Categories
Forex Course

17. What Is The Best Time To Trade The Forex Market?

Introduction

The Forex market is open 24 hours daily and is traded from Monday to Friday. This feature makes it feasible for traders all around the world to trade it. However, it is not quite ideal to trade anytime in Forex. There are specific times of the day and week that offer greater liquidity. These are the times when the professional traders step into the market as well. So, let’s dive right into the topic.

The preferable time to enter the forex market

Liquidity and volatility are the two vital factors a trader must consider before choosing the best time to trade. Because, with the absence of liquidity and volatility, it is not possible to grab big moves in the market. Hence, one must look out for the times when there is a high volume of trading happening in Forex.

As far as liquidity is concerned, liquidity is excellent (as well as volatility) when two sessions overlap. During these times, the volume of orders double, making significant movements on major pairs. Hence, getting in-depth knowledge about how pairs behave during session overlaps is very important.

The overlapping sessions

The Tokyo-London Overlap

During the Asian session, there is not much movement in the market. But, when the London market opens, the Tokyo markets are still running. Hence the volume during the overlap time segment increases as both the markets are actively traded. Having said that, most of the volume comes from London, which ends up suppressing the Tokyo market. Hence, trading this overlap session is highly recommended.

The London-New York session

The London market and the New York market alone bring in considerable volatility. And when both these markets combine, the liquidity rises significantly. Hence, this becomes the ideal time to trade the forex market. Moreover, due to the high liquidity, the spreads during this time are incredibly tight.

Now that we’re clear with the preferable time to trade the markets let us discuss the preferred weekdays to engage in trading.

What are the days of the week best to trade?

Let us answer this question by considering the average pip movement of currencies pairs on all trading days of the week.

From the above table, we can ascertain that the pip movement on Monday is lesser when compared from Tuesday – Friday. Also, on Friday, once the afternoon sets off, the liquidity reduces considerably. Hence, to get the best from the Forex pairs, it is best to work during the middle of the week and near the time of the market openings.

This brings us to the end of this lesson. To get a recap of the above lesson, you can take up the quiz given below.

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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 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 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 Elliott Wave

Elliott Wave Principle – Advanced Concepts – Part 3

The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this educational article, we will review how to apply the RSI with the Elliott Wave Analysis.

The basics

Possibly, the RSI indicator is the most widespread indicator from professionals to retail traders. The RSI is an oscillator that moves in a range between 0 to 100. Alexander Elder describes it as a “leading or coincident indicator – never laggard.”
 
Some applications of RSI are tops and bottoms identification, divergences, failure swings, support and resistance, and chart formations.
 
In the Elliott wave theory, the RSI application can to aid in the wave identification process. In particular, the identification of divergences is the most used application in the wave analysis.
 
J. W. Wilder describes the divergence between the price action and RSI path as a “powerful indication that the market could reverse soon.
 
A divergence takes place when the price is still increasing, while the RSI began decreasing (bearish divergence). Or when the price falls, and the RSI climbs (bullish divergence.) In the wave analysis terms, divergences appear between the end of waves three and five. Let’s see a couple of examples.

RSI and the Elliott Wave Principle

Johnson & Johnson (NYSE:JNJ), on its weekly chart, illustrates the RSI and the Awesome Oscillator. Both indicators show the divergence created between the end of waves three and five.

On the JNJ chart, we also can observe the RSI levels when price action runs in a wave three. When this occurs, the RSI tends to move between the levels 70 and 80.

In a bull market scenario, usually, the price action tends to find support near to level 40. When the price moves in a bear market, the ascending correction tends to find resistance near to level 60. This concept, with the swings identification, can support the wave analysis.

The following chart corresponds to the Dollar Index (DXY) in its 8-hour timeframe. From the figure, we observe the bullish sequence developed in five internal legs, in which we observe that each leg has three waves.

As a conclusion from the study using the RSI indicator and wave analysis, the price action unveils an ending diagonal pattern. The Elliott wave structure shows us that the Greenback should see new lower lows.

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 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 Course

16. Trading The London Session

Introduction 

The London session, also referred to as the European session, is the session where a significantly high amount of trading happens. The London session opens at 3:00 AM EST and is rigorously traded for eight hours straight.

There are several big financial institutions in Europe. So, the trading volume in the FX market during this session is extremely high. Due to this, many retail traders also show massive participation during this session. Hence, the London session was named the forex capital of the world.

There are thousands of transactions every minute during this session. As per sources, 30% of all forex transactions are executed during the European session.

In the previous lesson, we saw the average pip movement in the Tokyo session for some majorly traded currencies. The average there came to around 53. Now, coming to the London session, the average is much higher than the Tokyo session. The number stands at 72. During this session, the FX majors, as well as minors, tend to move by large amounts.

The below table gives you an idea of the average pip movement for some intensively traded currencies.

More about the London Session

As mentioned, London is considered as the Forex capital of the world. The majority of the volume in the market comes during the London session. Hence, there is high liquidity during this session.

The London session opens during the closing time of the Asian market. During the Asian session, the market usually goes through a consolidation phase. But, when London opens its shops, the consolidation comes to an end, and the market begins to move in a trend state. However, during the middle of this session, the market slows down and begins to consolidate. This could perhaps be due to the fact that the traders are waiting for the New York market to open. It has also been observed that the market reverses its direction at the end of the session. This could mean that the large players are booking their profits.

As far as trading in this lesson is concerned, this is the ideal session for the trend traders. A trend trader can analyze the markets during the Asian session and gear up to take trades when the London market opens.

The best currencies to trade during the London session

It is clear from the table that we can trade any pair in the market. There is sufficient liquidity in most of the currency pairs. Specifically speaking, one can keep a close eye on pairs such as EURUSD, GBPUSD, USDCHF, USDCHF, GBPJPY, EURJPY, etc. Moreover, as there is a heavy volume of trading in these pairs, the spreads here are very tight.

Thus, this brings us to the end of this lesson. In the next lesson, we shall discuss the New York session. For now, test your learning by taking up the quiz below.

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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 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 Course

15. All About Trading The Tokyo Session!

Introduction

Japan’s capital Tokyo, is the most majorly traded market in the Asian continent. That is, in Asia, the highest volume comes from the Tokyo market. In fact, it is considered the financial capital of Asia. Moreover, it is the third-largest trading center in the world.

The Tokyo session, also referred to as the Asia session, opens at 8:00 PM EST and is traded until 5:00 AM EST. In terms of Japan’s local time, the trading happens between 9:00 AM to 6:00 PM. As ‘Yen’ is the currency of Japan, 16.50% of all the Yen transactions take place during this time. And as far as all currency transactions are concerned, the value lies at 21%.

The one that matters the most during any session is the pip movement in different pairs. Below is a table which represents the average pip movement for some of the major currency pair.

Now, the average of the above currency pairs turns out to be around 53 pips. This number is less when compared to the New York session and the London session.

Some facts about trading the Tokyo session

During this session, the market is seen to fade away its momentum. That is, the market is seen to be quite flat. In technical terms, the market usually goes through a consolidation state. This session might not be the ideal session for the ones looking for large pip movement. However, this session can be great for scalpers.

Tokyo market typically is known to correct the overbuying and selling in the New York session. The market makes drastic moves during the NY session and comes to slows down its pace during the Tokyo session. Therefore, the liquidity during this session is quite feeble.

It is not just the central banks and hedge funds that move the market. Since Japan is the largest exporter in the world, a large number of transactions come from the exporters as well.

Also, the Bank of Japan is an active participant in the forex market during the Tokyo session. This is because it intervenes the curb appreciation in the Yen regularly.

Which currency pairs should you focus on?

The market conditions and situations tend to change from time to time, so it becomes uncertain to predict the exact movement of pairs. However, if we were to consider the average rates, we can keep an eye on the news from countries like Australia, New Zealand, China, and Japan. The news from these countries comes during the Tokyo session or just before its open. And the news usually pumps up the volatility and liquidity of the market. Hence, one can have a focus on AUD, NZD, and JPY pairs.

When the Tokyo session comes to an end, the London markets open, which causes overlap between the two sessions. So, to be part of the significant movements, keep an eye on GBP, EUR, and CHF along with AUD, NZD, JPY, and USD.

This is a brief review of the Tokyo session. We shall discuss the other sessions as well in the upcoming lessons. Take the below quiz to know if you have learned the concepts right.

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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 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 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 Course

14.The Different Sessions In The Forex Market

Introduction

The forex market is traded all across the world. In fact, it is open 24 hours. And these markets are traded in countries when their national markets are open. There are about four major countries where vast lumps of cash flow in and out of the forex market and thereby keeping it very liquid and volatile. To trade professionally, having an idea of the different markets open and close is vital. Hence, in this lesson, we shall be going over the various sessions in the forex market.

Forex market trading sessions

Though all countries trade in the forex market, there are a few countries where the massive volume of trading takes place. The 24 hours trading in the forex market is divided into four sessions. These four sessions are given as follows:

• The Sydney Session 

• The Tokyo Session

• The London Session

• The New York Session

Moreover, the open and close of these sessions vary based on the season as well. One session falls between March/April to October/November, and the other starts from October/November and goes up to March/April. The former is the spring/summer session, and the latter is the Fall/Winter session.

Trade timings during Spring/Summer (in the US)

Trade timings during the Fall/Winter (in the US)

Note that the time represented is the local time (US) and the EST, and is different from every country’s standard time. However, the standard market timings for most countries lie within 7:00 AM and 6:00 PM.

Furthermore, there is an overlap between sessions. That is, during the overlap, the Forex market is traded by two regions simultaneously. For example,

The New York and the London session has an overlap between 8:00 AM – 12:00 PM EST

The Sydney and the Tokyo session overlaps between 7:00 AM and 2:00 AM

And the London and the Tokyo session overlaps between 3:00 AM to 4:00 AM.

