trader may opt for the weekly or the monthly. Apart from analyzing these timeframes, it is also necessary to know the volatility range in each of the timeframes. Knowing the pip movement range in each timeframe, one can assess their risk involved in each trade.

Below is the table, which represents the minimum, average, and maximum pip movement in each timeframe.

Note: The below values are an approximation from the Average True Range (ATR) indicator.

AUD/USD PIP RANGES 

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.
GBP/USD Cost as a Percent of the Trading Range

This is where the above values are put into play. By considering the volatility range in each timeframe, the cost (fee) for a single trade is measured in terms of a percentage for every mentioned timeframe. The basic idea to this is that the higher the percentage value, the higher is the cost of the trade.

The cost is calculated by considering three variables, namely, slippage, spread, and trading fee. And the sum of these values gives the total cost of each trade.

As mentioned earlier, the cost varies from the type of trading account. So, there will be variation in cost percentages as well.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total fee = Spread + Slippage + Trading fee = 0.7 + 2 + 1

Total cost = 3.7 (pips)

STP Model Account

Spread = 1.4 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.4 + 0

Total cost = 3.4

The Ideal Timeframe to Trade GBP/USD

The first observation that can be made from the above percentage values is that the minimum column has the highest percentages compared to other columns. This means that the cost is pretty high when the volatility of the market is too low irrespective of the timeframe. Contrarily, the costs are significantly less when the volatility of the market is high (max column). However, it is quite risky to trade when the market volatility is high though the fee is less. So, it is ideal during those times of the day when the market volatility is above average.

Note that volatility is not only one which decides on which is the best timeframe and time of the day to trade. The slippage value equally plays an important role, as well. For instance, if the slippage is made nil and the percentages are calculated, it is seen that the ranges drop down considerably. Hence, it is recommended to enter and exit trades using limit orders and not market orders.

Categories
Forex Assets

Everything You Should Know To Trade The GBP/USD Forex Pair

Introduction

Introduction

Introduction

Currency pairs are classified as major, minor, exotic, etc. Major currencies pairs are those pairs that involve the US dollar as one of the currencies. These currencies typically have high liquidity and volatility. GBPUSD is one such example. It is the currency pair where Great Britain Pound is traded against the US dollar.

In this article, we shall be covering all the basic fundamentals which are essential to know before trading this pair. And before getting into the specifications of this pair, let us first understand what actually the price of GBPUSD signifies.

In GBPUSD, GBP is the base currency, and USD is the quote currency. The value (price) of the pair determines the units of USD required to purchase one unit of GBP. For example, if the current value of GBPUSD is 1.3100, then the trader must possess the US $1.3100 to buy 1 Pound.

GBP/USD Specification

Spread

Spread is simply the difference between the bid price and the ask price. The spread depends on the type of account.

Spread on ECN: 0.7

Spread on STP: 1.3

Fees

Again, the fee depends on the type of account. Typically, there is no fee charged by STP accounts. There is a trading fee on ECN account, which depends from broker to broker.

Slippage

Forex is very liquid and volatile. Hence, this causes slippage. Slippage is the difference between the price requested by the trader and the actual price the trader received. And this depends on the broker’s execution speed and volatility of the market. The slippage in major currency pairs is usually within 0.5 and 5 pips.

Trading Range in GBPUSD

As a trader, it is vital to know the number of pips a currency pair moves in a period of time. This is basically the volatility in the currency pair. And volatility is one of the factors which are helpful in risk management.

The volatility is measured in terms of percentage or pips. For example, if the volatility on the 1H timeframe of GBPUSD is 15 pips, then one can expect to gain or lose $150 (15 pip x $10 per pip) within a time period of few fours.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

EUR/USD PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

(originally posted in our article here)

GBPUSD Cost as a Percent of the Trading Range

A Forex broker usually levies three type of charges for each trade. They are:

  • Slippage
  • Spread
  • Trading Fee

The sum of all the three costs will generate the total trading cost for one trade.

Total cost = Slippage + Spread + Trading Fee

Note: All costs are in terms of pips.

To bring up an application to the above volatility table, we bind these values with the total cost and find the cost variations (in terms of percentages) on different timeframes. And these percentages prove to be helpful in choosing the right timeframe with minimal costs.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1

Total cost = 3.7

STP Model Account

Spread = 1.3 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.3 + 0

Total cost = 3.3

The Ideal Timeframe to Trade GBPUSD

Above are tables that illustrate the cost ranges in terms of percentage. Let us now comprehend the tables and figure out the ideal timeframe to trade this currency pair. From the above table, it is evident that the cost is highest (74% and 66%) in the 1H timeframe when the volatility is low. Hence, it is not ideal to pick the 1H timeframe when the volatility is around 5 pips (minimum).

On the flip side of things, the cost percentages are minimal on the 1M timeframe. Traders with a long term perspective on the market can invest with minimum costs.

Intraday traders, on the other hand, can pick the 1H, 2H, 4H, or the 1D timeframe when the volatility of the market is above average.

Another point to consider is that slippage eats up the costs significantly. So, it is recommended to plan strategies that involve placing of limit orders and not market orders.

As proof, below is a table that clearly shows the reduction in the cost percentages when the slippage is made NIL.

Total cost = Slippage + Spread + Trading fee = 0 + 0.7 + 1

Total cost = 1.7

Comparing these values to the table with slippage=2, it can be ascertained that the cost percentage has reduced by a considerable amount. Hence, all in all, it is ideal to trade by placing limit orders rather than executing at the market price.

Categories
Forex Economic Indicators Forex Fundamental Analysis

Forex Fundamental Indicator – What you need to know about the GDP & GDP Growth

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

What is GDP

The Gross Domestic Product is defined as a “monetary measure of the market value of all the final goods and services produced in a specific time period, often annually”- Wikipedia

This is the total economic activity generated by both private and public companies within a country in a specific time period.

Nominal GDP vs. Real GDP

Nominal GDP is the market value of all goods and services produced in an economy with inflation adjustments. Real GDP is the Nominal GDP, which has been adjusted for inflation.

Components of the GDP

The GDP is broken down into four components and is an indication of what a country is good at producing: Personal consumption expenditures of goods and services, business investments, government expending, and net exports of goods and services.

Personal Consumption expenditures

Consumer spending is one of the main contributors to production and is the best way to compare using data from different years. This is subdivided by the BEA into goods and services.

Goods are further subdivided into durable and non-durable goods. Durable goods are cars and furniture, for example, and have a lifespan of three or more years. Non-durable goods are fuel, clothing, food, etc.

Services include commodities that cannot be stored are consumed when purchased.

Business investments

This includes purchases that companies make to produce consumer goods, and not every purchase is counted as purchases must go to creating new consumer products. Again the BEA divides this component into two subcomponents;

Fixed Investment – It is a non-residential investment that consists of business equipment like software, capital goods, and manufacturing equipment, and this also includes commercial real estate construction and residential construction. This component is based on monthly shipment data from the BEA durable goods order report.

Change in private inventory – this is how many companies will add to their inventories of goods they plan to sell. As orders increase, companies may not have enough goods in stock and therefore order more to ensure supply and the increase in private inventories contributes to GDP. If there is a decrease in inventory orders, then companies will halt manufacturing, and if it persists, then staff reductions are next.

Government spending

This is an indication of the size of government across countries. There is a large variation in this indicator and highlights the countries’ approach to delivering public goods and services.

Net exports of goods and services

Imports and exports have an opposite effect on GDP as exports add to the GDP and imports subtract from the GDP data.

 

The economic reports

The economic reports of the GDP cover quarter or annual data periods, and this data is reviewed periodically until the final GDP data is released. There are some countries that release this data on a monthly basis, like the USA. However, the majority opt to release this data quarterly and annually.

Analyzing the DATA

The economic reports of the Gross Domestic Product are such an integral measure of economic activity that it is a vital component of fundamental analysis in a currency pair. The GDP data is a key measure in determining the strength of a country’s economy and hence the strength of its currency. By comparing the two sets of data on both currencies and comparing each set of GDP data to that of previous releases. This comparison helps to determine which of the two currencies is stronger, and enjoying a strong economy.

When analyzing this data, it is necessary to compare like for like economies as each country is at a different level of development. When we look at developing economies, we can anticipate seeing annual growth rates that exceed the norm, and for the emerging economies, annual growth rates can climb to double digits.

What is the GDP Growth Rate

The GDP growth rate measures how fast an economy is growing and is the next comparison, which is necessary in order to evaluate the previous years’ data is in line with the previous years for the same period. This collection of data shows the expansion or contraction of economic activity within a country.

What determines growth

A nation’s GDP growth rate determines its economic health. If the growth rate is positive, it indicates that the wealth of the nation is improving, and the economy is doing well. If the GDP growth rate is negative, meaning it has fallen below the previous period, it is a clear indication that the economy is declining. This decline in the GDP growth rate has serious ramifications as unemployment rises with the downturn of production.

Economic reports

The GDP economic reports are a vital measure of economic activity and integral to the fundamental analysis for any currency pair you wish to trade. This data is vital in determining the benefits of a particular economy and the strength of its currency. By comparing this data to previous years or periods, one is able to ascertain the progression of the expansion or contraction of the economic activity and thus evaluate if it is equivalent to the same period of previous years.

Impact on currency

The GDP growth rates are a massive driving factor in a currency’s performance because of the results that economic activity has on a currency. This means that higher levels of economic activity will generate a higher demand for a specific currency, and an increase in economic activity will also generate an increase in the total value of that economy.  The more value that a specific country’s economy has, the higher the value of its currency. What traders are looking at when analyzing this data is the difference found between the two currencies’ growth rates. As a rule of thumb, the currency which has a higher growth rate will generally experience an appreciation of its currency.

 

Sources of information on GDP

Most nations release their GDP data on a monthly, quarterly, and annual basis, and in the U.S., it is the Bureau of Economic Analysis (BEA) that publishes an advanced release of this data.

When one is contemplating doing their own fundamental analysis, it is imperative to take into account the effect that a country’s GDP will have on its currency strength and the importance of measuring the data rate from previous periods. The GDP data is closely monitored as it defines the movements of an economy is a straightforward way.

Links to GDP information resources:

IMF

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

OECD

https://data.oecd.org/gdp/gross-domestic-product-gdp.htm

USA

https://www.bea.gov/data/gdp/gross-domestic-product

Europe

https://ec.europa.eu/eurostat/statistics-explained/index.php/Main_Page

UK

https://www.ons.gov.uk/economy/grossdomesticproductgdp

Canada

https://www150.statcan.gc.ca/n1/daily-quotidien/190531/dq190531a-eng.htm

Japan

https://fred.stlouisfed.org/release/tables?rid=269&eid=155790#snid=155791

China

http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/

Australia

https://www.abs.gov.au/ausstats/[email protected]/mf/5206.0

New Zealan­­­­d

https://www.stats.govt.nz/indicators/gross-domestic-product-gdp

 

Categories
Forex Economic Indicators Forex Fundamental Analysis

Fundamental Analysis – A Brief Introduction

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Fundamental Analysis is simply a type of market analysis which involves studying the economic or political position of a country in order to be able to assess the relative value of currencies more effectively. In a nutshell, Fundamental analysis is the study of economic factors that influence foreign exchange rates to predict future prices.

Traders studying macroeconomic data of the major economies and try to interpret the economic events, news, and press releases with the aim of predicting future moves a currency can make. Traders must also take into account the microeconomics of a country, such as supply and demand, consumer expending, and unemployment to assess the macro trends in the currency markets and always be on the right side when trading.

Also, the different scheduled news releases that are the benchmark for fundamental analysis can create price shocks in the market when the figures do not match the analysts’ consensus. Therefore, it is critical, also, to keep track of the Economic Calendar to avoid the potential volatility the news event can produce.

So when embarking on doing your own fundamental analysis, there are a few economic indicators considered key underlying drivers. Let’s have a short glance at these basic economic indicators.

The Gross Domestic Product (GDP)

The GDP data is used primarily to gain insight into a country’s economic strength, is calculated annually, and the broadest measure of a country’s economy. It is a representation of the value of all goods and services produced within that country over a defined period of time. The GDP data is one of the Economic Indicators which is closely monitored as it represents a countries contraction or expansion in a straightforward way, allowing the Trader to see whether a country is experiencing rapid growth or going into recession. The GDP growth rates from quarter to quarter can be the driving factors in the performance of a given currency.

Interest rates

The interest rate is one of the most critical factors that drive the Forex market. The interest rate of a country helps us to determine how the central bank is responding to the economic factors present in that country at the time. When a country is experiencing consumer inflation, the central bank will increase interest rates to curb inflation. When a country’s growth weakens, it will reduce the interest rates to spur economic growth. When a central bank changes interest rates, it creates movement in the market. It causes volatility, and if you are armed with an accurate prediction can lead to a beneficial outcome on a specific trade.

Inflation rate

Another piece of fundamental analysis data that one needs to look at is the inflation rate. This is the rate at which goods and services are valued, which changes over time. We measure inflation at both the consumer level and producer level. The producer level is defined as wholesale companies, and the consumer level is defined as households and consumers. A high rate of inflation can cause a currency value to rise as traders anticipate a rise in interest rates. The central bank, to protect consumers from excessive inflation, tends to increase the interest rates. This reduces the spending power that consumers have and thus reducing the price of goods and services.

Unemployment Rate

The unemployment rate is an indication of that country’s workforce that is actively seeking employment or are currently unemployed. If a country has a high unemployment rate, then it would be considered a weakening economy and lead to the currency deprecating. Low unemployment rates indicate a strong economy and increase the demand for the currency.

The Debt-to-GDP Ratio

The debt to GDP ratio is the ratio of the public debt that a country has compared to its Gross domestic product. If a country is unable to pay back its debt, it will default, and a financial panic may erupt. The usual bar set for GDP growth is 77% if it exceeds this amount over an

Balance of trade (BOT).

The balance of trade is defined as the difference between the value of a country’s imports and exports over a set period of time. The BOT is used by economists to measure the strength of a country’s economy. A Sustained trade deficit is considered bad for the economy. Therefore, it will also hurt the valuation of its currency, whereas a strong surplus on the BOT will drive the price of the country’s currency higher.

Current account to GDP

Two components make up a country’s Balance of Payments, the current account, and capital account. The current account consists of the trade balance, the net factor income, and net cash transfers, which are all measured in the domestic currency.
When the account balance of a country is positive, that country is referred to as a net lender to the rest of the world. When the account balance is in the negative, then the country becomes a net borrower to the rest of the world. This ratio of the current account balance to the Gross Domestic Product (or % of GDP) provides the country’s ability to pay back its debt and is an indication of the country’s competitiveness in world markets.

In conclusion, when fundamental analysis data is used correctly, it is an invaluable resource for any forex trader. By looking at the bigger picture of how a country is performing, it gives an insight into how the market will move, allowing you to profit from your trades.

Categories
Forex Basics Forex Price-Action Strategies

A Story of a False Bullish Breakout

In today’s lesson, we are going to demonstrate an example of a short entry that is derived from a false breakout. It contains two lessons. Let us get started.

In today’s lesson, we are going to demonstrate an example of a short entry that is derived from a false breakout. It contains two lessons. Let us get started.

In today’s lesson, we are going to demonstrate an example of a short entry that is derived from a false breakout. It contains two lessons. Let us get started.

The price heads towards the North and makes an upside breakout. The buyers are to keep their eyes on the pair to go long upon consolidation and bullish reversal candle at the breakout level. Let us find out what happens next.

Wow! This is a copybook corrective candle, which closes right at the breakout level. A bullish reversal candle followed by a breakout at the highest high would get the buyers engaged in buying the pair.

The buyers might not have even thought about it. They are to let the sellers dominate in the pair, while sellers should wait for the breakout confirmation and a bearish reversal candle to go short on the pair. However, they have to calculate that the last swing low is not too far.

The price keeps going towards the South without having apposite consolidation. It consolidates just before the support. The price has been bearish but has not offered any short entry on this chart. Meanwhile, it has made another bearish breakout. The sellers shall be hopeful again. Look at the chart below.

This is an explicit breakout, and the next candle confirms it. The consolidation and the price breakout at the lowest low would be a signal to go short. Let see what the price does this time.

Price action traders have been waiting for this. The price consolidates and makes another breakout. By setting Stop Loss above the resistance, an entry may be triggered right after the last candle closes.

This is how it goes. The price produces consecutive four bearish candles. The very last candle comes out as an Inside Bar. Most traders may come out with their profit; some may still hold their trade by locking some profit.

 Lessons

We learned two lessons from here

  1. False breakout usually drives the price towards the opposite direction.
  2. Risk-reward is always a factor. It does not offer an entry within the first support since risk-reward is not lucrative. It offers an entry on the second breakout, where there is not support nearby.

The Bottom Line

In the beginning, it may sound too many things to remember in price action trading. It is right to some extent. However, if we practice hard, study with the recent price behavior on the chart with as many pairs as we can, surely it will get easy for us.

Categories
Forex Chart Basics Forex Daily Topic

Caution! A Big Round Number Ahead

In today’s lesson, we are going to demonstrate an event to find out what the price may do around the big round number. A big round number plays a significant role as far as traders’ psychology is concerned. The price usually gets volatile around a big round number. It may get tough for the traders to find out entries around the big round number. Let us now dig into USDCHF recent activities around the big round number 1.00000.

In today’s lesson, we are going to demonstrate an event to find out what the price may do around the big round number. A big round number plays a significant role as far as traders’ psychology is concerned. The price usually gets volatile around a big round number. It may get tough for the traders to find out entries around the big round number. Let us now dig into USDCHF recent activities around the big round number 1.00000.

In today’s lesson, we are going to demonstrate an event to find out what the price may do around the big round number. A big round number plays a significant role as far as traders’ psychology is concerned. The price usually gets volatile around a big round number. It may get tough for the traders to find out entries around the big round number. Let us now dig into USDCHF recent activities around the big round number 1.00000.

The price is heading towards the North with good bullish momentum. Look at the last candle. This is one good bullish candle, which states that the buyers are dominating the pair. Do you notice anything unusual here?

Here it is. The candle breaches through the level of 1.00000. As a trader, you must not miss such a big round number. Now that the price makes a breakout, you are to wait for the breakout confirmation and a strong bullish reversal candle to go long on the pair. This might be one of the best trades in your trading life if things go accordingly.

The price comes back in. However, it still looks all right for the buyers since if we consider the spikes at the last swing high. A bullish engulfing candle closing above the last bearish candle would be the buying signal. On the other hand, if it keeps going towards the downside, the sellers may take over the baton.

The price does not produce any bullish momentum. For the last four H4 candles, it could go either way. Traders are to wait patiently since this is the game around a massive round number.

Here it comes. It has now become sellers’ territory. The candle forms right at the level of 1.00000. The level could have been a level of support. It is now a level of resistance. The sellers on the minor charts keep going short; on this chart, they are to wait for consolidation and downside breakout to ride on the next bearish wave.

It consolidates and produces a sell signal after four H4 candles. The last H4 candle suggests it may be time for the price to consolidate again. An explicit bullish breakout at the level of 1.00000, did not work for the buyers. It could happen at any level, but when we deal with a massive round number, we happen to see it more often.

The Bottom Line

The market runs on many aspects, and traders’ psychology is one of them. Many traders set their Stop Loss and Take Profit at round numbers. Thus, the price may get extra volatility around a big round number. We may get breakout even on the H4 chart, which may turn out to be a fake breakout. We must remember this every time we see a big round number.

 

Categories
Forex Basic Strategies

No Breakout Confirmation or No Consolidation Means No Entry

Price Action traders crave for the breakout. Breakout is one of the most important components of price action trading. However, there is another equally important thing, which is breakout confirmation. Since the Forex market is very action-packed, it is often found that the price does not come up to the breakout level to confirm the breakout. It consolidates and produces a reversal candle to offer entry. The question is, does it always consolidate and offer an entry.

Price Action traders crave for the breakout. Breakout is one of the most important components of price action trading. However, there is another equally important thing, which is breakout confirmation. Since the Forex market is very action-packed, it is often found that the price does not come up to the breakout level to confirm the breakout. It consolidates and produces a reversal candle to offer entry. The question is, does it always consolidate and offer an entry.

Price Action traders crave for the breakout. Breakout is one of the most important components of price action trading. However, there is another equally important thing, which is breakout confirmation. Since the Forex market is very action-packed, it is often found that the price does not come up to the breakout level to confirm the breakout. It consolidates and produces a reversal candle to offer entry. The question is, does it always consolidate and offer an entry.

Let us find out.

The price headed towards the South and seems to have found its support. It has been heading towards the North now. The price is at the last swing high. Thus, the buyers are to wait for an upside breakout and breakout confirmation to take a long entry.

The price makes a breakout, but at the time of confirmation, it comes back in. Thus, the breakout is void. It goes towards the upside again. This time it gets rejected from the last swing high. Thus, the price does not make any breakout here.

This time it does. A huge bullish engulfing candle breaches the last swing high. That is a Double Top resistance as well. The buyers are to wait for the price to come back at the breakout level and get a bullish reversal candle right there. Alternatively, it may consolidate somewhere in between the highest high and the breakout level.

It keeps going up. Let us not give up but keep eyeing on the pair. It has gone too far up. It may not come back at the breakout level. It may rather consolidate. Let us find out what it does.

It keeps going towards the North. There is no sign of consolidation yet. A swing high on the chart is evident, which is nearby. As things stand, risk-reward is getting less lucrative.

As expected, the price has found its resistance before the level of the last swing high. The price action gets choppy. Traders are to wait for the price to give them the next direction. In a word, price action traders do not keep this kind of chart on their watch list.

The Bottom Line

A chart looked extremely good and was about to give us an entry ended up being a choppy chart. What more frustrating is it went towards the desired direction, but it did not offer us entry. Some traders may think it would be good if an entry is taken. At least some pips can be achieved. Please note, do not even think about it. After breakout, the price must confirm the breakout or consolidate. To sum up the whole equation, no confirmation or no consolidation means no entry.

Categories
Forex Basic Strategies

Is Drawing One Trendline Enough?

The Trendline is an excellent trading tool that the price action traders love using on their charts. Drawing trendline as accurate as it can get and adjustment with spikes are two factors that traders are to look after before using trendline. Another factor trendline traders often need to do is drawing multiple trendlines on the same chart. In this lesson, we are going to demonstrate an example of that.

The Trendline is an excellent trading tool that the price action traders love using on their charts. Drawing trendline as accurate as it can get and adjustment with spikes are two factors that traders are to look after before using trendline. Another factor trendline traders often need to do is drawing multiple trendlines on the same chart. In this lesson, we are going to demonstrate an example of that.

The Trendline is an excellent trading tool that the price action traders love using on their charts. Drawing trendline as accurate as it can get and adjustment with spikes are two factors that traders are to look after before using trendline. Another factor trendline traders often need to do is drawing multiple trendlines on the same chart. In this lesson, we are going to demonstrate an example of that.

The chart shows that the price after finding its support at the trendline heads towards the North and makes a new highest high. Thus, this is a valid trendline. Ideally, the buyers are to wait for the price to come back to the trendline again and to produce a bullish reversal candle to go long on the pair. Let us proceed to find out what happens next.

The price does not come at the trendline. It finds its support well above the trendline and heads towards the North again. This is annoying, is not it? Do not get annoyed. Concentrate on the chart. Do you see anything interesting? Have a look at the next chart.

We can draw another trendline on the same chart since the price has a bounce and makes a new highest high. Traders are to wait again for the price to come back at the trendline and to produce a bullish reversal candle to offer them a long entry.

Wow, this time, the price comes at the trendline and produces a bullish reversal candle. Traders have been waiting for such price action. By flipping over to the next chart and an upside breakout, traders may grab some green pips.

The chart shows that the price comes back near the trendline’s support again, then heads towards the North. It consolidates hard on the minor charts, as it seems. The point here is that the price does not come at the first drawn trendline or produces a bullish reversal candle. It comes at the second drawn line, and this time, it creates the bullish reversal candle right at the trendline’s support. It heads towards the North and may have offered entry as well.

The Bottom Line

In most cases, the price does not come at the first drawn trendline. It has the tendency to come at the second drawn trendline more. It is often seen that the price obeys the third drawn trendline as well. Thus, if we are to trade on the trendline, we may keep an eye on the chart to draw a trendline as many times as we need to.

Categories
Forex Basics Forex Daily Topic

A Breakout Brings More Momentum than any Other Trading Factor

A Breakout Brings More Momentum than any Other Trading Factor

A Breakout Brings More Momentum than any Other Trading Factor

A Breakout Brings More Momentum than any Other Trading Factor

A bearish engulfing candle at a Double Top or consolidation resistance is an excellent signal to go short. However, if a bearish engulfing candle closes right within the support level, it sometimes may create an upside momentum on the minor charts. In today’s article, we are going to demonstrate an example of that.

The price heads towards the North with strong bullish momentum. Ideally, traders are to look for opportunities to go long here upon consolidation, followed by upside breakout. The last candle comes out as a bearish candle. It may consolidate and make an upside breakout as things look. Let us go to the next chart to find out what happens next.

The pair produces a bearish engulfing candle. Several rejections and a bearish engulfing candle suggest that traders may want to go short on the pair. If they’re going to go short from here, they are to flip over to the H1 chart since it is an H4 chart. For a reason, I am not showing the H1 chart since the H4 chart itself tells the story that I want to share. Let us look at the H4 chart with another equation.

The candle closes right at a level where the price has bounced earlier. This is an explicit support level, which may play an essential part in the minor charts. Soon we find out how the pair reacts from here.

Look at the last candle. The candle comes out as a bearish engulfing candle. However, look at the upper shadow. It goes up to the consolidation resistance. With some brokers, because of the high spread factor, some traders’ Stop Loss may be swept away. The last candle, after having a strong rejection at around the resistance level, closes below the support. The sellers are to flip over to the H1 chart, wait for consolidation and bearish breakout to go short on the pair.

Again, I am presenting the H4 chart to show the next price movement.

The price does not look back this time. It heads towards the South with strong bearish momentum. The H1 chart may have offered some entries, as well. What lesson do we get from these examples?

  1. In an H4-H1 combination, after an H4 reversal candle, traders are to flip over to the H1 chart to take an entry.
  2. The last swing high or swing low on the H4 chart is to be counted.
  3. If the reversal candle closes right within the last swing high or swing low, it may push the price towards another direction, produce spike and sweep away our Stop Losses.
Categories
Forex Chart Basics

An Inverted Hammer at a Double Bottom

The Double Bottom is a pattern, where the buyers eagerly wait to get a bullish reversal candle at. Typically, a Bullish Engulfing Candle, a Bullish Pin Bar,  a Bullish Truck

The Double Bottom is a pattern, where the buyers eagerly wait to get a bullish reversal candle at. Typically, a Bullish Engulfing Candle, a Bullish Pin Bar,  a Bullish Truck

The Double Bottom is a pattern, where the buyers eagerly wait to get a bullish reversal candle at. Typically, a Bullish Engulfing Candle, a Bullish Pin Bar,  a Bullish Truck Rail are considered the strongest bullish reversal candle pattern. Usually, a Bullish Inside Bar and an Inverted Hammer are the weakest reversal pattern. In today’s lesson, we demonstrate an example of how a Daily Inverted Hammer candle offers a long entry.

This is the daily chart. It shows that the price has been roaming around within two horizontal levels. It is at the support and produces an Inverted Hammer. An Inverted Hammer is a bullish reversal candle but not a very strong one. Look at the upper shadow. It suggests that the price has a strong rejection at a level of resistance.

To some extent, it signifies intraday buyers’ less confidence. However, it is the daily chart, and the bullish reversal candle forms right at a double bottom’s support. Thus, let us flip over to the H4 chart to find out whether it offers us an entry.

The H4 chart shows that the price is on consolidation. The last candle looks ominous for the buyers. Nevertheless, traders on this chart combination are to look for long opportunities as long as the support holds the price. Let us go to the next chart to find out what happens.

The price finds its support and produces two consecutive bullish candles. One of them breaches the resistance and closes well above the resistance. A long entry may be triggered here by setting the Stop Loss below the consolidation support.

The price heads towards the North with good bullish momentum after triggering the breakout. The last candle on this chart comes out as a bearish candle with some gap. The buyers may consider closing the entry and come out with the total profit. On the other hand, some traders may want to take partial profit and ride on the wave up to the resistance. Have a look at the chart below.

The price may go up to the marked resistance level since this is the last swing high. If we consider the risk-reward, it is an amazing trade. The reward is about five times the risk. Do you remember how it started, though? It began with a Daily Inverted Hammer Candle (relatively weaker bullish reversal) at a Double Bottom’s support. Yes, this is what support of Double Bottom can do.

Categories
Forex Market Forex Risk Management

These Are Some Of The Best Position Sizing Techniques You Should Know!

Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which

Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which

Introduction

In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which are very important. In this article, let’s determine how one can position themselves in the forex market based on three different models. Each of these has its own merits that impose some sort of position sizing discipline in traders.

The three core position sizing techniques in terms of risk are:

  • Fixed lot per amount
  • Percentage margin
  • Degree of volatility

These models can be applied to all the asset classes and are time frame independent.

We suggest you stick to one model to estimate the position size or at most two position sizing techniques. Following every given method will increase complexity, and that is not good for a trader.

Fixed Lot Per Amount

This is a fairly simple model. It requires a trader to simply state how many lots he is willing to trade for a given amount of capital. For example, let us assume a trader is having $2000 in his trading account, and he trades only the major currency pairs like  EUR/USD, GBP/USD, GBP/JPY, USD/JPY, etc.

The trader simply needs to make a thumb rule that he/she will not trade more than one standard lot of futures (of major currency pairs) per $2000 at any given point.

The lot size can also be determined based on their risk appetite and money management principles. This technique of ‘fixed risk’ is based more on the discipline than strategy.

Percentage Margin

This position sizing technique is more structured than the ‘Fixed lot per amount’ technique, especially for intraday traders. It requires a trader to position themself based on the margin. Here, a trader essentially fixes an ‘X’ percentage of their capital as margin amount to any particular trade. Let’s see how this works with the help of an example.

Assume a trader named Tim has a trading capital of $5000; with this, he decides not to expose more than 20% as margin amount on a particular trade. This translates to a capital of $1000 per trade.

Now, if Tim gets an opportunity in another currency pair, he would be forced to let go of this margin as it would double to 40% (20% + 20%). This new opportunity will be out of his trading universe until and unless he increases his trading capital. Hence, one should not randomly increase the margin to accommodate opportunities.

The percentage margin ensures a trader pays roughly the same margin to all positions irrespective of the forex pair and volatility. Otherwise, they would end up in risky bets and therefore altering the entire risk profile of their account.

Degree Of Volatility

The degree of volatility accounts for the volatility of the underlying asset. To measure volatility, we make use of the ATR indicator, as suggested by Van Tharp. This position sizing technique defines the maximum amount of volatility exposure one can assume for the given trading capital.

Below we have plotted the ATR indicator on to the USD/JPY forex chart.

The 14-day ATR has a peak and then a decline, which shows a decrease in volatility. As you know that high volatility conditions are the best times to trade (less slippage, high liquidity, etc.), you can risk up to 5% of your trading capital on the trade while one should not risk more than 1% when the ATR is at the lowest point. Do not forget the risks involved while trading highly volatile markets. Only use this position sizing technique when you completely trust your trading strategy.

Conclusion

A trader should not risk too much on any trade, especially if their trading capital is small. Remember, your odds of making a profit are high when you manage your position size and risk the right amount on each of the trade you take.

Beginners should trade thin to get experience with open positions, so they can assess the stress of a loss and gradually increase the position size as he is comfortable with the strategy results and performance. As a matter of fact, this is also the right way to proceed when trading live a new strategy, be it a beginner or an experienced trader.

Cheers!

Categories
Forex Market

Finding The Optimal Risk % In Forex Trading

Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they

Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they

Introduction

Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they can tolerate. In this article, we shall focus on determining the appropriate risk % that fits your trading style. The goal of risk management is to gain control over three things:

  • Emotions
  • Leverage
  • Sustenance

Furthermore, by limiting the loss per trade, a trader can ensure that his/her trading capital is not wiped out in one single trade. Having this discipline systematically reduces the loss per trade and provides an opportunity for the trader to re-look at the situation.

Calculating the risk

One can determine the risk based on the following factors:

Win rate

Win rate refers to how often a trader takes profitable trades relative to the trades that result in a loss. Win rate is determined by using the risk-to-reward ratio (RRR) and is calculated by the following formula.

Win rate = 1/(1+RRR)

The above-given formula is also referred to as the Minimum win rate. If any trader is trading with an RRR of 1, then his/her minimum win rate will be 50%. So out of 100 trades, we require a minimum of 50 trades to end as winners to compensate for the losing trades.

This will help a trader in deciding their maximum risk based on the win rate. This formula can also determine if a trade can be taken or not. For example, if someone has a win rate of 25%, he/she will not be able to take trades that have a risk-to-reward ratio of less than 3.

Nature of the market

Depending on the market situation, the risk can vary substantially. In a trending market, like the one in the below chart, risk should be reduced as much as possible by using a stop-loss order. We are recommending this idea as you would most probably be trend trading, and there is no point in risking more than the usual (can be lesser).

Trending Market

In a market that is trapped in a range (below image), the risk is always higher. This means anyone who trades the consolidation market is essentially increasing their risk. This would mean increasing the stop-loss, thereby reducing the risk-to-reward ratio (RRR) of the trade.

Ranging Market

Maintaining a risk of 1% constantly, regardless of the market conditions, will help the traders to sustain the loses and stay in the game even after a series of losing trades. This is a conservative method that reaps fewer rewards, but the risk is certain.

Conclusion

The aim is to achieve some level of consistency in trading by allowing yourself and your trading strategy to fight the evil forces of the market. We would say in all circumstances, a max risk of 1% appears to be the winner if you are a conservative trader. When the risk increases, it is said to impact not only the capital of the trading account but also the psychology of a trader. Hence it is better to keep risk at a bare minimum in times of uncertainty.

Categories
Forex Market

Understanding Drawdown & Its Relation With Position Size

Introduction
Do you know that there is a safe way to choose the maximum lot size when you trade? That too while keeping your account safe from blowing when a

Introduction
Do you know that there is a safe way to choose the maximum lot size when you trade? That too while keeping your account safe from blowing when a

Introduction

Do you know that there is a safe way to choose the maximum lot size when you trade? That too while keeping your account safe from blowing when a losing streak of trades occur? To constantly stay in the game and be able to recover from losses requires patience, clarity, and, more importantly – optimal Position sizing. The position size in simple words is how much a trader invests in each trade. There are different models deployed to reach the optimal position sizing depending on the objective of the trade. Before that, let’s first understand what drawdown is and how it is related to position sizing.

What is the maximum drawdown?

The maximum drawdown is the biggest drop in the accumulated profit chart and, consequently, that of the trading capital. Imagine a situation where a trader had 200 pips in profit after a number of trades, and on the following days’ profit dropped to 136 pips before he can make new accumulated high.

So, the drawdown here was 200-136 = 64 pips

When this drawdown increases, it reaches a level (negative drawdown), after which it becomes impossible to trade (due to loss of trading capital). Maximum drawdown is the loss that the trader can take in order to survive in the market and be able to continue trading.

How is drawdown related to position sizing?

Taking the above example, let us assume that the trading capital was $500 and the trader trades with a lot size of 0.01. The drawdown he experienced was 64 pips, which is $6.4 (1 Pip = $0.1). So the amount of money he/she risking in this trade is 6.4/500 x 100 = 1.28% of the account size.

Now let us see how this drawdown increases with a change in position size.

How much drawdown can I handle so that it doesn’t affect the mental state and my trading style?

As you can see below, the drawdown % increase as the lot size increases and the account gets into an unsustainable state (Especially when the Trading Capital is $500). Hence you need to calculate risk based on your risk tolerance drawdown.

The right way to look at drawdown and position size

Typically, the drawdown occurs after a series of consecutive losses. The very first thing a trader needs to do is to analyze and figure out the number of losing trader he/she can endure. Depending on that, the maximum risk percentage should be defined. So essentially, this percentage is the maximum amount of trading capital a trader affords to lose. If the losses cross this percentage, his/her account get unsustainable.

For instance, I can bear a maximum drawdown of 20%. So I should be willing to design a strategy and chose my trading size in such a way that it is very unlikely for me to reach the 20% drawdown. Let’s denote the number of losing streaks as N. I should make sure that my strategy has a winning percentage of at least 50% or more with high RRRs. Let’s assume the maximum number of losing streaks I can afford is 10 (i.e. N=10).