These overlapping sessions are essential for traders because at that time is when more liquidity and volatility are created in currency pairs. This is so because traders from two markets operate simultaneously.

Hence, this completes the lesson on the different sessions in the forex market. And in further lessons, we shall discuss each one of the sessions in detail. For now, test your learning of this lesson by taking up the quiz below.

[wp_quiz id=”46553″]
Categories
Forex Elliott Wave

Elliott Wave Principle – Advanced Concepts – Part 2

Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in an Elliott Wave study.

The basics

The Awesome Oscillator (AO) is also known as the Elliott Wave oscillator, was developed by Bill Williams. The AO measures the immediate momentum of the five previous periods, compared with the momentum of the last 34 periods.

The calculation is based on the simple moving average of the midpoint (HL / 2) of 34 periods minus the simple moving average of the midpoint of 5 periods.

Elliott Wave and the Awesome Oscillator

The following chart corresponds to the Johnson and Johnson (NYSE:JNJ) weekly chart. The bullish motive wave started with the August 2015 low at $128.51 per share. From this low, JNJ began to a bullish sequence, which drove it to reach the $148.32 level.


From the AO oscillator, we can recognize the following elements of the price action:

  1. Trend bias: If the trend is bullish, the AO will be positive. If it is bearish, the oscillator will move on the negative side. For our example, the market direction of the range of time studied corresponds to a bullish trend.
  2. Wave three: We can identify wave three with the most prominent distance of the AO. From the JNJ example, we distinguish a wave (3) of Intermediate degree labeled in black. At this point, the stock reached $125.90 per share. After this peak, JNJ started a corrective sequence, and the oscillator began to decrease, even moved in the negative side.
  3. Wave five: In the same way as the third wave, we can recognize the fifth wave watching the AO because momentum follows the dominant trend. However, in this segment, the oscillator shows a divergence between the peaks of waves three and five. In our example, JNJ ended the wave (5) on the half of January 2018 at $148.32 per share. We can observe the bearish divergence between the price and the oscillator.
  4. Corrective waves: We can use the AO to identify corrective waves watching how it decreases against the prevailing trend. From the JNJ chart, the oscillator turns negative when the price develops a retracement.

In summary, the Awesome Oscillator can be a useful tool to complement the EW analysis, especially in wave identification. A divergence involves the exhaustion of the movement, but the price is not compelled to reverse the trend.

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 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 Course

13. General Myths In The Forex Market Every Trader Must Be Aware Of

Introduction

Forex is the market for trading currency pairs. It is a real business that happens over the internet. However, many new traders do not take it seriously and often associate it with gambling. And this misconception still exists in the minds of people. Hence, it is necessary to fade these thoughts away as it could lead to significant losses in the long term.

Having that said, in this lesson, we shall discuss some of the myths and facts about the forex market, which are vital for traders to know.

Myths about the Forex Market

Forex is a get-rich-quick scheme

Many traders enter into this market with the assumption that they can make quick profits consistently. They start off with a small capital do make quite a good amount of money. This entices them, and they begin to maximize their lot sizes. In the end, they lose all of their profits, including their capital in just one trade. So, do not ever enter the forex market, considering it to be a game of gambling as it can completely blow away your account within no time.

Professional traders have an accuracy of 100% profitability

Whosoever be the trader, when they trade in the forex market, it is almost impossible to have only profitable trades. This is because; sometimes, there are events that happen to occur without the knowledge of the trader. And during these times, there is a high probability for the trade to go against your direction. So, the consistency of a successful trader is around 80-90%.

Stop-losses are purposefully triggered by the broker

Many traders believe that their stop-losses are hunted by their broker. But, this is just a misconception in the minds of people. Note that brokers have absolutely nothing to do with your stop-loss. It is the market itself that hunts for your stop-loss.

There exists ‘THE best strategy’ in trading

Many novice traders, in fact, all novice traders, go in search of the best strategy to trade. But, the truth is that the best strategy is not an absolute term. There are a countless number of strategies out there, and it all depends on you on how you adapt to it. Hence, there the concept of  ‘best strategy’ is just a myth.

You need to have a financial degree to trade in forex

Well, a great fact to know about the forex market is that you do not need any degree to qualify to trade. However, as we always say, education is definitely required for you to succeed in the market even though it is not a formal one.

The price movements in the forex market are entirely random

Even though the forex market is extremely hard to predict, the price movements are not entirely random. There are different ways through which a trader can assess the conditions of these prices. With the help of Technical Analysis or statistical (quant) methods, a trader can moderately anticipate the price action of currency pairs and thereby they can have an edge in the market.

This brings us to the end of this lesson. We hope we’ve cleared out some of the misconceptions you had about the forex market. To have a recap to this lesson, we have a quiz set up for you below.

[wp_quiz id=”46291″]
Categories
Forex Harmonic

The 5-0 Harmonic Pattern

Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern

The 5-0 Harmonic Pattern

Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney revealed this pattern in his second book in his harmonic series, Harmonic Trading: Volume Two.

The 5-0 pattern is easily one of the wonkiest looking patterns. Depending on where you are at with your knowledge of harmonic patterns, the 5-0 will look foreign. And this is primarily because the 5-0 Pattern starts a 0. If you are used to seeing XABCD,  then 0XABCD will undoubtedly look odd.

5-0 Elements

  1. The pattern begins (begins with 0) at the beginning of an extended price move (direct quote from Carney’s work).
  2. After 0 has been established, an impulse reversal at X, A, and B must possess a 113 – 161.8% extension.
  3. The projection off of AB has a 161.8% extension requirement to C. C can move beyond the 161.8% extension but not beyond 224%.
  4. D is the 50% retracement of BC and is equal to AB (a Reciprocal AB=CD Pattern).
  5. The reciprocal AB=CD is required.

One of the best ways to interpret this pattern is to view it from an exasperated trader’s point of view. If we take the Bullish 5-0 Pattern as an example, then we can see why. The AB leg ends with B below X, creating a lower low. We then get an extended move in time where the BC leg is the most prolonged move with C ending above A. The movement from B to C may take on the appearance of a bear flag or bearish pennant. C to D shows intense shorting pressure and a belief among bears that new lows are going to be found. Instead, we get to D – the 50% retracement of BC. Instead of new lower lows, we get a confirmation swing creating a higher low. That move will more than likely generate a brand new trend reversal or significant corrective move.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Harmonic

The Deep Crab Pattern

Harmonic Pattern Example: Bearish Deep Crab

The Deep Crab Pattern    

The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still has the endpoint (D) at the 161.8% extension of XA, but the AB=CD importance is a little different.

The most distinguishing component of this pattern is the importance of the specific 88.6% retracement point of B. Along with the Crab Pattern, the Deep Crab Pattern presents an especially extended and long move towards D.

Carney stressed that the Crab and Deep Crab represent significant overbought and oversold conditions, and reaction after completion is often sharp and quick. It is the opinion of many traders and analysts that the Crab Pattern and Deep Crab represent some of the fastest and profitable patterns out of all harmonic patterns.

Deep Crab differences from the Crab

  1. BC leg projection is not as extreme as the Crab.
  2. B must be at least an 88.6% retracement. Common to move more than 88.6% retracement level not above/below X (not above X in a Bearish Deep Crab and not below X in a Bullish Deep Crab).
  3. AB=CD pattern variations are more important in the Deep Crab Pattern.
  4. The BC leg is a minimum of 224% but can extend to 361.8%.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Harmonic

The Shark Pattern

Harmonic Pattern Example: Bearish Shark

The Shark Pattern

The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in his Harmonic Trading series, Harmonic Trading: Volume Three.

To gain a further understanding of the terminology used in this article, I would strongly encourage everyone to pick up all three of Carney’s books.

The Shark Pattern shares some of the more peculiar conditions that exist on some of the most extreme patterns. For example, both the 5-0 and the Shark Pattern are not typical M-shaped or W-shaped patterns. The Shark Pattern shows up before the 5-0 Pattern. It also shares a specific and precise Fibonacci level that the Deep Crab shares: The 88.6% retracement.

One behavior that might sound abnormal to all other harmonic patterns is that the reaction to the completion of this pattern is very short-lived. I think this is one of the most potent harmonic setups in Carney’s entire work because I am an intraday trader, and this pattern is very much for active traders.

Shark Pattern Elements

  1. AB extension of 0X must be at least 113% but not exceed 161.8%.
  2. BC extends beyond 0 by 113% of X0.
  3. BC extension of AX must be at least 161.8% but not exceed 224%.
  4. Because the Shark precedes the 5-0 Pattern, the profit target should be limited to the critical 5-0 Fibonacci level of 50%.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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 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 Daily Topic

To Reinvest or Not Reinvest, That is the Question

That is one key issue when trading. Should I stick with the same trade size, or is it better to compute trade size based on the account balance?

In his book “The mathematics of money management, Ralf Vince answers that question simply and elegantly, so let’s follow Ralph’s steps to dissect this topic.

No Easy Answer

The question of reinvestment or not can’t be answered directly. Let’s see an example where a wining system becomes a loser by reinvest.

Table 1 – System A

In System A, we have two trades. In the first trade making 50% and -40% in the second one, for a total profit of 10%. If we take the same sequence and reinvest, the system loses 10%.

Table 2 – System B

Using System B, we see there is a gain of 15%, followed by a loss of 5% for a total of 10% gain. This system also nets 10% without reinvestment, but it continues being a winner with reinvestment.