Dividing the maximum drawdown (20%) with N (10) gives 2%. This means that I cannot risk more than 2% of my trading capital on a trade to sustain in the market. If I have more than one open trading position, I should be distributing the risk among all of the open positions. So here, if I have 2 open positions, I shouldn’t be risking more than 1% in each of the trades. This is one of the best ways to look at drawdown and position size.

Different approaches to position sizing

Defined Percentage Risk

In this position sizing strategy, we risk a fixed percentage of the trading capital (e.g., 1%) for each trade. This is followed by most of the traders across the world and it is pretty simple to use as well. Essentially, the trader is required to put the stop-loss more accurately and not randomly to prevent the stop-loss hunt. This might sound pretty easy but it needs a lot of discipline to overcome the greed and not raise the position size when you see a clear profitable trading signal.

The Kelly Criterion Model

John Kelly described this criterion pretty long ago, which computes the optimal position size for a series of trades.

Kelly Percentage = W – [(1-W) / R)

Where, W – Winning probability and R – Profit/Loss ratio

When a trader keeps a record of all their trades, they can calculate their winning probability and profit/loss ratio. Then, they can use them in the above equation to calculate the optimal position size.

Conclusion

You now know the importance of position size and its relation to drawdown. By using this, leverage can also be used appropriately to avoid blowing-up your account because of the drawdown. By doing this, you can maximize your earnings and reduce drawdown to an acceptable value.

Our suggestion for you is to use a trading strategy for a long time. If a strategy hasn’t been tried many times, the big drawdown might not have appeared yet. The bigger the history of using the strategy, the more confidence you will get to increase the lot size. Cheers!

Categories
Forex Basic Strategies

The H4-H1, an Action-Packed Combination

In today’s lesson, we are going to demonstrate an example of the H4 and the H1 chart combination for taking entries. Both are intraday charts. A large number of traders

In today’s lesson, we are going to demonstrate an example of the H4 and the H1 chart combination for taking entries. Both are intraday charts. A large number of traders

In today’s lesson, we are going to demonstrate an example of the H4 and the H1 chart combination for taking entries. Both are intraday charts. A large number of traders do the job using those two charts. Thus, it is an excellent combination to trade in the Forex market.

Let us get started.

This is an H4 chart. The chart shows that the price heads towards the North. On its way, it made an upside breakout, which may play a vital role in pushing the price towards the North further. Despite having a long lower shadow, the last candle comes out as an Engulfing candle. The price may start its correction this time.

As expected, the price comes down to the flipped support and produces a bullish engulfing candle. The last swing high is far enough to offer a 1:1 risk-reward. However, we do not take an entry right after the candle H4 closes. We rather switch over to the H1 chart.

This is how the H1 chart looks. It shows that the price starts having correction by producing a Doji candle. An engulfing bullish candle closing above the Doji candle is the signal to go long here. Let us wait for a Marubozu bullish candle.

This is one good-looking Marubozu bullish candle. However, it closes right at the resistance zone. Risk-reward is 100:0 here. We must wait for an H1 consolidation and breakout towards the upside to take a long entry.

Here they come. The price consolidates and produces an H1 bullish candle, which closes above the resistance. Traders may trigger a long entry right after the candle closes by setting stop loss below the last support. The H1 chart does not show any resistance nearby. Thus, the price may head towards the North with good bullish momentum. It may get us 1:2 risk-reward or even more. Usually, the price reverses once 1:1 risk-reward is achieved. Let us find out what happens here.

The price consolidates much earlier than our expectations. Our reward is not achieved. Thus, we keep holding our position. We are risking a loss here. However, we must keep our patience.

The price makes another upside breakout and heads towards the North. The wave gets us our expected reward and starts having a pullback. If we have not set our take profit, we may manually close it; or we may use a trailing stop loss. We will demonstrate some examples of using trailing stop loss in this combination in upcoming lessons.

The Bottom Line

The H4-H1 combination is an eventful combination. A Trader needs to have skill, expertise, experience, and patience to handle it. Once he learns it well, it may have his hands full in making money by trading.

Categories
Forex Basic Strategies Forex Daily Topic

A Story of an Early Exit

Risk-Reward is a factor, which every successful trader takes care of. Before choosing a chart to take an entry, the first thing that is to be considered is the trend

Risk-Reward is a factor, which every successful trader takes care of. Before choosing a chart to take an entry, the first thing that is to be considered is the trend

Risk-Reward is a factor, which every successful trader takes care of. Before choosing a chart to take an entry, the first thing that is to be considered is the trend, then the risk-reward factor. Once we have set our Take Profit and Stop Loss level, we shall leave the entry either to hit the Stop Loss or the Profit Target. However, today, we are going to demonstrate an example of an early exit.

This is an H4 chart. The chart shows that the price has found its support as well as a resistance zone. After having a final rejection, it makes a move towards the downside. Then, it heads towards the North now (see the next image). Another rejection and bearish reversal candle at the resistance zone may produce a short entry.

The last H4 candle is bullish. However, the candle closes within the resistance zone. It may go either way. The buyers may get an upside breakout; the sellers may get a bearish reversal. Let us proceed to find out what happens next.

In the above chart, we can see one good-looking bearish Marubozu candle. The candle suggests that the sellers may wait for consolidation and downside breakout to take a short entry. The candle forms at a Double Top resistance as well. The price may consolidate around the neckline level.

As expected, the price starts having correction around the neckline level. It needs to find its resistance and produce an H4 bearish reversal candle along with a breakout at the neckline.

Here it comes. The last candle engulfs all the candles by closing below the neckline. An entry may be triggered right after the candle closes. The price has enough space to travel down to the red-marked line, which allows an excellent risk-reward. However, there is a support level in between, that may hold the price for a while.

The price heads towards that level with good bearish momentum. The way it has been going, it may hit the red-marked level within four/five H4 candles. This means one more trading day may be required to hit the original Take-Profit level.

The in-between level is a vital level, which produces the H4 bullish reversal candle. The price has reacted several times at that level earlier. Usually, we must stick with our original Profit-taking target. However, it is also legit to close our entry right after the last candle closes. A question may be raised “why do we close our entry here?”

Reasons for Early Exit

There are two reasons

  1. The support level is significantly strong
  2. The current bar is the last H4 Friday’s candle, which means the market closes once the candle is finished.

The Bottom Line

When using the Weekly and the Daily charts, traders are to let their opened positions to reach the target during the weekend. However, intraday traders should consider closing their floating trade before the week’s end. Mondays often start with a big gap, which may hurt intraday Stop Losses.

 

Categories
Forex Daily Topic Forex Stop-loss & argets

Masteting Stop-Loss setting: How about using Kase Dev-Stops?

The stop-loss setting is a crucial component to the long-term success of a forex and crypto trader. The market forces cannot be adapted to the wishes of traders. Successful traders

The stop-loss setting is a crucial component to the long-term success of a forex and crypto trader. The market forces cannot be adapted to the wishes of traders. Successful traders

The stop-loss setting is a crucial component to the long-term success of a forex and crypto trader. The market forces cannot be adapted to the wishes of traders. Successful traders must accept that fact instead of fighting it for the sake of being right. “What cannot be cannot be, and, furthermore, it is impossible,” said some time ago, a well-known politician in a phrase that did not pretend to be comical. But it states a clear fact: Fight against the markets is like Don Quixote fighting Windmills.

In previous articles, we explained John Sweeney’s MAE method, and also average true range-based stop-loss settings. In this article, we are going to talk about Cynthia Kase’s Dev-Stops.

Cynthia Kase is a well-known and successful futures trader, speaker, and author of several books on trading and technical analysis. She conceded high importance to stop settings. Cynthia says something undeniable to most of us, Technical literature has mostly focused on entries, and almost nothing on entries besides some words on stop-loss or trailing stops. She says that this is like teaching how to drive a car but without explaining where the brake pedal and how to press it.

In her book “Trading with the Odds,” she explains that this situation is mostly due to greed and fear. Traders don’t like to lose, and most of them don’t know when to get out of a trade. Also, she explains that fear of losing causes people to hang on their losses in the hope the market will turn and recover them. Another explanation for this situation is that the beginning of technical analysis was on the stock market, and no company wants its stock downgraded from buy to hold or, worse, to sell. As opposed to Forex, only a handful of people make money shorting stocks, so exits are much less critical on the stock market.

Stops based on fear and greed

Most traders want to squeeze out the most of a trade. Therefore, they decided to use the highest possible leverage. To reduce the dollar risk, they desire to put it as close as possible to the entry-level. But, as said earlier, using obvious levels of support/resistance and set the stop order just two or three pips below is absurd. Better send your money directly to the charity, since they will make much better use of it than the institution that is going to collect your hard-earned money for free.

Risk is imposed by the market

The critical point is not to impose our conditions on the market, but read what the market is telling us in terms of Risk. In trading, Risk is proportional to volatility. Your dollar risk is the amount the price can move against you in a given interval, times your position size.

Volatility is measured using the Range and also by the standard deviation of prices on an annualized basis. One standard deviation of the price holds 68$ of all the potential price movement if we assume prices are dispersed in a gaussian distribution. That means that a price that goes against a trade by one standard deviation it will encompass 34% of the observations (the other 34% would go in the direction of your trade). The problem with using volatility is that a yearly measurement of the price variations does not help with sudden short-term volatility changes. That’s the reason for using ATR instead.

The concept of the threshold of Uncertainty

A trade is a bet on a market trend. We think a particular trend is in place. Ideally, the direction is a straight line between one initial level and a final level. If we think of the short-term price wiggles as random noise, we adapt our trade by placing our stops far enough away from the trend mean to include noise. The magnitude of the noise means we don’t want to exit at the minimum turn against the trade. The trader needs to devise a way to follow the trend while getting out when it ends. 

 The Kase Dev Stops

Using a fixed multiplier for the True Range is an initial approximation. In our article of true range, we used a fixed 2X multiplier to set our stop order away from the market noise. Kase’s Dev Stop uses what she calls the skew of the volatility, the measure at which a range can spike in the opposite direction as a multiplier of the range measure. That makes the Dev-stop an adaptative trailing stop. Dev Stops is a well-known indicator in TradingView. Also, it is available for downloading at the MQL5.com site for your Metatrader workstation. 

Chart 1 – Kase Dev-Stops in a GBPUSD 4H chart.

We can see in Chart 1 that four lines follow the price action. The first one is the mean line and the 1, 2, and 3 standard deviation (SD) lines of a two-bar reversal. As we can see, the 3rd standard deviation is seldom touched, being the 2-SD the conservative method, and the 1-SD the preferred aggressive method. In the case of using 1SD, it is advisable for a reentry plan, or create mental stops that would trigger if the close happens below the 1SD Dev-stop line.

As it should be the norm when learning a new method, it is strongly advisable to backtest it first to assess which SD line works better with your particular asset and objectives. Also, after backtesting your optimal solution, it is prudent to trade it using a demo account. There we could also assess the costs and benefits of the method by adding the brokerage costs.

Reference: Trading with the Odds, Cynthia A. Kase. 1996, The McGraw-Hill Companies Inc.

 

Categories
Forex Basics Forex Daily Topic

A Winner is Not Always a Good Trade

Price action traders use chart combinations such as Weekly-Daily, Daily-H4, H4-H1, and H1-15M, etc. Intraday minor charts’ traders such as the H1, 15M, 5M do not have an undeviating relation

Price action traders use chart combinations such as Weekly-Daily, Daily-H4, H4-H1, and H1-15M, etc. Intraday minor charts’ traders such as the H1, 15M, 5M do not have an undeviating relation

Price action traders use chart combinations such as Weekly-Daily, Daily-H4, H4-H1, and H1-15M, etc. Intraday minor charts’ traders such as the H1, 15M, 5M do not have an undeviating relation with the daily chart. However, it is often seen that if the daily price action is choppy, it gets tough to find out a good entry for the intraday traders. Notably, on a choppy daily chat, it gets extremely tough for the H4 traders to find an entry with good risk-reward. Thus, even a trade that gets us profit may not always be a good one. Let us demonstrate an example of that.

This is a daily chart, which shows that the price action has been choppy. It gets caught within a bullish rectangle. The daily traders are to wait for a breakout. However, the H4 traders know the range. Thus, they are to wait for a daily bearish reversal at the resistance zone and bullish reversal at the support zone. Let us see where it produces the next reversal.

The chart produces an Inverted Hammer right at the resistance. The H4 traders are to flip over the chart; wait for consolidation and bearish breakout to take a short entry. The risk-reward looks good here.

The H4 chart shows the last candle comes out as a bearish candle. If the price consolidates with the support of the candle’s lowest low, a bearish breakout will be the signal to go short.

The next candle comes out as another bearish candle. The candle has a bounce at H4 support, as well. If the price consolidates and makes a bearish breakout, the sellers may take a short entry. There is still space for the price to travel towards the downside.

The price consolidates and makes a breakout at the support. The breakout candle looks good. By setting Stop Loss at the consolidation resistance, a short entry may be triggered right after the last candle closes. Take Profit shall be placed at the red-marked level. Let us find out whether it hits Take Profit.

It does. It gets us profit. The question is whether it is a good trade or not. As far as risk-reward is concerned, it is not a good entry. It gets us less reward than the risk. Thus, traders shall skip taking that entry in the first place.

The Bottom Line

Price action traders may find many trade setups that match with all the norms for taking an entry. However, they must consider risk-reward on every single trade. If it offers less than 1:1 risk-reward, they shall avoid taking that entry. In most cases, an entry offering less than 1:1 risk-reward has less chance to be a winning trade as well. In this example, it is a winner. However, considering entire facts, it is not a good entry.

Categories
Forex Market

Advantages & Risks Involved With Volatility Trading In The Forex Market

Introduction
The forex market offers a lot of trading opportunities, but still, many traders find it difficult to make profits consistently. Emotions combined with undue risk and money management are

Introduction
The forex market offers a lot of trading opportunities, but still, many traders find it difficult to make profits consistently. Emotions combined with undue risk and money management are

Introduction

The forex market offers a lot of trading opportunities, but still, many traders find it difficult to make profits consistently. Emotions combined with undue risk and money management are often the main obstacles that new traders face.

In this article, we will discuss the hourly volatility in the forex market and the trading risks involved during these hours. Some traders trade the market based on its volatility. Few traders enjoy volatile markets, while others prefer trading in non-volatile conditions. So let’s get right into the topic.

The volatility of a major currency pair

Hourly volatility is relevant to short term forex traders but is not a significant factor for long term investors. The global trading sessions affect volatility within the 24 hours. A forex pair is typically most volatile when a major trading session opens, or two market sessions overlap with one another. For example, EUR/USD is the most volatile and active when London or New York is open because these markets are associated with the Euro and USD, respectively. The below figure depicts the volatility of EUR/USD in a day.

The average volatility of EUR/USD currency pair on a single day

The bar chart shown above represents the volatility of EUR/USD in a day. It depicts nothing but a candle with lower wick, body, and upper wick. One can see that during the Asia session, the price is not volatile. Whereas during the New York session, the price makes large movements shown by larger wick and body of the bar chart. Even without looking at candlestick charts on the trading platform, these bar charts are sufficient to decide at what time to trade during the day, which is much easier than analyzing candlestick charts.

Low volatile hours – Asia Session and Time b/w NY close & Asia Open  

Traders have a misperception that “More risk equals more return.” There is no doubt that highly volatile pairs deliver impressive returns, but research and data have found that lower-volatility sessions generate risk-adjusted returns over time. This is the reason why traders include the ‘Low volatility factor’ in their portfolio.

Risk of trading in low volatile hours

In times of low volatility, there is increased slippage, which means a trader will hardly get the price they desire for. This would mean eating up of their profits, or even sometimes a complete drain of profits (when trading on a lower time frame). In this way, a trader will not be trading according to the rules of money management. Hence, to manage risk, there is a right way to trade during such times. Some of them are discussed below.

Why is it important?

There are several reasons why trading in lower volatility conditions has the potential to create a lot of money over the long term.

Leverage aversion– In money management theory, we had mentioned earlier that the more leverage a trader use, the more is the risk. In times of lower volatility, traders are restricted from using the leverage from their trading account. As a result, they buy and sell currency pairs that are less risky with good profit potential.

The lottery ticket– Many traders treat the forex market as a “lottery” where they buy and sell currency pairs like they are purchasing lottery tickets. This, in turn, raises the bid of high-risk pairs, which leads to the type of lottery effect and increases volatility. Here, we need to find pairs that are under no one’s attention and buy them (which will be least volatile).

High volatile hours – London & New York Sessions

Many traders live on volatility in the forex market, as volatility is what creates profitable trading opportunities.

Risk of trading in high volatile hours

High volatility hours also has its own disadvantages. During such times, one can see their stop-losses getting triggered frequently. This happens due to the tricks played by more significant players like stop-loss hunting. Another risk is the high leverage provided by forex brokers. So to manage these risks, high volatile hours should be traded in a certain way. Some of them are listed below.

Trend trading– One key opportunity in a volatile market is that trending currency pairs may see the rate of their trend increase. When we are trading with the trend, our risk drastically reduces, which is good for money management.

Short-term strategies– In volatile markets, strategies work the best by booking profits automatically than manually. In this way, we will be eliminating emotions in trading as everything will be done by the system, which is crucial for risk management. Strategies also make use of indicators like RSI and Bollinger bands, which help in identifying overbought and oversold zones.

Bottom line

Every trading session and hour has its own advantages and risks, which a trader needs to evaluate, based on his/her risk appetite. The right time to trade depends on the personality of the trader and style of trading. Volatility on an hourly basis is more complex than how much a forex pair moves each day on an average basis. We see volatility varies drastically across different hours of the day and days of the week. We need to monitor and adapt to these changes. Cheers!

Categories
Forex Basics Forex Daily Topic

Attributes of the Signal Candle Not to be Ignored

After choosing a pair to trade, traders wait for the signal candle at the desired zone/level to take an entry. The attributes of the signal candle are important. Ideally, a

After choosing a pair to trade, traders wait for the signal candle at the desired zone/level to take an entry. The attributes of the signal candle are important. Ideally, a

After choosing a pair to trade, traders wait for the signal candle at the desired zone/level to take an entry. The attributes of the signal candle are important. Ideally, a signal candle is to be a Marubozu candle, barely having an upper or lower shadow, and longer than other candles around. In today’s lesson, we are going to show an example of how attributes of a signal candle affect the market. Let us proceed.