Changing the order of the sequence does not alter the final result, provided none of the trades leads the account to a broke (because then the second trade would not be happening). You can make your own calculations, but multiplication is commutative, isn’t it?: 

 A*(1 +0.15)* (1 -0.05) = A*(1 -0.05)*(1 +0.15)

Geometrical Mean: Key to Qualify Systems under Reinvestment

Let’s add two one-point winners to system A, and two one-point losers to system B.

Table 3 – System A

Table 4 – System B

Now we will take as a reference a typical bank account paying one point per period. 

Table 5 – System C

We already know that system B is the optimal one for reinvesting, but, let’s see which parameter defines the optimal system to fulfill our objective to maximize profits under reinvestment. How could we determine which system is the best for reinvesting, given we had only the information of its non-reinvesting performance?

By percentage of winners, system C will be the winner, by average trade or by total dollars the winner is system A. Risk/reward or lowest drawdown is not the answer. If that was the answer, then we should move our money to a bank account.

 We know system B has the right mix of profitability and consistency, and systems A and C lack one of these properties. So how to measure this mix?

According to Vince, the right formula is the Geometric Mean, which is the Nth root of what he calls “Terminal Wealth Relative” (TWR), where N is the number of trades. TWR is the cumulative amount we would obtain if the initial amount of the trading account were 1 instead of 100. 

TWR = (1+%R1)*(1+%R2)*… (1+%RN)

Where %Ri is the percent returns on each trade.  

A simpler formula to express TWR is:

TWR = Final Capital / Starting Capital 

      And these are the  TWR of our systems :

Table 6 – TWR   

    By taking the square roof of the N trades we obtain

Geometric Mean (G) = TWR^(1/N)

G = (Final Cap/Starting Cap)^(1/Nr of trades)

     Let’s see the G of our sample systems  

  Table 7 – Geometric Mean   

From table 7 we can see that the best performer in terms of geometric Mean is System B.

Final words

The Geometric Mean is the growth factor per trade. A system with the highest G is the system that makes the most profit and grows the fastest on a reinvestment basis. 

G less than one means the system is not profitable and would lose money when using reinvestment.

If we obtain a G = 0, it means we went broke because anything multiplied by zero is still zero, and G is a multiplicative function. Any big losing trade will have a powerful effect in G. That is a mathematical way of saying, “cut your losses short.”

As Ralf Vince put it: “in trading, you are only as smart as your dumbest mistake.


Reference: The Mathematics of Money Management, Chapter 1.

The examples of this article were taken from Ralph Vince’s book, although the formulas were checked and computed using an Excel spreadsheet.

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 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 Price Action

Price Action, Market Psychology, and Adjustment

Price action traders are to get clues from what the price has been doing. Horizontal Support/ Resistance, Trend Line Support/Resistance, Fibonacci Levels, Equidistant Channel along with Candlestick Pattern are price action trader’s main weapons. A trader must know how to use these tools as far as price action trading is concerned. Moreover, traders often need to adjust to marking levels, which are to be integrated with price action and market psychology. In today’s lesson, we are going to show an example of that.

The price has been heading towards the downside with strong bearish momentum. Ideally, traders are to look for short opportunities at upside pullback. See the first reversal candle. The candle closes within the support of the last bearish candle. Thus, the traders must wait to go short since the support holds the price. Let us see what happens next.

At the last candle, the price goes towards the downside but comes back within the support again. Equations are different now. Long lower shadow and proven support suggest that the traders may have to wait longer than they thought.

As expected, the price consolidates on choppy price action, which makes traders wait. Traders find horizontal support. Let us draw it.

The price obeys the support level several times. However, do not forget that the price had a strong rejection. This is where traders may need to make an adjustment.

 

The price has been heading towards the adjusted support. Risk-Reward does not look right here. It is better to wait for either a downside breakout or a bullish reversal to go long. Let us see what happens next.

 

We have a bullish reversal here. A bullish engulfing candle right at the support level suggests that the traders may have to look for long opportunities here. The question is, shall we take an entry right after the last candle closes or not. The answer is ‘No”. We have to wait for an upside breakout. Can you guess where the breakout level is? Think for a minute, and then proceed to the chart below.

The price has been obeying a down-trending Trend line producing a Descending Triangle. Thus, the breakout at the Trend line resistance is a signal to go long here. All the buyers need here a breakout by a bullish Marubozu candle.

Here comes the breakout that the price action traders shall wait for. The buyers may trigger a long entry right after the breakout candle closes. Stop Loss is to be set below the horizontal support. Let us find out how it proceeds.

The price heads towards the North and provides 1:1 Risk-Reward. So far here, it seems that it is having consolidation. Some traders may want to come out with their profit. Some may shift their Stop Loss at the breakeven and take some profit out targeting to go all the way towards the swing high. This depends on how a trader wants to manage his trade. With these above charts and examples, we have realized the importance of adjustment in marking support/resistance.

 

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 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 Harmonic

The Cypher Pattern

The Cypher Pattern

The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by Scott Carney. Darren Oglesbee discovered this particular pattern.

This pattern is very similar to the Butterfly in both it’s construction and where it typically will occur (near the end of trends). However, the Cypher Pattern is a rare pattern and not one that shows up with a high amount of frequency. Don’t confuse rarity with being more powerful or profitable. I do not know enough about this pattern, nor have I had the opportunity to trade it enough to gauge it’s ‘power’ versus its peers. All I do know is that in the times I have traded it, its positive expectancy rate is high, no different than a Bat or Alternative Bat in my experience. The same goes for the Crab and Deep Crab, for that matter. Just like all of the other Harmonic Patterns that you will have learned about, the Cypher has specific rules and conditions that must be met for it to be a specified Cypher pattern.

Cypher Confirmation Conditions

  1. B must retrace to an expansive range between 38.2% and 61.8% of XA. At least 38.2% but not exceeding 61.8%
  2. C is an extension leg and moves beyond A – but must move to at least 127.2%, but it is normal for it to go as far as the 113% – 141.4%. It is considered invalid if it moves beyond the 141.4%
  3. CD leg should break the 78.6% level of XC.
  4. The PRZ (Potential Reversal Zone) of D is a wide range where the price must get to. Price can move anywhere between 38.2% to 61.8%.

I’ve created a simplified approach to how to ‘see’ this pattern.

Simplified Approach (Bullish Cypher)

  1. C must be higher than A.
  2. D must be less than B but greater than X.
  3. We should see a higher high (C > A) and a higher low (D > X).

Simplified Approach (Bearish Cypher)

  1. C must be less than A.
  2. D must be more than B but less than X.
  3. The same approach as above, reverse: lower high (D < X) and a lower low (C < A).

This pattern can be confusing (all harmonic patterns can be complicated), but in a nutshell, what we see happening with the Cypher pattern is the first pullback/throwback of a trend (B). After B, the small pullback/throwback of B occurs with the C leg. From a bullish perspective, when we see prices making lower highs and lower lows, but there is no follow-through shorting pressure, we should be on the lookout for some powerful and influential moves to occur in a very short period of time. It is not uncommon to see a bullish candle engulf several days of consolidation with this pattern.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Course

12. The First Step In Your Trading Journey

Introduction

Trading the forex market involves high risk. As per statistics, 95% of the traders fail in this domain. Hence, having expertise and experience in trading is very necessary for staying away from the 95%. And in this course, we’re here to guide you on how to be a successful trader. So let’s discuss what your first step should be in your trading journey.

Demo Trading

As mentioned, forex is a very risky business. One must never enter the live market during their initially early stages. So, brokers help the novice traders by providing a facility to demo trade. With a demo trading account, one can place live trades in the market just like a real trading account. In this account, you get virtual cash to place trades on the live charts. Moreover, in this platform, you get all the features and tools that are available on a real trading platform. And the best part is that this platform is provided by brokers for free of cost.

Advantage of Demo Trading

Helps test your strategies and techniques

There is no strategy that will work with 100% certainty. So, testing a new strategy on the real account can cause damage to your account balance. But, with a demo account, you can test your strategies without any risk.

Gives you a hands-on experience on placing orders

In forex, there are different types of orders. With a demo account, one can test the working of all these orders without the fear of losing money.

Helps concentrate on analysis rather than emotions

Emotions play a major role when it comes to trading. Emotions in trading can lead to huge losses as it takes over the actual analysis. One can reduce emotions entering into them while trading, only when they start gaining experience. Hence, trading in a demo account can help you focus on your analysis rather than emotions taking over.

How to create a trading plan

Well, having experience in demo trading is insufficient to start trading the live markets. A systematic plan for trading plays a vital role, as well. Below is an example of how you can create a perfect plan for yourself.

Choose your time zone: Though the forex market is a 24 hours market, it is not ideal to trade anytime in the day. Hence, you must choose those zones which bring in great liquidity and volatility in the market.

Fix your timeframe: You must be firm on one set of timeframes because switching over timeframes is a clumsy way of trading.

Choose the right currency pairs: There are about 28 majorly traded currencies. Keeping track of all these is a challenging task. So, you must select only a few currencies and analyze them deeply.

Have one fixed strategy: Novice traders look for new strategies every trading day. But, this is completely the wrong way to trade as it becomes more like gambling than real trading. So, you must have one standard strategy in which you can keep optimizing with experience.

Maintain a trading journal: This can be the most vital plan in your trading plan. However, many take this for granted. With a journal, one can keep track of their past transactions and get a statement on the number of loss & win trades. It will give you a clear picture of your consistency. This can help you improve your trading by learning from past mistakes.

By following these steps, you can be sure that you are up to a great start on your trading journey. Take the below quiz to check your learnings.

[wp_quiz id=”45923″]
Categories
Forex Harmonic

The Crab Pattern

The Crab Pattern

 

The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the extremely tight and resistance endpoint of 161.8% of the XA leg.