The price after being bearish finds its support. A long consolidation suggests that a breakout towards either side makes the chart lively again. An upside breakout and the confirmation offer good risk-reward considering the last swing high. A downside breakout seems even more rewarding. Let us find out which way the breakout takes place.

It is an upside breakout. The breakout candle looks fantastic. Buyers are to wait for consolidation and breakout at the highest high to go long on the pair. However, buyers shall calculate that the last swing high is not too far away now.

The price continues its bullish journey towards the last swing high, and it consolidates. Flipped support is to be adjusted here considering the Inside bar. However, an upper shadow at the previous swing high holds the price as well up to the Inside bar. The last candle comes out from the zone, though. Look at its attributes

  • It is a bullish engulfing candle
  • It breaches the resistance zone
  • It is a Bullish Marubozu candle

Many of us may trigger an entry here by setting Stop Loss below the lowest low of the candle. Let us find out what happens next.

The price comes down again. It may have swept away many Stop Losses. Thus, the last entry gets the buyers loss. What do you think about the last candle?

  • It is a bullish engulfing candle
  • It breaches the resistance zone
  • It is a Bullish Marubozu candle and
  • It breaches the last swing high

 

Traders may want to trigger an entry here. Let us go to the next chart to see how it goes.

This time it works excellently well. A question may arise here: what the difference is between these two candles?. The only difference that can be observed is, “It breaches the last swing high.”

The Bottom Line

We have demonstrated an example today and learned a lesson. Traders are to be immaculate in making a decision, and they have to calculate every single aspect that is related to the trading decision.

 

Categories
Forex Basics Forex Daily Topic

Using Trailing Stop: An Art to Be Learned by Traders

Using a trailing stop is a way to lock a profit in trading, at least with some profit. A floating profit trade may not always hit its Take-Profit level. Thus

Using a trailing stop is a way to lock a profit in trading, at least with some profit. A floating profit trade may not always hit its Take-Profit level. Thus

Using a trailing stop is a way to lock a profit in trading, at least with some profit. A floating profit trade may not always hit its Take-Profit level. Thus, traders use Trailing Stop to lock-in some profits and let it run to hit the target. Otherwise, some trades may result in a loss instead.

In today’s lesson, we are going to demonstrate an example of that.

The price heads towards the North with good bullish momentum. The buyers are to wait for price correction and bullish reversal candle to go long on the pair. Let us proceed to the next chart to find more about the correction.

The correction looks very bearish. However, a flipped support level holds the price. Thus, it is going to be an interesting battle between the bull and the bear. Let us find out who wins. Does it make a downside breakout or a bullish reversal candle?

The chart produces a bullish reversal candle. We can see that this is an Inside Bar, which is the weakest reversal candle. A flipped support creates a bullish reversal candle but does not make any breakout. The buyers are to flip over to the trigger chart to get consolidation and breakout to go long on this. This is the daily chart. Let us flip over to the H4 chart.

The H4 chart looks suitable for the buyers. The level of support produces a bullish engulfing candle. It has started the price correction. An upside breakout from a good level of support is the signal to trigger a long entry.

The price goes upward and consolidates. Upon finding support, the last candle breaches the level of resistance. Setting Stop Loss below the level of support, an entry may be triggered right after the last candle closes. The Take Profit shall be placed at the highest high of the previous bearish wave.

The price continues to go towards the upside for a while. It has started having consolidation. The price has found its support. An upside breakout is to push the price towards the North further. On the other hand, a downside breakout may push the price towards the South and even change the whole equation. Thus, the buyers are to move their Stop Loss. Have a look at the chart below.

The buyers shall move their Stop Loss below the level of support and hope it makes another upside breakout to hit the Take Profit. Let us find out what happens next.

This is what Forex trading is all about. You never know what exactly happens next. The price comes down. It would hit the Stop-Loss, where it was set at the very outset. By using Trailing Stop, the buyers have made some profit. Otherwise, they would have to encounter some loss.

The Bottom Line

Using Trailing Stop is an art. It needs a lot of practice to be master at it. Without knowing how to use it properly, it may hurt a trader instead. Since it is an important trading feature to save us from encountering a loss with a profit trade, a trader must study/work hard on this.

Categories
Forex Basics Forex Daily Topic

The Simpler the Better

Financial traders follow many charts, patterns, and trading strategies. Each one has its own advantages and disadvantages. Nevertheless, there is a saying, ‘the simpler, the better.’ In the financial markets

Financial traders follow many charts, patterns, and trading strategies. Each one has its own advantages and disadvantages. Nevertheless, there is a saying, ‘the simpler, the better.’ In the financial markets

Financial traders follow many charts, patterns, and trading strategies. Each one has its own advantages and disadvantages. Nevertheless, there is a saying, ‘the simpler, the better.’ In the financial markets, especially in the Forex market, a trader cannot deny this truth.

Let us demonstrate an example of this.

The price heads down with strong bearish momentum. The sellers are to wait for an upside correction and a breakout at the support to make it more bearish. Let us proceed with what happens next.

The price has an upside correction, but it did not make a breakout at the support. It instead produces a huge bullish engulfing candle at Double Bottom support. Things are different now. Traders are to look for a long opportunity on the chart.

The price is bullish, but it gets caught within an ascending channel. A breakout at either side attracts traders to trade in this chart. The chart shows that the price makes an explicit breakout towards the upside. Ideally, the buyers shall flip over to their trigger chart to find a long entry. Let us find out whether they find any on the next candle.

The price does not make a breakout at the highest high of the breakout candle. Thus, the traders do not find an entry on the triggered chart. However, see the second candle (bullish candle). It makes a breakout (horizontally) at the highest high of those two candles. The buyers are to flip over the trigger chart again to find an entry. Do they see an entry this time? Let us find out.

 

Yes, they do. The price heads towards the North with good bullish momentum, and it does not come down to the support of the breakout candle. By flipping over to the trigger chart for an upside breakout to trigger an entry, a trader makes some green pips.

In this chart, the price makes a breakout at ascending channel’s resistance just a candle earlier. That breakout does not create bullish momentum. However, when it makes a breakout at the horizontal resistance, it creates the momentum that the buyers look for. I am not saying a breakout at ascending channel’s support/resistance does not offer entry at all. It does. A breakout at horizontal support/resistance offers more entries than the channel’s support/resistance breakout. It is because; it is simple and easy to be noticed by most of the traders.

The Bottom Line

Does that mean we stop looking entries on a channel or other pattern breakout? No, we shall eye on those breakouts; flip over to the trigger chart and trigger an entry if the trigger candle makes a new higher high or lower low. It is just the probability that a breakout at horizontal support/resistance offers more than any other chart pattern. After all, it is simple, and we know “the simpler, the better’.

Categories
Forex Basics

Importance of Timing in Trading

Timing is an essential factor in trading. Price action traders take entry on signal candle’s/bar’s attributes and support/resistance breakout. Many traders ignore the timing factor. However, it is an important

Timing is an essential factor in trading. Price action traders take entry on signal candle’s/bar’s attributes and support/resistance breakout. Many traders ignore the timing factor. However, it is an important

Timing is an essential factor in trading. Price action traders take entry on signal candle’s/bar’s attributes and support/resistance breakout. Many traders ignore the timing factor. However, it is an important factor when the signal candle is produced. In this article, we are going to demonstrate an example of the importance of timing in trading.

This is a daily chart. The price keeps going towards the South. Traders shall only look for selling opportunities in this chart on upward price correction/consolidation. Let us go to the next chart and find out what happens next.

The chart produces an engulfing bullish candle. It is a sign that the price may go towards the North. Intraday buyers such as 5M, 15M, H1 traders may look for long opportunities in this chart. The daily chart traders must wait for the correction/consolidation to get over upon a daily bearish reversal candle.

The price heads towards the North with good bullish momentum. The intraday buyers have made full use of the engulfing candle here. However, upper shadow and an Inside Bar suggest that a bearish reversal may come soon.

Here it is. A bearish engulfing candle suggests that it is time to look for short opportunities. It is a daily chart, so we shall flip over to the H4 chart to look for short opportunities.

The H4 chart shows that the price consolidates and makes a bearish move. However, support is still intact. The sellers must wait for a breakout at the support to go short on this chart. Let us draw the support line on the chart.

With an upward adjustment, the support lies at the black marked level. One of the H4 bearish candles is to breach the level for the sellers to get engaged in selling. Let us proceed to the next chart.

Concentrate on the chart. The chart has produced six candles since we have flipped over to the H4 chart. Six H4 candles mean a trading day is passed. Does it have any message to give us? We dig into the message later. Let us proceed to the next chart.

Wow! We have a breakout. Some traders may want to trigger an entry right after the candle closes. Let us find out what happens next.

The price starts heading towards the North. The price hits the Stop Loss. It even breaches the highest high of the wave. This is a different ball game now. If it were a technically right entry, we would not have talked about it. The thing is this one was a wrong entry, as the signal candle forms at the wrong time.

The signal candle does not form within the next trading day. It takes nine H4 candles to make the breakout. If the signal came within the first six candles, it would have been a valid trade. Since it comes at the ninth candle, it means the support has become daily support. Thus, an H4 breakout is not enough to drive the price towards the South. It goes towards the upside instead. The lesson we have learned here is, “A breakout is not a breakout if it does not take place at the right time.”

Categories
Forex Chart Basics

Unusual Candlestick Chart Types

In our previous article, we have seen the mainstream chart types, out of which the candlestick charts are the most prevalent in the current markets. But traders devised other ways

In our previous article, we have seen the mainstream chart types, out of which the candlestick charts are the most prevalent in the current markets. But traders devised other ways

In our previous article, we have seen the mainstream chart types, out of which the candlestick charts are the most prevalent in the current markets. But traders devised other ways to represent the price action in their search to get an edge over the rest of the traders. In this article, we are going to describe two popular variations of the basic candlestick chart.

Tick Charts

Tick Charts look similar to a candlestick chart, and every bar indeed is a real candlestick. But a Tick Chart does not depict a linear time scale. Instead, the chart moves to another bar every time a determined number of ticks have been reached.
And what is a tick? A tick is defined as one trade. So a 100-tick chart changes to a new candle every 100 trades, no matter its size.

Advantages of Tick charts

The main advantage of tick charts is that it allows spotting bars mostly populated by non-pro trades. Since every bar is made of the same number of trades, it is easy to detect bars with low volume, caused mainly through retail accounts. That allows pros to fade them and collect their money.

Tick charts homogenize the potential volatility on every bar because all bars represent the same number of trades. Therefore, it compresses low liquidity time segments into a few or one candlestick and expands hyperactive times into several candles. That way, amoving averages, and other indicators are more accurate. Also, the price action can be better appreciated, breakouts appear earlier, and chart cycles show up better.

 

Range Charts

Range charts are a convenient kind of chart. It also gets rid of the temporal method to move to the next bar. The idea of a range chart is to switch to a new bar once the chart has covered the assigned range. On the example supplied, the EURUSD is drawn using a 10-point range. Every candlestick covers ten pips and moves to the next bar. If the instrument is stuck inside a tight range, that candle may last for hours, until volatility comes back and the price creates a breakout.

Advantages of Range Charts

A range chart acts as a filter for ranging periods if the range size is adequately set, so trades can more easily avoid choppy market action, and only act on trendy segments.
Range charts also homogenize volatility.

Trends can be spotted more quickly as a result, and the trader can act on breakouts sooner than with regular candlestick charts. As happens with tick charts, indicators such as moving averages, MACD, and Stochastics work better with range charts.

The key to a proper range setting is to see when a relevant range starts a trend. It is easy to experiment until the adequate range hides most of the sideways action and takes away these harmful periods of inactivity. Looking at the average true range indicator on the timeframe of reference can help with the decision. The style of the trade should be taken into account. A scalping trading style calls for shorter ranges than a 4-hour trader.

To trade using range charts, we can add trend lines, averages, and other indicators. Range charts, as said, are excellent charts for the early entry of breakouts. Finally, range charts are very handy to spot momentum, so trade strategies based on volatility work better using them.

 

Categories
Forex Basic Strategies

Even a Choppy Price Action Offers Entries

The market moves in three ways upward, downward, and sideways. In today’s lesson, we are going to demonstrate an example of a Rectangle breakout and an entry from a choppy

The market moves in three ways upward, downward, and sideways. In today’s lesson, we are going to demonstrate an example of a Rectangle breakout and an entry from a choppy

The market moves in three ways upward, downward, and sideways. In today’s lesson, we are going to demonstrate an example of a Rectangle breakout and an entry from a choppy price action. Let us have a look at the chart below.

The price action is choppy in this chart. Typically, traders avoid this kind of price movement. However, if we want to take trading as a full-time business, we are to widen our eyes. An entry can be found even in this market. Concentrate on the rectangle drawn here. After all these bounces, rejections the price finds its support and resistance within the rectangle.

The chart produces a bearish engulfing candle right at the resistance of the rectangle. This is a sign that something may happen. Let us assume a bearish move may occur. The first candle of the bearish trend looks good. A downside breakout with good momentum is the second thing that the sellers may wait to get.

The next candle comes out as a bearish candle followed by an Inside Bar. Things are getting better for the sellers. A bearish engulfing candle closing below the support would be the signal to go short for the sellers.

Here it is. The breakout candle is a bearish Marubozu candle. We may trigger a short entry right after the candle closes. Let us find out where we will set our Stop Loss.

Many traders may suggest setting the Stop Loss above the resistance of the rectangle and setting the Take Profit with the same distance. This is a good idea. However, we may set our stop-loss just above the resistance of the last consolidation. The reason is the price consolidates before making the breakout at the support. If the price made a breakout without the consolidation, we would have set our Stop Loss differently. By setting Stop Loss above the last consolidation’s resistance, we are to keep an eye with our Take Profit level.

We may set our Take Profit all the way down at the last swing low. The price may have kept going towards the major support. Look at the chart above. What do you think? The price is still very bearish but it produces a bullish reversal. That is too with a gap. The price action traders do not like price gaps. Considering the fact that we have set our Stop Loss as close as it can get, thus it may be the time to close our trade and come out with the profit.

The Bottom Line

Even a choppy market ends up producing an excellent trading signal. Our first choice shall be trending markets to look for entries. However, if we can spot out some entries from the choppy market, it would surely make us be more profitable.

Categories
Forex Chart Basics

All you need to be introduced to Trading Charts – Part 1: Line, Bar, and Candlestick Charts

Why Technical Analysis?
The expression “technical analysis” originated from the belief that price action is all that is required to make sound trading decisions. Fundamental analysts believe that fundamental or

Why Technical Analysis?
The expression “technical analysis” originated from the belief that price action is all that is required to make sound trading decisions. Fundamental analysts believe that fundamental or

Why Technical Analysis?

The expression “technical analysis” originated from the belief that price action is all that is required to make sound trading decisions. Fundamental analysts believe that fundamental or structural influences are already incorporated in the history of the price. The concept of price action analysis is credited to Charles Dow, the author of the Dow theory, around 1900.

Starting from there, TA began to rise in importance to traders. The idea that price movement discounts all new information seemed rational. Concepts such as price trending, price confirmation, support, resistance, divergence, and volume confirming price started to emerge.

TA practitioners believe that the current price represents the instantaneous consensus of value. It’s the cost at which someone is ready to buy and a different person to sell. That agreement depends on the different beliefs persons hold about the prevailing market situation. A potential seller believes that odds the price continuing moving up are minimal or that it will surely go down shortly. Opposing this view, a buyer, maybe trading in a different timeframe, might think it is the right place for the asset to start an uptrend. There’s a third category of people: Traders that are expecting to detect another price level to make a decision.

Charts

Traders using technical analysis record prices in charts. Since thousands of transactions happen every minute, chartists accumulate the market action in packets called timeframes. The x-axis registers the passing of time, while the Y-axis register the prices. Usually, volume bars are added at the bottom of the graph.

When traders and investors had to draw the charts on graphical paper, the usual was to use a daily timeframe and follow the daily closings. With the advent of personal computers and dedicated charting packages, we can find charts from sub-minute timeframes to hours, days, weeks, and months. Precisely, the MetaTrader 4 platform allows timeframes of 1 min, 5 min, 15 min, 30, min, 1 hour, 2, hours, 4 hours, one day, one week and one month.

Line charts

The most basic chart is the line chart. Line charts connect the ending price of every frame with a line.

Fig 1 – Line chart of the Bitcoin in a daily timeframe.

Bar charts

Line charts are useful to see trends but lack the information about how volatile was the session. To record this kind of information, chartists decided to draw vertical bars in every time segment, showing four critical elements: The open (O), the high (H), the Low (L), and the Close(C) prices of every segment of trading activity. That’s why sometimes they are called OHLC charts.

Fig 2 –  The same Bitcoin segment of history in a daily bar chart.

As we already stated, every bar is composed of four prices. The Open price is shown as a horizontal mark on the left side of the bar. A close price is depicted as a horizontal mark on the right side of the bar. The high is the highest point of the bar, and the Low price is the lowest part of a bar. The Close is the most crucial level, followed in importance by the Open, and then the high and the low.

Fig 3 – Bar anatomy.

The most probable price path for the bar shown above is the price moving from Open to High, then descending to the Low and finally having the strength to close higher. But we don’t know for sure. It might have moved from open to low, from there to a high to descend to the closing level, finally.  What we know for sure is that the sellers had the strength to drive down the price.

Candlestick charts

Candlesticks are a relatively new way to draw charts. They were introduced to the western world by the work of Steve Nison on the Japanse charting and trading methods.

They use the same four points, OHLC, but a body of the candle is formed between the Open and the Close. The rest of the price action, beyond that range, is left as a line called wick or shadow.

Fig 4 –  The same Bitcoin segment of history in a daily candlestick chart

 Traditionally a bullish candle was drawn hollow or white, while the bearish candle is drawn in black. Now we can assign any color to it. On figure 4, the upward candlesticks are depicted in turquoise, and the red candles denote descending prices.

Candlestick charts are much more graphical, and traders can see immediately if the trend is up or down. During the uptrend seen in fig 4, the turquoise color is prevalent, while the color shifted to red in the downtrend that followed.

Fig 5 –  The candlestick Anatomy

On candlestick charts, the Open and close prices are deducted by the context. The ascending candlestick moves from a lower open to a higher close, while the descending one moves from a higher open to a lower close.

The next article will be dedicated to introducing other forms of charting, such as Renko, three-line break, and point and figure.

 

Categories
Forex Basics Forex Daily Topic

Stop Loss: An Art to be Learned Well by Traders

Setting Take Profit and Stop loss in the right areas are essential factors in trading. A trader does not survive in the market by placing Stop Loss and Take Profit

Setting Take Profit and Stop loss in the right areas are essential factors in trading. A trader does not survive in the market by placing Stop Loss and Take Profit

Setting Take Profit and Stop loss in the right areas are essential factors in trading. A trader does not survive in the market by placing Stop Loss and Take Profit at the wrong places. In today’s lesson, we are going to demonstrate an example of an entry with the level of Stop Loss and Take Profit.

This is a daily chart. The price heads towards the North with good bullish momentum. The buyers are to look for long opportunities at the pullback. Let us wait for the price to make a pullback.

The price starts having a downside correction with an Inside Bar. It produces two more candles that are bearish. After that, it forms a Spinning Top right at a flipped support. This is a bullish reversal candle but not a strong one. A breakout at the top of the Spinning Top attracts the minor charts’ buyers to go long on the pair. However, major charts’ traders may want to wait for a stronger daily bullish reversal candle.

The next candle comes out as an Engulfing candle. This reversal candle attracts more traders to look for long opportunities here. Since it has not made an upside breakout, thus, to take an entry, traders shall flip over to the H4 chart.

This is the H4 chart. The price has a rejection at the red marked level on the daily chart. Thus, this is the level where the price may find its resistance on the H4 chart. This shall be the level to count in setting Take Profit. The H4 chart shows that the price starts having a pullback. Things are getting better for the buyers.

Let us draw the resistance. If the price consolidates and makes a breakout at the black marked level, a long entry may be triggered. However, the buyers must wait to get the level of support.

Here it comes. A bullish reversal candle forms at a flipped support followed by a breakout candle. A long entry shall be triggered right after the last candle closes. Stop Loss may be placed right below the support where the price forms the bullish reversal candle. Many traders set their stop loss right below the breakout candle. In my experience, this offers a better risk-reward, but it often brings more losing trades.

Have you noticed that the price came back and then headed towards the North? If we had set our Stop Loss right below the breakout candle, our Stop Loss would have been hit. Rather than making some profit, we would make a loss here.

The Bottom Line

Setting Take Profit is important, but setting Stop Loss is more important. In my opinion, it is an art. It needs a lot of practice to be well acquainted with the art of setting Stop Loss as immaculate as it can get.

Categories
Forex Basics Forex Daily Topic

The Babe Ruth Syndrome

In his book More than you know, Michael J. Mauboussin tells the story of a portfolio manager working in an investment company of roughly twenty additional managers. After assessing the

In his book More than you know, Michael J. Mauboussin tells the story of a portfolio manager working in an investment company of roughly twenty additional managers. After assessing the

In his book More than you know, Michael J. Mauboussin tells the story of a portfolio manager working in an investment company of roughly twenty additional managers. After assessing the poor performance of the group, the company’s treasurer decided to evaluate each manager’s decision methods. So he measured how many of the assets under each manager outperformed the market, as he thought that a simple dart-throwing choice would produce 50% outperformers. This portfolio manager was in a shocking position because he was one of the best performers of the group while keeping the worst percent of outperforming stocks.

When asked why was such a discrepancy between his excellent results and his bad average of outperformers, he answered with a beautiful lesson in probability: The frequency of correctness does not matter; it is the magnitude of correctness that matters. 

Transposed to the trading profession, The frequency of the winners does not matter. What matters is the reward-to-risk ratio of the winners.

Expected-Value A bull Versus Bear Case.

Since a combination of both parameters will produce our results, how should we evaluate a trade situation?

Mauboussin recalls an anecdote taken from Nassim Taleb’s Fooled by Randomness, where Nassim was asked about his views of the markets. He said there was a 70% chance the market had a slight upward movement in the coming week. Someone noted that he was short on a significant position in S&P futures. That was the opposite of what he was telling was his view of the market. So, Taleb explained his position in the expected-value form:

Market events Probability Magnitude Expected Value
Market moves up 70% 1% 0.700%
Market moves down 30% -10% -3.000%
Total 100% -2.300%

  As we see, the most probable outcome is the market goes up, but the expected value of a long bet is negative, the reason being, their magnitude is asymmetric. 

Now, consider the change in perception about the market if we start trading using this kind of decision methodology. On the one hand, we would start looking at both sides of the market. The trader will use a more objective methodology, taking out most of the personal biases from the trading decision. On the other hand, trading will be more focused on the size of the reward than on the frequency of small ego satisfactions.

The use of a system based on the expected value of a move will have another useful side-effect. The system will be much less dependent on the frequency of success and more focused on the potential rewards for its risk.

We Assign to much value to the frequency of success

Consider the following equity graph:

 

Fig 1 – Game with 90% winners where the player pays 10 dollars on losers and gains 1 dollar on gainers

This is a simulation of a game with 90% winners but with a reward-to-risk ratio of 0.1. Which means a loss wipes the value of ten previous winners.

Then, consider the next equity graph:

Fig 1 – Game with 10% winners where the player pays 1 dollar on losers and gains 10 dollars on gainers

A couple of interesting conclusions from the above graphs. One is that being right is unimportant, and two, that we don’t need to predict to be profitable. What we need is a proper method to assess the odds, and most importantly, define the reward-to-risk situation of the trade, utilizing the Expected Value concept,

By focusing on rewards instead of frequency of gainers, our strategy is protected against a momentary drop in the percent of winners.

The profitability rule

P  > 1 / (1+ R)  [1]

The equation above that tells the minimum percent winners needed for a strategy to be profitable if its average reward-to-risk ratio is R.

Of course, using [1], we could solve the problem of the minimum reward-to-risk ratio R required for a system with percent winners P.

R > (1-P)/P    [2]

We can apply one of these formulas to a spreadsheet and get the following table, which shows the break-even points for reward-to-risk scenarios against the percent winners.

We can see that a high reward-to-risk factor is a terrific way to protect us against a losing streak. The higher the R, the better. Let’s suppose that R = 5xr where r is the risk. Under this scenario, we can be wrong four times for every winner and still be profitable.

Final words

It is tough to keep profitable a low reward-to-risk strategy because it is unlikely to maintain high rates of success over a long period.

If we can create strategies focused on reward-to-risk ratios beyond 2.5, forecasting is not an issue, as it only needs to be right more than 28.6% of the time.

We can build trading systems with Reward ratios as our main parameter, while the rest of them could just be considered improvements.

It is much more sound to build an analysis methodology that weighs both sides of the trade using the Expected value formula.

The real focus of a trader is to search and find low-risk opportunities, with low cost and high reward (showing positive Expected value).

 

Appendix: The Jupyter Notebook of the Game Simulator

%pylab inline
Populating the interactive namespace from numpy and matplotlib
%load_ext Cython
from scipy import stats
import warnings
warnings.filterwarnings("ignore")
The Cython extension is already loaded. To reload it, use:
  %reload_ext Cython
from scipy import stats, integrate
import matplotlib.pyplot as plt
import seaborn as sns
sns.set(color_codes=True)
import numpy as np
%%cython
import numpy as np
from matplotlib import pyplot as plt

# the computation of the account history. We use cython for faster results
# in the case of thousands of histories it matters.
# win: the amount gained per successful result , 
# Loss: the amount lost on failed results
# a game with reward to risk of 2 would result in win = 2, loss=1.
def pathplay(int nn, double win, double loss,double capital=100, double p=0.5):
    cdef double temp = capital
    a = np.random.binomial(1, p, nn)
    cdef int i=0
    rut=[]
    for n in a:
        if temp > capital/4: # definition of ruin as losing 75% of the initial capital.
            if n:
                temp = temp+win
            else:
                temp = temp-loss        
        rut.append(temp)
    return rut
# The main algorithm. 
arr= []
numpaths=1 # Nr of histories
mynn= 1000 # Number of trades/bets
capital = 1000 # Initial capital

# Creating the game path or paths in the case of several histories
for n in range(0,numpaths):
    pat =  pathplay(mynn, win= 1,loss =11, capital= cap, p = 90/100)
    arr.append(pat)

#Code to print the chart
with plt.style.context('seaborn-whitegrid'):
        fig, ax = plt.subplots(1, 1, figsize=(18, 10))
        plt.grid(b = True, which='major', color='0.6', linestyle='-')
        plt.xticks( color='k', size=30)
        plt.yticks( color='k', size=30)
        plt.ylabel('Account Balance ', fontsize=30)
        plt.xlabel('Trades', fontsize=30)
        line, = ax.plot([], [], lw=2)
        for pat in arr:
            plt.plot(range(0,mynn),pat)
        plt.show()

References:

More than you Know, Michael.J. Mauboussin

Fooled by randomness, Nassim. N. Taleb

 

 

Categories
Forex Basic Strategies

A Twist in the Tale

The Forex market can be very unpredictable. It is a game of probability. With more experience and knowledge, a trader increases the chance to be right in making a trading

The Forex market can be very unpredictable. It is a game of probability. With more experience and knowledge, a trader increases the chance to be right in making a trading

The Forex market can be very unpredictable. It is a game of probability. With more experience and knowledge, a trader increases the chance to be right in making a trading decision. Having immaculate risk management is another aspect that keeps a trader safe with his investment. In today’s lesson, we are going to talk about the unpredictability of the market.

Let us start with a daily chart of a Forex pair.

The price makes a bullish move and finds its resistance. After four daily candles, the daily chart produces a bullish engulfing daily candle. This is a powerful bullish reversal candle, which forms right at a flipped support. Have a look at the chart below.

The chart above shows that the bullish engulfing candle forms at the flipped support. This means buyers on this chart are to go long on a chart pattern called ‘ABC’ or ‘123’. This is a lucrative and consistent chart pattern, which price action traders love to trade. Let us find out what happens next.

The price stalls and has a rejection at the same level. The buyers would love to get a breakout here to go long and grab some green pips. However, the chart produces a bearish engulfing candle instead. What do you think a trader should do here?

He shall start looking for short opportunities. This is the daily chart. Thus, he shall flip over to the H4 chart to find out a short opportunity.

This is how the H4 chart looks. A very strong bearish candle followed by a little Inside Bar. The trader (the seller) is to wait for consolidation and a bearish reversal candle to go short.

The price consolidates more. It produces a good-looking bullish candle. Let us find out how the next candle comes out. Do not forget that the sellers are waiting to get a bearish reversal candle breaching the lowest low.

This is it. A bearish engulfing candle closes below the level of support. The sellers have been waiting to get a signal candle like this. A short entry may be triggered right after the last candle closes. Let us find out what happens next.

As expected, the price heads towards the South with good bearish momentum. We see the first H4 bullish reversal candle forming at the daily support as well. This may be time to take out the profit.

The Bottom Line

Do you notice how things change within a candle? Before that bearish engulfing daily candle, the pair looks extremely good for the buyers. An upside breakout would make them go long on the pair and push the price towards the North. However, that does not happen, but the price comes down instead. This is what I call “Twist in the tale.” Forex traders often get these twists.

Categories
Forex Market

Leverage Trading & Important Money Management Rules To Follow

What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk

What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk

What is Leverage?

Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk while expecting for additional rewards. This is done by the traders only when they think the odds are in their favor. Leverages is basically represented as a ratio or with an ‘X’ next to the times of leverage. For instance, to take a trade what is double the size of the amount you want to risk, you are essentially taking leverage of 2:1 or 2x.

The main leveraged products available today for Forex traders are spread betting and contract for difference (CFDs). Other products include options, futures, and some exchange-traded funds (ETFs). Before using leverage, a trader needs to understand the risk associated with it. Controlling risk means having money management principles that can be used on a daily basis. Since leverage trading can be risky, as losses can exceed your initial investment, there are appropriate money management tools that can be used to reduce your potential losses. Now let’s look at a few of these tools.

Money management rules

Using stops

Putting a stop-loss to your position can restrict your losses if the price moves against you. As mentioned in previous articles, markets move quickly, and certain conditions may result in your stop-loss not being triggered at the price you’ve set. Do not forget to trail your stop-loss after you get in a profitable position. By trailing your stop-loss, you will be able to lock in the profits you have made on your trade. There is no need to monitor your position nor the need to adjust your stop-loss manually.

The right risk to reward ratio

The risk to reward ratio can be calculated by taking the total potential profit and then dividing it by the potential loss. You need to calculate risk based on your trading capital (risking not more than 2% of trading capital) and the leverage that you use to trade, as the leverage can alter your stop-loss.

Choosing the right leverage level

It is hard to determine the right margin level for a trader as it depends on trading strategy and the overall market volatility. But from a risk perspective, there is a maximum level of margin that one should use in order not to overexpose themselves to the market. It is seen that scalpers and breakout traders use high leverage when compared to positional traders, who often trade with low leverage. Irrespective of the type of trader you are, you should choose the level of leverage that makes you most comfortable. Since forex brokers provide a maximum leverage of 1:500, newcomers find it attractive and start trading with that amount of leverage, which is very dangerous.

If you are a novice trader, the optimal leverage to use in Forex should be below 10X. But if you are an experienced trader and are extremely sure about the trade you are about to take, the maximum you can go up to is 50X. But as discussed, Forex brokers offer a maximum leverage of 500X and some time more too. But it is advisable not to go that far until and unless you have the appetite to take that risk. By using less leverage, you can still trade even after having a series of losses in the market as you are taking a calculated risk.

Bottom line

A simple rule to keep in mind is that you shouldn’t be risking more than you can afford in the market. You can open a special type of account with a forex broker known as limited-risk accounts, which ensures that all your positions have a guaranteed stop. They decide your account type and leverage based on the information you give them while opening an account. Hence, leverage can be used successfully and profitably with proper money management techniques.

Categories
Forex Basics

Do not be Biased with Your Anticipation

Financial markets keep going up and down. Traders make money out of those moves. To take an entry, a trader is to do a lot of calculations, such as detecting

Financial markets keep going up and down. Traders make money out of those moves. To take an entry, a trader is to do a lot of calculations, such as detecting

Financial markets keep going up and down. Traders make money out of those moves. To take an entry, a trader is to do a lot of calculations, such as detecting a trend, waiting for the price to go to the right zone, market psychology, and signal candle, etc.

In trading, we often find ourselves in a situation in which we were waiting for a long entry from a support zone, all of a sudden the price makes a breakout at the support and heads towards the South instead. We feel deprived. However, this should not be like this. In trading, we are to get ready to sell and to buy since the market can go anywhere. We are to stick with the rules to take an entry.

Let us demonstrate an example.

The price heads towards the North with good buying pressure. It seems that the price finds its resistance as well. The buyers are to wait for a bullish reversal candle and a breakout at the resistance to go long again on the pair.

The price keeps being bearish. It seems that the price is going to have a long correction instead of consolidation. The price is at a flipped support. This is where a battle is going to take place between the bull and the bear. Traders are to wait for a downside breakout to sell the pair. On the other hand, a bullish reversal candle is going to attract them to keep an eye for an upside breakout and buy the pair.

The bull wins here. An engulfing bullish candle right at the flipped support means traders shall wait for an upside breakout to buy the pair. The momentum looks good. If the breakout takes place within the next candle, it will be an excellent buy signal. If it takes two candles to make the breakout, that will be a good buy signal as well. Let us proceed to find out what happens next.

The bull has lost the momentum. Traders are to wait for an upside breakout to go long. A good-looking bullish engulfing candle at the support area shall attract the buyers on the minor time frames to push the price towards the upside. That would eventually help the price make an upside breakout on this chart. Let us wait and find what happens next.

What do you see here? A bearish engulfing candle is right at the resistance level. This is a Double Top resistance level as well. If you have been waiting to go long, please change your mind. Get ready to look for short opportunities. This is how the market changes its complexion. You know what you have to do to deal with it. Yes, you must not be biased with your anticipation/calculation — Trade what you see, not what you think.

 

Categories
Forex Daily Topic Forex Money Management

Why Compounding is such a Powerful Tool

Novice traders put their focus on how much leverage brokers are offering as a crucial part of their decision process to choose the right brokerage account. But in fact, as

Novice traders put their focus on how much leverage brokers are offering as a crucial part of their decision process to choose the right brokerage account. But in fact, as

Novice traders put their focus on how much leverage brokers are offering as a crucial part of their decision process to choose the right brokerage account. But in fact, as we saw in our previous article, Things you should Know about Leverage, Drawdown and Risk , there is no need for leverages above 30X, and in 99% of the cases, leverage is the rope with which traders hang themselves. 

In this article, we will show that compounding is a terrific tool to boost the growth of a trading account.

In our article To Reinvest or Not Reinvest, That is the Question, we discussed the properties needed for a trading system to be suitable for reinvestment strategies. 

Unhappily, 95% of the traders fail. The main reason for failure is discovered in the final section of the article. The article unveils that the growth factor of any investment strategy is called the Geometric Mean (G).

The Geometrical Mean  G = TWR^(1/N)  has two operators.

N the number of trades registered on the system, so it is just a normalization factor to equate all systems no matter how many trades were recorded.

Thus, TWR is the key. TWR means Total Wealth Return and is 

TWR = SUM(1+%Ri) 

where %Ri is the individual percent gains and losses.  

TWR is a product of (1 + the individual gains). If the gain is negative (a loss), this particular factor will decrease the total value of the account by the percent that was lost. If the gain is positive, it will increment it by the percent gained.

As an example, let’s say that 1,000 USD is the initial amount in a trading account, and two trades were performed. One lost 10%, and the other gained 15%. Which is the final TWR of this account, and which is the final balance?

TWR = (1- 0.1)*(1+0.15) = 0.9 *1.15 = 1.035

Final balance = TWR * Initial Capital

Final Balance = 1.035 * 1,000 = 1,035 USD

In this simple example, we clearly see that a system with large losses greatly hurts the growth of the investment.

For instance, if the first loss were 50% then

TWR = (1-0.5) * (1+0.15) = 0.5*1.15 = 0.575

and Final Balance would be =575 USD

Of course, 100% loss would mean the account wiped out and no second chance to make it grow. Therefore, it seems wise to concentrate on steady and continuous gains and cut losses short.   Let’s explore the long-term performance of low-risk position sizing strategies.

It is evident that a loss limit of 1 percent of the trading capital on each trade looks much better than a ten percent loss in our TWR equation.  The issue here is how it performs as generator of growth.

As a first approximation of what we could achieve, let’s look at an equity curve that might seem boring. It is the equity curve of a 26% yearly continuous growth. That was the rate of return Berkshire Hathaway gave his shareholders. 