Like almost all harmonic patterns, the potential reversal in price action after this pattern has been complete is generally fast, violent and powerful. However, Carney gives special attention to this pattern and reports that it is usually the most extreme of all harmonic patterns.

The pattern is not as frequent as others due to its five-point extension structure. It is desirable to utilize an oscillator to filter entries of this pattern according to any divergence between price and your selected oscillator.

Crab Pattern Elements

  1. B must be a 61.8% retracements or less of XA.
  2. The BC projection can be quite extensive, generally 261.8%, 314%, or 3618%.
  3. An AB=CD 161.8% or an Alternate AB=CD 127% is required for the formation of this pattern.
  4. The extension of 161.8% of XA is the end limit of the pattern.
  5. C has an expansive range between 38.2% and 88.6%.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Daily Topic Forex Psychology

Taking Forex Trading as a Business

Forex trading is a hard business. A trader has to work hard to learn the algorithm of it as well as psychologically strong enough to apply them when it comes to making money out of it. Some individuals may have enormous knowledge as far as trading is concerned, but they do not do well in trading. It is because they are not capable of dealing with the real heat.

Having losses is another inevitable issue with trading, which every trader is to encounter. It does not matter how good a trader is; he or she must face losses. In trading when a trader loses a trade, he loses in two ways

  1. He loses his money
  2. He loses faith in his calculation or belief

Losing the Money

When a trader loses money in trading, I do not think it needs an explanation of how bad it feels. Losing money on any occasion hurts. Traders are bound to err because this is a game of chances, so they sometimes lose money. In the Forex markets, a trader can lose an unlimited amount of money. He can lose an amount of money he even cannot think of. Experienced traders do err as well.

In most cases, it is not about making mistakes. The market can be unpredictable from time to time. Even excellent trade setups don’t always work. This fact may make a trader believe something wrong with the strategy. He starts adding/changing more things with the strategy; runs after Holy Grail. We know what the last consequence is. He quits after losing valuable time and invested money. Statistics show that only around 5% of investors are successful in the Forex market.

How to Overcome It?

A trader must be ready to take losses. He should look at trading as a business, and count his losses as business expenditure. Let us consider. If we run a business, we have to pay utility, rent, wage, miscellaneous spending. A trader may count his losses as an expenditure of his trading business.

Losing on Own Belief

We often ignore this issue at the time of analyzing traders’ psychology. I find this to be a severe issue. When a trader takes an entry, he throws his skill, experience, belief in it. If it goes wrong, he loses a trade on his calculation. Psychologically, it hurts a lot. We can compare the feeling when our favorite team loses a match against an archrival. Losing on own belief is often more painful than losing the money only.

How to Overcome It?

It is a severe psychological trading issue. To overcome this issue, a trader must remember that there is no such strategy in the Forex market, which is 100% successful. Even the best of the best strategy is bound to encounter losses. Typically, if a strategy is successful even in 60% cases, the market analysts consider it as a good strategy.

The Bottom Line

A trader is to take trading as a business. The market is not an ATM. Making money consistently does not mean a trader makes money on every single trading day. A trader is to have some good days and some bad days. There is no point in jumping with joy on good days or being grumpy on bad days. Just take them professionally.

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 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 Course

11. The Different Order Types In The Forex Market

Introduction

In the world of trading, the order types are identical, irrespective of the market you’re trading. The type of the ‘Order’ refers to how you wish to enter or exit a trade. If you’re new to the world of trading, you might only know two order types – Buy and Sell. But there are other order types that serve different purposes, and improve the way you trade. In this lesson, we will be discussing some of the most used orders in the forex market.

Types of Orders

There are about four order types widely used by traders. These are

  • Market Order
  • Limit Entry Order (Buy Limit, Sell Limit)
  • Stop Entry Order (Buy Stop, Sell Stop)
  • Stop Loss Order

Apart from the above, there are other orders that are exclusively offered by specific brokers like ‘Trailing Stop-Loss’ and ‘Profit Booking Order’ but in this article, we shall confine only to these four types.

Understanding the Bid and Ask prices

Let us first discuss these two terms as they form the base for understanding the order types.

Bid price

The bid price is the price at which the broker is willing to buy the currency pair from you. So, when you short sell a currency pair, you will be executed at the bid price.

Ask price

Ask price is the price at which the broker is willing to sell the currency pair to you. So, if you go long (buy) on a currency pair, you will be filled at the ask price.

With this under consideration, let us continue our discussion on different order types.

Market Order

This is the most basic form of order. In a market order, you get filled at the current market price. It is basically the best price available in the market to buy/sell a currency pair.

For example, let’s say the bid price of EURUSD is 1.2150, and the ask price is 1.2152. Now, if you execute a market buy order on this one, you will get filled at the ask price, i.e., at 1.2152. Similarly, if you go short on this pair, you will get filed at 1.2150.

Market orders are fast. A trader uses that order to enter a marker no matter what. That speed and fill guarantee comes at the cost of the slippage is the market has moved from the instant the trader pulls the trigger to when the order is filled.

Limit Entry Order

Limit entry order is an order where a buy order is placed less than the current market price, and a sell order is placed above the current market price.

For example, let’s say the current market price of AUDUSD is 0.6750. Now, if you want to buy it at 0.6725, you will have to place a Buy Limit order at this price. And if you want to short it at 0.6790, you will need to place a Sell Limit order at this price.

Limit orders can be used as entry or as exit orders.

As entry orders, you are applying the logic of buy low and sell high (on short-sell limit orders). A limit order is handy to spot a support area while the price moves back and get filled as the price approaches support.

As exit orders, they are handy to take profits. You place a limit to sell at your profit-taking level on long trades and you place a buy limit order at your profit target level on short trades.

Stop Entry Order

A stop entry order is the reverse of a limit entry order. Here, you can place a buy order above the current market price and a short sell order below the current market price.

For example, let’s say the current market price of GBPJPY 1.6570. Now, if you think the market will head up only if the price breaks above 1.6590, you must place a Buy Stop at the price you wish to buy. So, when the price goes up to 1.6590, your buy order will be executed.

Stop-Loss Order

A stop-loss order is special order for closing a trade. This order is placed against the price at which you bought/sold the currency pair. This is done to avoid further losses from trade. Since this order ‘stops’ the losses, it is called a ‘stop-loss’ order.

For example, let’s say you bought a currency pair at 1.1320. Now, for this trade, if you place a stop-loss at 1.1250, the positions will be closed when the market touches this price, hence, protecting you from further losses.

This completes the lesson on basic order types in the forex market. We will discuss the more premium broker specific orders in our future lessons. For now, take the below quiz and check what you have learned the concepts right.

[wp_quiz id=”45527″]
Categories
Forex Elliott Wave

Elliott Wave Principle – Advanced Concepts – Part 1

Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.

The basics

In financial markets, we use the correlation to measure the relationship between two or more assets. These assets can be from the same or different markets.

For example, we can analyze the relationship between a commodity and a currency pair. In the first figure, we observe the relationship between Crude Oil (NYMEX:CL) and the FX pair US Dollar – Canadian Dollar (USDCAD).

From the figure, we observe that Crude Oil holds an inverse relationship with USDCAD. It means that, if CL soars, the USDCAD should decrease, and vice-versa. This type of correlation is known as negative or inverse correlation.

In the contrarian case, when an asset moves in the same direction that the second one is known as positive or direct correlation.

The second key concept in the Intermarket analysis is convergence and divergence. In the same way that we use and identify divergences, or deviations, on technical indicators, we use it with correlations. Divergences allow us to foresee the exhaustion of a sequence.

From the figure one, we identified the divergence with the red arrow. In the example, we observe at the end of a wave, when Crude Oil soars, the Loonie decreases. In general, we find divergences when the fifth wave is in progress.

Putting all together

The next chart corresponds to the NASDAQ Biotechnology ETF (IBB) and the stock price chart of MERCK & Co. (MRK), in the weekly timeframe and log scale.

In this case, both assets belong to the same sector. Thus, we expect a positive correlation with each other. From the chart, we observe that IBB and MRK started a rally in the third quarter of 2009.

MRK looks like it’s near to end the bull trend; however, IBB unveils an incomplete bullish five-waves sequence.

Finally, please, note how the divergence appears at the end of the third wave on IBB, while MRK started the wave four.

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 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 Harmonic

The Alternate Bat Pattern

Harmonic Pattern Example: Alternate Bat Bullish

The Alternate Bat Pattern

The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in his Harmonic Trading series of books. He discovered this pattern roughly two years after (2003) his discovery of the Bat Pattern (2001). Carney wrote that ‘the origin of the alternate Bat pattern resulted from many frustrated and failed trades of the standard framework. The standard Bat pattern is defined by the B point that is less than a 0.618 retracement of the XA Leg.’ Essentially, with the Alternate Bat Pattern we observe an extension beyond the 88.6% level at D, where D moves slightly below X (in a bullish Bat) or above X (in a bearish Bat). I view Alternate Bats as classic and powerful bear traps and bull traps. And they are just plain nasty if you find yourself thinking that a new low means further downside movement and a continuation lower – but instead to you get whipsawed by a massive reversal.

 

Alternate Bat Elements

  • Whereas the 88.6% retracement is nearly singular to the Bat Pattern, the Alternate Bat Pattern utilizes the 113% retracement of XA to determine the endpoint.
  • B must be a 38.2% or less retracement of XA.
  • Minimum projection of 200%
  • The AB=CD pattern must be an extended AB=CD and often is a 161.8% level.
  • The pattern is potent when using a form of divergence detection, such as the Composite Index, to confirm the pattern.

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Course

10. Understanding Lots & Different Types Involved

Introduction

In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are combines into different tradable sizes, and they are called as ‘Lots.’ Hence, to buy and sell currency pairs, you must trade in the form of lots. There are different lot sizes depending on the number of units you trade. For example, 10,000 units are referred to as a mini lot and 100,000 units as a standard lot. Now, in this lesson, we shall understand other lot sizes along with some examples.