Fig 1 – 10-year chart of risk-free 26%/year returns 

In this chart, we show ten years of 26% compounding interest. With an initial balance of $10,000, the final capital is $128,173.33 for a capital appreciation of 1,182%. Not a bad feat!

Well, let’s look at what this strategy does in 40 years:

Fig 2 – 40-year chart of a risk-free 26%/year returns 

We can see that in 40 years, this strategy converts $10,000 into 287,818 million dollars and a total growth of 1.88 million percent.

I know, waiting forty years is too much for the instant-satisfaction generation. Maybe we don’t need to wait so long. But before going further, let’s see the properties of this curve. On the 10-year graph, we can see that it takes 400 months to reach $500,000 and just 100 more months to go from 0.5 to almost 3 million. Compounding needs patience and perseverance because its power comes from the accumulation of past gains. 

A Trade sizing system for the faint-hearted

We are going to use a Forex discretionary system that was used live by a friend. Since we don’t have 40 years of history for it, we will extrapolate it with resampling with replacement to simulate its performance. The system will take three daily trades 20 days per month.

To refresh our memory, the following are the relevant statistical data of the system:

STRATEGY STATISTICAL PARAMETERS : 
 Percent winners         : 58.74%
 Profit Factor           : 1.74
 mean Reward Ratio       : 1.22

 Sample Statistics:      
 Mathematical Expectation : 0.0628
 Standard dev            : 0.4090

 Mathematical Expectation using Bootstraping, Samples=100K, confidence limit 99%: 
 Expectation interval   low : -0.01          high : 0.1776

The main parameters are 58% winners and an average reward to risk ratio of 1.22.

The following chart is one year of simulated performance of this system using a 1 percent risk on every trade:

Fig 3 -1-year chart of 1% risk Model Forex System

The figure also shows all the relevant information needed. We see that the system was able to move the initial balance from $10,000 to $13,729.25 for a total profit of 37.29 percent and a max drawdown of just 3.87%. That system beats Berkshire Hathaway Inc, by a fair margin.

Let’s see what it can do in 20 years:

Fig 4 -20-year chart of 1% risk Model Forex System

We can see that this modest system can produce $91.8 million in 20 years with no more than 6.3% drawdown.

We have shown here that there is no need for high leverages and drawdowns to be successful and rich in the long run.  But to show you the power of compounding, let’s show here the 20-year equity curve using a 2 percent risk to observe that drawdowns above 20% are not needed at all and that high leverages are totally unnecessary.

Fig 5 -20-year chart of 2% risk Model Forex System

This system gets the insane amount of $663 billion in 20 years with just a 12% drawdown, and the first 100 million is reached before year 10, starting with only $10,000.

We could go even to 3 percent. I did the numbers, and still, the drawdown is below 20% for insane theoretical profits. Of course, the system would break down well before such amounts could be traded.

The key idea is to show that insane risks are not the way to richness. The way to wealth is compounding with a controlled risk state of mind.

Categories
Forex Market

Dealing With Liquidity & Volatility In The Forex Market

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?

When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest figures suggest that the daily trading volume of forex is close to $5.1 trillion.

Liquidity is the ability to trade a currency pair on demand. In simple terms, it is the measure of how easily a currency can be exchanged. When you are trading major currency pairs, you have an exceedingly high amount of liquidity. This liquidity is provided by financial institutions, big businesses, and retail traders as well. However, not all the currency pairs are liquid; liquidity depends on whether a currency pair is major, minor, or exotic. Major pairs typically have high liquidity compared to the other currency pairs. In the next section, we will look at some of the money management principles in trading with respect to liquidity.

Liquidity and Risk

A market with low liquidity has chaotic moves and gaps because of the absence of buyers and sellers at any given point of time. These gaps occur when news announcements are made over the weekend or if an event happens at the same time. The chart below depicts such a gap after a news release.

According to money management principles, when you know that there will be a change in liquidity levels between Friday to Monday, it is not advised to carry huge positions on Friday. The risk drastically increases, if the price opens above your stop loss on Monday, it will become a market order, and this loss will be much higher than the predefined loss (determined using stop-loss). A conservative trader especially should not take any positions during times of news releases.

Retail forex traders need to manage liquidity risk by lowering their leverage and putting stop losses based on higher time frames. In this way, you would be safe from any kind of gaps that happen at the beginning of the week.

Volatility

Volatility refers to the currency fluctuations in the global exchange market. Price movements can vary from hour to hour, minute to minute, and second to second, depending on many factors. A lot of forex traders enjoy volatility, but it comes with a risk. Therefore it is important to manage volatility and do plenty of research before placing a trade.

Eliminating the risk of volatility

In order to make the most out of volatility, follow the below-mentioned techniques:

Volatility strategies

Money management, in relation to volatility, essentially suggests traders invest in strategies that can perform in different market conditions. Some of the strategies that can be used to turn the volatility in your favor include widening your targets, placing tight stop-losses, and analyzing the higher timeframes.

Stay diversified

Don’t rely too much on any asset class or forex pair. If one investment performs poorly, other investments may perform better over that same period and thereby reducing your overall losses. This happens due to the difference in volatility across various asset classes. A balanced portfolio protects from losses and provides a high return on investment.

Money management should always be a top priority for every trader, as these principles guide us while taking trading decisions. A lot more concepts related to money management will be discussed in the upcoming articles.

Categories
Forex Chart Basics

Why Mark Support/Resistance Zone Along with Line?

Most traders use a horizontal line on their trading chart to mark support/resistance levels. Support and Resistance lines are the most basic trading tools, which traders use to make a

Most traders use a horizontal line on their trading chart to mark support/resistance levels. Support and Resistance lines are the most basic trading tools, which traders use to make a

Most traders use a horizontal line on their trading chart to mark support/resistance levels. Support and Resistance lines are the most basic trading tools, which traders use to make a trading decision. However, traders often find that the price does not react right at the drawn level.  It is because of candles’ wicks and candles’ bodies. We may see that sometimes the price reacts at the level where the candles’ bodies are, and sometimes the price reacts where the wicks are. Thus, it is a good practice that we mark the support/resistance zone instead of marking the level only.

Let us demonstrate an example of that.

The price is being bullish after producing a Pin Bar. We know that a bullish Pin Bar has a long lower shadow. This means it reacts from a zone not only from a particular horizontal line.

The price is on the correction. Look at those Spinning Tops with long upper and lower wicks. Do you notice that one of the flipped support holds the bodies of the candles? However, those shadows often play an essential role, especially when the price is to confirm a breakout. We will reveal that soon.

The flipped support does not hold the price at last. The price comes towards the South further to find its support. The last bullish candle suggests it finds one strong support for sure. Do you notice that this is where the price has bounced earlier and produced spikes?

This time we have marked out the resistance zone. A bullish candle breaches the zone. The buyers need to wait for consolidation. The question is which level to hold the price as the level of support. Is it the level where the wicks are or where the bodies close or both?

Both levels hold the price as support. On this chart, the level, which is drawn on the wicks, holds the price as the support. On its smaller time frames, the level that is drawn on candles’ bodies holds the price as support. If we draw just one level here, we may get confused. Thus, we must mark out the support/resistance zone. Since the buyers are waiting for a bullish reversal candle to go long, it may be produced where the price is now. The price may as well come down at the lower level of the support zone and create a buy signal. Both are valid signals. Let us find out where the signal is produced.

The buyers may want to trigger a long entry right after the last candle closes. Assume only the red line was drawn here. Some buyers would have been confused that the signal did not come from the right level. Thus, drawing the support/resistance zone comes out handy for the traders. Support/Resistance zone helps traders take a better trading decision.

Categories
Forex Daily Topic Forex Money Management

Things you should Know about Leverage, Drawdown and Risk

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with leverage, risk management plays a crucial role. This article tries to show why.

Key points

 In trading, There are two key points a trader must care and make sure:

  1.  That his strategy is good
  2. Risk management trough proper position sizing

Good Strategies and Bad strategies

The first thing to consider is the quality of the trading system or strategy. There are risk management ideas that might convert a losing system into a winner if the problem was that stop-loss settings were wrong, But no position sizing can change a losing strategy into a winning one. Therefore, the first thing a trader should care about is for his system to have a positive edge.

In statistical terms, the strategy should have a positive expectation. If not, the trader should analyze it, find the weak points, and modify it for profitability. Once the system is profitable, it can be traded. Finally, depending on its quality, the system will make grow the trading account fast or slow, and, also, its growth can be optimized through position sizing.

Strategy basic Statistical 

To analyze a trading strategy, we need to normalize its trades to a basic unit and, then extract its four main statistical parameters:

  • Percent winners
  • Mean reward-to-risk Ratio
  • Mathematical expectation
  • Standard Deviation of the expectation.

For example, the system we are going to use as an example in this article shows the following parameters:

STRATEGY STATISTICAL PARAMETERS : 

  •  Nr. of Trades: 143.00
  •  Percent winners: 58.74%
  •  Mean Reward Ratio: 1.22
  •  Mathematical Expectation: 0.0887
  •  Standard dev: 0.4090

It is not a really good system, but it’s tradeable. The Mathematical expectation says that the system, using a basic unit of risk of one dollar, is able to extract a mean of 8.87 cents per dollar risked on every trade. Therefore, the system has an 8.87 cents edge against the market, which is 8.87%.

Drawdown

You can see that here, we did not show the drawdown as a parameter to consider. That is because drawdown is dependent on position sizing. The parameter we can compute, though, is the losing streak, which is the number of continuous losses we could expect based on the percent of losses. As we know, the percent of losers is 1-percent winners. Therefore, in this case, Percent losers = 41.26%

With that information, we can create a probabilistic curve of a losing streak of size N, such as the one here. But the trade size is what is going to define the drawdown parameter.

Fig 1 – Losing Streak Probability Curve

Leverage and Drawdown

Forex is a leveraged trading environment, and many brokers offer its customers the ability to go up to 500:1, meaning traders can use up to 500x the size of its trading account to open positions. But is it wise to get that leveraged? Let’s do an experiment using the above-mentioned system.

As said above, the system has been taken from a real trader and is a good, although not brilliant system. But it is a real no-hype system that can be traded what we want to test. For this test, we will always start with a balance of $10,000 and will increase the trade size using the same trade segment. 

Leverage = 1

Fig 2 – 0.1 Lots per trade

Using a leverage of one, we see that the system shows a max drawdown of 10.4 percent, and the final equity after 143 trades is a bit more than $11.600, which is 16% growth.

Leverage = 5

Fig 3 – 5X Leverage

Using 5X leverage, we notice that the Max Drawdown went to 39.58%, and the final equity ended up at $18,400.00 for an 84% profit.

Leverage = 10

Fig 4 – 10X Leverage

If the trader dares to go to 10X leverage, he must endure close to 61% drawdown for the opportunity to receive 168% profit and a total equity of $26,800 at the end of a 143-trade cycle.

Leverage = 20

Fig 5 – 20X Leverage

Leverage 20X is even wilder. The trader has to withstand up to 83.4% drawdown for a gain of 336.00 % profit.  The question is when to stop? Will a 40X leverage be even better for the profit-hungry trader?

Leverage = 40

Fig 6 – 40X Leverage

We can see that at some point, the risk is too much, and a profitable system, with the wrong risk and size management, can be converted into a very fast losing system and wipe the entire account.

As we see here, a 40X leverage is wild enough to wipe an entire account using a very profitable trading system. We must understand that up to one point, increasing the leverage will increase risk while decrease profitability.

As a summary, let’s see the plot of several account histories with increasing leverage

Fig 7 – 40X Leverage

This time we have plotted the histories on a semi-log scale to be aware of the enormous scale of the drawdowns. On the graph, we can see that the most critical moment of the histories happens at about trade Nr. five or six, which crashes all accounts above 30X leverage. But, if we take this event aside, we can see that to reach its destination traders must endure four more events when they lose close to 80% of their initial funds. We must take into account that at the moment of these events happening, there is no way to know when will they stop and start recovering the funds back.

A Propper Attitude Towards Risk

Position sizing and risk management are the tools traders have to accomplish their trading objectives, but it has to be done correctly.

We first need to set the daily, weekly, or monthly profitability of the trading strategy. Let keep using the previous example.  We know that the system has a mean of 8.87 cents per dollar risked.  Let’s suppose the system has an average of six daily trades. Then, the profitability of this system is $0.53 daily, and $10.64 monthly per dollar risked.

From the losing streak curve, we see that it is wise to be prepared for a max streak of, at least eight losing trades.  Then, we define our comfort zone for drawdowns. Let say we are bold and wanted to risk up to 40% of the capital. To accomplish this, we divide the max 40% drawdown by our defined max losing streak of 8, and the result will be the maximum percent risked on every trade. In this case, Risk per trade = 5%. (That is a huge of risk, we do not recommend more than 1%, by the way).

Now, if your current account balance were $10,000,  the risk per position should be 5% * 10,000, = $500. With that information, we can see that the system would deliver $5,320 monthly, on average.

If we were to double this amount, we would need to double the account balance or wait roughly two months until the profits reached the $10K mark.

The concept of applying a trade size proportional to the account balance helps traders to apply compounding growth to their accounts, while automatically reducing the trade size while in a losing streak on a dollar basis. More on compound growth will be developed in a future article.

 

Categories
Forex Market

What Should You Know About Funding Your Forex Trading Account?

Introduction
A forex account, also known as the foreign exchange account, is used to hold and trade different currencies. When a trader opens an account with a forex broker, they

Introduction
A forex account, also known as the foreign exchange account, is used to hold and trade different currencies. When a trader opens an account with a forex broker, they

Introduction

A forex account, also known as the foreign exchange account, is used to hold and trade different currencies. When a trader opens an account with a forex broker, they will have to fund his account with his home currency, and then they get to buy or sell foreign currencies using that money. Today, opening a forex account and funding that account is a pretty seamless process. All you need to do is to choose a reliable and credible Forex broker, open an account with them, and fund it to start trading. Forex brokers provide many options to fund a trading account. Let’s look at those methods in this article.

Funding methods in forex

To attract traders, forex brokers offer a wide range of payment options for both deposits and withdrawals. They are categorized into the following methods.

Offline payments

Offline payment options involve traditional means of funding trading account which includes:

  • Local deposit
  • Western union
  • Bank wire
  • Cheque

These methods are best used when you want to trade in huge amounts of money. However, before you transfer this large amount of money, make sure that you know the broker well enough and that you trust them completely. Payment via Bank wire and other methods are relatively more expensive and take at least six days or more. The reason for this method being expensive is because it involves bank transaction fees and currency exchange services fees. These are additional costs which are levied when you make payments.

The disadvantage of using the above method is that if you fall prey to a scam, it will get hard to get your money back. The broker will provide you with the transaction ID, which is the only proof of payment.

eWallet payments

eWallet payments are getting more and more popular nowadays due to their ease of use, relatively lower transaction costs, and faster execution. In fact, most brokers offer instant deposits and withdrawals with eWallets. Some of the widely used eWallet funding methods include:

  • Neteller
  • Skrill
  • Paypal
  • CashU
  • Webmoney

Using the eWallet payment method is often better than using offline payment methods. eWallet service providers offer higher protection of trading account, which means if you want a refund of your deposit, your eWallet can get the job done for you easily. It acts as a medium between the merchant (the forex broker) and the customer (the trader). Forex brokers also offer special bonuses when you use your eWallet very frequently or make transactions with huge volume.

Debit/Credit cards

Funding your trading account using debit/credit cards is another popular way for traders to deposit instantly. However, the bank will enforce a limit on deposit and withdrawal based on the trader’s capacity. If you notice the broker is carrying out any malicious activity, you can take back all your money using a facility called ‘chargeback.’ Note that a ‘chargeback’ does not guarantee your money back. Therefore traders need to be cautious when funding their account using debit/credit cards. Even the credit card details will be exposed, of course, when using this method for transactions.

Best way to fund your trading account

After looking at different funding methods, eWallet payments turn out to be the best option for funding for the following reasons:

  • Lower transaction cost (relatively) – Deposits and withdrawals can be done almost cost-free, which are usually covered in spreads charged by the broker.
  • Safe – eWallets ensure the safety of your money, with great transparency.
  • Fast execution – Deposits and withdrawals are faster via eWallets as it is instant in most of the cases. You can also link your debit or credit card to your eWallet and use them.

This covers most of the ways through which you can fund your trading account. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Basics

What leads a Breakout to be Nullified?

Price action traders consider the breakout as one of the most important factors. It is, once it is confirmed. However, momentum, overall psychology are essential aspects of breakout that less

Price action traders consider the breakout as one of the most important factors. It is, once it is confirmed. However, momentum, overall psychology are essential aspects of breakout that less

Price action traders consider the breakout as one of the most important factors. It is, once it is confirmed. However, momentum, overall psychology are essential aspects of breakout that less experienced traders often misapprehend. In this lesson, we are going to demonstrate an example of a breakout with less momentum. Let us get started.

The chart shows that the price is up trending with good buying pressure. The price makes a breakout at the last swing. This is an ideal chart for the buyers to look for buying opportunities. They are to buy the pair on the pullback. Let us proceed to the next scene.

The price starts having a correction and comes back up to the breakout level (the last swing high). It produces an engulfing candle, which is a strong sign that it may keep going towards the upside, makes a breakout, and offers a long entry.

The price does not find a strong buying momentum. It goes towards the upside and comes back again to the support. It seems the buyers may have to wait longer than they thought.

Things look a bit different now. Rather than making an upside breakout, it has a strong rejection at the resistance. The support is being tested again.

No downside breakout, but the support holds the price. The price gets caught within two horizontal levels. To be precise, the price gets caught within a rectangle. Ideally, both the sellers and the buyers love to keep this chart in their watch list; get a breakout at either side to take an entry.

Two consecutive bullish candles right at the support suggest that the buyers have the upper hand. The buying momentum looks good here. If it continues going towards the upside and makes a breakout, the buyers may dominate here. Let us see what happens next.

Oh no, the price heads towards the North with less buying pressure. The bullish move has much less speed than the last bearish move. This sort of price action usually makes the price have another bearish move and head towards the support. Let us find out what happens next.

An upside breakout this is! After the breakout, if the price consolidates and makes another bullish move from the breakout level, it would be a buying market again. However, the question is whether it makes the buyers interested in buying or not.

  1. The last bullish wave does not have the drive.
  2. The resistance level is strong

Let us find out what happens next.

It does not produce a bullish reversal after the breakout. Instead, it comes back in. The breakout is not valid anymore. What may have been a strong buying market has become a choppy market again.