What is a lot in Forex?

A lot in Forex is the number of units of a currency pair. Note that one unit is not equal to one lot. Instead, a collection of units of a currency pairs make a lot. And depending on the number of units that are involved in making up a lot, there are different lot sizes in the market.

Different Types of Lots in Forex

Depending on the number of units, we can classify Lots in four types.

Standard Lot

The size of this lot is 1 and is made up of 1000,000 units of a currency pair. So, buying 100,000 units of EURUSD is as good as saying you have bought 1 lot of EURUSD.

Mini Lot

In terms of lot size, the quantity of ‘lots’ in a mini lot is 0.1. And one mini lot consists of 10,000 units of a currency pair.

Micro Lot

The quantity of lots in a micro lot is 0.01. And this lot is made up of 1,000 units. So, buying is 1 micro lot means, buying 0.01 lots or 1,000 units.

Nano Lot

0.001 lots make up one nano lot, and it consists of 100 units of a currency pair.

Now, let us take some examples and clear out the differences in these types.

Examples

E.g., 1: Buying 5 standard lots.

Lot size distribution = 5 * 1 standard lot

Number of units = 5 * 100,000 = 500,000 units

E.g., 2: Selling 1.5 standard lots

Lot size distribution = 1 * 1 standard lot + 5 * mini lots

Number of units = 1.5 * 100,000 = 150,000

E.g., 3: Buying 3.2 mini lots

Lot size distribution = 3 mini lots + 2 micro lots

Number of units = 3.2 * 10,000 = 32,000

Leverage trading

You must have seen brokers who let traders trade with as low as $100. In fact, they let you trade mini lots with it. Now, you must be wondering how one can trade 10,000 units with just $100 in their account. Well, this is facilitated by the brokers as they offer to trade with ‘leverage.’

In leverage trading, brokers let you take positions larger than the capital you possess. And as far as the mechanism of this is concerned, a broker lends you with the required money to take a position. And for this, they keep some amount of your capital as deposits. This deposit stays with them until your trade is open. When the trade is closed, the complete deposit is returned back to you. Leverage, also referred to as margin, is usually measured in ratios or in percentages. A detailed explanation of this shall be discussed in further lessons.

Hence, this completes the lesson on Forex lots and its types. And below is a quiz to help you check if you have grasped the concept better.

[wp_quiz id=”45130″]
Categories
Forex Harmonic

The Bat Pattern

Harmonic Pattern Example: Bearish Bat

The Bat Pattern

The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney – found in Volume One of his Harmonic Trading series (I believe that Mr. Carney’s work is essential in your trading library).

I am particularly grateful to Carney’s work because it was his work that introduced me to a very powerful Fibonacci retracement level: 88.6%. Previously, I have followed Connie Brown’s suggestions in her various books utilizing only the 23.6%, 50%, and 61.8% Fibonacci levels – the 88.6% is now a near-constant in my own analysis and trading. That particular level, the 88.6% level, is the primary level to reach with the Bat pattern.

One of the key characteristics of this pattern is the strength, power, and speed of the reversals that occur after a confirmed and completed pattern is verified. As a Gann based trader, this is the pattern I personally look for to identify the ‘confirmation’ swing in a new trend (the first higher low in a reversing downtrend and the first lower high in a reversing uptrend).

Bat Pattern Elements

  1. B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
  2. BC projection must be at least 1.618.
  3. The AB=CD pattern is required and is often extended.
  4. C has an expansive range between 38.2% and 88.6%.
  5. The 88.6% Fibonacci retracement is a defining and particular level to the Bat Pattern.
  6. The 88.% D retracement is the defining and exact limit of the end of this pattern.

Ideal Bullish Bat Conditions

  1. 50% retracement of XA.
  2. Exact 88.6% D retracement of XA.
  3. BC wave 200%.
  4. Alternate AB=CD 127% is required.
  5. C should be inside the 50% and 61.8% retracement range.

Ideal Bearish Bat Conditions

  1. B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
  2. BC projection must be at least 88.6%.
  3. BC projection minimum of 161.8% with the max extensions between 200% to 261.8%.
  4. AB=CD is required, but the Alternate 127% AB=CD is ideal.
  5. C wave retracement can vary between the 38.2% to 88.6% retracement levels.

 

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Categories
Forex Daily Topic Forex Risk Management

How to determine if your Trading System shows Dependency

How to determine Dependency in your Trading System

As we have explained in our previous article How to be sure your trading strategy is a winner, traders usually apply position size strategies that conform with the belief that future outcomes somehow are influenced by the previous result or results. This phenomenon, in statistical terms, is called dependency, which means the probability of the next event happening depends on the last or past events. 

The example of a card game such as Blackjack or Pocker, can enlighten this concept. In a deck of cards, the odds of getting a particular card, such an ace is dependent on the cards already on the table. So, the first time, with no card drawn, the probability of drawing an ace is 4/52. But the next time we draw a card, the probability changes to 4/51 or 3/51, depending on if an ace was drawn on the last time.

What does dependency mean to Trade

Having dependency on a trading system or strategy would mean that the odds of the next trade being profitable or unprofitable change with the outcome of the last trade. If we really could prove dependency and its kind, we could adapt our trade size accordingly, making the system more profitable than assuming non-dependency.

 As an example, if we devise a system on which a winning trade precludes another winner and a losing trade another loser, we could increase trade size while on a winning streak and decrease it on losing streaks. That way, we could maximize profits and minimize losses. 

How do we determine if a system shows dependency

Dependency on trading has two dimensions. The first dimension is dependency in terms of wins and losses, which is the sequence of wins and losses showing dependence. The second dimension is if the size of wins and losses also show dependency.

The run Test

On events such as drawing cards without replacement, it is evident that there is a dependency. But when we cannot determine if the sequence of results show dependence, we can perform a Run Test.

The run test is merely obtaining the Z-scores for the win and loss streaks of the results. A Z-score tells us how many deviations our data is away from the mean of a normal distribution. We are not going to discuss run tests here, as there is a simpler and more complete method to find out dependency. If interested in this subject, you can find multiple sources by googling the term.

Serial Correlation

Dependency can easily be measured, using a spreadsheet, since dependency is measurable using a CORREL() function between the trade results, and the same data shifted one place. This technique uses the linear correlation coefficient r called Pearson’s r, to quantify dependency relationships. 

As an example, I passed one trade system of mine I backtested some time ago to a through the correlation function CORREL. The system produced 55% winners with 1.7 reward-to-risk factor on the DAX30 Futures contract.

The following image shows the result on this system, with about 250 trades (only the first 30 shown)

Image 1 – Dependency test on a DAX System

If you click on the image, you can see the result is 0.0352, which means the test failed miserably for dependency. That means we should separate our entry decisions from the trade size. Trade size will be a function of the system’s drawdown and our appetite for risk, not a function of the last trade being a winner or a loser.

Another test in an old trade system I devised back in 2016 for the ES futures gave this result:

In this case, the correlation factor was 0.249. That is a relatively high positive correlation for a system. The figure implies that big willers aren’t usually followed by big losses, and also the vice versa: Big losses are seldom followed by big wins.  Using this system, we could improve the results if we increase our trade size after a win, and decrease the trade size after a loss.

A negative correlation can be as helpful as a positive correlation. For example, on a system with a negative correlation, we can expect large wins after a large loss, so it is wise to increase the trade size if that event occurs. Also, we can expect a large loss after a large win, so it is best to reduce the trade size before a large win.

To better determine dependency, Ralf Vince, on its book The Mathematics of Money Management, recommends splitting the total data of your system into two or more parts. First, determine if dependency exists in the first part of your data. If you detect it in that section, then check for dependency in the second section, and so on.  This will eliminate the cases where it seems to be dependency, but in fact, there is not.

Categories
Elliott Wave Guide Forex Elliott Wave

Essential Elliott Wave Theory Guideline

Recently, we ended the series that presents the basic concepts of the Elliott Wave Theory. In this guideline, we disclose the contents developed.

  1. Fundamentals of Elliott Wave Theory. Divided into three parts, we introduce the basic concepts of the wave principle.
    1. Wave principle and the five-waves structure.
    2. Motive waves, corrective waves, and cycles.
    3. Degrees and labeling.
  2. Planning the First Wave Analysis. In this two-parts chapter, we explain the necessary steps to analyze using the Elliott wave principle.
    1. Setting charts and the identification process.
    2. Proportionality and the relationship between price and time.
  3. Impulsive Waves Construction. This section offers the key concepts to understand the nature of impulsive waves.
    1. Nature of impulsive waves and the alternation principle.
    2. The channeling process.
    3. Extensions.
    4. Leading and Ending Diagonal.
  4. Corrective Waves Construction. Elliott, in his Treatise, spent a large part of time describing corrective waves. In this section, we present different corrective formations.
    1. Nature of corrective waves and alternation.
    2. Zig-zag pattern.
    3. Flat pattern.
    4. Triangles.
    5. Complex corrective waves.
  5. Elliott Wave Theory and Fibonacci. In this one-part article unfolds the keys to use Fibonacci retracement and expansion tools.
  6. Trading the Elliott Wave Principle. We end the cycle of the Elliott wave theory with the five-part guidelines.
    1. Wave three structure trading setup.
    2. Wave five and ending diagonal trading setup.
    3. Zig-zag pattern trading setup.
    4. Flat pattern trading setup.
    5. Triangle formation trading setup.
Categories
Forex Price Action

Equidistant Channel Trading: What Else to Consider?

Equidistant Channel is a very reliable trading tool for the price action traders. In an ascending Equidistant Channel, the buyers wait for the price to come at the support level and to get a bullish reversal candle to go long. It is vice versa, in the case of a descending channel. However, some other equations are to be taken care of by the traders when trading with an Equidistant Channel. In today’s lesson, this is what we are going to demonstrate. Let us get started.

The chart above shows that the price is caught within an ascending Equidistant Channel. Look at the last bearish wave. After a rejection, the price heads towards the support. As a trader, we shall wait for a bullish reversal candle to go long here. Let us proceed to find out what happens next.

Wow! The price action traders always dream of this. This is one good bullish reversal candle. A bullish engulfing candle right at the channel’s support, the buyers, shall jump into the pair to start buying. However, we must set stop loss, take profit. Stop Loss level looks very evident here, which will be below the signal candle (Bullish Engulfing Candle here). What is about the Take Profit level? Where shall we set it? Typically, we set it at the upper band of the channel since the price usually goes towards the resistance of the channel after having a bounce at the support level.

Look at the chart. At the last wave, the price produced a bearish engulfing candle right at a strong horizontal resistance (arrowed). It had a rejection at this level earlier, as well. Thus, this is a level, which must be counted at the time of setting Take Profit level.

Despite having an engulfing daily candle, the price does not head towards the North with a good buying pressure. Anyway, it heads towards the upside. Look at the rejection. This means setting our take profit at the horizontal resistance would give us 1:1 risk and reward ratio here. This is not bad. However, if we make a target to go all the way towards the upper band, it may get us a loss instead.

Let us see how the price action acts afterward.

We would not make a loss here, but see how the price action has been. It gets choppy. It may still offer more long entries since the support is held by the price. However, we know what else is to look for, a breakout at a significant level of horizontal resistance.

Key Points to Remember in Equidistant Channel trading:

  1. A significant level of horizontal support/resistance is to be broken.
  2. If there is no horizontal support/resistance, an anti-trend line is to be broken.
  3. The signal candle is to be a strong trend reversal candle.
  4. In the case of having horizontal support/resistance in the middle of a channel, at least the Risk-Reward ratio is to be 1:1.
Categories
Forex Elliott Wave

Traders’ Guide to the Elliott Wave Theory

The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave Principle.”

The Wave Principle

In Elliott’s treatise, the author indicates that financial markets as a socio-economic activity hold a specific structure composed of five waves. In his model, Elliott teaches us that waves 1, 3, and 5, move following the direction of the dominant trend. On the contrary, waves 2 and 4 develop an opposite movement to the primary trend.

Parts of the Cycle

The Elliott wave cycle has two components; these components are an impulsive wave and a corrective wave.

As said before, an impulsive sequence holds five waves; and a corrective wave contains three segments. In consequence, a complete cycle has eight waves.

The next figure unveils a complete Elliott wave cycle.

The Analysis Process

When R.N. Elliott developed its theory, he defined a specific terminology to maintain the order in the analysis process. The author established a series of degrees that must be considered in relative terms about price and time.

The next table illustrates the different degrees defined by Elliott.

The analysis process starts with the relevant highs and lows identification in a larger timeframe. After this, we proceed to study the prices’ sequence; to aid to do this step, we examine the proportionality and the relation between price and time. The next chart illustrates the relationship between price and time.


The next stage is to identify impulsive waves. The basic guidelines of motive waves are:

  1. It has five consecutive segments building a trend.
  2. Three segments move in the same direction.
  3. Wave three never is the shortest.
  4. Wave two never ends below the origin of wave one.
  5. When an impulsive movement finishes, it starts a corrective move of the same degree.

Alternation is a key concept of the wave principle. We observe the motive and corrective waves alternate one with another.

We observe the alternation in:

  • Distance.
  • Time.
  • Retracement.
  • Complexity.

The following EURAUD charts illustrate the concept of an alternation.

Categories
Forex Price Action

Retracement, Consolidation, Breakout, and Price-Action Trading

In the financial market, there is a saying, “Trend is your friend.” When the price makes a strong move towards a direction breaching a significant level of support/resistance, traders start looking for opportunities to take entries. The word ‘opportunity’ signifies a lot. After making a strong move, the price usually makes a correction/consolidation. At the correction/consolidation, the price finds a level of support/resistance. This is what gives a good risk-reward ratio to traders. In the end, it brings more winning trades, as well. In this lesson, we are going to demonstrate how a retracement gives us an entry.

The price produces a Double Bottom and breaches the neckline level. The buyers are to look for opportunities to go long on the chart. Look at the last two bearish candles. The price seems to have started having a correction. The last candle closes within the support. We might as well get a buying opportunity here. A bullish reversal candle at this level shall attract the buyers to go long. Let us see what happens next.

A bullish engulfing candle is produced here, which is considered the most powerful reversal candle. We have been eyeing to buy. Make a decision. What shall you do? Are you going to click the “Buy” button? Hang on. You must consider an equation before going long here. Look at the chart below.

The bullish reversal candle is produced at a level of support where the price had its last bounce. This is consolidation where the price is caught in a range. Thus, until the price makes a breakout at the resistance, we must not buy. Let us look at the chart below to find out what happens next.

The price comes out from the consolidation zone by making a downside breakout. It seems that the price is going to have a long retracement. Honestly, it appears that the buyers may not get the opportunities to go long. The price has been heading towards the South by making an ABC pattern, and the bullish trend is about to collapse. A down-trending Trend Line works as a resistance as well. Then, this is what happens.

We have a massive bullish engulfing candle at the level where the price has had several bounces. This is the candle, you may click the “Buy” button, right after it closes. A question shall be raised here that we do not take the long entry at the first bullish engulfing candle, but we do it now. What is the reason behind that? Before answering the question, look at the chart below.

The signal candle this time makes a breakout at the down-trending Trend line. This means along with a strong bullish reversal candle, we get a breakout as well. This is what makes the price action traders click the “Buy’ button this time. Let us have a look at the chart how it looks after clicking the “Buy” button.

It looks good. The price heads towards the North with good buying pressure. This is what we love to see. However, this does not come as easy as it sounds. The first bullish engulfing candle does not offer us entry, but this one does. The reason is it makes a breakout. We need to have a lot of practice, study, and research to be well acquainted with consolidation, correction, reversal, and breakout. Stay tuned to get more lessons on these topics.

 

Categories
Forex Course

9. Understanding The Concept Of ‘Pip’ In Detail

Introduction

‘Pip,’ the word sounds pretty familiar, right? Well, that’s because this is a fundamental term when it comes to trading in the forex market. Pip forms the base for reading the price changes in the currencies. Hence, understanding this lesson is very important. So, let’s begin by defining what a pip is.

What is a pip?

Pip is a unit of movement in currency pairs. It basically tells, by how many values the price of the currency pair has changed. A pip is the same for all the pairs except for the currencies paired with JPY. One pip for every JPY pairs is 0.01 while it is 0.0001 for the rest. Hence, the fourth decimal place in the price of the currency pair represents a pip for non-JPY pairs, and the second decimal place in the price represents a pip for JPY pairs. Now, let us comprehend this with an example.

Let’s say the current market price of EURUSD is 1.1000. We say a currency price has moved by one pip when the price rises to 1.1001. Similarly, when the price goes up to 1.1008, we say the price has moved to by 8 pips (w.r.t 1.1000). Taking it further, if the price goes up even higher until 1.1010, we say the market has risen by 10 pips. From these three examples, we can come up with the formula for pip as follows:

Pip = current market price – initial price under consideration (For long position)

Pip = initial price under consideration – current market price (For short position)

Let’ say the CMP of USDCAD is 1.3230. Later, the price shoots to1.3293. Let us calculate how many pips have this pair increased.

Pip = 1.3293 – 1.3230

Pip = 0.0063

Hence, the currency has risen by 63 pips.

Pips extended

The change in the value of the price on the fourth decimal point represents the pip change between 0-9.

The change in the value of the price on the third decimal point represents the pip change between 10 and 99.

The change in the value of the price on the second decimal point represents the pip change between 100 and 999.

The change in the value of the price on the first decimal point represents the pip change between 1000 and 9999.

Let us understand this by an example. Let’s say the current market price of a currency pair is 0.5829.

Here, 9 indicates 9 pips,

2 indicates 20 pips,

8 indicates 800 pips, and

5 indicates 5000 pips.

What is Pip a value?

The pip value adds value to the pip by determining its ‘worth’ in terms of the base currency. Pip value for a currency pair can be calculated using the below formula.

Pip value = change in the value of counter currency * exchange rate ratio

Example: Let’s say the price of GBPUSD is 1.2450. That is, 1 GBP is equal to 1.2450 USD. Now, if price moved by one pip, i.e., to 1.245. The pip value for this can be calculated as follows.

Pip value = 0.0001 USD * (1 GBP/1.2450 USD)

Pip value = 0.00008032 GBP

Hence, by trading one unit GBPUSD, you will make 0.00008032 GBP. Similarly, trading 100,000 units of this pair, you will get 8.032 GBP.

What is Pipette?

Apart from pips, brokers represent quotes in pipettes, as well. An increase in the decimal place of a pip will get you the pipette value. So, the 5th decimal and 3rd decimal place represents pipettes for non-JPY pairs and JPY pairs, respectively.

For example, if the price of EURUSD increases from 1.21001 to 1.21002, we say the price has risen by 2 pipettes.

That’s all about Pips. If you have any more questions, let us know by commenting below. Don’t forget to check your learning by answering the below questions.