The Bottom Line

The breakout may have offered us entry if it produces a bullish reversal candle at the breakout level. That does not happen. We cannot precisely tell why that happens here. However, the less momentum to begin the potential trend is one of the reasons among many. It represents that psychologically, the buyers are not confident about the breakout and continuation, which makes that a nullified breakout in the end.

Categories
Forex Market

The Basics of Spread & Slippage

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread

Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a fee on zero-commission accounts (STP accounts). A spread is simply the price difference between the purchase price and selling price of an asset. The broker always shows two quotes of currency – one at which they sell the underlying asset to you and another at which they buy the underlying asset from you. The spread between these two prices makes the broker’s revenue from the foreign exchange transactions they perform for their clients.

Bid-Ask spread

There are two types of forex rates, the Bid and the Ask.

The price you pay to buy the forex pair is called Ask. It is always slightly higher than the market price.

The price at which you sell the forex pair is called Bid. It is always slightly lower than the market price.

The price that you see on the chart is always a Bid price. The ‘Ask’ price is always higher than the ‘Bid’ price by a few pips. Spread is essentially the difference between these two rates.

Spread = Ask – Bid

For example, when you see EUR/USD rates quoted as 1.1290/1.1291, you buy the pair at the highest Ask price of 1.1291 and sell it lower Bid price of 1.1290. This particular quote shows a spread of 1 pip.

Types of spreads

The kinds of spread depend on the rules of the broker. Spreads can either be fixed or floating.

Fixed spreads remain fixed no matter what the market conditions are at any given point of time. The advantage of this type of spread is that the broker will not be able to widen the spreads during volatility.

Floating, also known as variable spreads, are continually changing. They widen or tighten depending on the supply and demand of currencies and market volatility.

Slippage

Slippage is a phenomenon in the forex market where currency prices change while an order is being placed, thus causing traders to enter or exit trades at prices higher or lower than they desire. Slippage happens because of the imbalance of buyers, sellers, and trade volumes. It also occurs when the market is less active with lower liquidity.

For instance, a trader wants to buy a currency pair at $1.0015 (Current Market Price) with a broker of his choice. Once he submits the buy order, the best-offered price suddenly changes to $1.0020. It is considered as a negative slippage of 5 pips. In the same example, if the best-offered buy price suddenly changes to $1.0005, it is regarded as a positive slippage of 10 pips.

How to avoid slippage?

Slippage cannot be entirely avoided if you trade using market orders, but it can be reduced. One way a trader can minimize slippage is to ensure that their broker has many liquidity providers. Another way is to avoid trading during periods of high volatility as prices move faster and at wider intervals. To check volatility, traders can make use of technical indicators such as Bollinger bands or Average True Range.

The only way to entirely avoid slippage is by using strategies that employ limit orders on entries and exits.

Categories
Forex Basics

Even a Combination of Double Top and Engulfing Fails

Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms

Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms

Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms a Double Top. As far as the candlestick pattern is concerned, an engulfing candle is the most reliable reversal candle that traders usually love to take an entry from a value area.

A combination of Double Top and a bearish engulfing candle attracts sellers to go short. Since it is an outstanding price action combination, it does not usually go wrong. However, in today’s lesson, we are going to demonstrate that even a great flourishing price action combination can go wrong, as well.

The price consolidates at the marked resistance and heads towards the downside. It then goes back towards the resistance. The sellers are to get ready to get a bearish reversal candle. The red-marked level is the resistance level, where we don’t consider the upper shadows. Since the price has several rejections at the marked level, and it is a valuable area for the sellers, the price most probably may respect the area and produce the bearish reversal candle.

The price does not respect the red-marked level, but it does not make an upside breakout either. Instead, it closes within the upper shadows. Traders are to adjust here. Let us see how it looks now.

The level where the last candle closes has some significance. One of the bullish candles closes within the marked level. This level may work as a resistance level and ends up producing a bearish reversal candle.

Here it comes. The Double Top’s resistance level produces a bearish engulfing candle. We have found the resistance level at last. So all the equations to go short from here seem to match as far as price action trading is concerned.

  1. The price produces a Double Top.
  2. The price produces a bearish engulfing candle right at the resistance of the Double Top.

The swing low is far enough, which offers good Risk-Reward as well. All seems to be okay to trigger a short entry.

After triggering the entry, the next candle comes out as a bearish Doji candle. Things still look good. The sellers are going to grab some green pips!

No! The next candle comes out as a bullish Marubozu candle, which breaches the resistance of the Double Top. It wipes off the Sellers Stop Loss. The buyers may take control once the breakout is confirmed.

The Lesson

It does not matter how good a trade setup looks: it may fail. Thus, there is no reason to be too optimistic about any entry. We must calculate our Risk-Reward and have immaculate risk management with every single entry that we take in the market.

Categories
Forex Market

What Is Pip & Why Should You Know About It?

What is a pip?
Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that

What is a pip?
Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that

What is a pip?

Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that most currencies are priced to 4 decimal places, obviously, any change in price would start from the last decimal point. For example, in the price quote, $1.0002, ‘2’ indicates the pip value. A pipette means the 5th decimal place, while pip is the 4th decimal place.

For most pairs (except JPY), it is equivalent to 0.01% or 1/100th of one percent. In the forex market, this is referred to as Basis Point (BPS). One BPS is equal to 0.01% and denotes the percentage change in the exchange rate.

Calculation of move

Now that you know what pip means, let us see how it changes the profit and loss in your trading account. Large positions will have greater monetary consequences in your balance. The formula for calculating the value of the position is:

Position size x 0.0001 = Monetary value of pip

Let us use the above formula and apply it in some real pairs. If you open a position of 1000 units, the pip value can be calculated as 1000 (units) x 0.0001 (one pip) = $0.1 per pip.

When you open buy positions and market reacts in your favor, for every pip movement, you will earn $0.1, and the same is the case for a sell position. If the market moves against you after you buy or sell, $0.1 will be lost per pip movement as the trend continues in the opposite direction. Increasing or decreasing the number of positions will have the exact effect on the pip value.

Different currencies and their pip value

Pip value varies per currency as they are dependent on how it is traded. It also depends on the trading platform and the price feed. It is important to know that there are brokers who show four digits as pip, and some show five. One of the most important points you need to know is the average daily trading range, in order to gauge volatility in the market.

Average daily pip movement of major currency pairs

Conclusion

To conclude, pips are the smallest increment by which a currency pair can change in value and represents the fourth decimal of a currency pair other than the Japanese yen. In the case of Japanese yen, the pip is located at the second decimal place. Proper knowledge of pips will help you determine your stop loss size, as it is a major part of any strategy. One should never underestimate the simplicity of pip. Now that you have learned what a pip means, you can proceed to more trading concepts. Cheers!

Categories
Forex Assets

All you need before trading the EUR/USD Pair

The EUR/USD pair tracks the exchange rate of the Euro against the US Dollar. Since this pair represents a combination of the two stronger economies in the world, it is

The EUR/USD pair tracks the exchange rate of the Euro against the US Dollar. Since this pair represents a combination of the two stronger economies in the world, it is

The EUR/USD pair tracks the exchange rate of the Euro against the US Dollar. Since this pair represents a combination of the two stronger economies in the world, it is the most traded asset in Forex, and, therefore, the one with higher liquidity and less spread and slippage.

The value assigned represents how many US dollars are needed to buy a single EUR. That is, the quote is presented as 1 euro per x US dollars. For example, the current value is 1.1079, which means a trader needs to use 1.1079 dollars for every Euro he is willing to buy.

EUR/USD SPECIFICATIONS

LOT SIZE 100,000 EUR
MAGIN CURR. EUR
DIGITS 5
PIP VALUE $10
MIN TRADE SIZE 0.01 LOTS
MAX TRADE SIZE 1000 LOTS
AVERAGE 24H  VOLUME $575 BILLION

 

Spread

Spread is the difference between the bid and the ask prices. The EUR/USD spread varies depending on the account type. 

ECN: 0.3 pip

STP: 1 pip

Fees

The broker charges a fee per lot on ECN accounts, and usually, no fee on STP accounts The usual fee on an STP broker is from 6 to 10 pips per round trip and lot. Other

Slippage: Slippage is the difference between the trader’s intended price and the real price he received from the broker. It depends on the current volatility at the moment of the order. Slippage can be in favor of or against the trader.

Depending on the broker’s execution speed, slippage can be as low as 0.5pip or as high as 3 pips. 

Note:  Slippage happens twice: At the open and the close of a position.

Trading Ranges:

The following trading range tables measure the min, average, and max volatility of the asset at different timeframes.  Range figures usually multiply by the square root of two for every doubling of the timframe. That is, if the hourly timeframe volatility is 1, its 2h timeframe will show 1.41 on the same date. Trading ranges are useful tools to assess the risk. If the hourly volatility of the EURUSD is 20 pips, it means a potential $200 gain or loss in an hourly time span ( 20 pips + $10 value per pip).

The values shown depict ranges occurring at the moment of the creation of this document. The trader should assess the actual values at the moment of his trading activity.

        EUR/USD PIP RANGES  

MIN AVERAGE MAX
1H 5.9 10.4 26
2H 8.5 14.5 37
4H 13 22.1 49
D 45 64 114
W 119 160 210
M 290 537 918

  

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EURUSD Cost as a percent of the Trading Range

To compute the costs, we add the trading fee, an average slippage value x 2 converted to pips, and we calculate what percent represents the min, average, and max of the ranges, assuming a range represents the amount of potential profit for one unit of time.

ECN MODEL ACCOUNT

ECN MIN AVERAGE MAX
Total 3.3 1H 55.93% 31.73% 12.69%
Slippage 2 2H 38.82% 22.76% 8.92%
Spread 0.3 4H 25.38% 14.93% 6.73%
Trading_Fee 1 D 7.33% 5.16% 2.89%
W 2.77% 2.06% 1.57%
M 1.14% 0.61% 0.36%

 

STP MODEL ACCOUNT

STP MIN AVERAGE MAX
Total 3.5 1H 59.32% 33.65% 13.46%
Slippage 2 2H 41.18% 24.14% 9.46%
Spread 1.5 4H 26.92% 15.84% 7.14%
Trading_Fee 0 D 7.78% 5.47% 3.07%
W 2.94% 2.19% 1.67%
M 1.21% 0.65% 0.38%

 

Best EUR/USD timeframe for trading

From the above charts, we see that hourly charts show a very high cost on entries with low volatility ( the Min column) therefore to trade these timeframes, traders need to spot the surges in volatility and be right most of the time to compensate for the 50%+ costs.

Intraday traders’ best timeframe is, definitively 4H, although the should optimize the costs using proper assessment of the volatility.

In both cases, strategies that take away slippage using limit orders would dramatically reduce costs and improve the results.

As an example, these are the results if we take away slippage using limit orders in entries and exits on an ECN account.

ECN MIN AVERAGE MAX
Total 1.3 1H 22.03% 12.50% 5.00%
Slippage 0 2H 15.29% 8.97% 3.51%
Spread 0.3 4H 10.00% 5.88% 2.65%
Trading_Fee 1 D 2.89% 2.03% 1.14%
W 1.09% 0.81% 0.62%
M 0.45% 0.24% 0.14%

 

We can see a percentual reduction of over 50% in costs, compared to market orders with slippage.

Categories
Forex Market

What Are The Different Types Of Orders In The Forex Market?

What is an order?
One of the first things every forex trader should know is about the different order types and implications of each one. An order in forex determines

What is an order?
One of the first things every forex trader should know is about the different order types and implications of each one. An order in forex determines

What is an order?

One of the first things every forex trader should know is about the different order types and implications of each one. An order in forex determines how you will enter or exit the market. Today, in trading, more options are available than just buying and selling at the current market price. With different order types, one can make the most of their trading opportunities.

Why are different order types needed in the forex market?

There needs to be some automation in the forex market. As we know that forex is 24 hours market, investors’ holdings, and their net worth keeps changing 24/7. If an open position is not managed regularly, the profit/loss figure can change drastically. Also, it is not possible to manage your positions all the time if you are working full time.

Therefore, in such a scenario, pending orders came in handy. These are tools investors and traders in the forex market use to manage their open positions. ‘Orders’ allow the traders to ensure that the value of their trades remain within certain bounds even though the market is open all day. Now let’s look at different order types.

Market order

Market orders are the most common types of orders used in the forex market. It is just an order to buy an asset at the current market price. Market orders are executed on a real-time basis when placed. Since prices in the forex market are changing rapidly, the order may be completed at a different price than you intended. This is known as slippage in market terminology. Slippage may work in the favor or against an investor. A market order creates an open position immediately.

Pending order

A pending order is an instruction to buy or sell an asset when certain conditions are met. It is a type of market order that gets executed only when certain conditions are fulfilled. It is a conditional market order. Pending orders eliminate the need to monitor the screen for placing trades continuously. It sets up an automatic order system that will execute trades instantly when the conditions are met. There are different types of pending orders. They are:

  • Buy Limit Order
  • Sell Limit Order
  • Buy Stop Order
  • Sell Stop Order

Let’s understand each of these orders below.

Buy & Sell Limit Order

It is an order placed by the traders to buy or sell a currency at a particular price. Typically, this price is better than the current market price. Traders can find both buy and sell limit orders in most of the trading platforms. A buy limit order will always be below the current market price (or sometimes equal), while a sell limit is always above the current market price (or sometimes equal). For instance, if you want to buy EUR/USD at 1.05 and the current market price is 1.11. You can place a limit order at 1.05, and your order will automatically get executed if the currency pair reaches this price.

Application limit orders

Let us assume that the market is in a downtrend. As a trend, you wish to sell precisely at the support and resistance line. Since a market order does not assure the precise price, you can prefer placing a sell limit order instead. This is because, with a limit order, your order will get executed at the exact price you were willing to take the trade.

Buy & Sell Stop Order

This is the converse of Limit order. By using this order, traders can place a buy order above the market price and a sell order below the market price. By doing this, they can increase the odds of entering or exiting the trade at their preferred price.

Application of stop orders

Let’s say the market is in a range and there is some news coming up which you think will break above the range and head north. You being a breakout trader wish to buy it after the breakout. During the news, the volatility is so high that it is hard to get hold of a good price if executing a market order. So, here is where a stop order comes to action. With this order, you can keep a buy stop order just above the range, as it will execute the trade automatically when the price hits the buy stop price.

Stop-loss order

It is an order placed by the traders to limit their losses on the trades they take. By using this order, a currency pair can be bought or sold once its price reaches a particular price, also known as ‘Stop Price.’ For instance, if you buy USD/CAD for $1.31 and not willing to lose more than $0.1 when you exit, you can place your stop-loss order at $1.21. This order only gets executed if and only if the price of the currency goes below $1.21.

Conclusion

There are more premium orders that are being provided by the advance brokerage firms. Some of them include Trailing Stop-Loss Order, After Market Order, and Bracket Order, etc. The forex market is gradually moving towards artificial intelligence for executing trades. The latest development in ‘orders’ is the creation of dependent orders. This means the investor can place two orders simultaneously, and based on the input, only one of the two will be executed. Dependent orders use complex algorithms that execute trades with minimal human intervention.

Categories
Forex Basics

Let Profit Trade Run

There is a saying in the financial market, “Cut your losses short and let your profit run.” Letting the profit trade run is not as easy as it sounds. Traders

There is a saying in the financial market, “Cut your losses short and let your profit run.” Letting the profit trade run is not as easy as it sounds. Traders

There is a saying in the financial market, “Cut your losses short and let your profit run.” Letting the profit trade run is not as easy as it sounds. Traders try to do it in many different ways, such as taking partial profit, using a trailing stop, etc. Both are very handy, but traders are to use them sensibly.

At the time of entering a trade, a trader has to determine the next level of support/resistance (take profit) at where the price may lose its momentum. If the price hits the level, he gets the reward. The length difference between the entry point and the support/resistance (stop loss) is the risk. The risk and reward ratio shall be at least 1:1. The more, the better it is.

Let us think of an example. A trader is about to take a long entry. He measures the next level of resistance offers enough space for the price to travel towards the upside. The price reacts at a level of support and is about to produce a bullish reversal candle. Let us assume the Risk-Reward ratio is 1:1, which he is happy with. He takes the entry, and the price heads towards the direction according to his anticipation. The trend looks strong, and he decides that he would let the trade run.

Traders can do it in many ways. Let us get acquainted with two popular ways to do it.

Trailing Stop Loss: Though his initial calculation offers him a 1:1 risk and reward ratio, he sets Take Profit far away. He makes sure that he sets Stop loss where he planned before initiating the trade. Once the price has gained some profit, he shifts the Stop Loss along with the price by having enough gap. This is how he gives himself a chance to grab some extra pips.

To do that accordingly, minor time frames may be used to spot out support level. Using trailing Stop Loss is not always that rewarding. However, if it works well, it may give you a huge return.

Taking partial profit: Taking partial profit is another way that he can let his profit run. Once the price is at the first resistance, he shall take half of the profit; let the rest of it run and shifts the Stop Loss at the breakeven point. This means he has free trade, which does not have anything to lose. He has already taken some profit (50%) out. Let us assume that the first resistance level gets broken and the price heads towards the second resistance level. What does he do?

Think for twenty seconds, what would you do?

He takes some part of the profit again, shifts his Stop Loss up, and lets the rest of it run. This is what he keeps doing with at least 10% of his original trade until the Stop Loss gets hits by the price.

If a trader can do it accordingly, he maximizes his chances to grab some extra pips. Both of them need a lot of practice. Backtesting, demo trading, or letting a very tiny part of the profit, such as a 5% run, can help us learn the art of taking partial profit.

 

Categories
Forex Market

Trading Energy Commodities – Crude Oil, Coal & Natural Gas

Introduction
Energy belongs to that category of commodities, which has the most significant impact on our daily lives. Energy prices affect the cost of almost everything that we consume on

Introduction
Energy belongs to that category of commodities, which has the most significant impact on our daily lives. Energy prices affect the cost of almost everything that we consume on

Introduction

Energy belongs to that category of commodities, which has the most significant impact on our daily lives. Energy prices affect the cost of almost everything that we consume on a daily basis, including the clothes we wear, the fuel we put in our cars, and the electronic gadgets. They, in turn, determine the increase or decrease in the prices of homes, hospitals, schools, etc. We cannot imagine ourselves in a world without energy.

The unit that is used to define the quantities of energy is the British thermal unit (Btu), which measures the heat content of fuels. According to the Energy Information Agency (EIA), every year, worldwide energy consumption exceeds 575 quadrillions Btu and is expected to reach 736 quadrillions by 2040.

Major energy commodities

Highly traded energy commodities are from non-renewable energy sources, except for ethanol and electricity generation. These commodities are very liquid when it comes to trading. Traders can also invest in these commodities through ETFs and CFDs.

Crude oil

Crude oil is one of the most actively traded commodities in the world. The price of crude oil affects many other commodities, including natural gas and gasoline. Crude oil comes in different grades. Light Crude oil is traded on the New York Mercantile Exchange (NYMEX). This type of crude oil is popular because it is the easiest to distill into other products. The next grade of oil is Brent Crude oil, which is primarily traded in London and is seeing the increasing interest. The last grade of oil is the West Texas Intermediate (WTI) oil from U.S. wells. The product is light and sweet and is ideal for making gasoline. The reports for crude oil are found in the U.S. Energy Information Administration (EIA) reports. This report is released every Wednesday around 10:30 PM ET. Traders take investment decisions based on the data of this report.

Coal

Coal is a fossil fuel that is formed from dead plant matter trapped between rock deposits. Coal is used as an energy source for hundreds of years. This mineral generates 41% of the global supply of electricity and plays a crucial role in other industries. The top 5 coal-producing countries are China, the USA, India, Australia, and New Zealand.

Natural gas

Natural gas is formed either by methane-releasing microorganisms in swamps or by pressurizing organic material deep underground. Three major reserves for natural gas are Canada, USA, and Russia. This commodity has many applications, from electricity generation to fertilizers. Natural gas futures and ETFs are available for traders and investors. The price of natural gas depends on the demand and supply of the commodity itself.

Energy commodities can also be traded through Forex Brokers these days. Many of the credible and regulated and unregulated Foreign exchange brokers allow their customers to trade all the major energy commodities like Crude Oil, Coal, and Natural Gas.

Factors affecting the prices of energy commodities

  • Market growth
  • Energy efficiency
  • Population growth
  • Electricity penetration
  • Industrialization in developing economies

Conclusion

Investors who want to invest in the energy sector should track the indices of that sector. These indices measure the production and sale of energy. One can also monitor the performance of energy company shares prices. Energy company’s revenue depends on the price of the commodity they are selling. Other factors include production costs, competition, and interest rates. That’s about Energy commodity. Cheers!

Categories
Forex Market

What Should You Know About Trading Metals?

Introduction
We have discussed metal commodities briefly in the previous article. In this article, let’s understand trading metals in detail. Trading precious metals were only possible by wealthy investors in

Introduction
We have discussed metal commodities briefly in the previous article. In this article, let’s understand trading metals in detail. Trading precious metals were only possible by wealthy investors in

Introduction

We have discussed metal commodities briefly in the previous article. In this article, let’s understand trading metals in detail. Trading precious metals were only possible by wealthy investors in earlier days. But now, every retail forex trader gets to trade these metals with the advent of CFD trading. Hence, a lot of investors hold metals in their portfolios by investing a significant chunk of their money in metals. Metals create a balanced portfolio as they are considered a hedge against inflation. Metals such as gold and silver can be treated as safe-haven bets since their scarcity provides support to their value.

Gold – The highly traded metal

Among all the metals, Gold is the most actively traded metal. This metal possesses intrinsic properties such as durability, malleability, and conductivity. These properties offered by gold account for its superiority. They also find their primary use in jewelry making. As with other commodities, forces of demand and supply determine prices of gold. The gold market is also influenced by risk parameters, market sentiment, and inflation trends. Investors turn to gold and invest heavily when there are signs of a global economic slowdown. The slowdown could be due to reasons like recession, political crisis, or government debt.

Because of these reasons, Gold is mostly traded by long term investors. They only look for signs of gold entering a bull or bear market. The trend can be determined with the help of equity indices. A strengthening economy means weaker demand for gold.

Silver

Silver is seen as the best metal trading option right after gold. It has its own merits. This metal is used in various industries, making it more sensitive to business conditions and trading activities. Hence, the prices of silver are more volatile than that of gold. So we can say that silver is ideal for short term traders.

Platinum

Platinum is also seen to gain value during times of economic and financial crisis. However, because of scarcity in the availability of platinum, the price is much higher compared to gold. Therefore it is less frequently traded. It still is a robust and safe-haven alternative, especially when the Gold is overbought in the market. The industrial use of Platinum is kind of similar to that of silver, making it price-sensitive to business conditions. In recent times, the demand for platinum in industrial usage is reduced by the increased use of catalytic converters.

You can trade metals with Forex brokers too

One of the important advantages of trading metals is that they give protection against inflation, which is not offered by any other financial instrument. Taking this into consideration, a lot of Forex brokers offer above mentioned precious metal trading against major currencies such as the US dollar, Japanese yen, Euro, Australian dollar, Canadian dollar, and British pound. You will also find metals such as Copper and Palladium on their platform. Some of the metal currency pairs include XAU/USD (Gold), XAG/USD (Silver) and XPT/USD (Platinum).

Conclusion

Even if it obvious, we must tell you that buying and selling precious metals do not mean the actual delivery of these commodities. We trade these metals over the counter (OTC). In this type of trading, there is high risk involved. So make sure you have a risk management plan in place, else there is a possibility of you losing all the money you have in your trading account. Some vital risk management tools include stop-loss and order cancellation. They will always protect the balance of your account.

Categories
Forex Assets

An Overview of the Commodity Markets

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction

Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are further divided into soft commodities and hard commodities. Hard commodities are natural resources that are mined or extracted, such as gold, silver, and oil. Soft commodities are agricultural products or livestock such as corn, coffee, sugar, and wheat.

Traders can invest in commodities in multiple ways. The most popular method of investing in commodities is by buying a futures contract. You also can purchase commodities through ETFs. Some of the U.S. commodity exchanges are the Chicago Mercantile Exchange, Chicago Board of trade, New York Board of Trade and New York Mercantile Exchange.

Different categories of commodities

Agricultural commodity trading

The commodities that fall under this category are sugar, coffee, cocoa, cotton, corn, and wheat. Many assume that agricultural markets are not thickly traded, but that’s a myth. In fact, coffee is the second largest commodity in the world, after oil.

The factors which impact the price of agricultural commodities are supply/demand, weather, trade agreements with other nations, new technology, taxation, etc. There are regulatory bodies that decide how a particular commodity should be produced and sold.

Energy commodity trading

This is an extremely popular category of commodities that includes Brent crude oil, WTI crude oil, gasoline, and others. The reason why these commodities are important is that they are an integral part of numerous industries. They have the power to move an entire economy. For example, an increase in oil prices will affect aviation companies, paint industries, tire companies and many more.

Countries like Russia and Saudi Arabia heavily depend on oil for revenues. Factors such as supply and demand play a major role in determining oil prices. Some other factors (which are specific to oil) include OPEC (Organization of the Petroleum Exporting Countries) meeting outcome, political statements, International agreements, etc.

Metal commodity trading

This category includes precious metals like Gold, Silver, Platinum, and Palladium. Earlier trading in precious metals was only possible by rich investors, but now with the introduction of CFD trading, traders can easily invest in metals along with wide leverage options. Supply and demand once again affect the prices of gold and other metals. Other factors include economic changes in China and India (as they are the world’s largest consumers), taxation, and Federal reserves’ interest changes.

Commodities on Forex Brokers 

Despite the fact that Forex is primarily a market for trading a variety of currencies, most Forex brokers offer a wide range of other various trading assets to their customers. By doing this, these brokers are helping their customers in diversifying their investments.

Currency trading brokers allow trading precious metals such as gold, silver, and platinum. Traders can also invest in energy commodities that include crude oil and natural gas. Forex brokers that provide commodity derivatives and CFDs are getting more and more popular and in-demand than the brokers who deal with only currencies and nothing beyond.

Guidelines to Commodity Trading

Novice traders should look at broad trends while investing and trading individual commodities. They could look at levels of crops being produced, metals being mined, and the oil extracted. Because these factors can give them clues about the direction of the market. Similar to this, inventory levels can also be a great tool for analyzing commodity markets. Continuous drawdown in inventory levels can lead to higher prices, while inventory buildup can lead to lower prices.

Technical analysis is another widely used method to trade commodities. This type of analysis uses historical prices and trends to predict the future. True technical traders do not pay any attention to fundamental factors but just price-action. But, our recommendation is to look at both fundamental factors and technical analysis in order to get the best trading results while dealing with commodities.

We hope you had a good read. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Market

Contract For Difference (CFDs) Explained!

What is CFD?
A contract for difference (CFD) is a form of derivative trading. CFD allows a trader to speculate on prices of global financial markets such as shares, indices

What is CFD?
A contract for difference (CFD) is a form of derivative trading. CFD allows a trader to speculate on prices of global financial markets such as shares, indices

What is CFD?

A contract for difference (CFD) is a form of derivative trading. CFD allows a trader to speculate on prices of global financial markets such as shares, indices, commodities, and of course, currencies. While trading CFDs, a trader gets to bet on both upside and downside movements of the market. The profit and loss for CFD are calculated by taking the difference between the entry and exit prices and multiplying it by the number of units. CFDs always comes with an expiration date, before which you need to close your position. Trading these CFDs may appear sophisticated and complex in the beginning, but once you start trading them, it becomes easy to handle.

Leverage trading CFDs

CFDs are a leveraged product, which means a trader needs to maintain an optimum level of capital in their trading account to execute a trade. As it is leverage/margin trading, this capital can only be a small percentage of the full position’s value. While margin trading allows a trader to magnify their returns, losses will also be more as a trader will lose leverage times the capital he is betting on. Hence it is always recommended to go for less leverage. If you are a novice trader, we suggest you not to go beyond 2X leverage. And obviously, the gains and losses will be based on the value of a CFD contract.

Costs involved while trading CFDs

There are three types of costs a trader may incur while trading CFDs. Each of them is explained below.

Holding cost – At the end of each trading day (mostly at 5 PM New York time), if the positions are open in your account, it will be subject to a charge called ‘holding cost.’ Holding costs will depend on the CFD, direction of the position, and the holding rate.

Spread – CFDs always come with a spread, which is the difference between the buy and sell price. This price is decided by the broker, and it varies from broker to broker. A trader will have to enter a buy trade at the buy price quoted by the broker, and exit using the broker quoted sell price. The narrower the spread, the less the price needs to move in trader’s favor for their profits to start. These spreads are extremely competitive across all the brokers.

Market data charges – For getting live market feed and accurate prices, a trader must pay the relevant market data subscription fees. However, this fee is mostly applicable to stock CDFs and varies from broker to broker.

Things to remember

Like any other market, there are high risks involved in trading CFDs as well. CFDs are complex in nature (at least for novice traders), they carry a high risk, so it is important to do your research before you start trading. Also, since CFDs are leveraged products, losses can easily exceed your total investment. In volatile markets, your account balance can drop down to zero or even to a negative balance in no time. Following best trading practices like proper applying risk management to your trades will increase the chances of profiting.

We hope you find this article informative. Let us know if you have any questions in the comments below. Cheers!

Categories
Forex Market

Everything You Need To Know About The Forex Currency Pairs

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex is fundamentally about.

How does it work? 

A currency pair is a code representing the interaction of two different currencies. In that pair, the first currency is known as the Base currency, and the second one is called the Quote currency. When you are buying a currency pair, you are essentially buying the base currency and selling the quote currency. It is vice-versa for selling.

When you see a currency quoted as 1.32., it means you can exchange 1 unit of base currency for 1.32 units of the quote/counter currency. When the value of currency changes, it is always relative to another currency. If the value of GBP/USD changes from 1.26345 to 1.26460 the next day, it means that the Pound has appreciated relative to U.S. dollar or U.S. dollar has depreciated relative to Pound as it will cost more USD to purchase 1 Pound.

What are the major currency pairs?

The most liquid currency pairs are known as major currency pairs. These are the pairs where USD is involved either as a quote currency or base currency. Some of the most popular currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, and USD/CAD. They represent some of the largest economies of the world and are traded in high volumes. These currencies also have low spreads, which is good for traders.

Minor or cross-currency pairs

Cross-currency pairs are nothing but the crosses of major currencies. They do not include the USD in them. Some of the popular cross-currency pairs include EUR/GBP, EUR/JPY, and EUR/CHF. Even though the trading volume of these pairs is significantly low compared to the major currency pairs, they do contribute with a large amount of volume to the Forex market. Let’s understand more about the volatilities and preferences of these minor currencies.

  • Predicting the EUR/GBP currency pair is most difficult compared to other currencies.
  • Traders prefer trading EUR/JPY as they believe it is easier to forecast, thus making it a popular cross-currency pair.
  • EUR/CHF is also popular because of the fact that the Franc is a safe-haven currency. It is traded during times of high volatility.

Here we have only discussed the EUR crosses. We recommend you to explore more cross-currency pairs and understand each of their volatilities. There is another type of currency pair known as Exotics. In this type of currency pairs, one currency is Major while the other an upcoming currency. Examples – USD/TRY & USD/MXN.

Commodity currencies

Australian dollar and New Zealand dollar are the currencies that are greatly influenced by commodity prices. The Australian dollar is greatly affected by mining commodities, beef, wool, and wheat. Aussie (AUD) is strongly influenced by China as these two countries are huge trading partners. USD/CAD is also one currency that is affected by commodities like oil, timber, and natural gas. The Canadian dollar price movement is strongly related to the U.S. economy. New Zealand, however, is heavily influenced by news release of agriculture and tourism. Along with commodities, the effect of central banks and reserve banks shouldn’t be underestimated. Changes in monetary policy from either of the country’s banks will lead to huge volatility.

The point we are trying to make here is that each of the currency pair’s price movements is influenced by some of the other external factors. As you start your journey in trading Forex markets, you will understand these influencing factors in detail.

What moves these currency pairs?

As discussed above, there a lot of independent factors that move the price of these currencies. But the fundamental factors are interest rates, economic data, and politics. Let’s understand these in detail.

Interest rates – Central banks raise or reduce interest rates to maintain financial stability. This increases demand for currencies whose interest rates are high, as investors get a higher yield on their investments.

Economic data – Economic releases are reports that give a glimpse of the nation’s economy. Relevant economic data include CPI, Non-farm payroll, GDP, Retail sales, and PMI. This data will have a positive or negative effect on that country’s currency.

Politics – Trade wars, elections, and changes in the ruling government introduce instability, which reflects in the Forex market. The decision the government’s take can boost or depreciate the economy.

Which currency pair should you trade? 

If you are new to forex, choose the currency pair which has the most liquidity. Always start with Major pairs before exploring the others. Analyze the fundamentals of a currency. If you know technical analysis, you can combine it with technical indicators to know and understand when to trade. Do not use leverage; even if you do, use appropriately so that you don’t wipe out your account. To learn more about Forex trading from the very basics, you can sign-up for our free Forex course here. Cheers!

Categories
Forex Market

What Should You Know About Forex Brokers?

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction

In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The majority of these foreign exchange transactions are done by major financial institutions and global organizations. But where do the retail traders like you and I undertake Forex trading? We do it through independent companies called brokers. In this article, let’s understand what a Forex broker is and the different types of Forex brokers existing in the market.

What is a Forex broker?

In the Forex market, buyers and sellers can be thousands of miles apart. So there needs to be a mechanism that matches their interest. This is where a Forex broker comes into the picture. A Forex broker is a platform where the buyers and sellers get to buy and sell currencies. It acts as a middleman between a trader and the market. In simple words, to find a buyer or seller for a particular currency, the broker matches your order with the respective buyer or seller. These brokers are also known as ‘liquidity providers.’

Types of Forex brokers

Even though all brokers in the Forex industry provide the same basic service, there is a difference in their functionality and mechanism. The first thing to look for with every Forex broker is whether they have a ‘dealing desk’ or not. In brokerage firms, the dealing desk refers to a team of traders who manage the broker’s inventory and hedging operations. Nowadays, most of the dealing desks consist of hundreds of traders and analysts.

Brokers that work on dealing desk operate in a closed environment wherein they set their own price rates. They fill their client orders by matching the buy and sell orders of their clients. When a broker uses a dealing desk, they are called as Market Makers.

Brokers that don’t use a dealing desk get rates from the interbank market and process their client orders by linking them directly to institutions, hedge funds, mutual funds, and other brokers. When a broker does not use a dealing desk, they are either known as ECN (Electronic Communication broker) or an STP (Straight Through Processing) broker.

Market Makers

Market Makers (MM) are called ‘dealers’ in the interbank market. They charge a variable spread instead of commission, which is why most of the time, they are accused of manipulating the spread and prices of the currency pairs. Theoretically, the spread should widen or narrow during high liquidity conditions, but MM brokers offer a fixed spread and compete based on the spread.

Electronic Communications Network (ECN) Broker

ECN brokers make their profits from spreads they charge on buy and sell rates or from fixed trade commission. The transactions here are mostly interbank. Because the spreads in the interbank markets are dynamic, ECN brokers prefer charging commissions rather than fixed spreads. This is one of the easiest ways to trade, but this requires a much higher investment capital as clients in the interbank markets only trade large lots. Therefore, trading with ECN brokers requires a minimum account balance of $1000. In addition, there is no guarantee that you will find a buyer or seller in the interbank market at your quoted price. ECN brokers sometimes won’t be able to execute orders at that price, so they issue a re-quote or simply reject the order. These are some of the limitations of ECN brokers.

Straight Through Processing (STP) brokers

Like ECN brokers, STP brokers, too, don’t have a dealing desk. But they use some of the practices of Market Maker brokers to provide flexibility to their clients. They display rates similar to the interbank market rates, and their first priority is to process trades directly in the interbank market, like an ECN broker. If the counterparty is not found, they start acting like a Market maker and match the order with their own client. The initial capital required to trade with this type of broker is relatively lesser compared to ECN brokers.

These are the different types of brokers in the market. So when you are choosing a broker, make sure to select the one that suits your trading style and capital available to trade.

Trading Platforms 

The ‘Market Makers’ provide trading platforms like Act Trader and MetaTrader since their orders are executed at the dealing desk. However, non-dealing desk type of brokers uses direct access trading platforms. They display prices directly from different liquidity providers. The platforms which are best suited for this requirement include Currenex Viking software and Level II software. The trading platform should be chosen in such a way that it suits your trading objectives. We hope this article helped you in deciding that. Let us know if you have any questions in the comments below. Cheers!