[wp_quiz id=”44951″]
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 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 Course

8. Which Is The Right Currency Pair To Buy & Sell?

Introduction

By now, we know that trading Forex market involves trading of currencies pairs rather than just a single currency. The working mechanism of this is quite different from that of the stock market. In the previous lessons, we learned how the buying and selling of a  currency pair work. However, this is still insufficient to take a trade on these currencies. Though you have the knowledge of which pair is strong or weak, choosing the right currency pair plays a vital role. There are times where you make a loss even if your analysis of the currency was correct. In this lesson, we shall try keeping you away from incurring these events.

Strength of the currency pairs

As discussed in the previous lessons, in a currency pair, we have something called as a base currency and a quote currency. To brush things up, the left currency on currency pair is called the base currency, and the one on the right is called the quote/counter currency. To trade the forex market successfully, one must do their analysis on both the currencies of the currency pair. For example, if you wish to trade the EURUSD currency pair, having knowledge in either EUR or USD is insufficient. Instead, you must have insights on both the currencies. This will not only prove the rightness of your analysis but will also reduce your risk considerably. Now, let us understand this in detail.

The answer to ‘why’ you must consider both currencies in a currency pair in your analysis rather than just one currency lies in the previous lessons. Well, when you go long/short on a currency pair, you are actually buying one currency and simultaneously selling the other one. So, if you analyze only one currency, you will be blindly be hitting a buy or sell on the other currency. Hence, it becomes equally important to consider the other currency in your analysis as well. For example, if you buy AUD/USD thinking that AUD is strong, there is no certainty that the prices of this pair will rise, as USD has its role to play as well.

Choosing the apt pair to trade

The answer to choosing the right currency pair is self-explanatory. It is always recommended to choose a currency pair where one of them is strong, and the other is equally weak. For example, let’s say in the USD/CHF pair, USD is strong, and CHF is weak. Ideally, one would buy a currency that is strong and would sell a currency pair that is weak. Coming to the case of USD/CHF, if you buy this currency pair, you are buying the USD and even selling CHF at the same time. Hence, you are basically doubling your success probability or halving your failure probability. If we were to visualize this currency pair, the USD would be shooting to the north while the CHF would be dropping towards the south. And in the form of a currency pair (where the base currency is taken into consideration), the chart would visually look in one direction, which is upward.

Apart from strong vs. weak pairs, you can even trade strong/weak vs. neutral pairs as well. But, note that it is highly risky to trade a strong vs. strong or weak vs. weak as the overall direction of the market becomes hard to predict. We hope you understood this concept. Now, let’s take a quick quiz.

[wp_quiz id=”44815″]
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 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 Harmonic

The Butterfly Pattern

Butterfly Harmonic Pattern Example: Bearish Butterfly

The Butterfly

The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its 4th Edition, initially published in 1987)– a must-read for those interested in harmonics patterns. He is the creator of his proprietary software called WaveTrader. The Butterfly is one of the most potent harmonic patterns because of the nature of where it shows up. Both Carney and Pesavento stress that this pattern typically shows the significant highs and significant lows of a trend. In fact, in utilizing multiple time frame analysis, it is not uncommon to see several Butterfly patterns show up in various timeframes all at the end of a trend (example: the end of a bull trend can show a bearish butterfly on a daily chart with a 4-hour and 1-hour chart showing a bearish butterfly ending at the same time). This pattern is an example of an extension pattern and is generally formed when a Gartley pattern (the Gartley Harmonic pattern) is invalidated by the CD wave moving beyond X. From a price action perspective, this is the kind of move where one would ‘assume’ a new high or low should be established, but extreme fear or greed takes over and causes prices to accelerate in both volume and price to end a trend.

Failure, Symmetry, and Thrust

Pesavento identified three crucial characteristics of the Butterfly pattern.

Thrust – C should be observed as an indicator of whether a Gartley or Butterfly pattern will form. He indicated specific Fibonacci levels that are important for gaps – but that is important for equity markets that are rife with gaps. That is not important for us in Forex markets (gaps in Forex are rare intra-week and typically form only on the Chicago Sunday open, Forex also has an extremely high degree of gaps filling). He noted that thrusts out of the CD wave point to a high probability of new 161.8% extensions rather than a 127.2% extension.

 

Symmetry – The slope of the AB and CD wave in the AB=CD should be observed strictly. Depending on how steep the angle is on the CD wave, this could indicate a Butterfly pattern is going to be formed. Pesavento also noted that the number of bars should be equal (10 bars in AB should also be 10 bars in CD). Regarding the steepness of the CD wave, this is where Gann can become instrumental. In my trading, and depending on the instrument and market, I utilize Gann’s various Squares (Square of 144, Square of 90, Square of 52, etc.). If you use a chart that is properly squared in price and time, there is very little ambiguity involved in identifying the speed of the slope of a CD wave.

 

Failure Signs – Very merely put, Pesavento called for close attention to any move that extends beyond the 161.8% XA expansion. And this is an excellent point because one of the most dangerous things we can do as traders is an attempt to put to much weight on a specific style of analysis. It’s easy to think, ‘well, the Butterfly pattern is strong, so if it completes that must be the high or low.’ That is a very foolish and dangerous assumption to make. When markets, even Forex, make new highs or lows in their respective trends, that is generally a sign of strength. So while the Butterfly pattern does indicate the end of a trend – common sense confirmation is still required. The Butterfly pattern should help confirm the end of a trend, not define it.

 

The Five Negations

Continuing on with the great work of Pesavento and Jouflas, they identified five conditions that would invalidate a Butterfly pattern:

  1. No AB=CD in the AD wave.
  2. A move beyond the 261.8% extension.
  3. B above X (sell) or B below X (buy).
  4. C above A or C Below A, respectively.
  5. D must extend beyond X.

 

Ideal Butterfly Pattern Conditions

Carney identified six ideal conditions for a Butterfly pattern. You will note that the combination of Pesavento and Jouflas’s work greatly compliments Carney’s.

  1. Precise 78.6% retracement of B from the XA wave. The 78.6% B retracement is required.
  2. BC must be at least 161.8%.
  3. AB=CD is required – the Alternate 127% AB=CD is the most common.
  4. 127% projection is the most critical number in the PRZ (Potential Reversal Zone).
  5. No 161.8% projection.
  6. C should be within its 38.2% to 88.6% Fibonacci retracement.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

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 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!

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Forex Course

7. How Does Profit & Loss Take Place When You Are Trading in Forex?

Introduction

Forex is that market where buying and selling of currency pairs take place. Unlike the stock market, where you need to consider only one stock to analyze, in the forex market, you will have to examine two different currencies to trade one instrument, as instruments here are traded in pairs. Hence, the correlation between currencies plays a major role while trading a currency pair.

Understanding the Current Market Price (CMP)

The current market price (exchange rate) of a currency pair tells you the number of units of the quote currency you’re required to pay to buy one unit of the base currency. For example, let’s say the exchange rate of EURUSD is 1.1000. Here, to buy one unit of EUR, you will have to pay 1.1000 USD. So, basically, while trading a currency pair, you are buying one currency and simultaneously selling the other currency.

Extracting money from the Forex market

Our purpose in this market is to make money. And to make money (profit), understanding the relationship between the two currencies in a currency pair becomes vital. Now coming to the objective, a trader must buy a currency pair when they expect the base currency to have more potential to show strength in the future, comparative to the quote currency. Or in simple terms, to make a profit from a trade, you must go long on the currency pair when you think the base currency will increase in value relative to the quote currency. (Going ‘long’ in Forex is nothing but buying the currency pair and going ‘short’ is nothing but selling it)

Complete trade example

For instance, the CMP of USD/CAD as 1.3240. And let’s say you believe that the USD/CAD is going to drop in the near future. So, you wish to short sell this currency pair. Consider your short sold 10,000 units of USD/CAD. Here, by selling this pair, you have internally sold 10,000 US Dollars and bought the equivalent Canadian Dollars (10,000 USD * 1.3240 = 13,240 CAD). After some days, you see that the prices have dropped to 1.3180. Now, since the value of this currency pair has changed, the 10,000 US Dollars in CAD will be turn out to be, 10,000 USD * 1.3180 = 13,180 CAD. Now, when you sell this currency pair at the CMP, you will actually be buying 10,000 USD and selling 13,180 CAD.

In the above example, let us see if you made a profit or a loss. Initially, you had sold 10,000 USD to buy 13,240 CAD. At this point, you are sitting with 13,240 CAD. Later, you bought back that 10,000 USD, and you paid (sold) just 13,180 for it. That is, you are still left with 60 CAD (13,240 – 13,180) with you.

Hence, you made a profit of 60 CAD ( which is ~45 USD).

Quick cheat sheet

When you buy a currency pair (buy – base currency, sell – quote currency), you need the price of the currency pair to appreciate in value.

Conversely, when you sell a currency pair (sell – base currency, buy – quote currency), you need the price of the currency pair to depreciate in value.

Now let’s check if you understood the concepts right by answering the below questions.

[wp_quiz id=”44276″]
Categories
Forex Harmonic

The Gartley Pattern

Harmonic Pattern: Bearish Gartley

The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability remains exceptionally resilient. This is especially true when we consider how old the pattern is and how it has remained profitable in these contemporary trading environments. Pesavento reported (at least I think he was the one who wrote this statistic) that it is profitable seven out of ten times and has remained that way for over 80 years. It is important to remember that all harmonic patterns have stringent ruleset. There is no room for interpretation in the construction of any pattern, and the Gartley pattern is no different.

Rules

  1. D cannot exceed X.
  2. C cannot exceed A.
  3. B cannot exceed X.

Characteristics

  1. X is the high or low of a swing.
  2. It is impossible to project or determine A.
  3. Main Fibonacci levels are 38.2%, 50%, 61.8% and 78.6%.
  4. Precise 61.7% retracement XA for B.
  5. BC projections have two specific Fibs: 127% or 161.8%.
  6. The BC projection must not exceed 161.8%.
  7. Symmetrical AB=CD patterns are frequent.
  8. C retracement has a wide range between 38.2% and 88.6%.
  9. An exact D retracement is 78.6% of the XA move.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

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, 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 Course

6. Different Ways Of Trading The Forex Market

Introduction

Forex is a market to trade foreign currencies. It is traded 24 hours electronically over-the-counter, meaning the transactions are performed over the networks around the world. One way to trade the forex market is for one party to buy a currency, and the other to sell it. This method is referred to as spot forex trading. Apart from this, there are other ways to trade the Forex market. And in this lesson, we shall discuss these different ways.

Forex market and its types

If we were to consider the primary forex market asset types, we could find four. They are:

Spot Forex Market

Currency Futures

Currency Options

Currency Exchange-traded funds

Now, let us explain the working of each one of them in detail.

Spot Forex Market

As discussed, in the spot forex market, currencies are bought and sold for a short period of time, based on the current market price (CMP). The prices in this market are settled in cash, on the spot, bases on CMP. Hence, the spot market is also called a ‘cash market’ and ‘physical market.’ The settlement of orders in the spot market takes two days, while in the futures market, it takes much longer.

Spot trading is the most popular form of trading where the majority of the retail traders trade on. There is great liquidity in this market, and brokers even offer tight spreads on them. Apart from retail traders, other participants in this market include commercial banks, central banks, arbitrageurs, and speculators.

Currency futures market

In the currency futures market, the buyer buys a contract of one currency by paying another currency. While the seller of the contract holds the opposite obligation. And this obligation is due on the expiration date of the future. The ratio of the currencies is settled in advance between both the parties (the time when the contract is made). The parties make a profit or a loss depending on the difference between the real effective price on the date of expiry and the settled price.

Currency Options

A currency option is a type of options contract that gives the buyer the right, but not the obligation, to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder of the option pays a premium to the seller who is known as an option seller.

There are two types of currency options, ‘Call option’ and ‘Put option.’ A call option gives the buyer the right to buy a currency pair at the strike price before the expiry date. A put option gives a buyer the right to sell a currency pair at the strike price before the expiry date. Currency options are a popular way of protecting against loss.

Since the options are a bit complex, let’s understand them with an example. If you believe that the price of the Euro will rise against the US dollar, you can buy a currency call with a strike price of 1.31000 and expiry at the end of the month. If the price of EUR/USD is below 1.31000 on the expiration day, the option expires worthless, and you would lose the premium paid. On the other hand, if EUR/USD increases to 1.50000, you can exercise the option and buy the currency for 1.31000 (At strike price). By doing this, you have generated high returns on your investment by using options.

Currency exchange-traded funds

Back then, Exchange-traded funds (ETFs) were only available for the stock market. But in the present, ETFs have expanded to the Forex market as well.

A currency ETF is a fund that clubs a single or typically a bunch of currency pairs. These funds are managed by financial institutions and are offered to the public for purchase on an exchange board. Hence, one can trade ETFs just like any share on the stock market.

These are the four primary ways of trading the Forex market. Now take the quick quiz below to know if you have understood the above concepts.

[wp_quiz id=”42577″]
Categories
Forex Harmonic

AB=CD Pattern

AB=CD Pattern

Bearish AB=CD Harmonic Pattern
Bullish AB=CD Harmonic Pattern

The AB=CD Harmonic Pattern is the most basic and common pattern in harmonic geometry. It is the building block of all other patterns. It is the ‘bread and butter’ pattern. Pesavento and Carney recommended that this pattern should be learned first – and reading this article does not qualify for having learned this pattern. Like any form of analysis, you will need to regularly and consistently train your brain and eyes to find this pattern. You won’t be able to get very far in the study of harmonic patterns until you can see this pattern just by glancing at a chart.

Rules

  1. BC cannot exceed AB.
  2. D must exceed B to form a completed AB=CD pattern.

Characteristics

  1. CD is an extension of AB, generally from the Fibonacci ratio of 1.27% to 2.00%.
  2. CD’s slope is steep or longer/wider than AB.
  3. BC often corrects to the Fibonacci ratios of 38.2%, 50%, 61.8%, or 78.6%.

 

AB=CD Pattern Reciprocal Ratios

Point C Retracement BC Projection
38.2% 24% or 261.8%
50% 200%
61.8% 161.8%
70.7% 141%
78.6% 127%
88.6% 113%

 

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

Categories
Forex Harmonic

Harmonic Geometry

Gartley Harmonic Pattern Example: Cipher Pattern

Harmonics – Gartley Geometry

Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method that draws new traders to it more than Gartley Harmonics. People see these wonky triangles on a chart and automatically assume that because it looks so complicated and esoteric, they should probably learn these patterns right away. If that sounds like yourself, stop reading the remainder of this article and come back once you have learned the fundamentals of technical analysis. And certainly, don’t implement a new and complicated form of technical analysis like that harmonic geometry you’re your trading until you can look at a chart and tell what patterns exist just by glancing at it. Folks – I need to repeat this: Harmonic Geometry takes time to learn – this isn’t like learning about support and resistance. It’s not a topic that you can read about, understand, grasp, and learn in one weekend and then implement into your trading. The best way I could explain the time it takes to learn Carney’s harmonic structures is comparing it to the time it takes for a person to be able to look at a chart using the Ichimoku Kinko Hyo system and know, just by looking, if a trade can be taken and what the market is doing. That’s the best comparison I can find. Until you can look at a chart and within 10-20 seconds identify an important harmonic pattern on that chart – without having to draw it – then you should not use this in your trading. You need to become an expert in the analysis part before you start to trade with it.

I believe we should be calling these patterns Carney Harmonics or Gilmore Harmonics because Gartley never gave a name any designs – the genius work Bryce Gilmore and Scott Carney did that in his various Harmonic Trader series books. Scott Carney is the man who discovered and named a great many patterns and shapes that we see today. And Carney’s work is some of the most developed and contemporary work of Gann’s and Gartley’s that exists today. But the understanding and application of Carney’s and Gilmore’s patterns have been woefully implemented by many in the trading community. Any of you reading this section or who were drawn to it because of the words ‘harmonic’ or ‘Gartley’ must do two things before you would ever implement this advanced analysis into any trading plan:

  1. Read Profits in the Stock Market by H.M. Gartley – this is the foundation of learning and identifying harmonic ratios.
  2. Read Scott Carney’s Harmonic Trader series: Harmonic Trading: Volume 1, Harmonic Trading: Volume 2, and Harmonic Trading: Volume 3.

There are a series of other works by expert analysts and traders that address Gartley’s work and are worth reading, such as Pesavento, Bayer, Brown, Garrett, and Bulkowski. Do not consider their work merely supplementary – I find their work necessary to fully grasp the rabbit hole you are attempting to go down. Harmonic Patterns are an extremely in-depth form of analysis that encompasses multiple esoteric and contemporary areas of technical analysis. If you think finding the patterns and being able to draw them is sufficient to make a trading plan, you will lose a lot of money. Additionally, some words of wisdom from the great Larry Pesavento: An understanding of harmonics requires an in-depth knowledge of Fibonacci.

Harmonic Geometry, in a nutshell

In a nutshell, Harmonic Geometry is a study and analysis of how markets move and flow as a measure of proportion from prior price levels. These proportional levels are measured using Fibonacci retracements and extensions. When these patterns (triangles) complete, they create powerful reversal opportunities. Carney calls the end of these patterns PRZs – Potential Reversal Zones. The significant error that many new traders and analysts make when they find a complete pattern is the same problem many new traders make with any new tool, strategy, or method: they don’t confirm. Make no mistake: Harmonic Patterns are powerful. But like any analysis or tool, it is not sufficient to take a trade. Harmonic Pattern analysis is just one tool in your trading toolbox. And like any toolbox, you need multiple tools to tackle the various projects and goals you want to achieve.

Harmonic Trading Ratios

Contrary to popular belief, Gartley did not utilize Fibonacci levels or ratios in his work. Nonetheless, harmonic ratios are based on three classifications of harmonic ratios: Primary Ratios, Primary Derived Ratios and, Complementary Derived Ratios. As you develop a further understanding of the various patterns and their ratios, you will come to appreciate the very defined structure of this type of technical analysis.

Primary Ratios

  • 61.8% = Primary Ratio
  • 161.8% = Primary Projection Ratios

Primary Derived Ratios

  • 78.6% = Square root of 0.618
  • 88.6% = Fourth root of 0.618 or Square root of 0.786
  • 113% = Fourth root of 1.618 or Square root of 1.27
  • 127% = Square root of 1.618

Complementary Derived Ratios

  • 38.2% = (1-0.618) or 0.618 squared
  • 50% = 0.707 squared
  • 70.7% = Square root of 0.50
  • 141% = Square root of 2.0
  • 200% = 1 + 1
  • 224% = Square root of 5
  • 261.8% = 1.618 squared
  • 314% = Pi
  • 361.8% = 1 + 2.618

Elliot Wave and Harmonic Geometry

Ellioticians are very aware of the strong connectedness that Gartley’s and Carney’s work has within Elliot Wave Theory. There are significant elements between the two types of technical analyses that create a mutual symbiosis. However, while they are very similar, it is crucial to understand that there are some significant differences between the two.

Elliot Gartley
Dynamic, Flexible. Static, Definite.
Wave counts are more fluidly labeled. Each move is labeled either XA, AB, BC, or CD.
Many variations and intepretations No variation permitted.
Wave alignment varied and malleable. Each price point alignment must be exact.

The combination of Elliot and Gartley is powerful, and Gartley Harmonics can help confirm Elliot Waves. The following articles will describe, in further detail, specific Harmonic Patterns.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley