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Forex Assets

The Most Competitive Advantages of Google

The value of the search engine lies in the fact that practically everyone uses it to browse the internet. This network effect also occurs in other products such as Youtube, Android, Google Play apps, etc.

In this sense, Alphabet’s strategy is based on creating the best service at no cost. And when it already has the largest market share, that’s when it already focuses on monetizing it. That’s why today it has services like Android (with almost 90% market share on smartphones) that are still not exploiting and that will most likely do in the future. Or for example also Google Maps, the best browser that has ousted the famous but outdated TomTom. These last two cases are examples of future revenue sources that we do not see their impact on the accounts today.

They also have a clear cost advantage, both for themselves and for customers who pay for their services. In the case of Alphabet, it is not a capital-intensive sector requiring huge investment and high fixed costs. This implies that if their income grows, expenditures do not grow in the same way, since they are capable of generating economies of scale.

In addition, their advertisers also allow them to get the most out of their money invested thanks to all the information they have stored about the behavior of their users. If someone can invest $10,000 in advertising, they probably prefer to do so by targeting their target customer to the maximum rather than investing that $10,000 in a newspaper ad with many more targeting limitations.

I have already mentioned the main competitive advantages but there may still be some more. If you notice this or see service within the Alphabet ecosystem that has some competitive advantage don’t hesitate to put it in the comments.

Alphabet Manager Team

To get into this topic you need to explain the three types of actions that are in Alphabet to actually check who is in charge.

Class A Stocks (GOOGL):

These stocks have the right to vote at shareholders’ meetings (1 vote for each share). Anyone can buy them.

Class B Stock (cannot be purchased):

These stocks have the right to vote at shareholders’ meetings (10 votes per share). Here Larry Page and Sergey Brin (the founders) own 84.3% of the class B stocks, allowing them to secure 51% of the voting rights. In other words, even if a single person were to hold 100% of the type A stocks, they would still have less voting power than the founders. 

Class C Stocks (GOOG):

These stocks do not have the right to vote at shareholders’ meetings. Anyone can buy them. Alphabet uses this class to create its stock options to reward workers. It also uses these kinds of actions to make its buybacks.

If it did not buy back stocks, this class would increasingly dilute shareholders. In recent years, despite large share buybacks, the trend was more diluted, with more stocks in circulation each year than the previous one. Although in 2019 there has been a very aggressive repurchase of stocks that has stopped this trend in its tracks by returning to levels before 2015 in terms of the number of stocks in circulation.

Next, I will focus on the founders, Larry Page and Sergey Brin, who although officially no longer have responsibility seats in the company in the end are still in charge. We could go deeper but the article is already getting too long.

To analyze the management team we can look mainly at three things:

  • Do you have skin in the game REAL?
  • Past results?
  • How have they allocated their resources?

Alphabet Managers

We already know that skin in the game means sticking your neck out, that is, that one way or another, the results of a company are tied to individual interests. Wow, the managers are gambling their rooms, too.

The real thing is, there may be traps here.

In smaller companies, perhaps we can see that the maximum responsible owns 30% of the company (or more) so we assume that it has skin in the game. Note that this manager can also have a portfolio of investments that include other companies and that 30% of that company corresponds to 1% of its total portfolio. Do not fool yourself because there is skin in the game, little.

Another important question is whether managers have spent money to acquire the stocks or simply earned them with stock options for their performance in their jobs. Better if we know that managers buy their stocks than if they “give them away”.              

Google’s Results

As Sergey Brin and Larry Page have been the founders and have remained in the company throughout this time, we can assume that a good part of these results are attributable to the management of both.

The results we know have been spectacular. They’ve turned Google into one of the largest companies in the world with a market capitalization of more than $700 billion, with more than 100,000 employees, with an annualised sales growth has been 20%, this growth has been maintained in the last 10 years and a free cash flow growth of 17% (24% in the last 5 years).

There are several businesses in which you have a dominant market share, great competitive advantages, and still with many assets that you are not exploiting and that could start to monetize soon.

How have they allocated their resources? Here we should look at what they do with all the money they earn. If they use it to pay off debt (they have very little). if they distribute dividends, if they invest in organic growth (in their own business), inorganic growth (acquisitions)… Alphabet doesn’t give out dividends, which I think is reasonable given that they are able to grow at rates close to 20%.

Acquisitions

One of the most famous was Youtube. It seemed an expensive price to pay $1.65 billion back in 2006… However, to this day Youtube is still the leading video portal on the web and only in 2019, they entered for advertising on Youtube $15b. From a perspective, the price paid doesn’t look bad.

Another example was when Google bought Android for $50 million in 2005. By 2016, it had already generated $22 billion in revenue. In addition to this, every year more than 1.5 billion smartphones are sold. Let’s assume that about 1.300 carry the Android operating system. If Google had charged manufacturers only $1, it would have $1.3b more in its accounts. If I had charged $5 it would mean $6.5b, and if I charged $10 it would be $13b more, that is, almost the same as what was entered in the Youtube advertising ($15b).

This may sound like milk stories, but it’s likely to end up happening, as the alternative for manufacturers would be to work to launch their own operating system, and this would definitely be more expensive than paying the premium that Google puts down for using Android. For all this, it is clear that the directors of Google will be wrong in some decisions, but it seems that to date the management of the company we can value it at least remarkably.

One Last (Important) Thing…

Now that we know the business of Alphabet, how it earns money, its competition, the quality of its management team, and its competitive advantages, we only need to see the most important…

How much is Google really worth and how much are we willing to pay for an Alphabet action? This will be discussed and discussed in a future article called… How much is Google worth?

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Forex Basics

Which Countries Ban Forex Trading?

Forex trading is certainly legal in the vast majority of countries around the world, and very few countries prohibit speculative currency trading. At present, Belgium is the most prominent case, with too many warnings to its citizens. Another very different question would be to analyze why in some countries there is more difficult than in others to carry out Forex trading, and then we would have to stop to analyze the particular situation of each one.

Researching in different brokers we have observed that there are restrictions to the opening of accounts to citizens of certain countries. The issue is not that in these countries the practice of Forex is illegal, but that the brokers themselves for different reasons do not want to open accounts with some nationalities.

In summary, the list of countries where it would be more difficult to open an account for Forex trading would be as follows:

“Afghanistan, Azerbaijan, Bosnia and Herzegovina, Brazil, Guyana, Iraq, Laos, Yemen, Vanuatu, Uganda, Quebec, Syria, Ethiopia, Sri Lanka, Trinidad and Tobago, Tunisia, Iran, North Korea, Burundi, Cuba, the Democratic Republic of the Congo, Libya, Republic of Mali, Nicaragua, Somalia, Sudan, Zimbabwe, and Venezuela”

Many times, although the governments of these countries do not explicitly prohibit forex trading, it makes it difficult for various reasons, one of them may be the prohibition of bank accounts denominated in currencies other than those of the country itself. That is, as is the case of Venezuela for example, which limited the currency USD for use among its citizens. This circumstance makes complicated the payment in several gateways like Skrill or Neteller and therefore the simple task of opening an account with a few dollars becomes very complicated.

In other cases like Cuba, the limitations that the population has for good access to the Internet also make it very difficult for its citizens to practice Forex trading. Let us not forget that in Cuba and in some other countries the US economic and financial blockade still exists.

Another case apart is the countries in war, in these countries, some of them in the Middle East, it becomes practically impossible to have an account to practice Forex, as the difficulties in general multiply.

“Since tradING is extremely risky, many countries have imposed strict regulations on Forex trade to prevent financial losses for their citizens.”

Brokers are well aware of all these circumstances, and that is why many of them do not want to have relations with citizens of countries they consider “conflicting”. But as the circumstances of each country change from day to day, this list of “banned” countries is constantly being updated.

China. China and India deserve special mention, in these countries Forex trading is restricted by their respective governments, which does not mean that it is prohibited. Yes, it is legal and although China allows currency trading, Chinese traders cannot open their accounts with foreign brokers due to strict capital controls. China-based traders can only open their accounts with Chinese brokers. To attract Chinese traders, international currency brokers can open a local branch in China.

India. Forex retail is permitted in India, although it should be routed only through registered exchanges. Indian traders are not legally allowed to finalise cash transactions for foreign exchange trading. Another restriction of Indian traders is that they can only trade in currency pairs with the Indian rupee (INR), for example, EUR-INR, GBP-INR, JPY-INR, and USD-INR. This implies that Indian traders cannot trade in currency pairs without the INR. This is a big disadvantage for Indian Forex traders.

Japan. There is a lot of competition for Forex trading in Japan for smaller traders, and the market is growing rapidly. The financial services agency allows retail Forex traders in Japan to trade only through licensed brokers in Japan, they cannot register with other foreign brokers. There are also restrictions imposed on margin trading, typically 1:25 for major currency pairs.

South Korea. Forex restrictions in South Korea combine the restrictions of Japan and China. Due to capital controls, traders in South Korea cannot open their Forex account with foreign brokers. Due to strict government regulations, local brokers impose many restrictions on currency trade in South Korea. The maximum permitted leverage for Forex trading is quite low at 1:10

Turkey. The law has recently changed (relatively new regulations have only been introduced in 2017) for Forex trading and traders cannot use the services of unregulated foreign brokers. The local broker must also obtain a license to trade on Forex from the Turkish board for capital markets. The trader is required to make a minimum deposit of at least 50,000 Turkish lira.

Forex-Friendly Countries

On the contrary side to what we have been dealing with, are the countries where everything is easy for the practice of forex, and we have thought it convenient to name them also in this article because not everything will be prohibitions and difficulties!!

One of the particular advantages of becoming successful enough on Forex to do full-time trading is that it is possible to do it from any place where there is good access to the internet. There are no bosses, you don’t have to leave the house to go to work, and you don’t need to be in a specific place. You can go anywhere, so why not choose the best place? Naturally what is best depends on each person, but there are some general considerations we can use to make some recommendations.

The Right Price

Many dream of becoming rich with trading, and living in luxury in a city like New York. But the most realistic probability is to have a modest and consistent income. Earning a couple of thousand dollars isn’t exactly a bad income, but there are places where that can be a very good income.

Forex traders know that currencies vary in their purchasing power, and you have to take advantage of that knowledge. In fact, switching to another country could improve the situation of a forex trader significantly.

Basics

Trading on forex requires a good internet connection, banking infrastructure, and a friendly tax environment. It is for the latter that many immediately think of countries that do not tax capital gains. But several of those countries, like Hong Kong, Singapore, or Switzerland, have a high cost of living.

On the other hand, some of the so-called low-cost countries w-cost countries have other problems, such as lack of infrastructure and security. The ideal is to find a balance. But you also have to consider trading hours; it is not very pleasant to get up at a foul hour to trade at the best times in the market.

Candidates

If measured by popularity, Thailand would be at the top of the list. Not only for Forex traders, but many of those who work online will live or spend a good time there. They have no tax on capital gains, life is cheap, friendly people, there is good internet, and many foreigners. Another close candidate would be neighboring Malaysia, for the same reasons. Other countries that are not so well known, but still would be interesting to consider.

Panama: For those looking for a business-friendly and safe environment, in addition to being relatively close to the US. It is also an advantage that they speak Spanish and English.

Malta: It has the same status as the countries of the European Union. The weather is mild and meditative, and it does not tax most of the gains from forex trading.

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Forex Basics

The Rules of Forex: Are They Meant To Be Broken?

Darwin, analyzing the content of his work “the origin of species”, explained that the strongest species are not the ones that survive, not even the ones that have the greatest intelligence, the ones that survive are the species that best adapt to the changes. This has always been an important part of my investment philosophy, a clear example is my aversion to pension schemes, a product whose extreme illiquidity prevents adaptation to change, and the coronavirus crisis has set a good example of how harmful this can be: Many people have gone blind until it is not known when, and many of them are left without income and perhaps with economic problems. 

Having savings allows you to adapt to change, it is good to have savings; but if the bulk of your savings is locked in a pension plan, they will not serve to adapt to change…

Okay, yes, governments have changed the rules to allow some to be saved. And you’ve done well, by the way. But is it wise to let your adaptability depend on the government changing the rules? What if you’re not on the assumption that ransom is allowed? Maybe you can’t get it out because the plan is in your partner’s name, or because you don’t have problems but your son, father or brother does…

But this post is not about pension plans, but about rigidity vs flexibility; rules vs exceptions. And I’ve titled it “Rules are enemies of the best,” because that’s the corollary that comes from two premises that I think are true:

Rules Are Good

I will finish the post defending the deviation of the rules in certain circumstances, so it is good that I start by making it clear that normally you must follow the rules.  When there is a rule for anything (from the circulation code to the ratio of fixed income to the equity that you should have according to age and risk profile), these rules have been put by people who know a lot about the subject, and who have seen that for most people, Following these rules often gives good results most of the time. If you find a rule in a field where you are not an expert, you will do well to follow it. And if you find it in a field where you are an expert, you should have it as a reference and follow it most of the time.

That being said, make it clear that there are a few rules that are an end in themselves, and these must be fulfilled ALWAYS. But most rules are not an end but a means to achieve a goal, and in such cases, you have to stay the course towards the goal, not the rule…

But Rules Aren’t the Best

¡Nor do they claim it! Many rules do not seek to achieve the best, but to avoid the worst. I saw this a lot in my time at Indra, working in public administrations. There are rules to prevent the posts of civil servants from being given to friends, which would be “the worst thing,” but what happened with those rules is that if someone had entered as an interim had done a good job, he could not be allowed to continue in his post. 

But his position was taken to the contest by anyone who knew how to memorize more articles of the constitution… although that had no correlation with his good performance in the post. What was going on? On more than one occasion, they cheated themselves to make a call tailored to the person who was acting, breaking the rules, to achieve “the best thing”: that the one who had been doing that work continue doing it, for the benefit of all. Probably illegal, but certainly not reprehensible… if you’re looking for the best, you’ll have to break the rules. And the same thing happens with promotions, competitions for hiring companies… or outside the administrations, also happens with professional associations or designations of origin of wines. They all have rules to ensure minimum quality, but these rules will make it difficult to achieve the best possible result.

What About the investment Rules?

Investment rules are made with two main objectives:

Limit the risk: Achieve adequate profitability for the level of risk assumed. Both objectives are desirable (although the definition of risk can be discussed a lot), and to achieve them, certain investment rules have been proposed:

The Permanent Portfolio proposes:

  • 25% Shares
  • 25% Long-term bonds
  • 25% Gold
  • 25% Cash

Reducing the risk with age, Bogle proposed that the percentage you have in the stock market should be to subtract your age from 100 (I who have 46 would have to have 54% in the stock market), and the rest to fixed income. If your profile is more conservative, you can change the 100 by 90 or 80, if you are riskier you can use a 120.

These rules have worked pretty well most of the time, so it would be foolish to ignore them. But this post is about adapting to change… and certain circumstances have changed most of the time. The risk-free bond used to give modest but reasonable returns (2%-4%). Now he’s giving negative returns… you pay to lend the money!

For me, fixed income is at a terrible time, and variable income is at an optimal time. Are we going to follow the rules? Do we remember that the purpose of the rules was to limit risk and increase profitability? Because in the long run, buying cheap (stock market) is a great way to limit risk and increase profitability… 

The problem, of course, is that this is difficult because it is very easy to go from “applying the rules with flexibility” to making hot decisions, guided more by emotions than by reason. This is why designing a system of rules where rules evolve with the environment is especially attractive. Frankly, I have not seen anything similar in other disciplines (except in computer science, but is that computer scientists are “special”), and it would be very interesting… can you imagine that when a particular public administration shows above-average performance, it would be allowed a freer system of recruitment, without the obligation to go through competitions and competitions?

And this that I have commented regarding the rules of distribution of assets in portfolios applies also for many other rules that are used in investment…Distribution of assets by sector? Yes, but first let’s see if there are any particularly bad sectors (banking, for example), or expensive (dotcom in 2000, brick in 2007), and that we leave out.

Distribution By Country? Same Thing

The rule of PER 14? Very useful for detecting craziness when you see normal companies trading at PER 40, but beyond these extreme cases, it has many exceptions and nuances that need to be known. The rule not to invest in companies with high debt? It is more difficult to find exceptions to this because we are just talking about the survival of those species that are able to adapt to change, and high debt limits the ability to adapt to change.

So you know, learn the rules, apply them in detail, understand them thoroughly… and start thinking about when it’s time to break them. Adapt to circumstances and be flexible. And do not stop questioning your own ideas, and listen carefully to those who question them; sometimes you have to unlearn some things to continue moving forward. And as a general rule, avoid the rigidity that comes with debts and illiquid investments… Although I do not despise an illiquid investment that comes with a substantial discount!

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Forex Assets

Little-Known Tips for Trading Commodities In Forex

Negotiating the realm of raw materials may be new to many of you, but in the end, doing so is very much like negotiating any other financial instrument. The first thing to decide is which broker you will use. There are CFD markets, futures markets, and a variety of options markets that can help you access commodity markets. To help you make this decision, just look at how much money you have available to negotiate.

Size Matters (When It Comes to Trading Raw Materials)

Size matters when it comes to raw materials. This is because of futures markets. Futures markets are defined contracts that give you the option to trade several raw materials. To place a transaction in the commodity market of your choice, you need to have the necessary amount of margin to open that position, just like in the Forex world. In this situation is where futures markets could be a little expensive for some people. While some raw materials are cheaper to trade than others, some raw materials require an initial margin of more than 5000 USD for a contract. Beyond that, standardized contracts mean there is only one tick value available. For example, if you sell crude oil, each tick is worth 12.50 USD. There are “mini contracts”, but they are usually not as liquid and are still very expensive for some traders.

This is where CFDs suppliers of raw materials come into play. These contracts allow you to negotiate less than one full contract, mainly because you are not actually operating in the futures market. You are negotiating a contract with your broker to pay or receive the difference between the opening price and the closing price. This is why your broker can offer the equivalent of 1 bale of wheat compared to the standard contract size, for example. In that sense, CFD brokers may be a good option to consider.

A final option may be to trade raw materials in the options markets, but lately, the options have been extraordinarily volatile and costly. Similarly, binary options have had a lot of bad press lately and, in general, can be extraordinarily dangerous because of the large amount of leverage they offer.

The Fundamental Factors Differ

Keep in mind that the fundamental factors in commodity markets can be quite different from the factors you are used to if you are a stock trader or foreign exchange trader. This is because these are real “things” and not necessarily about companies or economies. To take an example, several years ago there was a long series of floods along the Mississippi River and the surrounding area of the United States. This had a great effect on the price of wheat because of the floods they became a problem. The destruction of crops reduced the supply of wheat to the market, which naturally led to an increase in prices.

This is why so-called “soft” commodities in futures markets, which are usually products that grow on the ground, can be a little difficult for some traders to negotiate as weather patterns become very important. Usually, when a currency is traded, you don’t have to worry about the weather, unless there is some kind of anomaly like a tsunami in Japan. In general, climate rarely enters the equation for Forex traders. However, traders in agricultural raw materials trading in wheat, maize, soybeans, and many other products are totally dependent on weather reports.

Precious metals are also a completely different financial instrument, as they often react to interest rate expectations from the Federal Reserve. Similarly, the price of metals is directly affected by the strength of the dollar, as most of the larger precious metal markets are denominated in this currency. This is why it is very important that you have knowledge about how the US dollar has high volatility before trading in gold, silver, or other metals.

The Liquidity Varies

Another thing to consider when operating in commodity markets is the liquidity of the market where it is traded. The fact that your futures broker offers the wood markets does not mean that you should participate in them, as they are very illiquid and are usually used for hedging more than for anything else. This would not be the place for retail traders to participate. There is a contrast with the pair of EUR/USD and you can notice that there is a big difference between the opening and closing a position. Many retailers have been adversely affected by the lack of liquidity in a market they do not understand.

Stick With What’s Important

It’s really funny that I recommend this because I don’t think it’s the case in the currency markets, (although many traders will argue the opposite). This is because the commodity markets have variable liquidity and, if you are involved in a futures contract, that liquidity may hurt you, as the value of the tick may be extraordinarily large in some of these contracts. This is why typical retailers should trade assets such as crude oil, gold, silver, corn, wheat, soy, natural gas, etc. Participating in milk, wood or even palm oil may sound exotic and therefore intriguing, However, it’s an excellent way to lose money.

This does not mean that you cannot deal with these raw materials, but you only need to have the right account size, something that is within the reach of very few retailers. At the end of the day, it is better to stick to markets that are much more stable.

In Summary

Find a broker, one that hopefully is regulated by a strong market authority, or maybe use one that you already have and that offers CFDs markets. As a retail trader, it is much better to initially use the CFD markets, because you can trade penny-worth ticks, compared to those large positions that are required in some of the markets. Remember that technical analysis, to some extent, works the same in all markets. The more liquidity the market has, the more likely the analysis is to work. That is the beauty of some commodity markets like crude oil because they are highly technical in nature.

Fundamental analysis can also be important for the negotiation of raw materials, as mentioned above, and news can also be important. Agricultural markets obviously focus more on climate, while crude oil can focus more on the Middle East. Demand is also a determining factor in the prices of raw materials. Beyond that, I have discovered that commodity trading works in much the same way as foreign exchange trading and is an addition worth considering for your long-term trading plan.

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Forex Basics

Traders: How Much Do You Value Your Time?

All traders at the end of the year always take stock of their own trading activity. There is, still, an element that is never taken into account and therefore we tend to forget… How much is our precious time worth?

While it may seem obvious, time cannot be “preserved” and we know this. It just happens. It is said that when we are born we are filled with time, because we have a life ahead of us, but no one can quantify this wealth and no one can know how long a person’s life will last.

Even so, this wealth is a certainty, since time can be devoted to all things that free will allows. Bearing in mind that our choices will show us the way because with each decision we take new paths and leave others.

This leads to a consequence: we spend more time on what motivates us the most. This motivation can be effective, economic, work, sense of duty, etc. It is interesting to note that on many occasions we use time as an exchange currency.

Traders Continuously Exchange Their Time

This concept applies particularly well to a trader. He exchanges part of his time to have more availability of it, later. What do you mean? Invest money in financial markets to get more of it so you have more time to enjoy your life with your goals and desires. Let me explain in detail what this phrase means.

Time and money are perhaps the two most important resources we have available to invest and make a profit. However, it is money that is really valued as an investment because it allows us, being a system of payment, exchange, and reference, to receive something in return.

Otherwise, when we invest our time, it is not so easy to quantify the performance we will get, only in some cases will it give us a profit in the form of money. For example, in the event that we exchange our time with work to be rewarded with a salary.

In others, the exchange is not tangible, for example, when we want to increase our knowledge through study. Paradoxically, these resources have great similarities: both can be managed, lost, wasted, saved, they are not infinite, but the substantial difference is that only money can be earned. If you lose money, you can recover it over time, but if you lose time, you can never recover it, even by buying it.

Unconsciously, money is valued more than time, except by increasing age: older people value time more because they realize their lack. Time is available at no cost and available at will. Moreover, it is the most equitable resource there is. We all have it. The problem is your administration.

Different Uses of Time and Money

The same amount of money and time in the hands of different people will not coincide with their uses, even if the source from which they come is the same. If it is easy to answer that time is the main resource we must fight for, we must be aware that money is decisive for our future. Buying new experiences or particular desires requires a significant monetary expense and an investment of time to enjoy them.

The needs of life and the time in which we live mark the future of events: money well-spent costs little, while time well spent is scarce and spent inadvertently. A very good dilemma.

Time measurement predates the creation of money and is often related to productivity. Benjamin Franklin said that “time is money” and explained that time spent working to earn money was time well spent; otherwise, if time has been spent on other matters, money has been lost. This reflection is correct only in its own context, outside of it it does not make sense because the time well spent not only generates money but also generates many benefits that go beyond money.

Both time and money are consumed even if nothing is done with them. If we let time go, it is spent. If we do nothing with the money, like leaving it in a non-productive place, then inflation will, over time, despite its initial value. And this is surely the most important theory of finance: while the price of money remains constant, its value fluctuates over time.

Time Should Be Devoted to Investment

In the world of investment, the results are obtained after having devoted much of our time to them. The paradox that to make money I have to invest my time and that if I have money I will have more control over my time, does not go beyond the fact that the reward of both is not proportional. Having a lot of money is not synonymous with having a lot of time.

Time is indifferent to the amount of money. Those who have obtained a significant amount of money have invested a lot of time in it and will also need a lot of time to manage it.

It is clear that everyone is happy in their own way, but it is possible that those who have more time and less money to devote themselves and their families will be happier. A study carried out by the publication Psychological and Personality Science reveals that 64% of respondents prefer to have money for leisure time, even if the results changed when asked about happiness. In fact, it has been concluded that the amount of money accumulated is not proportional to happiness.

When you reach a certain limit of money, by earning more, that extra amount is not proportional to increasing happiness. In this sense, it is said, and rightly so, that the rich do not enjoy the same happiness as money. This limit is at 60,000 euros per year, according to experts. 60,000 euros a year? Here must enter an important reflection.

Invest Time to Gain Time

The trader invests his time because a greater amount of money improves the ability to use his time. Very true, but how do you use this time spent for this purpose? The trader must be really good at managing the time he spends in this profession. If the study of trading requires much of our time and a lot of dedication, it is also true that we should not launch it in a 10-hour session that does not bring anything good.

Some will say it depends on how much I earn. True, but only in part. If I have to destroy my psycho-physical balance to make money, there’s no point in working like this. Trading is said to be freedom, but this statement is the subtle line between good and evil.

If by freedom we intend to spend money on totally useless luxury items or sit in front of the screen for hours and hours to end up repenting and burning our human contact with the outside world, happiness will never be there and this is clear to everyone. If, instead, we mean the possibility of having quality time, for example, stay with our loved ones or have experiences that enrich us as human beings, then everything changes.

Trading As A Growth Process

Trading can be seen as a great ladder: a path where step by step we grow first as people and then as traders. A continuous exchange of time and money that should have a higher quality of time available, but above all the awareness of ourselves and of how we want to live our lives.

Life… We know it’s unique and we’ll never know the exact moment we’re leaving. Therefore, we must be very responsible to ourselves throughout this journey. Negative emotions, the lack of objectives, and the inability to react in the difficult moments of this work must be prohibited.

Time is the most precious thing we have. Unfortunately, we seldom evaluate it consciously: it continues to decline, inevitably tending to run towards a zero balance. Only in the future will we lose the past and this can never be recovered. Therefore, it is necessary to manage time: if you want to achieve something, the first thing is to realize it. It would be sad and out of logic not to do so, it would be an act of self-denial.

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Forex Trade Types

Types of Orders in Forex and the Stock Exchange

While some traders prefer to work with a financial advisor who invests on their behalf, other traders choose to take a ‘do it yourself’ approach, buying and selling their own shares or trading. That’s probably why you’re on the professional trader website.

However, as you know if you’ve ever tried to buy shares, there are different varieties of stock order types. Some orders are executed immediately; others are executed only at a specific time or price, and others have additional conditions.

The type of order used can make a big difference in the price you pay and the returns you get, so it is important to be familiar with the different types of orders in the financial markets.

Order to the Market

A market order is when an investor to trader requests an execution in the act of the sale or purchase of an asset. While this order guarantees the execution of the order, it does not guarantee the execution price. It will usually be executed at the current purchase (sale) or sale (purchase) price. Investors can give simple or complex market order instructions, which can be accessed by brokers or banks they use to trade.

When executing an order to market, traders have no control over the final price. The execution of the order to market is correlated with the availability of sellers and buyers. Depending on the pace of the financial market, the price sold or paid can vary dramatically from the quoted price. It is also possible to divide market orders. The division of market orders can lead to multiple price points, due to the involvement of several traders in the transaction.

Limited Order

If you want to execute an order at a specific price, you must use a limited order. With a limited order, you will determine a certain price for which you want to buy or sell a value. The order is only executed when it has a buyer or seller who will pay or sell a number of assets for that price.

A limited purchase order is only executed at the limit price or below ( if, below).

Let’s take an example, if a trader wants to buy Apple Inc. for a price not exceeding $200 per share, the investor will make a limited order. Once the share price reaches $200, the order is executed. Although a limited-sale order is similar, it is only executed when the shares reach or exceed the limit price.

Limited sales orders may also have additional requirements such as Fill or Kill (FOK) or All or none’ (AON).

When a FOK is requested, the order is executed immediately or killed completely.

With an AON request, the order is executed or not executed at all. If the order is not complete, the request will remain pending until the order is completed.

This is a brokers’ market makers, that is to say, ALL brokers using Metatrader (that do not tell you stories of liquid suppliers and milongas, at the end of the chain there is a market maker), makes no sense. But I use futures or stocks and ETFs, it is basic in a trading strategy, especially when you make money allocation being CTA. You can’t buy futures from 20 customers and 30 can’t. Can I explain? Or all or none.

GTD (Good till date)

If you want to indicate the amount of time an order remains active, you will want to use a period of validity of the order. For example, a valid daily order (GFD) is an order in which the investor wishes to sell or buy insurance for a certain period of time. Once the trader requests the order, it will expire shortly thereafter during the day. These orders will only be valid during the day they are requested. If current orders are not executed during the day, they are canceled at the end of the trading day.

Investors can also request the cancellation of the order until the deadline is met, which requires certain cancellation criteria to continue indefinitely. Another request option is immediate or a cancel order (IOC) that executes or cancels the order instantly.

Conditional Orders of Exchange

Conditional orders allow investors to set the parameters that trigger execution. These options focus on the movement of prices of securities, forex, CFDs, indices, and other options contracts.

An investor can select trigger values, types of securities, and time limits for the execution of his orders. Now we present some of the most common conditions stock market orders that can be used in trading.

Order Stop Loss

The purpose of a suspension order is to limit the trader’s loss in a transaction. Traders usually apply for “BUY STOP” orders to limit their losses or protect their profits if they have put a short deal. Traders can use a stop-sale order to minimize their loss or protect a profit if they have a SELL STOP.

Some of the most common stop-loss commands include:

Stop Selling Order: The instructions for stop selling orders are to sell at the best available price, once the price falls beyond the stop-loss price.

Purchase Stop Order: Similar to the sale stop order, the purchase stop order is a safeguard to limit a loss. If a trader makes a short, you may want to place a stop purchase order to minimize your loss of earnings.

Trailing stop order: Introducing stop parameters that produce a mobile or drag price is a stop trailing order. Stop Trailing orders can maximize profit when prices increase and decrease significantly loss when prices fall. I don’t like them, but they are.

A purchase order at the market price if touched is an order that requests a purchase at the best available price, or at the “if touched” level. This order is the famous MIT ( Market if Touch) If the price of the value falls at this level, the order will become a market purchase order. While with a market order if touched, the sale occurs when a buyer wants to pay the level of ‘if touched’.

These types of orders are widely used in range break trading, where you enter the market at a high price if a certain value is exceeded. The same but the other way around, but on the short side.

An Order Cancels Other Orders

Investors can use an OCO command when they want to capitalize on one of the two trading options. For example, if an investor wishes to trade shares of ABC at 10 euros per share or shares of XYZ at 50 euros per share, the one who reaches the designated price first will be the one who occurs. Thus, if ABC shares reach 10 euros per share, the order is executed and the order for XYZ shares is canceled.

A bear command is when an investor wishes to send another order once his previous order has been completed. Let’s take an example, if a trader wants to buy ABC shares for 10 euros per share and then wants to place a sales order and make a profit, he would need to complete a two-part order. The first part is a limited order for the purchase of ABC shares at 10 euros per share. The second part would be to sell ABC’s shares at EUR 11 per share. Multiple commands enter the system simultaneously and then run sequentially.

Orders Sensitive to Tick

A tick-sensitive command is an order that is conditional on a tick going up or down. Traders can enter such orders in futures brokers such as Interactive Brokers. An example of this order would be to buy at a downtick at the opening price of the s&P 500 futures.

Conclusion

Before you start trading forex, stocks, futures, or whatever, it’s important to understand the vocabulary of the investment world. Perhaps no jargon is more important than the one surrounding the different types of orders, so I hope I helped you.

Categories
Forex Basic Strategies

An Entirely Innovative Approach to Forex Trading

If you are looking to find something different this is a good sign. You will do well in forex simply because you do not want to repeat what others are doing, including the mistakes. However, being different sets you on a harder road, most of the trading activity will not resemble anything else out there. All the things you come up with will result in a unique trading system specific to you, there is a limit to how much you can learn from others on this road. Still, you ought to do well, you do not belong to the 90% majority of beginner traders that lose wanting to walk the easy path to success. If you set your goals high, be ready to work towards them. Let’s dive into what is considered a unique approach to forex, something that may catch your eye.

Renko Charts 

These do not work like regular charts and candlesticks at all. It is a completely different philosophy that aims to cut all the redundant information from a chart. It is dumbed down if you want to describe it like that but in a good way. After all, simple strategies and systems are often the most effective. 

Renko charts present the price action uniformly, and simpler versions of Renko charts do not have a timeframe, they have a pip movement scale. Now, before you get all confused, Renko charts are made of bars, similar to the candlesticks except they represent a number of pips the price has moved. How much pips one Renko block will hold is up to you to set up. So, if the price hasn’t moved 20 pips up or down, for example, a new bar will not be drawn on the chart. Consequently, timeframe does not exist, just the pip per bar setting. If the price is ranging in the 20 pip zone for a long time, do not think the Renko chart is not working. 

This is one example of a fully developed Renko strategy in MT4: it includes Renko charts, one step moving average, and a modified type of MACD indicator.

Setting Your Renko Pip Settings

Getting the chart simple is a good thing and a bad thing, it actually depends on your personality. Do you like to analyze and go into details or do you like simple answers? Deep analysis might make traders indecisive and even set in the wrong direction while simplicity might not present all hidden truths about the market (pure Price Action analysts cannot see what they need on Renko). Renko is an innovative approach to trading, it defies the traditional analysis. However, it does not mean you cannot be a scalper or a midterm trader. As scalpers like lower timeframes on standard charts, investors might like the weekly. With Renko, all this scaling is in one setting – how much pips movement one bar represents. 

Lower pip settings are for scalpers, the chart will move faster. Higher pip settings will generate a bar only once the price is really moving, so it may take a while. Just understand, Renko follows the price, there is no definite time when the Renko bars show up. If you like to trade on a daily timeframe usually, waiting for a candle to close at the exact time of day might be your routine. This routine does not apply to Renko trading. You have to be ready to act when the price is moving and the bars are piling up. Of course, most Renko charts have the alert option, including some other custom indicators with the same function so you do not have to worry about missing the action. 

Renko chart with 10 pip settings on a USD/JPY pair

With a 10 pip Renko setting above (it is hard to distinguish lower and higher pip settings just by looking at someone’s Renko chart), understand that Renko follows the momentum. By this, we mean with the 10 pip settings a reverse bar can only form if the price moves 20 pips. Notice a clear downtrend on the right side of the picture, a black upward bar will form only if the price moved 20 pips up, while the white bar needs only 10 pips in the downtrend direction to continue. So, it is double the set value. This is done to confirm the trend is losing momentum. Renko is thus designed to show exit points too. 

Renko Pros

Renko is the noise reduction king. If you are looking for black and white answers, Renko will serve. Technical traders love indicators for reasons they are based on numbers, numbers are crisp, there no fuzzy logic with them. Renko can be regarded as a digitalized chart that helps traders decide. 

Indicators based on price levels such as Fibonacci and others do not make much sense with Renko. One more reason why Renko is innovative, it will stimulate you to find unique rules and indicators that can match up with Renko. This leads us to the next pro point.

Renko requires the rules you can make up to the point Money Management does not need anything else. Pretty neat, traders do not have to bother a lot to create exit points, where to scale out, measure volatility, volume, trailing and all other info Renko just eats up. Of course, you will have to try out what rules work for you, for example, try the two bar rule, exit, and enter when two consecutive bars appear. 

Renko Cons

The truth is, you will need more than just Renko. Even it looks great, a ranging chart might destroy what you have built-in trends before. Whatsmore, Renko is not adjustable except for the pip settings. So the odds are you might need some more tools or rules like in the picture above to get it right. 

As rigid as it is, Renko will work better on some trading assets than with others. Once you set up your bar pip value and the rules, all is set for that strategy. There are no messing with it now. You have to be present when the bars appear, and no one knows when it is going to happen. This is probably going to mess with the routine part of trading. However, all this is adaptive to how many pips you set, you can turn trading on and off whenever you like. 

Renko Indicators

All indicators work differently with Renko, they pull the data off the Renko charts after all. This also means indicators that you once discarded as junk on a regular chart could make wonders on Renko. Switching to Renko trading is very different from what you used to do, probably you will have to test all the tools once again. The work will pay off as you are not following the herd that loses. 

To start, go to the classic forex resources such as forexfactory.com, or forex-station.com where they have Renko dedicated sections. Installing Renko might require to do some research but it is easily done on MT4. 

Interestingly, Renko can also be combined with regular charts as an overlay. The example below is a Renko Shade indicator combined with a Vortex oscillator.

And below is a Renko dedicated indicator that measures how much time was needed for a Renko bar to form, called renkoAM. Some traders use it to create exit or entry rules. 

That being said, do not be surprised if you plug in the good ol’ MACD indicator and start to get excited as the results just keep the account pumping up. Rarely an indicator is designed to be used on Renko and no one knows the results of this formula. But you can, test it out. If it turns out to be a pip making machine, the secret of the holy grail is all yours. 

Categories
Crypto Forex Basic Strategies

Do Forex/Stock Day Trading Strategies Apply to Cryptocurrencies?

The short answer to this question is yes, absolutely, however, you will need to adapt for it to be so. Let’s dive into how.

① Common Ground

Did I make money whenever I had the chance?

This is your number one question that you would ask no matter the market. When you derive some strategies from the stock/forex market, you do want to see tangible results. 

Crypto is unique but there are also some universalities. 

You need a plan because we cannot just flip a coin and decide what to do next. We need a clear idea of how we are going to approach and exit the market so that we can correct any mistakes.

→ Solution: When you come up with a plan, you must stick to it. Also, check your totals and see if your overall percentage of trades puts you in the winning or losing group.

② Community

Forex and stock community spirit tends to be quite strong. The same is true for the crypto people. Especially since it is a relatively new market, many individuals want to take the opportunity and give their projections of the future. Unfortunately, as most of these forecasts are incorrect, the only thing traders get is a false sense of support. What is more, these posts and announcements often create a major hype, causing many crypto traders to forsake common sense and their judgment even when things start to turn sour.

→ Solution: Let go of groupthink and start practicing independence and individuality. 

③ Testing

You do not want to follow any advice too piously, especially if it proves not to work for you. 

How will you know what works? You will test every strategy and idea you find interesting.

Most successful traders had to hit rock bottom to realize what they can do better. Still, you can avoid this scenario if you take time to record your trades and ponder on the ways to make your returns higher.

→ Solution: Like in the forex/stock market, you need tests to be able to improve and learn from your mistakes. 

④ Money & Risk Management

Money management is key for long-term success. Without it, we are all just playing the lottery. 

Crypto is amazing because, once you limit your downside, the upside can be infinite.

→ Solution: Set your risk at 5% maximum of your entire portfolio.

⑤ Algorithm 

Traders claim to have successfully used the same algorithm they applied in forex trading for trading crypto. Still, you can trade cryptocurrencies without an algorithm. What you cannot do, however, is avoid money management.

Crypto is known to move 25% to the positive and then 25% to the negative in only one week (late and early 2020 rallies for example). As the moves can be quite extreme, you need the protection that money management brings.

→ Solution: While you need to be active to catch the big moves, do not forget that you will lose everything without proper money management. Algorithms are optional.

⑥ Scaling out

If you want to earn smart money, you will apply the scaling out strategy. You never want to go all in.

→ Solution: Take a portion of your money off and close positions. Overleveraging can lead to terrible losses in a market that moves as much as this one.

⑦ Holding & Holding

You want to play both offense and defense. Choose your long-term and short-term investment plans to fully use what the crypto market has to offer. Remember that the possibilities are infinite with proper money and risk management. 

We noticed how some stocks that generally do not do so well can go up substantially when the S&P 500 does. Similarly, altcoins are known to go up when bitcoin does, and this usually happens at a much higher rate. That is why it’s wise to allocate a small portion of your money (less than 1/5) and invest in these other coins.

→ Solution: Set 30% of your finances for short-term (more aggressive) investments and use the remaining 70% for your long-term strategy.

⑧ Spread out

Like in other markets, you will benefit from branching out. What this means is that you do not need to trade only one cryptocurrency. Rather spread out to ensure a higher return.

For example, you can have the majority of investment in stablecoins as a protection in case everything else falls apart. Your second layer of protection could be bitcoin or XRP or, preferably, both. Then, 5-20% could go into different altcoins. As there are different ideas on which are the best, you can just take your favorites and invest a little of your money there as well. Your final layer should be your longshots or the coins you use for your long-term strategy.

You can always use interesting investing research portals such as stransberryinvestor.com. There is solid research done on crypto and stocks and a very good benchmarking tool that grades crypto assets. These are based on core evaluations on each coin, useful to gauge the market in-depth, underneath the charts. The picture below is a snapshot of the benchmark table. These are free resources but you will have to register your account. Note that you should understand the project behind the coin. 

→ Solution: Trade different coins to ensure maximum growth, profitability, and protection. 

⑨ Entry

There is no one ideal piece of advice on where you should enter the market. As with forex and stocks, we can rely on different tools to find entry signals. For trading cryptocurrencies, you can always use “Trailing Buy” and even accommodate it depending on how the price moves.

In the image above, the price went low and there is a chance of it going even lower, so we want to move the red line further down.

If the price moves up, we are not going to make any changes in terms of the position of the red line. 

→ Solution: To get the signal to enter the trade, move the trailing line down only if the price goes lower than it is right now (i.e. if it breaks down upon the candle close). When the price finally hits the trailing stop, that is your sign to buy. 

⑩ Exit

You need to have a defined exit strategy for any outcome- whether a trade has gone well or bad. 

Like in any other market, you need to align your exit point with your overall strategy and be consistent with what you do. We cannot make any changes in the middle of a trade.

Your exit strategy may vary depending on the type of trade. As cryptocurrencies are great for holding, your exit will then largely depend on your idea of how long that trade should last.

→ Solution: Always have a projection of how far you want to go and where you want to take your money off. Be disciplined to ensure you know that your approach is working out for you. 

⑪ Psychology

Since many are affected by the craze over cryptocurrencies, you may experience the fear of mission our (FOMO). The rules regarding trading psychology are all the same, regardless of whether you are trading stocks or currencies. This means that any strategy you want to use cannot be perfected until you have control of what you are doing.

→ Solution: Complete a personality test and see how your traits might interfere with your plans for growth in this market. 

⑫ Similarities and Differences

Fiat may as well one day be completely replaced by crypto. Still, until that time comes, we must know that crypto largely depends on supply and demand – like stocks and unlike forex. 

That is why any strategy we wish to take from these two markets requires testing to see if it is going to help or hinder trading cryptocurrencies. 

→ Solution: Although forex/stock strategies can generally work with crypto, we need to be careful with our choices.

Categories
Forex Market

The Impact of Supply and Demand In the Forex Market

To become an expert in the field, any tennis player will have to learn how to yield the racket, move across the court, apply different strategies, and prepare mentally for both wins and losses. They will also need to distinguish between different surfaces and how these affect the style of the game, which is all true for forex traders as well.

The spot forex essentially revolves around currencies, so to answer the question in the title, we first need to acknowledge that it is money that moves this market primarily. Then, after coming up with the definition and its span, we can see the connection between the money we know today and the concept of supply and demand.

The story of trade started many years before we even had the currencies of today. People would exchange goods for other things they needed. So, they would weigh whether the value of their eggs and flour would equal the materials they needed to sew their clothes for example. The currency of the time was anything people made or obtained from nature.

While the barter system persisted, especially in times of war and crisis, people turned to using commodity money or the money made of copper and silver. When money came into existence, it was still used as a proxy, mimicking this correlation in value between different products and commodities. The laws of monetary exchange date back to the era before Christ, but the early connection between money and hard assets still reverberates to this day.

In the 1800s, countries across the globe adopted the gold standard which meant that every country would have the money in equal proportion to the quantities of hard assets. For example, before the new dollar emerged, the US government used to print gold, silver, and bronze dollars. 

Depending on the power of individual economies, countries had more or fewer commodity reserves and thus money too. However, as most countries left the gold standard in the 20th century, their official currencies were no longer backed by equal amounts of gold and so they lost their intrinsic value. As a result of these changes, the terms supply and demand hold little relevance to the concept of forex trading. Even though we can easily speak of supply and demand in terms of finance and economics, we cannot attach the same meaning to the currency trading market.

We usually describe supply as an available amount of a commodity, product, or service, while demand is defined as the consumers’ desire and readiness to purchase a certain product or service at a particular price. 

In the world of currency trading, whenever a currency pair reaches a certain peak, sellers often find that selling at higher prices could bring more opportunities. Likewise, buyers typically favor purchasing at a lower price each time a given currency pair drops to a lower level. These zones where the prices reach their extreme levels bear a great number of unfilled orders and are, therefore, considered the most fruitful to trade. 

While individuals cannot generate such friction in the market, big companies and institutions have that kind of buying power to create an imbalance between buying and selling orders. Since this affects the entire market, individual traders can witness quick changes in prices, which leave behind many unfilled orders on the supply or the demand level. At this point, the major players normally wait for their orders to get filled after the price returns to the zone.

Nowadays, there is much room for governments and banks to manipulate the circulation of currencies, increasing the overall money supply. Therefore, to trade in this market and have any hope of being successful, we need to invest in financial literacy. As forex traders, we need to know what we are dealing with.

With an increase in money in an economy, consumers demand more goods and this often results in higher prices. However, any changes in sales and prices also affect the forex market. For example, in 2019, the stock market enjoyed a long period of prosperity and unprecedented growth levels which triggered historic lows in the spot forex. These fluctuations of money between the two markets influence the volume in the currency market as well.

In the forex market, we can also trade crosses that involve different commodities such as silver. However, much of the silver that undergoes production is entirely used up afterward. This limited quantity directly affects supply and demand, like in the stock market. 

Even though the price of currencies does not revolve around traders’ willingness to purchase something at a specific price nor its quantity, silver or gold are inherently different from currencies. That is why trading such crosses requires different strategies from what we would normally use in trading currencies.

As supply and demand are not the best terms we could use to define the spot forex market, we can discuss other topics that are more relevant for currencies, such as reserve currencies, general interest in trading specific currency pairs, and the concentration of the majority of traders in one part of the chart at a specific point in time.

Historically, there have been a few currencies that are considered to be a safe haven. In periods of crisis, governments consider currencies such as the CHF to be the safest options to hold due to the stability of their countries’ central banks and governments. 

Also, the USD is typically one of the most traded currencies in the world, which is why it often attracts the attention of big banks that see the potential from controlling the market with so many participants. 

As we can see, many different factors can influence the forex market, but these do not involve individuals’ demand for specific currencies or the money supply in some markets per se. Rather, it is big banking institutions that cause the prices to fluctuate, along with news events or other geopolitical facts.

As currency traders, we all need to develop systems that allow trading to function regardless of what is happening in the world or the market. Forex is recession-proof, which means that your trading strategies and algorithms extract profits from both, bull and bear markets.

To ensure security against the involvement of big banking institutions, traders should apply money management and risk management skills and avoid currencies more susceptible to outside interferences.

Elections, wars, and economic reports, among others, are certainly good reasons to avoid specific currencies where the market is increasingly prone to “trick” you. We should not aim to beat these influences but rather learn how to avoid them, it is not something we can control. Supply and demand levels in forex are not bound to limits or logic.

Categories
Forex Market

EFTA and Its Relationship to Forex Trading

Did you know that all four EFTA member states enjoy some of the highest price levels of all European countries, supported by high productivity of the workforce, corresponding high salaries, exchange rates, and inflation? In fact, the overall price level in Iceland was 72% higher than the EU 2017 average, while the equivalent figures for Switzerland and Norway were 66 and 52% respectively.

It is an important body that is comprised of highly developed countries with impressive trade figures that operate closely with the European Union, the European Commission, and the European Economic Community. EFTA is the ninth largest merchandise trader and the fifth in services trading in the world. In addition, EFTA is also the third most important trading partner in goods for the EU and the second most important when it comes to services.

What is EFTA?

The European Free Trade Association (EFTA) is an intergovernmental organization of Iceland, Liechtenstein, Norway, and Switzerland that acts as a free trading bloc. As of its establishment in 1960, EFTA’s task has been to promote free trade and economic integration between its member states, within Europe, and globally.

EFTA’s Organizational Structure

EFTA is governed by the EFTA Secretariat, which has offices in Geneva (Switzerland) and Brussels (Belgium). The Secretariat is led by the Secretary-General and three Deputy Secretaries-General, who are appointed by the EFTA Council and shared between the organization’s member states.

The Secretariat is organized in a way that matches EFTA’s activities. The organization’s headquarters in Geneva deals with the management and negotiation of free trade agreements (FTAs) with non-EU countries as well as provides support to the EFTA Council.

In Brussels, the Secretariat provides support for the management of the EEA Agreement and assists the member states in the preparation of new legislation for the integration into the EEA Agreement. The Secretariat also assists the Member States in the elaboration of input to EU decision making.

These two stations work closely together to implement the EFTA Convention’s stipulations on the intra-EFTA Free Trade Area. EFTA’s activities are regulated by the ETFA Surveillance Authority (equivalent to the EU Commission) and the EFTA Court (equivalent to the European Court of Justice). The EFTA States have developed one of the largest networks of FTAs, which today spans over 60 countries and territories, including the EU. 

As of December 2017, the EFTA states have signed 27 FTAs with 38 partners from Eastern and South-Eastern Europe, the Middle East, North and Southern Africa, Asia, and the Americas. These agreements grant preferential access to markets of around 870 million consumers outside the EU.

EEA & EFTA

The European Economic Area (EEA) is an international trading and economic organization that, like EFTA, works closely with the EU. The EEA binds three of the EFTA nations (Norway, Lichtenstein, and Iceland) and the EU member states in a single market. Both EFTA and the EEA allow free trade and cooperation between member states, unencumbered by most of the political obligations and financial implications of EU membership.

Member States

Switzerland is nowadays a world leader in pharmaceuticals, biotechnology, machinery, banking, and insurance. Founded in 1291, Switzerland is located in Western Europe but is still separate from the EU. The country is known for its economic independence and neutrality during wartime. It is a large exporter whose 2019 GDP amounted to approximately 703.08 billion USD. Interestingly enough, the country’s GDB was barely affected by the 2008 global economic crisis. The Swiss franc (CHF), the official currency in Switzerland (and Liechtenstein), ranks fifth among all major currencies, which is directly proportionate to the quantity of money flowing into the country. The CHF is currently believed to be the most tightly linked to the price of gold among all other currencies. Unlike other central banks in the world, the Swiss National Bank (SNB) is a public limited company and a for-profit type of institution like JP Morgan. It appears that overall economic numbers do not impact the CHF substantially unlike some other currencies, as it barely ever reacts to the news. Some of the most liquid pairs are the USD/CHF and EUR/CHF.

Liechtenstein is a German-speaking principality between Austria and Switzerland founded in 1719. Like Switzerland, the country is a highly industrialized and specialized free-enterprise economy with a vital financial services sector and one of the highest per capita income levels in the world, despite its small size and lack of natural resources. The country participates in a customs union with Switzerland and uses the CHF as its national currency. Interestingly enough, Liechtenstein imports more than 90% of its energy requirements. Liechtenstein has been a member of the EEA since May 1995. With a strong manufacturing sector, the country’s industry accounts for 46.6% of its GDP.

Iceland, a Nordic island nation, was founded in 1944. The country benefits from renewable natural resources (fishing primarily) but also enjoys the diversification into other industries and services. Iceland’s economy is highly export-driven and most of its exports go into the EFTA and EU member states. The country’s relatively liberal trading policy has been strengthened by its 1993 accession to the EEA. Still, its economy entirely collapsed after the 2008 economic crisis. The exchange rate of the Icelandic krona (ISK) is determined in the foreign exchange market. After a pause of 10 years, the European Central Bank (ECB) again enlisted the ISK among the currencies on which it provides a daily quote. Swings in global commodity prices – fish, aluminum, iron – can easily drive the value of the ISK up or down. This “free-floating” currency is traded without restrictions on global foreign exchange markets but is still perceived as one of the more volatile currencies. Its small central bank with limited foreign exchange reserves struggles to control the value of its official currency in the face of trends on forex markets that are driven by much bigger financial players.

Norway, one of the wealthiest countries in the world established in 1814, is highly abundant in natural resources, which also significantly contribute to its economic strength. Oil and gas exploration and production, fisheries, and important service sectors (e.g. maritime transport and energy-related services) also greatly support the country’s economy, which is why it has such a high GDP (403.34 billion USD in 2019). The Norwegian krone (NOK) is believed to be an alternative to other safe-haven currencies (e.g. the CHF) and is traded frequently against the USD. Still, it can be quite a risky choice owing to the strong correlation with shifts in oil prices.

EFTA & Forex

Although expanding internationally can be an exciting opportunity for growth, an international business raises a unique set of challenges. Political and regulatory uncertainty, severe competition, and currency volatility are just some of the risks.

Trading agreements are among the most powerful tools to stimulate commerce. Smaller nations, in particular, look forward to joining trade agreements as a means to access larger markets, which is made possible through the elimination of tariffs, quotas, and other restrictions.

Governments can allow foreign firms to sell their products more competitively, ultimately driving costs down for consumers, by eliminating the special taxes applied to imported goods. Businesses also utilize currency transfer services to mitigate foreign exchange risk.

Owing to specific incentives provided by trade agreements, trade volume increases, flooding the economy with more money. Moreover, with an increase in money in an economy, consumers demand more goods and this often results in higher prices.

However, any changes in sales and prices also affect the forex market. For example, in 2019, the stock market enjoyed a long period of prosperity and unprecedented growth levels which triggered historic lows in the spot forex. These fluctuations of money between different markets influence the volume in the currency market as well, which is why the EFTA is also important for forex traders.

Categories
Forex Assets

Why Are Digitized Gold and Silver Perfect for Diversification?

Today, people have more and more investment options, from classics like gold and silver to recent innovations like Bitcoin and other cryptocurrencies. But there is one type of asset that has stood the test of time: precious metals. Here’s why what may seem like an old-school outdated product is still very interesting from the point of view of a young digital native investor.

A Brief History of Gold and Silver

The civilization of the Incas referred to silver and gold as “sun sweat” and “moon tears”. In ancient Greek mythology, gold represented the glory of the immortals. And even historical figures like Sir Isaac Newton believed in the long-discredited pseudo-science of “alchemy,” which aimed to turn basic metals into gold. The history of gold as money dates back to around 550 B.C. and government-issued fiat coins, such as the US dollar, used to be directly linked to gold in a monetary system known as the gold standard. And let’s not forget the statues of the Academy Awards, the World Cup trophy, or the medals for first place in the Olympics. All bright, beautiful, solid gold.

In January 2019 the purchase of gold by central banks reached its peak of the last 50 years, mainly because countries like Russia are changing their reserves from US dollar to gold. At the present time, the world consumption of newly produced gold is around 50% in jewelry, 40% in investments, and 10% in the industry. With 440 tons per year, China is the world’s largest gold-producing country. In January 2019 the purchase of gold by central banks reached its peak of the last 50 years, mainly because countries like Russia are changing their reserves from US dollar to gold.

Silver, on the other hand, remains the second most popular precious metal just behind gold. It is also used for jewelry, as an investment asset, and as an industrial resource. Many investors appreciate silver as an investment, as it tends to be more volatile than gold due to its lower trading volume.

Inflation-Proof Investment and Portfolio Diversification

Analysts have long argued that gold acts as a hedge against inflation and protects investors against market volatility and unpredictability. A general rule is to have 5-10% gold exposure in the portfolio.

For younger investors with higher risk tolerance and higher return expectations, gold might look like a conservative investment. But it can complement and enhance an investor’s overall portfolio by balancing technology-oriented assets with a time-tested commodity.

Gold is both a creator of wealth and a keeper of wealth. As young investors, you have to keep your eyes on the finish line, probably several decades in the future. Since people now live and work longer, long-term investment strategies that include stabilizing asset classes are crucial.

Why Digitize Gold and silver?

Possessing physical gold and silver has always been desirable for many. There is something tangible about it. Its physical quality means that you can see it, feel it, weigh it and admire its beauty. From a golden calf, a golden fleece and gold crowns to streets paved with gold, this metal has constituted a fundamental element of our collective human history and its images have filtered even into our language (for example, “as good as gold”, “worth its weight in gold”, etc.). In a word, gold is timeless.

There are companies that offer the best of both worlds: Purchases and possess digitized physical gold or silver. But you can exchange it with the same convenience and user experience you’re used to with other digital assets.

But possessing physical gold or silver has its disadvantages. You need to visit a gold trader or at least order physical coins or gold bullion at your store. Then you have to take care of security on your own and keep it at home. In case someone comes in and steals it, you need proper insurance and also a special safe to cover it. An alternative is to keep it in a safe deposit box at the bank or on a gold trader, which means you have to move there and pay relatively high commissions for it.

Categories
Forex Market

Will Forex Trading Ever Be Shut Down Completely?

Given some of the changes in recent years over Forex trading laws, it is understandable to understand why traders may be concerned. Many countries have imposed very harsh restrictions on the industry and, of course, some are concerned that this may mark a possible end to Forex. The currency market can be huge, but many industries have become obsolete and extinct as well. For a Forex trader who lives professionally in this industry or wants to have a future trading currency, it is worth considering all these changes and how they may affect you.

Of all the financial markets, the Forex market is the largest in terms of liquidity.

According to the Bank for International Settlements -BIS, forex achieved an average daily turnover of $5.1 trillion in 2016.

Remember that this was the moment when several foreign exchange brokers went bankrupt following the decision of the Swiss National Bank’s (SNB) to remove the Swiss franc from the euro. The impact of this momentous decision was catastrophic and immediate. Within minutes, the franc rose by 30% against the euro and other major currencies, causing huge losses to anyone occupying short positions in the franc. Even brokers with excellent opinions declared bankruptcy.

The consequences of the decision were felt throughout the rest of 2015, reducing daily turnover in the market. Most likely, this drop in trading volume until 2015 contributed to the decrease in the average daily trading volume in the Forex market from the previous record of US$5.5 trillion in 2013. Since then, the Forex industry has continued to suffer and therefore hope of a resurgence is diminishing. After the events of 2015, the Forex market recovered somewhat until ESMA announced its plan to change its regulations in 2016.

MiFID-regulated Forex brokers began to feel the pressure even before the MiFID II regulations came into force in January 2018. As early as 2017, UK and EU brokers were already seeing a decline in revenue. Meanwhile, brokers elsewhere, such as Australia, have reported an increase in European customers throughout 2018. This shows that many customers left Europe-regulated brokers to obtain better conditions elsewhere. As a result, these brokers began to enjoy better profit margins and customer bases compared to their European counterparts.

Today, many currency brokers are losing money after European regulators began to impose stricter laws on the industry. The story is the same with all European brokers, who have been forced to reevaluate their business models or face their demise.

In addition to changes in regulation, volatility has also been very low in foreign exchange markets. The BIS reported that the volume of retail trade in 2018 was US$1.104 trillion, while that of 2017 was US$1.672 trillion, a drop of 34%. Thus, there was much less trade in the Forex market in 2018.

Volatility in 2018 was lower as the ECB announced that it would not raise interest rates throughout the year, which would reduce the volatility of the euro. The ECB has been forced to keep its interest rates low after the IMF lowered its economic growth forecast. Add to this the talks about Brexit, trade wars and elections in different European countries, which probably means this won’t change soon.

Those traders who know these facts are very concerned that the foreign exchange market is in a difficult situation. It is quite likely that the main cause of the problem was the changes in regulation. Volatility is known to diminish, but laws are very difficult to reverse once they are active. For this reason, we must debate these laws in depth that have had a disastrous effect and why the authorities came to think they were such a good idea.

Changes in Forex trading laws

The real wake-up call came in 2008 because of the financial crisis, when regulators knew they could no longer rely on the financial companies’ own mechanisms. Japan was the first country to put limits on leverage. As of August 2010, leverage was limited to 50:1 and then reduced to 25:1 as of August 2011. The US of America followed similarly by reducing leverage to a maximum of 50:1 and 20:1 for major and minor/exotic pairs respectively. In both countries, the foreign exchange market declined significantly due to leverage caps and large capital requirements that were set as necessary for retail traders to participate. Japan is also considering another reduction in leverage to just 10:1, but this law has not yet passed.

The European authorities also knew that they could not allow financial institutions to express themselves either, but their response was slower and more measured, but just as devastating. The new Forex regulations were first proposed in 2014 and came into force in 2018 encapsulated under the MiFID II name. After US regulatory changes, the EU had become the next best option for brokers and traders alike, but no longer. ESMA set a leverage limit of 30:1 for major currency pairs, as the GBP/USD live charts and 20:1 for non-main pairs. That was even less than leverage in the United States…

How the new regulations have affected the industry?

As expected, restrictive regulations have slowed down the industry’s performance and revenue. ESMA hopes that by making the laws tough, new traders will refrain from trading and thus will not lose their capital. However, these traders mostly made the decision to trade with CFD brokers in other foreign countries abroad that had and offered better trading conditions. These brokers are often less secure to deal with as regulation in offshore countries is not as strict as that in Europe. To avoid the loss of customers, it has also been noted that European brokers ask their customers to register with their non-EU entities if they want better conditions.

Does this indicate the end of an era?

If history repeats (as it usually does), current levels of low volatility can be a sign that something dramatic is about to happen. This means that of course Forex is not about to end, but is at the dawn of a new era. In fact, this should be the time when traders take advantage of markets to make huge record-breaking gains.

In addition, there may be other causes that contribute to the low levels of volatility we are seeing at the moment, apart from changes in regulation. The growing tension between the US and China may be aggravating the problems existing in the market, as traders and investors in general are waiting to check what you finally happens. Whatever way the two superpowers decide to go, it will have a huge impact on markets and present wonderful business opportunities. In general, no one likes to risk capital when markets are volatile and unpredictable, which is our current situation. Once things fall, markets are likely to resume their previous volatility levels.

What will be the near future of the Forex market?

At some level, it seems all this even an attack on the industry and regulators want to set limits on markets, as many as possible to retail traders, but this is not the case.

The Forex market will definitely be very different in a few years. It may be almost impossible to create a centralized market for Forex operations, but there may be a dynamic for brokers to report all their transactions on time in the future. MiFID II has already proposed several ways to do this, and it is not unlikely to do so.

In fact, the Forex market today looks a bit like the old stock market, where the market was threatened by “bucket shops”. At the time, stock trading was very risky because there was no simple way to convey orders to the stock exchange, but this problem was solved by technological advances. Therefore, it is not so difficult to imagine a newer technology that unifies the Forex market and makes it centralized.

Categories
Forex Market

Where Forex is Headed Over the Next 5 Years?

This is one of the most common questions people are asking the experts. Luckily no one knows for sure, otherwise, forex would not be very interesting. Predictions are not a good trade, people get it wrong most of the time. Still, if we collect some facts about the market now, one might get it right. You have to ask yourself though, would you make a decision based on a prediction that is more likely to fail? 

Forex Traders’ Way

If you ask a forex trader what will happen in 5 years, get ready for a disappointing answer. They do not know, and they do not care really. Traders know better. They have their strategies and systems that say some asset is probably going this way. but not for the next 5 years. Traders do their thing intraday, daily, and on a weekly timeframe at most. There are simply too many events that could interfere with some asset. At the end of the day, it does not matter what will happen in 5 years as long as they play the long game and play your strategy to the letter. It is how they have their share of profits.

Prediction Problems

The further we go into the future, the less predictable the outcomes are. To cover for this uncertainty, predictions get more broad or vague. If we say the bitcoin price at the end of 2025 is going to be $142500, would you bet on it? A mathematical model might give you this precise result but we all know it is a 99.99 (and then more nines)% miss. So we blend and say it is going to be higher than today. All this is based on some fundamentals, the rising crypto market, people-orientation to savings, pandemic, and so on. But no one knows if governments are going to ban crypto as the market gets bigger, we all know they do not like it.

On the other side, who knows it is the bitcoin that will perform the best out of all other, more advanced cryptocurrency concepts? Predictions are fun to listen to, but common sense says let’s spend our time finding or creating information that we can use today. 

Foretellers Way

There is a way you can use such predictions and make money, a lot of it. It is nothing new, get ready… TV. How many times have you watched smart people on popular TV news channels predicting and reasoning? Listening to them will probably set you on the losers’ side. These people have skills in analysis and presentation, but they are not good when it is trading time. To quote Ray Dalio from his “Principles” masterpiece “Truth be known, forecasts aren’t worth very much, and most people who make them don’t make money on the markets.” They make money by producing fun predictions people like to listen to, not to mention the media. 

Investors’ Way

Now let’s get to the fun part, how investors think and adjust to the fundamentals. Fundamentals play a key role obviously in how they make predictions. They do not go too far into the future, up to a year at most. We are not talking about the buy and hold forever saving strategies here of course, but analyze the state we are now at the end of 2020. Forex is interconnected with other markets, major players are the banks, governments, companies, and sometimes viruses. It is said COVID-19 just deepened the problems already present in the global economy. 

Present Time Directions

Here is a snapshot of how the currencies performed during this year:

US dollar became a questionable safe-haven for many reasons, the major one is the FED decisions and printing. The stimulus is evergrowing, however, little budge is seen in the economy fundamental measurements. 

If we speak about safe heavens, precious metals are not really in the focus. According to research, gold is about to boom in 2021, and likely to continue in the next years as the economy gets back on its feet. Aside from the supply and demand stats all pointing to a long-term bullish sentiment that stretches beyond 5-year prediction, gold is not on the big scene yet. Consequently, the US dollar is not the currency to hold in 2021 and probably not in 2022. Japanese Yen or even Euro is a safer asset at the moment, likely to strengthen their value in the coming years. 

Now, the pumping is not stopping. Today we have a record high equities level, despite the bad fundamental results with employment, spending, and general activity indicators. Something is definitely wrong with this chart:

The massive printing and stimulus policies are producing a scary storm below this peak, and as the forex market is a part of the global capital flows, equity correlated AUD and NZD might follow the ride down in 2021. Despite all this turbulence, forex hasn’t shown the turbulence a trend trader would like to see. Looking at the Euro VIX ($EVZ), the 2019 and partly 2020 are still calm for forex:

The reason behind this is the overall drop in economic activity, there is no spending or rushing to safe heavens, even though the bullish pressure is rising on the elemental values as stated above. 

We have another market to consider too, the crypto market that is taking its share of the money flow. Even though this is below a $trillion market, small compared to the enormous precious metals or forex, it is increasingly attractive to young, open-minded investors. It is regarded as a safe haven area since the DeFi concept sets crypto out of the crisis danger zone. 

They Know and Decide When

So, you have very good prediction info, and guess what, majors players know them too, and some more. Everything says there is something fundamentally wrong with the charts, they are not following the real world. Well, it is not because the big banks, governments, and other big figures decide when it is time to let go. The moment they are ready to let the storm out, they would try their best to knock (stop loss) every forex or equities trader out of their positions. A common chart pattern is an unusually large price move before it starts to strongly reverse. This move happened with the gold right before the pandemic unleashed and the bull trend base in March 2020.

Forex and other markets are not free out of control and there is no way around it. It is regarded cryptocurrency market is not in the same boat but rest assured governments have control over how this market will develop. Interestingly, more and more major companies will compete to set the ladder with their dominant currency. Facebook is one example of the Libra. Investors and companies increasingly consider crypto assets as the offset instead of the USD or other major. 

Investors’ Patience

The average guy listening to this is not really going to understand, but he might like the „conspiracy“ side of it. Investors know how the FED and the big banks think, the play hasn’t changed yet. History is repeating and so-called smart money stands by. Reversal positioning is not their play. Investors wait out for the sudden shakeout and wait for the market to settle in direction. The pause could be a week or two before they move in. They did not long the EUR/USD before 2020 US elections results, only after the USD started to weaken after the charts show it is time and the fundamentals are still in line with the prediction. 

Traders all deal with the prediction, with technicals and fundamental analysis. They protect their wealth with risk and money management. Prediction is actually what we do, but all professionals have a sound and consistent way of doing it. The title question is out of their scope as the answer will not be of any use to them. 

Categories
Crypto Forex Basics

Forex or Crypto Trading: Which is More Profitable?

Forex and Cryptocurrency markets are very popular. With both traders trade looking to profit from this, but in itself which market is the most profitable? While cryptocurrency is growing, it is quite volatile, even more than the Forex market which makes many wonder which option is the most profitable.

Both markets have a high level of volatility, although the cryptocurrency market is much more volatile than any other and in this aspect, you can control more risks in the Forex market having greater chances to maximize profits. Trading in any form means a risk of capital loss but there is always the potential for a trader can earn money. Price changes in cryptos are very wide, and although you can earn money, you can also lose quickly by making risks more controllable on Forex by having less volatility.

The Forex market, as we know, is decentralized just like the cryptocurrency market, but what impact does this have? The currencies and assets of the Forex market are regulated and in the cryptocurrency market, cryptocurrencies are not regulated and are decentralised. Both the market and the assets present within it are totally decentralised.

Because of this, the variation in the price of assets in the cryptocurrency market is allowed to be much higher, which in turn leads to much higher volatility where prices rise and fall widely. While in the Forex market although the changes are present in the same way as the currencies regulated by the countries, their prices remain much more stable despite the volatility.

The purpose of this publication is to say that market is more profitable to operate in terms of the possibility of controlling the risk of loss of capital that as I said always is present. Now, if you ask me if you should trade cryptocurrencies, my answer is that if you do, start by using the most heavily capitalized cryptocurrencies like Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

Operating in both markets can generate potential profits, but what if you compare the two? You can conclude that Forex is much better, but if you only talked about cryptocurrencies in this article, I would tell you to make use of them because they are very good assets.

Many people wonder what will be the best option to invest, as cryptocurrencies are quite popular and have good returns, but Forex trading is gaining increasing popularity among young investors.

It will always be advisable to make good investigations of the markets of interest. Although for the modern investor Forex and cryptocurrencies head the lists, because they have very good profitability and also offer much desired financial freedom. It should also be noted that many of the investors at the moment have a stake in both markets.

Advantages of Cryptocurrencies:

-They are widely quoted and recognized worldwide.

-They do not depend on any central bank and are not regulated by any country.

-It functions as a scarce asset, so the market gives it value.

-It allows anonymous transactions outside the system’s regulation.

-Cryptocurrencies are immune to inflation.

-It is a payment system that does not depend on banks since it has a blockchain chain system that allows you to transfer money without the need for banking.

-It is a digital ledger that cannot be manipulated. 

Disadvantages of Cryptocurrencies:

-They are highly volatile: it has presented an annualized volatility in the last year of 80%, which makes it enter the classification of high-risk assets

-Changes and Attempts at Regulation: for many, it is a bomb that can explode at any time, and although they have tried to regularize it has only remained in comments and statements. To this end, countries like China prohibit cryptocurrency transactions.

-Robbery: although it is a bit difficult it is not impossible. Hackers have been engaged in developing different methods by which they have succeeded in taking over the assets of others.

-It demands high commissions for its exchange for traditional currencies and they are not yet accepted at all levels.

Advantages of Forex

-You can trade in any currency in the world.

-It offers a greater number of profitable options to invest.

-It is focused on trading (short-term trades) allowing you to see benefits in less time.

-It works with brokers that are regulated by the countries in which they were founded, which increases the reliability of the system.

-It is a highly liquid market and can operate with leverage. 

Disadvantages of Forex

-To see big profits requires the investment of a greater capital or in its absence of a greater number of small and effective operations.

-Forex as such is unregulated and no one or nothing watches over the trades that are made there.

-Leverage can be negative in some cases as it can lead to significant losses.

So… Cryptocurrencies or Forex?

This decision is very subjective, so let’s see what it’s like to invest in each of these markets.

First of all, time plays an important role when you buy these two investments. Forex transactions are short-term, you usually don’t wait more than a few days to close your positions. It’s pretty fast compared to cryptocurrencies, as you want to trade every opportunity you get because of small profit margins.

The more you trade, the more profits you will get, which means you must be an active and experienced Forex trader to know exactly when to place your trades and when to withdraw. With cryptocurrencies, it’s a completely different story.

To begin with, the market is highly volatile, meaning that prices can skyrocket or plummet significantly in just one day, even hours. Applying the same tactics as with Forex trading would be too risky because there is a lot of money at stake, especially if we are talking about Bitcoin.

This is because, in terms of investment, cryptocurrencies should not be regarded as currencies at all, but as precious goods of some kind. Therefore, when you invest in cryptocurrencies, you are actually making long-term investments, because the results are not quick: you will have to wait several months until they start to pay off.

As a result, cryptocurrencies are not for everyone, as they require an infinite amount of patience and self-control to prevent you from performing a panic-stricken transaction when the time is not optimal for you to sell. In addition, with more than 1500 cryptocurrencies today, predicting which one is the goose of the golden eggs and which one is not an almost impossible task.

On the other hand, Forex transactions are much more concrete, as they are almost always the four main pairs and have only a few coins crossed here and there. Forex is a more stable market than cryptocurrency, with the latter being a portfolio diversifier first. Of course, it does not take away the merit of virtual currencies, as they are still a very young market and have much to give, maybe in a few years have enough stability to be seen by traders with greater importance.

For now, Forex will continue to be the favorite for traders on a day-to-day basis, while cryptocurrencies will be seen as long-term investments for those people who can withstand the high volatility of these, and who seek to move away from traditional institutions, as well as banks and states.

Categories
Forex Daily Topic Forex System Design

Trading Algorithms IX – RSI Failures System

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

Divergences and Failure swings

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

Divergences

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

Failures

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

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

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

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

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

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

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

The RSI Failure algorithm

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

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

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

rsiValue = RSI(C,Length);

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

else
     rsiPivotHiFound = False;

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

else
     rsiPivotLoFound = False;

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

{The Bearish setup}    

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

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

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


{The bullish setup}

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


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

     end;
           

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

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

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

{The Long position management section}

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

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


{The Short position management section}


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

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

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

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

Categories
Forex Basics

Is it Possible to Trade Forex on Sundays?

If you’re new to forex trading, you may be eager to trade as much as possible, or perhaps you’re trying to figure out a schedule for trading that works around your daily life. For many of us, things slow down on the weekends, making it a good time to pursue extra tasks such as trading. The good news is that the forex market is in fact open 24/7, however, there are some things you need to know before you decide to devote a large amount of time to trading on weekends.  

To start, the forex market actually opens at 5 p.m. Sunday evening and closes at 4 p.m. Friday evening. Although this leaves out Friday night, Saturday and most of Sunday, overlapping market sessions and different time zones mean that there is always at least one market open. Market sessions are divided into the following:

As you can see, the overlapping market sessions make it possible for traders to enter currency trades at any hour. You’ll always have access to the most traded currency pairs as long as the market is open, but other currencies may not be available 24/7. These are the currencies you can always expect to see available for trading:

  • The U.S. Dollar (USD)
  • The Euro (EUR)
  • The Japanese Yen (JPY)
  • The British Pound (GBP)
  • The New Zealand Dollar (NZD)
  • The Canadian Dollar (CAD)

Did you know that these are the seven most traded currencies in the entire world? You also might be interested to know that spreads for cross pairs involving these currencies are tighter during the busiest market hours. If you trade during these times, you’ll be able to benefit from the tighter spreads while trading highly liquid pairs. 

Should You Trade Forex on the Weekends?

Although you can technically trade forex on the weekend thanks to the market’s time schedule, this doesn’t necessarily mean you should do so. Allow us to explain why.

Typically, the busiest trading times occur during the London and New York sessions and one of the best times to trade is when these two sessions overlap, from 8 a.m. to 12 p.m. CST. During this time, the majority of the daily volume is traded and the market is highly liquid. Things also tend to be much more active towards the middle of the week before slowing down on Friday for the upcoming weekend.

Many traders simply choose not to trade on the weekend. This is due in part to lifestyle reasons, as many of these traders are looking to spend time with their families or to kick back and relax as the weekends. Since there aren’t many traders online, the market slows down, and you’ll find a less liquid market with fewer trading opportunities. This is yet another reason why many traders avoid the market on weekends, as it seems less efficient to trade during this time. 

If you do choose to trade during the slower times, you’ll still be able to make a profit, so this is a personal choice. You should also know that there are some other times that may be better to avoid, such as when major news releases are expected. Political news or elections, financial news, and other events can really shake up the market and make it harder to predict what will happen, but some traders do thrive in this type of market environment. Another time when it’s better to take the day off is whenever there is a major holiday, as most other traders are doing the same and you won’t really be missing out on much. 

The Bottom Line

We covered a few important topics in this article related to trading on the weekend. Here’s a quick summary of the most important things you need to know on the subject:

  • Forex is considered to be a 24/7 market because of different time zones and overlapping market sessions. During this time, the seven most popular currencies are always available for trading, but other emerging currencies may be limited at times.
  • The best times to trade occur through midweek and when the London and New York sessions overlap. Brokers also offer tighter spreads on popular currencies during the most active times.
  • Monday mornings, Friday evenings, and weekends are typically slower and provide fewer trading opportunities, meaning that it is less efficient to trade during these times.
  • There are a few other times when you might want to avoid trading, including major holidays and times when important news releases are expected.  

Flexible market hours provide traders with several different opportunities for trading and everyone should be able to find trading times that work best with their schedule. It’s also important to keep the best and worst trading times in mind when planning what times you will and will not trade. Paying attention to the best trading times will help ensure that you get the most efficient results with less effort invested, plus you might be able to take advantage of benefits like tighter spreads and more trading opportunities.

Categories
Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 3

GBP/CAD Exogenous Analysis

The UK and Canada Current Account Differential

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

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

The interest rate differential between the UK and Canada

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

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

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

The differential in GDP growth rate between the UK and Canada

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

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

Conclusion

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

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

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

Categories
Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 1 & 2

Introduction

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

Ranking Scale

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

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

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

Summary – GBP Endogenous Analysis

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

Summary – CAD Endogenous Analysis

  • Canada Employment Rate

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

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

  • Canada Core Consumer Prices

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

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

  • Canada Manufacturing Production

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

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

  • Canada Business Confidence

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

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

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

  • Canada Consumer Spending

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

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

  • Canada New Housing Price Index

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

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

  • Canada Government Budget Value

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

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

Conclusion

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

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

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

GBP/CAD Exogenous Analysis

  • The UK and Canada Current Account Differential

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

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

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

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

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

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

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

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

Conclusion

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

 

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

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

 

Categories
Forex Basics

How to Explain Why You’re Trading Forex to Your Spouse

If you’re currently married and you’ve just decided to take up forex trading or you’ve recently opened a trading account, you might have a hard time convincing your spouse that it is a lucrative investment. Many people have heard rumors that trading is a scam and doubt that it’s really possible to make money doing it, or they assume that only the rich can benefit from forex trading.

Your spouse has likely heard about these misconceptions before. Some people even believe that forex trading is similar to gambling even though trading is based more on facts and evidence over chance. When it comes to marriage, it’s important to agree on financials, so you’re likely feeling frustrated if you can’t get your spouse on the same page with your decision to become a trader.

We’ll start by mentioning that forex trading can be a very profitable investment that can help with pocket money, pay bills, help you through retirement, or even take the place of your full-time job. If you realize this, you’re probably eager to gain your spouse’s approval so that you can start investing in order to gain a return. The best way to reach an agreement is to listen to your spouse’s opinion and provide hard facts and explanations if they disagree with you. Here are some of the best responses to common objections to forex trading:

Argument #1: Trading is the same as gambling.

When you gamble, you purposefully risk money while relying on things like chance to hopefully make more money. You never know if you’re going to get lucky and win big or walk away with nothing. Forex trading is different because decisions are made based on different kinds of evidence. For example, some traders look at historical price data on charts, while others try to measure the intrinsic value of a stock versus the price it is trading at. There are several other ways that traders make informed decisions about what they are trading and where the price will go. This takes away the whole chance or luck concept that comes with gambling because you’re making evidence-driven decisions. It’s true that the market might move against you, but you are much more likely to see good results if you make informed trading decisions. Think of trading as an investment where you can take steps to improve your likelihood of seeing a large return by performing research.  

Argument #2: You can’t make money by trading.

Some people think that forex is just a big scam that draws people in, gets them to invest money, and then sucks their account dry. Perhaps this comes from the fact that there are some shady brokers out there, or because the ability to trade from home with a small initial investment just seems to good to be true. The good news is that it is very possible to make money trading and it isn’t hard to avoid being scammed. You simply need to find a trustworthy broker that is regulated so that you’ll be protected from malpractice and your money will be refunded if the company goes out of business. After that, you need to find a good trading strategy that is profitable. If your spouse is still hesitant, try trading on a demo account using your trading strategy and then show them that the account was profitable. 

Argument #3: Trading takes up too much time.

It’s true that some forex traders sit in front of their computer screen multiple hours each day, but many others only trade part-time or devote a very small amount of time each week to trading. It’s very easy to find a profitable strategy like swing trading that doesn’t ask you to constantly monitor the market. Also, with all of the convenience offered by the modern world, traders can use signal providers to receive information about trades they should enter directly via alerts on their phone, which eliminates the need to do all the research yourself. An even more convenient option would be to use a forex robot, which trades on your behalf and only needs to be monitored from time to time. 

Argument #4: You Don’t Know What You’re Doing.

Everyone has to start somewhere. Fortunately, there are a ton of free resources available online that can help new traders learn everything they need to know, from beginner concepts like terminology to more advanced subject matter like reading charts and etc. If it makes your spouse feel better, you could prove that you know a lot about forex by taking some online quizzes and showing good results or by providing your demo account results from a period of time. 

Argument #5: It costs too much money to get started.

Most beginners choose to get started with a smaller deposit, oftentimes $100 or less. Most of us can afford to spare this much, so trading might not cost as much as your spouse is thinking. Of course, you can’t expect to make huge profits right off the bat with a smaller deposit, but you can still make some much-needed money while trading off a micro account. Try to compromise over the amount of money you will invest and make a deal that you will never deposit money into your trading account that is needed for household necessities. Once you start bringing in profits, your spouse will likely feel more comfortable with you investing a larger amount of money into trading.

Categories
Forex Basics

Proof That Forex is Exactly the Earnings Opportunity You’ve Been Looking For

Have you been looking to add a little more money to your wallet lately? It’s true that there are several rumors going around about ways to do it, especially when it comes to working from home options. Sadly, it’s difficult to pick out the reliable options from the hundreds of online scams that have been surfacing lately.

Many of these money-making schemes just seem too good to be true and there’s usually some sort of catch. For example, you might be able to find freelance work online, but you’ll literally be working for hours just to make a change. Fortunately, we do know of one proven work from home method that isn’t a scam – forex trading. 

If you’ve heard of forex trading before, you might have wondered if it’s just another waste of time. The reality is that trading is actually one of the best ways to make extra cash without taking out a second job or investing in a potential scam. Hear us out and we’ll explain the key reasons why forex trading is exactly what you’re looking for.

You Can Work from Home (Or Anywhere)

Working from home has always been a luxury compared to the hustle and bustle of a daily commute, even more so now that the nation is in the grip of a pandemic that doesn’t seem to be going away anytime soon. There’s nothing better than being in your own home, being able to wear pajamas all day if you want to, and making money. Most trading platforms can also be accessed from your mobile device, so you’ll be able to trade on the go if you have somewhere else to be. Being able to quickly check your trading account at a family function or in the waiting room at your doctor’s office brings working to a whole new level of convenience that you just can’t find with a regular job.

Flexible Hours

You don’t have to choose between forex trading and working a real job because you can set your own hours as a trader. In fact, trading could save you from having to go out and get a second job if you’re badly in need of money. It can also open the door to work for full-time students or stay at home parents that wouldn’t have the option otherwise. As long as you’re disciplined enough to work when you need to, you’ll be able to work around your own schedule and take time off when you have things to do. If you’re not a morning person, you don’t even have to force yourself to wake up early because you can simply trade later in the day. The flexibility offered by trading is definitely one of our favorite perks because it’s difficult to find this anywhere else. 

Safety

If you consider investing money through some other online option, you run the risk of being scammed. Most companies pay their sales representatives to convince you to invest, so you may think you’re talking with a stay at home mom that is telling you about her legitimate results when she’s actually just tempting you with false claims. You also might read online reviews that were written by the company themselves or edited. When it comes to forex trading, you don’t have to worry about this issue as long as you choose a trustworthy broker. Since most forex brokers are regulated by government entities, they are held to higher standards and you can be assured that you won’t lose your money if they go out of business. The profits you make are actually yours and your broker will definitely ensure that your money goes out to your bank account whenever you request a withdrawal. 

You Can Actually Make Money

A lot of these online promotions that claim to make your money don’t work. One common scam asks you to spend money on products that you’re supposed to sell, but you’re left with the bill once you can’t find buyers. With forex, you make an investment into your trading account, make trading decisions based on real evidence that suggests the way the market will perform, and then you make money. It’s true that there is always a chance you could lose money, but you’ll have every resource you need at your fingertips to make informed decisions that are more likely to bring in profits. Compared to gambling, forex trading is much more structured because it is based on solid evidence, rather than chance. 

It’s Easy to Get Started

You shouldn’t assume that opening a trading account is a headache. All you have to do is learn about trading online through sources like YouTube, Investopedia, etc., find a good broker, open an account, and make your first deposit. Learning the basics and mechanics of trading is the most time-consuming step, but you can learn everything you need to know for free at your own pace. People also assume that opening a trading account is difficult, but it truly isn’t. Most brokers will allow you to open an account for less than $100 and ask you a few simple questions before you can get started.

You Get to Be Your Own Boss!

Most of us have dealt with a boss that was…less than pleasant. In a normal workplace, you have to keep your composure and deal with it or else you run the risk of losing your job. With trading, you only have to report to yourself. If you need to take a sick day, want to go on vacation, need to stop early or have any other issue, you don’t have to ask anyone or stress about it. The same thing goes if you make a mistake – you may be disappointed in yourself, but you won’t have an angry boss breathing down your neck or asking for an explanation. You can work without the threat of being fired hanging over your head. 

People Will Admire You

Once you become a successful forex trader, your friends and family are likely to look up to you and see you as someone that is financially smart. You might even be able to help teach your family members or children how to trade, which can ease their financial burdens as well. This is a great conversation starter if you’re dating or your significant other is sure to be impressed once you start making extra money on the side!

Categories
Forex Indicators

How To Use the ADX for Forex Day Trading

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

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

Traditional ADX Indicator

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

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

ADX line

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

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

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

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

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

Directional Index

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

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

Values higher than 50 ADX indicate a very strong trend.

Important Facts

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

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

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

Alternative ADX Uses

ADX + MA

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

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

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

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

ADX DMI + OBV + MA (100)

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

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

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

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

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

ADX + RSI

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

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

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

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

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

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

For a buy strategy, apply the exact opposite.

Non-Traditional ADX Indicators

ADXm

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

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

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

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

DMI Oscillator

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

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

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

Conclusion

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

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

The daily time frame is the best option for using the ADX because it offers the least amount of inconsistency and incorrectness. 

The best profits come from catching strong trends and, with the right ADX strategy, you can accomplish your trading goals.

Since the standard version of ADX does not contain all data for the analysis of price action, it must be either used with other tools/indicators or simply replaced by a more recent, modified version.

It is extremely important to note that ADX (in particular) requires traders to rely on money management and risk management – especially with the original version. As Peter Borish says, we want to perceive ourselves as winners, but successful traders are always focusing on their losses. We cannot let the possibility of getting a false trend stand in the way of our (and our account’s) growth.

Finally, all indicators are just tools. We should use them only if they benefit us. Test ADX as well as all other ADX versions and tool combinations, and leave out anything that you feel you cannot use optimally.

 

Categories
Forex Basics

The Evolution of Forex Trading

So much has happened since the 90s once the internet started to connect the world. The evolution sparked many new things that unfortunately attracted some of the dangers too. Yet, where there is danger there is a secret, an opportunity uncovered. 

Generally, we can do so much more today than when the forex idea began. Actually, currency exchange is as old as the currency itself, but we are not going to go that deep into history, books will satisfy that hunger for knowledge. 

It is the beginning of a new era today, and most experts think It comes with the birth of a new type of currencies – cryptocurrencies. However, since the possibility for individuals to trade on the forex market, many opportunities opened for us and how we can manage our wealth, and yet few remember what made it all possible. Before we go into that, new traders should know how it was back then, when traders had to really warm the chair to get things done. Essential trading things for which we need a couple of minutes now. This article will cover how traders felt forex evolution. 

Traders and Copy Machines

How do you know your strategy or an idea works? You test it on the forex market. More precisely, you backtest and forward test. Only veterans remember how that part was very, very tedious in the 90s. They had to print the chart on their target time frame on a long paper sheet, take the ruler and start drawing. The “future” of the chart was covered so they have to decide to go long or short according to their strategy, without bias. Then write down the results and move the “future” cover by one period. 

Indicators you see today were not born yet. Price Action analysis and moving averages that were manually drawn is what most traders used, no one had the luxury of complex calculus merged into indicator coding we can just snap onto charts with one click. Access to the forex market was very rare, in the USA many traded from their workplaces if their company is connected to the broker. 

Contract For Difference

This little contract evolved forex and not only forex, it opened a new era of individual trading. The 2000s began and in Australia, CFDs were available to individuals finally. The interbank currency market was at traders’ grasp. Opportunities emerged, a new way to trade – CFDs allowed to go long and short on anything. Not only that, one could trade with more asset value than their accounts could handle usually. This was the CFDs and leverage. CFDs were essentially price trading, a trader could buy or sell at one moment and close the position after, without holding the CFD underlying asset. Suddenly you can also go short, not just long as people used to with stock trading. Even today some people do not know this. 

This ability opened new dangers, the risk was exposed and the masses lacked the skills to manage it. Regulations stepped in and closed some of the freedom traders could enjoy with CFDs, especially in the USA. Today, something similar is unraveling with the crypto DeFi idea. Interestingly, regulators did not try to change the broker business model, which leads us to the next part.

Broker Evolution

ECN, DMA, A book, B book broker, and so on, all terms that evolved with IT and communications. Back then with individual trading in its infancy, you could choose 2 or 3 brokers at best. IG Group was one of the pioneers and still exists today, which cannot be said for many others. 

Spreads and liquidity was an issue, you really had to be careful what currency pairs to choose and when. Of course, fast trading strategies that are popular now are out of the picture. With IT on the rise, brokers adapted the technologies, new companies emerged creating competition. Competition curbed the spread, commissions, and generally cost of trading for individuals. 

But new problems emerged, one of the most controversial is the conflict of interest between brokers and traders. The business model of a B-book broker does not externalize the risk, in other words, when a trader wins a broker loses and vice versa. The leverage we mentioned above just explodes the number of losing accounts, since beginner traders do not handle money management well. This profitable business sparked many new brokers to open with great trading conditions we see today. Unethical marketing emerged and evolved attracting many people that went in for the gamble. And as usual, the house always wins. 

However, it seems real brokers that externalize the risk, or true A book brokers are rare. It is considered that only 2% of them exist today. Regulators reduced the leverage more and more as the solution, while the toxic business model is not discussed. Offshore, shady business and fake investing platforms networks spoiled the industry to the point forex today is commonly associated with a scam. 

The latest developments in cryptocurrency technology paved the grounds for crypto-based brokerage. These investing platforms are not regulated and the trust is not backed by any contract. Still, even some of the crypto-based brokerages are not legit, but there are exceptions of brokers with very good reputations. 

Trading Access Evolution

Computers became more powerful, affordable, and interconnected. The Wall Street floor went quiet. No longer agents yelled at the phone line, everything is digitalized now. Computers got portable, so was forex. Platforms on mobiles are giving the traders accessibility to forex trading limited only by battery and internet connection. 

Some may argue this is not a good thing. Traders can get obsessed with following the market, overtrading, and even get health issues. Because of this and extreme marketing, it is never easier to blow your account. But let’s talk about the real benefits.

Platforms became more powerful, analysis went deep, wide, and quickly. MetaTrader platform became dominant on the market with a very good range of indicators with the ability to customize almost everything. Traders recognized they can make many strategies and make custom indicators that facilitated the introduction process to forex. Many professional traders are made in a few years. 

Social Networks and Community

This activity demanded a community, and social networks and forums came into play. Ideas and knowledge are exchanged without limits in a single digital place evolving trading to a whole new level. Information was very accessible, however, as before, this freedom pulled new dangers. 

Scammers could hide easily while picking victims in search of information on how to make money out of forex. Identity problems on social networks and communication platforms allowed forex trading to be plagued in yet another way. Unethical activity is really hard to miss now, making real forex trading harder to realize its true benefits to beginner traders. 

Nowadays, traders that dig deep and want to learn forex trading have to do good research and filter all the false info and noise out of this internet mess. It all became a very big marketing stage with media, government figures, news, and hypes that just are not aligned with the best interest of individual traders. 

Still, all the new tech and community allowed other trading forms to develop, such as automated trading, copy trading, signals providers, various trading proprietary firms, crypto-related exchanges, and staking, ETF types, indexes, and so much more on the horizon. 

The Forex Market Now

Forex, as a market is here to stay, however not much has changed recently. We are witnessing record-high equity levels, and when we see a steady rise of equities forex is waning in volume. The capital is always shifting, in 2019 we have seen record low volatility in forex. In 2020 similar happened except we had a disturbance caused by the COVID-19 pandemic. Whatsmore, the rise of crypto is now taking part in that capital flow. 

There are many fundamental signs of the upcoming crisis that are actually good for forex traders. On the other side, it stirs the need for financial education on how to protect individual wealth, something that is not much talked about. 

Categories
Forex Daily Topic Forex System Design

Trading System design -Creating Your Strategy with Tradingview’s Pine Script – Part 2

In part 1 of this article series, we have created the Stochastic RSI indicator as part of our idea for a scalping strategy. Now that we have it functional, we will make the bull/bear phases and visually inspect whether it captures the turning market’s turning points.

Possible ways to create bull/bear slices

Our Stochastic RSI consists of two lines, k and d, and two trigger lines, ob and os. Therefore we can use multiple variants that may allow the creation of bull/bear price legs. Let’s consider the following 3

Variant 1 – The transition occurs at the SRSI entrance of the oversold or overbought regions.

Bull: The d-line crosses under the ob-line, which indicates it is into the overbought area
Bear: The d-line crosses over the os-line, indicating d‘s entry into the oversold area.

Code:
if crossunder (d, os)
    SRSI_Long := true
    SRSI_Short := false
else if crossover (d, ob)
    SRSI_Long := false
    SRSI_Short := true 
else
    SRSI_Long := SRSI_Long[1]
    SRSI_Short := SRSI_Short[1]

This code creates a condition SRSI_Long at the cross of d under os, which holds until d crosses over ob and reverses it, creating an SRSI_Short state. This condition is only modified by d crossing under os.
The else statement ensures the condition does not change from the previous bar.

Once we have defined the bull and bear segments, we can color-shade them to visualize them in the chart. To do it, we will use the bgcolor() function.

bgcolor(SRSI_Long ? color.green: na)
bgcolor(SRSI_Short ? color.red: na)

The first statement asks the condition of SRI-Long ( the ? sign). If true, the background color changes to green. Otherwise, no change (an). The second statement behaves similarly for SRSI_Short.

Let’s see how this piece of code behaves in the BTCUSD chart.

Variant 1 triggers the transitions too early. We see that on many occasions when the stochastic RSI enters the overbought or oversold region, it is more a signal of trend strength than a turning point.


Variant 2 – The transition occurs at D and K’s crossovers if in the overbought/oversold regions.

Bull: the k-line crosses over the d-line, if below os ( inside the oversold region. We ignore crosses in the mid-area)
Bear: the k-line crosses under the d-line, if above ob ( in the overbought area. We ignore crosses in the mid-area)

Code:

// creating the long and short conditions for case 2

if crossover(k,d) and d < os
     SRSI_Long := true
     SRSI_Short := false

else if crossunder(k,d) and d > ob
     SRSI_Long := false
     SRSI_Short := true
else
     SRSI_Long := SRSI_Long[1]
     SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na) 
bgcolor(SRSI_Short ? color.red: na)

The last section for the background change is similar to Variant 1.

Let’s see how it behaves in the chart.

Variant 2 is an improvement. We see that the bull and bear phases match the actual movements of the market, although entries are still a bit early, and in some cases, it missed the right direction. It can be useful as a trigger signal, provided we can filter out the faulty signals.


Variant 3 – the transition occurs when d moved to the overbought or oversold region and, later, crosses to the mid-area.

Bull: the d-line crosses over the os-line
Bear: the d-line crosses under the ob-line.

if crossover (d, os)
    SRSI_Long := true
    SRSI_Short := false
else if crossunder (d, ob)
    SRSI_Long := false
    SRSI_Short := true 
else
    SRSI_Long := SRSI_Long[1]
    SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na) 
bgcolor(SRSI_Short ? color.red: na)

 

And this is how it behaves in the chart.


Variant 3 lags the turning points slightly, but this quality makes it more robust, as, on most occasions, it’s right about the market direction. This signal, combined with the right take-profit, may create a high-probability trade strategy.

Let’s try this one. But this will be resolved in our next and last article of this series.

Stay tuned!

Categories
Forex Elliott Wave Forex Market Analysis

USDJPY: Be Ready for this Flag Pattern Breakout

The USDJPY pair presents the breakout of a flag pattern corresponding to the third wave of Subminuette degree identified in green, triggered after the flag pattern breakout observed in Wednesday 26th session. Examine with us what’s next for the coming trading sessions.

Our Previous Analysis

Our previous Elliott wave analysis of the USDJPY pair commented on the complex corrective formation developed by USDJPY since the price topped at 111.715 in March 2020. Also, we recognized the internal structure as an incomplete triple-three pattern. 

As illustrated in the previous daily chart released in late December 2020, the USDJPY pair moved in an incomplete wave (c) of Minuette degree labeled in blue. Likewise, the lower degree sequence revealed the progress in an ending diagonal pattern, suggesting the corrective formation’s exhaustion, which belongs to wave B of Minor degree in green.

Likewise, the breakout of the trendline that connects the end of waves ii and iv of Subminuette degree labeled in green would confirm the end of wave B of Minor degree. In this context, once the USDJPY surpassed the upper-line of the ending diagonal pattern, the pair confirmed the end of wave B and the beginning of wave C of the same degree.

What’s Next?

The USDJPY surpassing the upper guideline of the ending diagonal pattern on January 07th confirmed the completion of wave B of Minor degree and the beginning of wave C of the same degree.

In this context, the first breakout the USDJPY formed in early January corresponds to wave i in green. Likewise, the consolidation sequence recognized as a flag pattern corresponds to wave ii. Both waves belong to wave C of Minor degree labeled in green.

The last breakout developed by the USDJPY activates wave iii that belongs to wave C in green. Its potential advance could strike the psychological barrier of level 106.

Summarizing, the mid-term Elliott wave view for the USDJPY pair suggests that the price action may advance in its wave iii of Subminuette degree, which belongs to the first segment of the internal structure of wave C of Minor degree identified in green. The upward wave iii in progress could exceed the psychological barrier of 106. It even could strike the supply zone between 106.561 and 107.050. Finally, the bullish scenario’s invalidation level is at the beginning of wave i in green, at 102.591.

Categories
Forex Daily Topic Forex System Design

Trading System design -Creating Your Strategy with Tradingview’s Pine Script – Part 1

As promised, in this article, we will go through the steps to create a custom strategy, from the initial idea to the implementation of signals, stops, and targets.

The skeleton of a trading Strategy

To create a strategy programmatically is relatively simple. We need to define the Parameters and the trade rules first, followed by the position sizing algorithm, the entry commands, and the stop-loss and take-profit settings.

Visualizing the idea

Human beings are visual. We may think our trading idea is fantastic, but translating it into code may not be straightforward. It is much easier to detect the errors if we see our rules depicted on a chart.

With the parameter declarations and trade rules, we can create an indicator first, so we can see how it appears. After we are happy with the visual 

The idea

For our example, we will use a simple yet quite exciting indicator called Stochastic RSI, which applies the Stochastic study to the RSI values. This operation smoothes the RSI, and it reveals much better the turning points on mean-reverting markets, such as in Forex. Let’s see how it behaves as a naked strategy.

Diving into the process

First, you need to open an account with Tradingview. Once we are in, we create a new layout.

Then we open the Pine Editor.

It appears in the bottom left of your layout. Click on it… and it shows with a basic skeleton code.

The Stochastic RSI code.

As said, to create the Stochastic RSI indicator, we will make the RSI and then apply the stochastic algorithm to it.

1 study(title="Stochastic-RSI", format=format.price, overlay = false)

This first line declares the code to be a study, called Stochastic-RSI.  

format = format.price is used for selecting the formatting of output as prices in the study function.

Overlay = false means we desire the RSI lines to appear in a separate section. If it were a moving average to be plotted with the prices, overlay should be set to true.

RSIlength = input(14, "RSI-Length", minval=1)

We define the RSI length as an input parameter called RSI-Length.

src = input(close, title="RSI Source")

The variable src will collect the input values on every bar. The default is the bar close, but it may be modified by other values such as (o+c)/2.

myrsi = rsi(src, RSIlength)

This line creates the variable myrsi that stores the time series of the rsi.

This completes the calculation of the RSI. 

smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)

These two lines create the smoothing values of the stochastic %K and %D. Since it comes from input, they can be changed at will.

Stochlength = input(14, "Stochastic Length", minval=1)

This code defined the variable lengthStoch, computed from the input parameter.

k = sma(stoch(rsi1, rsi1, rsi1, Stochlength), smooth_K)
d = sma(k, smooth_D)

These two lines completes the calculation of the stochastic rsi.

plot(k, "K", color=color.white) - Plot a white k line 
plot(d, "D", color=color.red) - Plot a red d line.

To end this study, we will plot the overbought and oversold limits of 80 and 20, filling the mid-band with a distinctive color.

t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.purple, transp=80, title="Background")

The complete code ends as:

 

// This source code is subject to the terms of 
// the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © forex-academy
//@version=4
study(title="Stochastic-RSI", format=format.price, overlay = false)

RSIlength = input(14, "RSI-Length", minval=1)
src = input(close, title="RSI Source")
myrsi = rsi(src, RSIlength)

smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)
Stochlength = input(14, "Stochastic Length", minval=1)

k = sma(stoch(myrsi, myrsi, myrsi, Stochlength), smooth_K)
d = sma(k, smooth_D)

plot(k, "K", color=color.white)
plot(d, "D", color=color.red)

t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.teal, transp=80, title="Background")

This code is shown in our layout as

Stay tuned for the second part of this article, where we will evolve the Stochastic RSI into a viable strategy.

 

Categories
Forex Price Action

How to Deal with Saturation of Sideway Market Movements

The market you are in is experiencing capital outflows, that is what is going on. Pull up your plan B. You noticed how the market has changed. It may not be trending as unusual and the opportunities have been scarce for a while. What do you do now? 

First, we need to acknowledge that the market never remains exactly the same. Sometimes the market will trend for a while after which we may see equally long (or longer) periods of consolidation. In fact, the market can be so devoid of any action that you may wonder if you are ever going to get a trade opportunity that is not a fake breakout.

From time to time, we will not be able to see any definitive upward or downward movement and the prices may not get to make your take profit targets, making traders insecure about the overall market direction.

So, how do you know that you are in a dead market?

Even though we can determine market volume with the help of ATR, ADX, and Bollinger Bands, among other tools, the $EVZ volatility index has proved to be extremely useful and easy to use. When you open the full chart, you will be able to see a number under the heading “Euro FX VIX.” 

If this number is lower than seven (7), for example, this means that volume and volatility are low. Also, the lower the $EVZ index is, the lower the chance of winning a trend following trade is as well.

If we need volume to trade effectively, how should we then approach long market dry spells?

There are a few ways to deal with unfavorable markets. First of all, dead markets are not the markets we want to trade, especially as beginners. However, we can still be productive! As a beginner trader, you are probably developing your system and trying to see if your tools are giving you valid information on the market.

If you are backtesting or forward testing your system, you should be getting a clear sign not to engage in trading at the moment. If you are still getting signals that it is ok to proceed, you need to change the volume/volatility indicator you are using.

Still, low volume/volatility is a normal part of market oscillations, as these constantly fluctuate. Even if you are getting a lot of losing trades, do not get discouraged. Your time will come.

You may be wondering if you can still trade despite sideways market movements, and the answer is…

…YES and NO.

You should not trade at this time because the price direction guesswork is extremely hard to get right and you can easily lose a lot of money. If you aren’t getting any signals, there is no reason for you to push it. Just stay put.

If you are, however, getting signals to enter a few trades please choose wisely! For example, forex traders may not want to trade pairs whose currencies are heavily monitored by big banking institutions. Any strange news event will also be a reason strong enough to avoid certain currency pairs altogether at this time.

Also, be careful with your money management!

We cannot scale out when the market is unresponsive. Therefore, we should in such cases take the entire trade-off at the first take-profit point. While we may be getting wins that are smaller than usual, we know that these are safer wins after all. It is far better to have minor wins than major losses. Even if the trade you exited seems to be heading somewhere, do not be regretful. Cut your take profit targets.

If the market happens to be extremely low in volume and volatility, you should also manage your risk differently!

We usually cannot have a standard 2% risk on trades encumbered by sideways market movement. Reduce your risk to 1%, for example, if you see that the $EVZ index is reaching incredible lows, like in 2019. 

What you can also do in times like these is use a smaller time frame to pick up your wins more easily. Again, dead markets do not necessitate that you forsake your daily time frame by default, but it can be a good opportunity for you to see if there are any changes between different time frames. 

This is a reminder not to forget the power of your mind!

If you are not prepared mentally or emotionally, your account will suffer no matter the conditions. If you start panicking the first moment you spot any sideways market movement, the likelihood of you making a good decision will start to decrease exponentially.

There is also a major prejudice concerning market volume and volatility. What we need is balance – in the market and in our approach to it. Therefore, if we enter trades with high volatility or volume, we are also adding unnecessary risk, which can be detrimental to our accounts.

Looking for an ideal trading scenario to start trading is as futile as is failing to recognize the potential of dead markets. When we are faced with the saturation of sideways market movements, we should perceive the market as our fertile land. It is those moments that give us perfect room for improving our systems. Reflect on your past trades and decisions, and see what you can do better. Focus your attention on your trading and test, test, test. If you find a strategy that is working well in these conditions, this is your plan B, switch to it.

Unfavorable market conditions affect us all. Do not think that experts are making a ton of money under any circumstances. You may have even had plans to leave your current job and turn to trading only, but now is not the time. Make no rash decisions, keep all of your sources of income active, and just wait for everything to go back to normal. Even when it does, you may still need a few months or years for everything to work out as you planned.

What happens when the market finally comes back to us?

Well, no matter how well-developed your system is, most volume indicators cannot record the first big move as quickly as it occurs. So, now that you know that it isn’t your fault, do not give in to any doubts or regrets and just move on. 

Finally, there is no way for you to “trick the system” and evade the sideway market movements. It is a perfect time to develop a strategy that can work in dead markets, it will stay with you when the markets are dead again. Do not go looking for a volume indicator that would tell you what you want to hear. Instead of feeling sorrowful about your fate, look where you have the power to initiate change. Trading is not about making wins only. Protecting your account and making smart money is far more important. 

Categories
Beginners Forex Education Forex Assets

Fundamentals of the British Pound

The British pound, whose use spans across more than 5000 years, is the oldest currency in the world. Originating from continental Europe under the Roman era, the official currency of the today’s United Kingdom was once also a unit of currency in Anglo-Saxon England, equivalent to 1 pound weight of silver, dating back to as early as 775 AD. Derived from the Latin word poundus which translates as weight, the name of the currency we use today is still in use. 

The symbol £ comes from an ornate L in Libra, whereas the ISO code under which it is recognized globally is GPB. Unlike other currencies, the GBP has endured such a vast portion of history and now tells a tale of how a currency once set the grounds for the future. In 928, the first King of England, Athelstan, adopted sterling as the first national currency, and one unit of the currency could actually buy off 15 heads of cattle. The name sterling, however, came to use only after the Norman Conquest, initially referring only to pennies and not pounds. This anterior name is of vague origin due to its connections to esterlin, a Norman word for little star, and lesterling, an Arab word meaning money

In the late 1600s, upon suffering naval defeat in the Battle of Beachy Head, King William III established the Bank of England to fund the war with France. As the first central bank ever created, the Bank of England and the British helped create laws and principles which are today considered essential for regulating currencies. In 1717, for the first time in history, the country defined the currency’s value in terms of gold rather than silver, and the gold price of £4.25 per fine ounce set by Sir Isaac Newton lasted throughout most of the following two hundred years. 

The country first adopted the gold standard in the 1800s, supporting the idea that the nation should back up its currency with an equivalent quantity of gold reserves. The United Kingdom briefly left the gold standard in 1914 to support itself during the war, yet the heavy borrowing led to high inflation that considerably devalued the pound. In 1925, Winston Churchill returned to the gold standard only to come off of it a few years later, in 1931, when the sterling once again underwent a significant drop. The 20th century gave birth to another nickname of the GDP, the cable, due to the creation of the first trans-Atlantic telecommunications cable used for stock exchanges between New York City and London. The term became part of today’s vernacular to the extent that the phrase what’s the quote on the cable is understood easily as the interest in knowing how many dollars are needed to buy pounds. 

Overall, the British pound holds so much history and truly embodies the qualities of an enduring currency. The British were the first to put together a stable government and currency, which remained a safe haven for hundreds of years. Nowadays, the GBP has lost its previous value and power as it stands approximately third in reserves, right behind the USD and the EUR. The 2016 Brexit led to one of the worst falls of the GBP in history and the attempts to foretell the future of this once great currency seem more challenging than ever before.

The Bank of England

Under the rule of King William and Queen Mary, upon the issuance of the 1694 Royal Charter, the Bank of England was founded in the hope of promoting stability and providing benefits to the people, which are still held as dominant values of the institution. As one of the longest central banks in its entire existence, created right after the Swedish Riksbank, the Bank of England (BoE) served as a model for other central banks around the world. Today the bank’s responsibilities include the issuance of banknotes, control of the country’s gold reserves, and setting the official interest rates. The BoE has a dual mandate consisting of two main objectives – monetary stability and economic stability. The former involves influencing interest rates so as to deliver the objectives of the Monetary Policy Committee (MPC), whereas the latter entails ensuring liquidity, together aimed at promoting growth and employment in the British economy. 

While the Bank of England bears the responsibility for printing money, it only includes the territory of the United Kingdom, while Ireland, which uses the EUR, is exempt from its authority. What is more, the BoE issues notes in both England and Wales, but Scotland and Northern Ireland can also do the same through several other banks. Coins are, however, manufactured by the Royal Mint, an export mint located in Llantrisant, South Wales. Since its opening by the Queen in 1968, the Royal Mint has been in charge of making and distributing the United Kingdom coins and supplying blanks and official medals. This government-owned institution now makes coins and medals for approximately 60 countries a year. 

Another important segment of the bank involves the Monetary Policy Committee (MPC) that consists of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, the Chief Economist, and four external members appointed directly by the Chancellor. These members are selected based on their expert knowledge of economics and monetary policy in order to decide on the best monetary policy action for the Bank of England to keep inflation low and stable. As of March 16, 2020, Andrew Bailey is the Governor, replacing Mark Carney. The new Governor was said to be the favorite choice in a number of media due to his extensive experience in the field of banking and, in particular, previous responsibilities and successes at the Bank of England. 

Some say that the BoE has been the main pillar of support of the United Kingdom during the past crises. The country’s economy is believed to fall into crisis approximately every 70 years and some past events, such as the Great Fire of London or the aftermath of the tea hegemony collapse, can support this viewpoint. It appears that every time the economy collapses the Bank of England steps in to provide support and safeguard the country and the currency against complete destruction. The Bank of England now has another task of helping the UK’s economy withstand the outcomes of Brexit-related decisions, which will be discussed later in the text, as one of the strongest factors impacting the country in the past few years.

UK Economic Reports

  • GDP Report

The GDP reports come out in three stages: the initial, the actual, and the final. Similar to the US GDP reports, the preliminary estimate is the most relevant piece of information as it first produces insight into the country’s economy. At the same time, this initial GDP report is also the least accurate, which is why the data is then revised in the following two reports. The current data shows how GDP is estimated to have fallen by a record of 20.4% in Quarter 2 (April to June), which was the second quarterly decline in a row after falling by 2.2% in the first quarter (January to March) this year. Despite the poor performance in the second quarter, the UK’s economy did see some improvement in June upon the easing of governmental decisions on lockdown (see the chart below). Currently seen as the worst in all G-7 states, the country’s GDP is estimated to fall by 8.3% in 2020, with a 6% annual growth rate anticipated in 2021. The UK’s economy is believed to rely heavily on social outdoor activities and the implications of the pandemic and related decisions can already be felt, as seen from the latest GDP report.

  • Claimant Count Change

Claimant Count Change is a monthly report that provides information on the employment changes upon measuring the number of unemployed people in the UK during the reported month. It is interesting to note how the Claimant Count Change averaged 3.70 thousand between 1971 and 2020, reaching an all-time high of 858.10 thousand in April of this year. The last report issued on August 11, 2020, signaled weakness in the labor market, with the number of people claiming unemployment benefits having gone up by 94.4 thousand to 2.7 million in the previous month.

  • Inflation/Monetary Policy Reports

The quarterly Inflation Reports comprise the Monetary Policy Committee’s economic analyses and inflation forecasts that are further utilized in making interest rate decisions. As of November 2019, the Inflation Report is called the Monetary Policy Report, yet its purpose has remained the same. The last Monetary Policy Report that came out on August 6, 2020, reported the impact of the COVID-19 pandemic on reducing jobs and incomes in the country. The report includes information on the assistance provided by the Bank of England to UK citizens. Moreover, the Monetary Policy Report states where the economy is in comparison to the overall monetary policy of the BoE. The Bank of England has already put effort into returning inflation to the 2% target which aligns with its 1989—2020 average of 2.53%. Inflation is considered as one of the key indicators used in trading in the spot forex market. Traders are generally advised to keep informed in order to understand the situation in the country at the time for trading.

  • Retail Sales

The Retail Sales report is an in-depth analysis of the latest macroeconomic and consumer trends affecting the UK retail industry. The last report issued in June 2020 indicated a 13.9% retail sales increase, which marks the second monthly increase in a row, resulting from the early economy recovery stages from the effects of the pandemic. Quite interestingly, while the United Kingdom’s retail sales averaged 0.23% between 1996 and 2020, they reached their all-time high of 13.90% in June 2020 and a record low of -18% in April of the same year. The next release of the report will be issued on August 21, which should give more information on whether the previous two-month increases will continue, further maintaining total sales to the pre-pandemic levels.

  • Manufacturing Report

Deemed the most vital indicator for the UK manufacturing industry, the Manufacturing Report reveals the manufacturers’ contribution to the country’s regions with regards to past 12-month output, jobs, investment, and business confidence and export. Over the last year, the UK has been largely affected by the attempts to leave the European Union and the impact of the COVID-19 pandemic, which have caused prolonged industry volatility. UK manufacturing production’s 1969—2020 average of 0.42% was exceeded by far in April of this year with an all-time low of -28.40%. The last statistics in June indicate a fall of 14.6% in comparison to the previous year, but the forecasts seem to be more positive for the following 12-month period.

The Most Traded Pairs

  • GBP/USD

GDP/USD or the cable is probably the most frequent currency pair traded that, like EUR/GBP, has a lot of volume with an estimated 15% of the total daily volume of forex transactions. As it comprises two of the most traded currencies in the world, the focus of attention is often pointed towards this particular cross. This week’s economic calendar is rather quiet and the chart below reveals a continuation of a bullish pattern. Nonetheless, with the Brexit talks ever-present, the pair could overall entail slightly more volatility than usual.

  • GBP/EUR

These two major currencies rank as one of the top eight most frequently traded currencies in the world. From the perspective of daily forex volume, the EUR is second only to the USD, with a market share of 39.1%, whereas the GBP ranks fourth with a 12.9% market share. This currency pair is said to be significantly less volatile than other EUR- or GBP-based crosses due to the economic closeness and interdependence between them. Nonetheless, the (ongoing) changes in monetary policy between the central banks of the UK and Europe can make this pair highly sensitive. 

  • GBP/JPY

The GBP/JPY currency pair is said to be quite a volatile pair. As a low yielding currency, the JPY is commonly used as a funding currency of trade. Therefore, since the GBP belongs to one of the biggest economies in EUT, this particular pair can reveal the state of the global economy. It also reveals risk-off moves in the market resulting in the development of strong trends exceeding thousands of pips.

The lower volatility of the pair is said to originate from the economic and geographic proximity of the two nations with both the GBP and CHF used as reserve currencies around the globe. This pair along with the ones mentioned above fall under the more liquid group of pairs, whereas outside this particular set, one can find some more exotic crosses.

  • GPB/AUD

This currency pair reveals a lot of big moves that signal a much lower value of 100 pips than in pairs such as NZD.JPY for example, where 100 pips would equal a 1.3% move. In this currency pair, however, the same number of pips would turn out to be only a 0.5% move up or down. The percentage return will demonstrate the amount that a trader can expect to get. A number of GBP crosses typically entail many pip moves and, whenever the GBP is traded, smaller position sizes are to be expected owing to the fact that the base currency is as high. 

Interest Rates

The GBP is generally believed to be doing better than the USD or JPY similar to other risk-on European currencies. Compared to other central banks, the Bank of England’s current 0.10% does reveal it to be one of the lower interest rates on the spectrum. At the same time, the current interest rate of the United Kingdom poses as a record low in the 1971—2020 average of 7.36%.

Trade Deficit

Like the US, the UK imports more than it exports which leads to large trade deficits with foreign countries.  In April of 2020, the total trade deficit of goods and services, without non-monetary gold and other precious metals, dropped down to 7.4 billion GBP in the past 12 months, with imports falling by 34.6 billion GBP and exports falling by 7.8 billion GBP. The total trade deficit for March 2020 was revised up by £2.7 billion to £4.0 billion, driven by a £2.2 billion downwards revision to services imports. These revisions also include the impact of the adjustments of GDP balancing applied to component series (including trade) to improve the alignment of the quarterly GDP position. The overall changes in the trade of the United Kingdom are presented in the image below and were certainly impacted by the strained relations with the EU and the overall state of the global trade under COVID-19.

Economic Activity

In order to understand the general state of the economy of the United Kingdom, one should look into the previously discussed GDP reports as well as FTSE (Financial Times Stock Exchange). FTSE 100 is the index of the 100 companies listed on the London Stock Exchange that will generate insight into the UK’s stock market. The chart below is an example of how the set of indices can provide market participants with information on the performance of the UK equity market. The current situation seems to have improved since the major drop in March of this year, but the likelihood of the return to the pre-pandemic state is still questionable.

Brexit

When Britain voted to leave the European Union in 2016, its currency plunged on world markets and 2020 still offers no actual resolution. The UK has officially rejected the notion of extending the transition period until December 31, 2020. After the video conference between UK PM Boris Johnson, European Commission President Ursula von der Leyen, and European Council President Charles Michel, both the UK and the EU came to terms with having more negotiations in the summer months so as to come to an agreement ahead of the EU summit on October of the same year. With both sides showing a willingness to mitigate the tension, the EUR/GBP currency pair seems to be caught in between the risk sentiment and Brexit. GBP improves along with the improvement of risk sentiment, yet the lack of Brexit progress drags the currency in the other direction.

The various currency pair charts above reveal the progression of the GDP across the years. It appears that the UK’s official currency has suffered quite a lot in the past few years. Upon the 2016 referendum, the GBP fell 8% against the USD and 6% against the EUR. The initial hopes of a weaker currency to increase exports and raise demand for the UK goods/services did come through to a certain degree, but the trade deficit is still very much present. The exports have been increased by the weaker GBP and the unexpected increase in import prices has led to a reduction in pay and, therefore, a drop in consumer demand. Some predictions of the future of the British pound are quite gloomy as some economists believe that the GBP could drop to the 1.10—1.19 USD range should the UK leave the EU without a deal.

Furthermore, without the trade agreement, the economy could shrink by 8%, which would lead to an employment crisis. The overall implications of the unresolved relationship challenges between the UK and the EU are already vivid; for example, after the Brexit referendum, the Dow Jones decreased 600 points, removing $2 trillion from the global markets. A sharp increase in the USD versus a weakened GBP and EUR could obstruct US exports, causing difficulty in the US manufacturing sector, already encumbered by the trade war with China. Apart from the US, the JPY was also feared to experience a major surge in value due to investors’ tendency to flock to domestic currency.

The past December election in the UK was believed to be able to bring some relief, yet 2020 witnessed more negotiations and equally unresolved questions. The possibility of coming to a mutually beneficial deal (termed soft-Brexit in the media) may help the GBP surge in the following months. The currency market is expected to remain unpredictable until the resolution of current matters and the economy was publicly described as high risk by Governor Andrew Bailey himself. The long-term consequences of the UK leaving the EU are largely unknown, very much like the realization of the Brexit supporters’ hopes of economic growth and the pound’s appreciation.

The UK appears to be putting extra efforts in maintaining and preserving the economy, especially with the support of 300 billion GBP of quantitative easing. Combined with the COVID-19 pandemic, the UK’s Brexit struggles seem to be magnified despite the country’s attempts to keep the economy under control.

2007 Financial Crisis

The British economy was said to have been booming with UK tourists visiting the US and the financial sector enjoying the golden days before the financial crisis of 2007. The GBP soared from 2002’s 1.40 up to 2.10 USD in October of 2007, when it decreased by 35% to 1.40 USD at the beginning of 2009. The United Kingdom is believed to have been affected by the crisis more than other countries due to several factors: without a big manufacturing base, the economy depended on financial services, real estate, and retail sales for development. The growth was not based on strong grounds and it heavily relied on credit borrowing/lending.

The bubble burst in 2007 and once the housing prices dropped and credit sources dried up, the economy of the United Kingdom was left in dire straits. The impact of the 2007 crisis would remain long-felt with numerous consequences. The moment the big banks understood what was happening, bank-to-bank lending was reduced immediately.

The number of financial institutions that would still borrow discovered that the interbank lending interest rate doubled and the credit ensuring costs increased as well. Once the lending ceased, the effects were already felt across all sectors and especially in the housing industry. The FTSE 100 dropped by 5.5% in January 2008, which was perceived as the greatest loss since the crash of 2001. Soon people found it difficult to pay mortgages, resulting in fewer retail sales. Cutbacks in housing and retail sales were followed by a number of redundancies and unemployment was staggeringly high.

All of the events further aggravated the already weekend UK economy. With such a vast number of people unemployed, there was a decrease in tax revenue and the downturn continued with the fourth consecutive quarterly drop of GDP at the end of 2008.
In the hope of jump-starting the economy, the UK government reduced the VAT rate, but the effects of the crises were already too severe. The 31.3% FTSE decrease in 2009 was the biggest annual drop since 1984 and the economy just kept shrinking. The financial crisis caused a global recession with many assuming that it resulted from the recklessness of bankers.

The UK’s GDP fell more during the 1930s’ Great Depression and the GBP overall experienced elevated volatility during the entire period of the crisis. The GBP/USD hit a 26-year high in 2007 and the pound kept revealing difficulties in equities and the banking industry. Soon after, in January of 2009, the GBP market hit a 24-year low against the USD, repeating a similar scenario to the one with the EUR in 2008.

Conclusion

With the virus spreading across China in December and January, most UK businesses seemed to be preoccupied with Brexit. The ramifications of these external factors are yet to be seen, but one may see the current GBP struggles as part of its long-lived pattern. The Bank of England has once again stepped in to help the troubled economy and the benefits of those steps are already noticeable. The pound has indeed lost its safety position, placed somewhat in the middle. The currency tends to appreciate more during an economic expansion, so we have yet to see some major moves as the UK’s economy further stabilizes. 

The negative impact of Brexit on the GBP has been extensively documented over the past years, but considering the current selloff, one cannot but recall a previous episode of intense Sterling selling: the financial crisis. Investors seem to be fearful of the GBP difficulties and history seems to be repeating. The UK’s deficit is masked by a secure flow of investor capital, which in turn maintains the value of GBP above where it would be if it only reflected imports/exports. The pound largely struggled towards the beginning of the month of August, with the number of virus-inflicted patients rising across the country. 

The global economy also went through a difficult period, but the GBP experienced some bigger moves against the USD, returning to 1.30. Looking throughout August, the final resolution of Brexit is still far ahead and the expectations of a new trade deal between the UK and the EU keep the tension up.  Aside from the Brexit-related challenges, the virus pandemic also affected the currency market, making it even more unpredictable. August is witnessing the release of several important reports (GBP already came out a few days ago) and traders should pay attention to market volatility and adjust position sizing accordingly. At 1.31 USD, the GBP stands firm ahead of new Brexit negotiations.

Policymakers are said to be meeting soon to discuss the relationship between London’s financial sector and the EU market. The past weekend economy was predicted to be soon seeing a rapid recovery from the impact of the virus on consumer spending. Last, the British pound is estimated to be trading at 1.30 by the end of this quarter and at 1.28 in the upcoming 12 months.

Categories
Forex Daily Topic Forex System Design

Trading System design – A Summary of your Best Options to Code your Strategy

In our latest article, we have seen that manually backtesting our strategy is cumbersome if performed correctly. Also, It is usually subjected to errors and the interpretation of the trader. Therefore, a basic knowledge of trading algorithm development and computer coding is a desirable task for any trader. The good news is, nowadays, there are many easy ways to do it since high-level languages are very close to natural language.

High-level languages to quickly build your Forex strategies.

MetaQuotes Language (MQL4/5) 

In this respect, the primary language we could think of to build your strategy in Forex is MetaQuotes Language 4 (MQL4). This language is a specialized subset of C++ , holding an extensive built-in library of indicators and trading signals.

Spending your time and efforts to master MQL4/5 is worthwhile because Metatrader 4 includes a suitable trading strategy tester and optimizer.

If you are new to programming, you could start by analyzing and modifying existing free-available EA’s. Starting with simple strategies is excellent because they will be easier to understand and change. Also, in trading, simple usually is much better than complex.

Python

Python is the reference language for data science. Its popularity and its extensive library on data science are well-known. What is less known is, Python also has comprehensive packages dedicated to trading.

As an example, you can have a look at this list taken from Open Source Python frameworks:

With Python, you can go as easy as backtest your strategy with three simple lines of code using the fastquant package.

from fastquant import backtest, get_stock_data
jfc = get_stock_data("JFC", "2018-01-01", "2019-01-01")
backtest('smac', jfc, fast_period=15, slow_period=40) 

source: Backtest Your Trading Strategy with Only 3 Lines of Python

Of course, first, you have to create the code for your strategy.

Market Data 

For backtesting purposes, you will need to download your historical market data with the necessary timeframe. The file, in CSV or Excel format, can be easily read by your Python code.

If, later on, you are going to apply your EA live, you will need a real-time streaming data feed. If this is the case, you will need to create an interface to your broker through an MT5 TradeStation (MT4 is not equipped with it).

Easylanguage and Tradestation / Multicharts

Tradestation and Multicharts are dedicated high-level trade stations. Easylanguage, a specialized subset of Pascal, was developed by the Tradestation team to create indicators and trading signals. Both platforms are terrific places to develop trading algorithms, and backtesting is straightforward.

Easylanguage, as its name indicates, was designed to make it as close to natural language as possible. The ample set of its built-in library makes coding simple, so the developer’s primary focus is the trading algorithm.

As this example, please read the code of an adjustable weighting percent blended moving average.

inputs: period1(50),period(20),factor(0.5);

variables: slow(0),fast(0), blended(0), var1(0), var2(0);

slow= average(close,period1);
fast= average(close,period2);

var1 = factor;

if var1<0 then var1=0;
if var1>1 then var1=1;

var2= 1-factor;
blended= (slow*var1)+(fast*var2);

plot1(blended,"blended");

 

You will see it is relatively easy to understand and follow. Anyway, it would be best if you dedicated some time to really master the language, to avoid or at least minimize coding errors.

Pine Script and Tradingview

Pine script is another specialized language to easily program your own studies and trading strategies if you have an account on Tradingview (which you may open for free). As in the case of Easylanguage, Pinescript is designed to be easily understood. 

Pine studies are used to display indicator information and graphs on a chart. It is preceded by the study() declaration. If you wished to create a strategy for backtesting, you have to use the strategy() declaration.

As with other languages, the best way to begin is by reading other people’s code and modifying it for your own purposes.

Coding strategies in pine script is similar to Easylanguage or MQL5. You create a code taking in mind that it will cycle on each bar in the chosen timeframe. 

We took this example of a MACD indicator from the Pine script quick start guide:

//@version=4

study("MACD")

fast = 12, slow = 26
fastMA = ema(close, fast)
slowMA = ema(close, slow)

macd = fastMA - slowMA
signal = sma(macd, 9)

plot(macd, color=color.blue)
plot(signal, color=color.orange)

Backtesting in Pine script is easy. But, there is no way to perform automated optimization. You will have to do it manually. You should go to the performance summary and the list of trades to find the causes of the lack of performance, apply parameter changes, and see if you get any improvement of that adjustment.

In our next article, we will go through the steps to develop a strategy using the Pine script.

Categories
Forex Basics

40 Key Phrases About the World of Finance by Robert Kiyosaki

Robert Kiyosaki is an American entrepreneur, investor, writer, speaker, and motivational speaker of Japanese descent. He is the founder, CEO, and majority shareholder of Cashflow Technologies, a corporation that holds the licenses for the “Padre Rico Padre Pobre” brand, his best-known work.

Kiyosaki has provided us with excellent readings, those capable of inspiring and transforming the lives of anyone. If anything stands out Robert Kiyosaki, it is his vocation to teach, his vocation to serve others. This vocation has led him to write a book where his purpose is to teach what is the vision that children should have about the financial culture. A culture that, unfortunately, is neither taught nor encouraged in the classroom. We will focus on providing phrases that I think can be tremendously revealing when it comes to the concept that modern society has about financial education.

What follows are forty of Kiyosaki’s most notable phrases.

“Teaching about money is not given in schools. The school focuses on professional and curricular skills, but not on financial skills.”

“Making money work for you is a permanent topic of study. Most people attend college for four years and their education ends.”

“You have to learn to master money, not to be afraid of it. And they don’t teach that to kids, and if you don’t learn it, you can become a slave to money.”

“The main cause of poverty and financial hardship is fear and ignorance, not the economy or government of the rich.”

“For most people school is the end and not the beginning.”

“To spend your life in fear, without exploring your dreams, is cruel. Working hard to make money and thinking that money will allow you to buy things that will make you happy is also cruel.”

“A job is the solution for the short term but it will be a long-term problem.”

“We focus on the word education and not on financial education.”

“In accounting what matters is not the numbers but what the numbers tell you. It’s like words. The important thing is not the words, but the story that the words tell you.”

“An asset is something you put in my pocket. A passive is something you take out of my pocket. If you want to be rich, just spend your life building assets.”

“What is needed in education is not how to make money, but how to spend it; that is, what to do after earning it. That’s called financial fitness.”

“Making more money rarely solves a person’s money problems. Intelligence solves them. If you find out you’re in the hole… stop digging.”

“An intelligent person hires people who are smarter than her.”

“You need to learn how to make your efforts benefit you and your family directly.”

“The rich acquire assets. The poor have only expenses.”

“Financial problems are often the direct result of people working their whole lives for another investor. Most people will have nothing when their working lives are over.”

“Our current education system focuses on preparing young people today for good jobs, rather than developing their financial skills. Their lives will revolve around their salaries.”

“What often happens with school is that you will often become what you study. (…) The mistake in becoming what one studies is that many people forget to take care of their own business. They spend their lives running someone else’s business and making that person rich.”

“Start by running your own business. Keep your job, but start acquiring real assets, not liabilities or personal effects that have no real value once you are home.”

“The first lesson to make money work for me instead of me working for money is actually about power. If you work to make money, you give power to your employer. If your money works for you, you retain and control power.”

“Most people only contemplate for their lives to work hard, borrow and save.”

“Poor people, and in general the middle-class work only for money, the rich make money.”

“Saving money every month is a solid idea. It’s an option: the option most people follow. The problem is this: it blinds people to what is really happening.”

“My child is doing well in school and is getting a good education. It may be good, but will it be adequate?”

“Financial intelligence consists of four main skills:

  • Financial education. The ability to read numbers
  • Investment strategies. The science of money creates money.
  • The market. Supply and demand.
  • The law. Know accounting rules and regulations.”

“Real opportunities aren’t usually seen with your eyes, they are seen with the mind.”

“Unfortunately, people are not rich because they are terrified of losing. People who avoid failure also avoid success.”

“Work to learn, not to earn money.”

“There is an old cliché in English that states that the word JOB is the acronym for Just over broke.”

“Since the school considers financial intelligence to be a form of intelligence, most workers live according to their means. They work and pay their bills.”

“I now know people who are often too busy to take care of their wealth. And there are people who are too busy to take care of their health. The cause is the same. They’re busy and they’re busy as a way to avoid something they don’t want to face. No one’s told them. Deep down, they know.”

“The problem I detect today is that there are millions of people who feel guilty about their ambition.”

“The message repeated to us again and again is: Let us work hard, let us earn money, let us spend it; when we run out, we can always borrow. Unfortunately, 90 percent of the Western world adheres to this dogma simply because it is easier to find a job and work to earn money.”

“All of us have a choice. I simply chose to be rich and make that choice every day.”

“Invest first in education. Actually, the only real asset you have is your mind.”

“Most people simply buy investments instead of first investing in learning about investments.”

“The poor have bad habits. A very common bad habit is innocently known as «resorting to savings». The rich know that savings are only to create money, not to pay bills.”

“We go to school to learn a profession in order to work for money, when it’s about making money work for you.”

“You were all given two gifts: your mind and your time. It is up to you to do as you please with both.”

“There are five main reasons why people with financial literacy cannot develop their asset column:

  • Fear
  • Cynicism
  • Laziness
  • Bad habits
  • Arrogance”

The relationship between Robert Kiyosaki and Forex has always been close and has left us with a lot of lessons, but only that, good lessons and ways forward to achieve success as investors. Robert Kiyosaki has never encouraged trade of any kind but has confined himself to analyzing and trying to educate through his books and lectures to have a winning mentality, and that we can eliminate all our fears so that we have the best habits for our investments.

As a curiosity…, one of Robert Kiyosaki’s latest statements predicts that Bitcoin will be worth $75,000 in 3 years. This means the price of Bitcoin will increase by almost 100% a year over the next three years. Will it come true?

Categories
Forex Elliott Wave Forex Market Analysis

USDCHF: Examine These Three Charts Before Taking any Trade

 

Last week, the USDCHF pair developed a sideways movement pattern that looks like an inverted head and shoulder pattern. However, the primary mid-term trend remains dominated by bearish sentiment. Examine with us these three charts to help you foresee the pair’s potential movements in the coming sessions.

Inverted Head and Shoulder Pattern?

The USDCHF pair illustrated in the following 12-hour chart seems to develop a sideways formation after the accelerated decline observed during the second half of November 2020. After easing from the psychological support of 0.89, the price began to consolidate in a range between 0.8917 and 0.8757.

In the previous chart, the USDCHF seems to be forming an inverse head and shoulder (iH&S) pattern, suggesting a likely bullish reversal movement. According to chartist analysis, the iH&S formation will be confirmed if the price breaks and closes above the neckline located at 0.89171. 

For this reversal scenario, the invalidation level is located below the head, which holds its lowest level at 0.87576, corresponding to the low touched last January 06th.

Elliott Wave View Suggests Exhaustion

The big picture of the USDCHF pair exposed in its daily chart reveals the incomplete bearish impulsive sequence of Minute degree labeled in black, suggesting a limited decline.

As illustrated in the last chart, the USDCHF began a downward impulsive sequence of Minute degree on March 23rd when the price found fresh sellers at 0.99017. The price action reveals the completion of its third extended wave bearish move, which found support at 0.89986 in late August 2020, starting to advance mostly sideways in its wave ((iv)) in black. 

Once the sideways corrective formation corresponding to the fourth wave in black finished, the pair began to continue its declines in the wave ((v)) of Minute degree, which currently seems developing its wave (iv) of Minuette degree identified in blue. 

On the other hand, the timing and momentum oscillator reveals that the bearish pressure still controls the price action. In this context, the price would see a further decline, confirming Elliott Wave’s outlook of a pending fifth wave of Minuette degree.

This bearish continuation scenario’s invalidation level stays at 0.8979, which corresponds to the end of wave (i).

Price Action Reveals Indecision

The USDCHF pair in its daily chart unfolded in the bellow chart shows an indecision candle corresponding to the last Friday’s session, leaving a narrow body and long-tailed candlestick pattern. This market context carries us to expect a pause in the downward movement developed in previous trading sessions.

The confirmation of the bearish scenario will occur if the price closes below the LOD at 0.88385. Conversely, a reversal signal could be established by a Monday 25th session’s close if it exceeds Friday’s high of 0.88662.

In summary, the USDCHF pair develops a sideways formation that looks like an incomplete inverse head and shoulders pattern suggesting the potential bullish reversal sequence if the price soars above the neckline located at 0.89171. However, the Elliott wave outlook suggests further declines, corresponding to a possible wave (v) of Minuette degree labeled in blue. In this context, the price action reveals the indecision of the next direction. If the price decides to continue its decline, the USDCHF could re-test January’s 06 low zone.

Categories
Beginners Forex Education Forex Assets

Fundamentals of the United States Dollar (USD)

The safe-haven currency, the United States dollar, known under the ISO symbol of USD or nicknames such as dollar and greenback, has enjoyed a prestigious position as the leading global currency for many years now. Although now the most traded currency worldwide, the USD only took over the throne from the GBP in the late 1800s, that is the early 1900s, which compared with the country’s inception on July 4, 1776, is in fact a rather short period. The USD has experienced times of crisis in the past, and especially now, amid the COVID-19 pandemic, the questions regarding the currency’s strength arise. Surrounded by a plethora of news, which keeps coming out daily, and the US institutions issuing statements in lieu of the current state of affairs, the USD once again defends its long-held unique status among the world currencies.

History of USD 

Before the late 1800s, the British conquest of half of the world helped establish their dominance, rendering the GBP the strongest currency for a period spanning a couple of hundred years. The recognition of the new standard, that is the view of the USD as the new currency of value, resulted primarily from the country’s strong economy and functioning government. Consequently, this new market became also the biggest market in the world with the USD growing to be the most desired currency worldwide.

Now bearing the title of the world’s reserve currency, the USD is the currency of choice whenever foreign governments desire to hold onto their money. As they prefer not to keep these funds in their own currencies, they rely on such diversification mostly due to the need to increase the level of safety. The need for such an approach is most prominent in a small country with an unstable government experiencing numerous ups and downs. If a country keeps all the wealth in their own currency, they risk endangering their financial stability in times of instability or crises, which is why other countries’ safe currencies are employed.

History keeps records of such cases where a country put practically all their eggs into one basket, in a manner of speaking, leaving the country in utter chaos. The notorious example of Zimbabwe, which kept printing more money to the point where it became entirely worthless, should serve as a 30-year-old example of why countries prefer to keep their reserves in more stable currencies such as the USD. The United States’ currency is the standard nowadays which is why many countries across the globe prefer this currency over the others.

The many stories discussing, for example, China buying the US government’s debt are actually the stories of how foreign money is invested in the USD. Even the currency’s value decline due to China’s massive spending involving hundreds of billions of dollars upon their preparations for the Olympics could not shake the USD’s long-term stability. Amid the booming of the world economy, feeling afraid of how this prolonged decline of the USD could impact their reserves, other countries finally decided against keeping their wealth in this currency. The news started to circulate, the tension just kept building up, and the financial collapse hit in the middle of these speculations. Nonetheless, all other currencies except for the USD and JPY fell in value. The event proves the point that the USD is an exceptional currency with the best track record and a strong economy to back it up.

Each time other countries, aside from the United States, have some additional reserves, they often choose to buy the USD, which is generally bullish for this currency. However, whenever countries undergo challenging periods, they may typically decide to sell a portion of their USD holdings which has a negative impact on the currency. Generally looking at the connection between the USD and other currencies, most currencies have historically been pegged to the dollar at some point, especially around WWII and after.

Another important fact concerning the USD is that almost all commodities are generally traded in this currency. Should you, therefore, wish to purchase oil, you would have to do it in the USD. In case you have some other currency at your disposal, such as the EUR, you would then exchange it into the USD to proceed with the purchase. This connection is really significant which is why this topic will be thoroughly discussed later in the text.

With regard to US institutions governing the matters vis-à-vis the USD, the US Treasury Department, which is part of the US government, bears the responsibility for the supply of the money, while the Federal Open Market Committee (FOMC), a partly government agency, handles the related policies. These are two main bodies that control the money in the United States and whose responsibilities will be further discussed in another section below.

The Gold Standard

The US government was the first one to leave the gold standard back in the 1930s, which basically refers to the idea that a country had to have a hard asset to back up the money it wanted to print. Prior to the onset of the new dollar era, the United States would print the gold, silver, and bronze dollars. Back in the days where this monetary system was followed, the value of the dollar derived from the commodity, not the government. This further means that the same quantity of gold had an equal price across different countries, so the money had equal value worldwide regardless of the printing design.

With the shift toward the use of paper money in the late 1600s, the US government still followed the same principle of hard assets providing the money’s value, which gave birth to the above-mentioned gold and silver notes. While these old notes are still available for online purchase nowadays, we cannot now go into any bank and exchange such a gold note of 100 dollars for the equal worth of gold as was possible before. The price of the USD was, hence, entirely attached to the price of the hard assets, and this is how worthless paper actually acquired the value of real gold and silver.

The previously mentioned FOMC was formed in 1933 when some of the United States’ best bankers gathered in private at which point the country decided upon letting go of the rule that prohibited countries from printing as much money as they wanted. Although this country was the first to move towards another monetary policy, which caused great turmoil around the world, all other countries moved along with applying the same changes. By the late 60s, the entire world had already adopted the same strategy.

The new system implied that countries no longer had to store all the gold and the silver, i.e. the hard assets, in order for them to be able to print money, called the money supply. The money supply is basically the total amount of one country’s money in circulation. This however does not only refer to the printed money as only 6% of the entire USD has been printed on bills. The remainder actually pertains to digital numbers, such as the money in an individual’s bank account. The phenomenon is similar to that of cryptocurrencies, and some companies may even allow you to exchange these numbers in a ledger for the USD. As money is generally digital, if the bank does have enough money at the time of the desired withdrawal, you will not be able to take out the money, or the bills, that you requested.

The US Agencies 

As discussed before, the US Treasury is tasked with deciding on how much money is going to be printed, controlling the money supply. The FOMC, on the other hand, is responsible for monetary policy, which further implies that they control interest rates, bailouts, and other important segments related to the country’s finances.

The United States comprises 12 sections governed by 12 different bank presidents charged with submitting individual reports concerning their districts. The reports are shared and discussed upon meeting with other committee members going through the information prior to making a vote. The voting is conducted so that it allows only five regional bank presidents to get a vote, rotating the votes in a manner that prevents the past year’s vote from coming up again. Out of the 12 members, the 7 remaining ones actually come from the FOMC. They alternate meetings between six and eight weeks apart, and the head of the committee that is the Chair of the Federal Reserve (the Fed) has the tie-breaking vote. 

FOMC Procedures

The current Chair of the Federal Reserve of the United States is Jerome Powell, who spent most of his time in the Banking Industry. Due to his banking background, he differs from the previous scholars and economists who used to perform this function in the past. The current Chair’s aforementioned experiences make him appear to truly understand more about banks than the previously chosen individuals, who are appointed every four-six years. 

Every other meeting involves the Chair holding a press conference, where he reads a prepared statement and conducts the Q&A session. In these meetings, the Chairs would typically share a lot of important information, which has historically been likely to usurp the market’s stability. The market would suddenly become quite volatile and traders would react to these events. The former Chair of the Federal Reserve of the United States, Alan Greenspan, was famous for the statement about the market he gave in the 90s that resulted in quite a turmoil. The market went down by 10% the same day only to go up and double after that, making the market even more unstable. These figures appear to exercise more control in their public statements nowadays, although these events have been said to still have an effect on traders and the market.

Key US Reports

The key documents providing the greatest insight into the state of the USD and related matters include the following five reports: GDP, employment, producer and consumer price index, retail sales, and trade deficit reports. 

The GDP or the Gross Domestic Product report provides information on this important economic indicator that signals the condition of the overall economy of the United States. Providing insight into the country’s productivity, the quarterly report is said to have a particular impact on traders and their decision-making. The United States, in fact, issues three such GDP reports: the initial report that comes out approximately three weeks upon the end of the quarter (e.g. if the quarter ends toward the second part of the month, the initial report will probably come out around the 20th of the following month); the second report issued a month later that will contain some actual numbers based on the revision of the previous data; and, the final number that comes out three months upon the quarter ending. Among the three, the least attention will be directed towards the final reports, which appear to only hold relevance for the record books, whereas the first one will generate the most interest. As the initial report of the quarter, it gives important clues to traders, which is why, for example, every January 20, April 20, July 20, etc. will be important dates that should be part of the traders’ calendars. 

Non-farm Payroll measures employment or the number of people employed in the previous month and many traders rely on this information due to its relevance. The report typically comes out the first Friday each month and entails an extremely important indicator of consumer spending. Should the Friday fall on the first of the month, the issuance will be postponed to the following Friday of the month. When the results exceed expectations or predictions, they are considered to be positive (bullish) for the USD, while the opposite scenario is considered as negative (bearish) for the currency in question. Some currency traders claim that the Non-farm Payroll report is one of the best reports to trade.

The monthly producer and consumer price index (PPI and CPI) are important indicators measuring the economy’s performance. PPI is an important piece of data that signals future expected inflation, any positive change in this index entails the rise of prices as well as the possibility to save money and earn interest. The PPI is said to have little effect on the USD per se, but its correlation with the CPI is found to be extremely important by some astute forex traders. The CPI, unlike the PPI, provides insight into current growth and inflation levels. What traders can generate from this information is an understanding of the impact of inflation on the USD. For example, the first half of 2018 recorded a rise in inflation which correlated with the increase in the US Dollar Index (DXY).

The retail sales report notes the changes in sales as an important indicator of consumer spending, which is said to account for approximately 70% of economic growth in general. Traders keen on trading the news find this information important, especially in the light of the recent pandemic. Similar to the Non-farm Payroll report, a positive retail sales reading generally proves to be bullish for the USD, whereas a low reading is seen as bearish.

The trade deficit, the last report, is considered important due to the fact that during such deficits, the USD is generally noted to weaken. As currencies are susceptible to change because of a number of factors (e.g. economic growth, interest rates, inflation, and government policies), trade deficit should be perceived as one of the determinants. Generally, the trade deficit is considered to have a negative impact on the USD although the currency’s appreciation could stem from other reasons.

Major Currency Pairs

The following seven currency pairs are said to have the greatest volume: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. The EUR/USD pair is said to hold 37% of all trading volume in the world. While this number can oscillate up and down, this currency pair is in fact the most liquid pair among the seven major ones and is generally considered one of the safer pairs to trade. Traders who are invested in trading big news events are the ones that should be particularly drawn towards the most liquid currency pairs since these entail tighter spreads and less slippage. What is more, traders interested in trading the Non-farm Payrolls report are advised to give this currency pair a try because, while it cannot grant 100% success, it does alleviate some of the challenges concerning trading currencies. 

With a total of 10% of the entire trading volume, USD/JPY accompanies the previously discussed currency pair to hold almost half of the world’s trading, making these two a focus of many traders’ attention. As the USD is the most popular currency in the world, every trade involving this currency should entail great trading volume even with pairs such as NZD/USD.

USD/Gold Correlation

The negative correlation between the USD and gold is considered as one of the most important topics regarding this currency. These correlations can at times increase or decrease in strength, but from the perspective of history, the USD has an 80% negative correlation with the price of gold. This further implies that once the price of the USD appreciates, the gold’s price should plummet, and vice versa, which can be seen from the chart below (spot gold is red while DXY is blue). Although at one point both prices started moving in the same direction, these occurrences are very short-lived because the standard negative USD-gold correlation is of a long-term nature and eventually everything goes back to its place. The strongest correlation, and the most prominent one, is the one that the USD has with the price of gold. It is an indicator that as soon as the price of one goes up, the price of the other will start moving in the opposite direction. Naturally, traders can find exceptions and this cannot be perceived as a guarantee, but this correlation has been present for many years.

Trading USD

As one of the most liquid currencies worldwide, the USD allows for traders peace of mind when trading the related currency pairs. The only exception to this rule is when trading big news events or if traders are expecting some important move in the market. The USD is generally perceived as the safest currency to trend with the tightest spreads and the least amount of slippage, although some traders avoid it due to the big banks’ attention, involvement, and impact on this currency and, hence, traders.

Upon the economic crisis of 2008, the FOMC was the first central bank to raise interest rates, and years passed until others started to do the same. The USD is certainly not the currency with the highest interest rates in the world at the moment, but we have witnessed how they kept soaring at a dramatic pace at a few points in the past. The reason why this happens lies in the central bankers’ desire to keep inflation under control. Therefore, whenever the economy is improving, the interest rates are increasing.

The currency market implies the flight to safety on one hand and the flight to risk on the other, which is why we have money flowing either in or out of the country. Therefore we can conclude that the reason behind the FOMC’s aggressive rise in interest rates is the strength of the US economy. As it is the largest economy in the world, it does impact the rest of the world. Hence, when the US economy is doing well, so are the other countries.

Whenever money is on the lookout for investment, it will direct itself towards risk, which entails locations such as China, Vietnam, and South America, heading towards the places where the greatest return on money can be found. The FOMC kept increasing the interest rates, but this did not always entail a strong US dollar since the rest of the world was in fact doing better at the time. Inflation was kept under control since 2008 and the world seemed stable until the onset of the COVID-19 pandemic.

An important fact regarding the USD concerns trade deficits owing to the fact that the United States imports increasingly more than it exports, in particular with countries such as China and Japan. These trade deficits are a long-term negative for the currency because the individuals living in the United States and buying foreign goods keep seeding the money out of the country, and it is these other countries where this money is reinvested. The opposite scenario, where the United States could do more exports and the money would come into the country, as a result, would create a trade surplus. The country’s age-old tendency has been one of the popular topics highlighted by US politicians as a long-term negative on the currency.

Economic activities always affect the USD price, so if the United States is undergoing a challenging period unlike other countries, the US economy can be expected to keep struggling. On the contrary, should the rest of the world be experiencing economic struggles, the US economy would probably be doing well. Nevertheless, in order to trade the USD successfully, traders are always advised to do extensive research and monitor the external factors surrounding the currency market. 

Impact of COVID-19

The pandemic has taken the entire world by surprise, also shaking the United States economy, leaving 22 million Americans unemployed. The worldwide economic shock has revealed a silver lining for the USD as it has led to a number of investors selling riskier assets (e.g. stocks and bonds) and taking cash as a form of safety. The currencies which were highly exposed to global trade suffered depreciation as they typically sell-off in the face of economic deterioration, but the US dollar again emerged as the currency of choice in times of crisis. As investors always flee to safe-haven currencies in such unpredictable times and as the COVID-19 pandemic is driving the global economy into recession, the demand for the USD rose to the extent that the US Federal Reserve has to set up new swap lines in order to be able to lend money to the central banks of other currencies. The USD is currently seen as the strongest currency probably due to the country’s stable and safe economy. However, such strong demand can even exacerbate the current situation which pushed the Federal Reserve to protect the currency from shortages. 

Although the USD did not appreciate more than in 2007, the currency’s index value did approach near record highs. So far, the USD has slightly leveled, still maintaining an edge similar to many major currencies (e.g. EUR or JPY). Nonetheless, the current preference of the USD and its strength seem to be calling for an increase in international collaboration. Now, as the Federal Reserve is yet again pumping the currency into the world market, the trend may have serious implications for other economies. For example, after the 2008 crisis, the cost of export created by a soaring JPY left Japan worse off than some countries directly affected by the financial tumult, starting with the United States itself.

Business owners across the world understand that should the pandemic continue, they will require significant capital reserves to withstand the blows of the economic contraction. The spread of the virus certainly motivated some large currency moves as well and, although similar tendencies have been recorded in the past, the pandemic does make this situation one of a kind. The quick-paced forex dynamics and capital outflows from emerging markets appear to be much more prominent.

The state of equities at the moment is certainly interesting as we can see from the chart below. The same contrasting behavior between DXY and SPX500 was noticeable before as well as during the financial crash of 2007. March was another time in history when a significant drop in equities was quite prominent only to go up recently.

Interest rates in the United States of America have leveled after the brief increase in the past year and as of March equal 0.25%, unlike the values proposed by some other central banks of the world. The current interest rate is practically the same as it was in the post-crisis period of 2008, where it maintained the same 0.25% until the beginning of 2015. Interest rates across the world mimic the same decline as that of the FOMC. However, some other central banks, e.g. the Central Bank of the Russian Federation (CBR) and People’s Bank of China (PBOC) keep their interest rates above 4%.

China’s and Russia’s attitude towards the USD has kept economy-related media and various markets’ participants quite entertained in the past few years, especially in relation to gold and surrounding events. The so-called de-dollarization appears to be backed up by previous political altercations between China and Russia on one hand and the United States on the other. These long-term geopolitical rivals were found in the middle of a currency war where the two countries appear to be fighting against the global hegemony of the USD. 

Despite countries leaving the gold rule, this pre-pandemic gold spree appeared strange in this digital era. However, the central bank of Russia suspended buying of gold on the domestic market which has been explained by the attempt to strengthen the local currency aligning with lower oil prices and the spread of COVID-19. Quite interestingly, Russia is claimed to have exported more gold than gas in the second quarter of the current year for the first time in approximately the past 30 years. Analysts explain the entire situation as a mechanism that stops Russia’s purchases of foreign currency and gold when the prices of oil fall below $42 a barrel. With gold prices reaching all-time highs beginning of August 2020, many major Chinese banks have already taken measures to stop customers from purchasing gold and other precious metal-related products through them.

Gold prices have gone up and down in the past, so the increase from the beginning of 2020 can be attributed to the onset of the COVID-19 pandemic as well as part of its natural longer upward trend. The current price exceeds that of the financial crisis of 2007 by far and the precious metals appear to be moving even higher, supporting the expectations of the US inflation increase. 

The FOMC maintains a positive outlook on the future, assessing the May employment rise in a number of sectors, employees’ return to work, and the reopening of many businesses. Some analysts even look back at the times of the previous financial crisis where many feared inflation, highlighting the importance of preserving a more enthusiastic perspective of the future of the USD and the US market.

The USD has once again been proved to be the reserve currency of most countries across the world with more than $1.8 trillion of Federal Reserve notes in circulation. This de facto global currency appears to be positioned well for future trades despite the severity of the global viral threat. The United States’ official currency is currently largely outside the country’s borders, yet it may be difficult to foresee any other currency taking over the USD prominence in the near future.

Categories
Forex Basics

Forex Books Recommended by Professional Swing Traders

Everyone who ever desired to become successful trading in the forex market understood how relevant getting proper education is. At times, we may watch videos or listen to podcasts, while some other times we might prefer blog posts or switch to some other media outlet. What we all understand is that forms of education are numerous and that in this day and age we can enjoy the luxury of being able to find the material that suits our needs, preferences, and most importantly our personality.

The choice of books can possibly best reflect these fine differences that exist among forex traders since everyone will eventually have their personal favorite according to the degree of the storyline or the message resonates with their own intentions, experiences, and goals. Many traders put extra effort into consuming as many facts as possible, which is understandably one way to go if you want to succeed. However, if you were to recommend a book to a complete newbie, which one would it be? Also, what would you base that choice on – technical aspect, indicators, success stories, or something entirely different? Today, we are diving into the pool of forex books in an attempt to offer a different perspective as opposed to what we commonly come across in terms of education in the general forex community.

One of the first factors we need to include in the book selection process is the existence of a wide variety of trading styles. Some may be more popular, whereas some others might not be as widely advertised thus creating a minority in the forex market. If you happen to feel passionate about support and resistance lines, price action, supply and demand, or fundamental analysis, among others, then the first book we are offering as a suggestion today is possibly the best material you can find on this approach to trading. The book’s author, Greg Michalowski, defines what makes a successful trader, defining some vital steps everyone should take to become a professional in detail. You may learn about the best techniques to enter and stay in trends as well as the manner in which you can manage your position or exit any trade.

This book is the most suitable choice for individuals who are keen on trying out different time frames, as the writer claims to use even the five-minute chart. One of the most unusual strategies he recommends is to move from the five-minute chart to the hour chart only to switch to the daily chart afterward. This, however, is not always possible from all locations because in some areas, such as Vegas, for example, it would require traders to stay awake from midnight until 10 a.m. Again, if you are keen on trying out this method and if you accept to include resistance lines, moving averages, and smaller time frames in your trading, this may be an interesting experience. 

The book above is, unfortunately (or fortunately), not a good fit for those who prefer a less popular approach to trading, avoiding the majority-like decision-making and the big banks. Due to the existence of so many high-quality forex-related materials online and the general lack of materials on psychology and mindset, the following recommendation of topics will chiefly boil down to the latter. Having a trading mindset and the right attitude can profoundly alter a trader’s experience. The right book choice can move a person from suffering from a scarcity mindset to seeing abundance in every step in and out of trading experiences. Everyone is different in so many ways – from trading to living, but we can all find some common grounds where the search for materials that can help us grow and further explore our options come in place. Many people are happy with what they have got at the moment, but nobody can tell you that you cannot do better.

Books can be such eye-openers even, or especially when, they do not concern some of the most discussed topics. The problem is that many traders, and particularly those who failed countless times, assume that technical knowledge or facts about strategies and methods of trading are the only items of knowledge that one needs to possess. Such an assumption is, however, entirely faulty, as trading, especially in this market, is a very unique package that, in addition to forex-specific technical knowledge, needs to consist of money management skills and trading psychology as well. Some experts even claim to owe their levels of success to the right choice of mindset books, which is why you can at least try reading one of the books below and see the impact it may have on your personal and professional lives.

Dubbed the predecessor of all motivational books, this 1937 masterpiece is the place to start growing your mindset. Naturally, all forex traders dream of becoming wealthy, affluent individuals, who wish to stop spending long hours working behind the desk. Luckily, the book is focusing on an extensive study of people who have accumulated a lot of wealth, based on which it provides a list of key principles to live by. If you are a career-driven professional and you feel passionate about expanding your opportunities, Think and Grow rich may just open a new window in your mind. Media all around the world praises the book to the extent that it even provided scientific evidence of how some of the suggestions from the book can truly and tangibly alter your everyday life.

As a uniquely philosophical, verging on the spiritual piece, you may find it to be a light material even if you have previously never had experiences with mindset work. If you are willing to test this book out, make sure that you apply the advice consistently as some of these pieces of advice are timeless but they do require some effort on your behalf. Even if you are not really interested in psychology, you may still want to give this road a try, at least just to be sure that this is not something you truly want to be doing in your life. Even though it is an entry-level read, you will find that Think and Grow Rich can proudly enjoy its nickname.

This is such a profoundly unique piece that many different people of various backgrounds still praise it. Written in the 90s, the book was such a revelation and is still one of the most captivating reads you will ever get to experience. Some traders vigorously claim that their entire lives completely changed purely after reading Rich Dad, Poor Dad as it covers topics very few people can see at this depth and level of understanding. The book discusses a road less traveled, or a path that we are typically not taught in our households or school systems, and helps its readers to see live from an entirely different standpoint.

The mindset Robert Kiyosaki describes is exactly what a forex trader should aim to incorporate in his/her trading toolbox. If you are a beginner or an experienced trader, this book can help you feel like the potential to be the most successful trader in the world. After finishing the book, many people started seeing the world in a different light because they finally found a way to get rid of the weight of constant self-doubt and anxiety, which traders are quite prone to. Naturally, we do not always need the same advice or strategies, but you owe it to yourself to at least read the book and see whether and to what degree it affects you. Unlike anything you have ever read before, Rich Dad, Poor Dad will surely leave a mark in your lives and your trading as a result.

A natural successor of Rich Dad, Poor Dad, this book is a logical continuation for anyone who has given work hours and schedules a thought. If you are keen on changing your daily routine and ready to take on new challenges, be prepared to be astounded by some amazing facts. While the title of this piece may invoke feelings of disbelief or doubt, it does not fall short of its name. You can learn from the author’s personal experience of growing his finances from $40,000 per year and 80 hours per week to $40,000 per month and 4 hours per week. This approach is particularly important for forex traders since we, as people, tend to try to copy the same type of mindset (e.g., belief that you need to work hard to earn more money) onto trading currencies, which need not be the case.

Moreover, if you are trading long hours and cannot seem to see any difference from the previous 40+-hour week, this book will provide invaluable advice in the form of creative solutions that you can start applying today. The book’s review points to its excellent use even in times of an unpredictable economy, which is another reason why forex traders should consider this book as a creative and practical assistant. Last, as you can find some prominent forex traders who feel passionate about this book because of the changes they witnessed upon reading it, the time you will put into reading this should be viewed as a smart investment.

Another more recent mindset masterpiece, Choose Yourself, combines the lessons you could learn from the previous two books we mentioned above. The book is often described as a source of refreshment and motivation, which everyone in this market needs – be it at the beginning of a forex trading career, after a major loss, or upon spending many years trading the same way. The book is particularly good in describing how in this world full of changes the only thing we can control is ourselves. The economies, retirement plans, governments, and even our age can change, but it is the perspective we adopt that will determine the quality of experience we get to have.

Are we putting available tools to good use in the times we live in? Are we exploring any creative solutions to alter reality and generate more happiness and health? Is our internal world in accordance with the external one? Are we getting the financial rewards we believe are rightfully ours? These and many other questions are discussed in detail in Choose Yourself along with numerous practical advice which stems from a plethora of real-life case studies and interviews. If you want to learn how to let go and properly enjoy your life, James Altucher has the remedy you need.

As the name suggests, Jocko Willink’s book discusses the topics of discipline and preparedness to be patient. The author’s immeasurable quality and variety of experience have been cleverly focused in such a way that you will never feel like you are reading a mindset book alone. If you are the type of person who is not a big fan of so-called self-help books, this one will teach you something you may not learn anywhere else. We can at last read about how a well-organized and orderly style of living can bring about the positive changes we aspire to see. No longer are people told to only visualize positive outcomes or a windfall of money because now we have a clear and straightforward instruction based on what constitutes a successful person. Human beings are heavily prone to procrastination, fear, and weakness regardless of their chosen profession.

Forex traders have had the opportunity to witness the same in their lives as well. Nonetheless, the same vortexes of turning off the alarm (whether figuratively or literally) can now stop with the help of this down-to-the-point yet light read. Traders do need to adopt some healthy everyday habits and routines because it will not only help them manage their trades more peacefully and successfully but will also improve their ability to discern when they are acting upon their impulses and weaknesses instead of using skills and tools. Furthermore, if you are someone who is currently working two jobs, with forex trading being your second endeavor, this book will teach you how to achieve the level of organization that such lifestyle and level of responsibility required.

The concept of stoicism implies the endurance of any hardship and acceptance that both good and bad with all the in-between shades that exist in this world. This Greek school of thought originates from the third century BC and the book cleverly and practically covers the thought patterns that many great minds have incorporated in their daily lives to this day. Traders are often compelled to do exactly what the majority does, without feeling the right to make any changes due to the fear of being different and experiencing losses as a consequence. This book, however, will show you how it is not what is happening on the outside that you should be worried about, but your own reflection of it. This crucial idea is key for surviving and being on top of situations, such as negative news or other external events that traders inevitably face quite a few times in their careers.

In addition, through this read, Ryan Holiday will teach us to look within and discover what motivates us to take a certain action. If you are ready to really let go of some unhealthy patterns that you have been clinging to, this book will shake you to the core not leaving any stone unturned. Traders in the spot forex market can finally enjoy a book that can teach them about principles of motivation, shed light on some personality traits they may not be aware of, and, most importantly, provide a long-term strategy that will prevent compulsive reactions which are both reckless and dangerous for this type of business. Last but not least, if you decide to go on this 365-day-long journey, you will learn how to stop being concerned with the things you cannot control (e.g. elections, news, big banks, etc.) which is one of the most important lessons a forex trader should constantly bear in mind. 

One of the richest men on this planet wrote a book about the importance of understanding the relationship between cause and effect in analyzing some existing patterns in life. The book so skillfully elaborates on the topic of life principles, covering many different points that traders may at times disregard as irrelevant. Concepts such as humility and open-mindedness are dexterously combined with practical tips on how to reach the level of success you desire. Traders who mostly sit at their computers may find some ingenious lessons on people in this book as it points to the belief that all industries inevitably fall on individuals. Although the forex market appears to be made of people making individual decisions, the chart often shows how the majority acts in the same way with everyone losing their money at the same time.

The book can also help you give meaning to your every day steps and discover a new sense of peace upon making a mistake. Through this unbelievably human and humane rhetoric, Ray Dalio can inspire traders to maintain control over the progress while constantly investing in growth. Principles will easily motivate you to think of the ways in which you can adapt to some circumstances or changes. What is more, if you are an experienced trader, this book will effortlessly encourage you to keep searching for ways to improve your trading. This is another important lesson for beginners who have yet to learn how forex is an ever-changing market that requires the preparedness to keep exploring both as a routine and as a way to salvage your account. Open yourself to the potential of learning from this successful individual who managed to evolve from an everyday medium-class family to a wealth exceeding 150 billion USD and enjoy the changes you experience in your trading as a result.

As we could see from the selection above, many self-made people do not fear delving into the depths of their personalities because they understand that technical and theoretical knowledge can get them only that far. Numerous excellent books can provide these other types of information, and if you feel inclined, do take time to do additional research on the aspects of trading you personally feel passionate about. Today’s choice of materials was inspired by a story of a trader who decided to leave his well-paid job and a 70-hour week upon reading one of the books we discussed today. This individual never looked back, and as Greg Michalowski shared in one of his interviews, neither should you. The choice and the determination to trade in this market do not shield you from making (many) losses, but your attitude and your readiness to keep fighting will help you wait for the success that will result from learning.

If you are in the middle of the process of completely tuning to forex trading, rest assured that the patience of postponing your vacation times, car purchases, and other enjoyable activities other people are having at the moment to a later time will double your chances to succeed and grow your finances. The lessons that come from withstanding hardship and investing in psychology will get you to the point where you wake up feeling elevated and ready to take on the world all on your own. You will feel confident and at peace with your decisions and your daily life and proper education can only make this path quicker.

Many of the books we discussed today are seen as the reason behind some traders’ success. The knowledge and wisdom contained in these pieces are the very constituent parts of these professionals’ approaches to trading. Whatever you resonate with and incorporate in your trading, whether it is a tool or some belief, will have an impact on your trading. The more you allow yourself to accumulate, the greater your vision will be. With a comprehensive and deep overview of oneself and the market, any trader can enjoy the perks that come from trading currencies. While many materials share the same pieces of information and go into too much detail, it is your task to cover as many sources as possible and continuously employ your critical thinking and analytical skills.

Even though you will often come across some overused words and phrases, try to not limit yourself to only what is popular. In addition, you may find that even though some people do not support your choice of literature, they can still share the same values and viewpoints concerning life and work. Having written that, we do insist that learning can come in many shapes and forms. An individual who is more of an audio learning type may prefer podcasts and videos, while someone else might choose written content over anything else. Some of the main hubs for learning about the forex market nowadays are YouTube and Twitter although many websites offer coaching materials as well. Whichever path you choose, aspire to grow as an independent trader capable of making impartial decisions. Whether you choose to read books only or you make a selection of various materials and advice, this choice will reflect on your career, as it will mold you into a forex trader. The knowledge you accumulate will always interact with your personality, and together they will make your personal system or approach to trading.

If you desire to be successful, go deep in exploration of what this word means to you and how you can make daily changes to get to that place. The work you put in education and mindset will always reflect you alone and besides being an inherent task attached to one’s desire to become a forex trader, it is also an art of choosing the right puzzle pieces to create a final masterpiece. 

Categories
Forex Basics

Five Questions Answered by Forex Mentors

Some statistics suggest that 90% of beginners lose the same percentage of their trading capital in the first 90 days of trading. As it appears, the odds of someone failing right from the start are staggeringly high, which is why a number of newbies decide to enter coaching programs. With a massive quantity of available information and websites where they rate various mentors, we cannot but wonder if this is the path we should be taking ourselves.

To answer this question in the most objective and straightforward manner, we have collected extensive data on mentors in the spot forex market and analyzed individual motivation behind a decision to start working with one. We know by now how forex trading neither requires any formal degree or certification nor it is a determinant of a trader’s success, so we naturally want to know why traders seek this form of certification. We also know how traders nowadays have such an incredible amount of data at their disposal – be it in the form of videos, blogs, books, and seminars, among others, and we would like to understand what pushes them towards individualized one-on-one coaching.

Moreover, what place does a trading mentor essentially hold, and how significant and determining is it for traders to immerse themselves in such programs? Before we give our final verdict on whether a mentor is a necessity for a forex trader to be good at trading currencies, we need to clearly and impartially group all relevant facts under common threads.

What is a Forex Trading Mentor?

Owing to the expansion of the media and technical support, we can naturally take on many different paths to learning, and finding a forex mentor you can look up to is certainly one way to do it. In the era of coaching programs, many assume that a mentor needs to be an individual who will be there to constantly give you tips and hints so that you could know what to do next. A mentor, however, can be a person who will serve as a guide or a source of information both as part of a specific program or a persona present in some social media outlet sharing his/her experience. The term mentor is, therefore, not completely (or always) equivalent to the word coach because the former entails a professional who provides guidance and advice in general, whereas the latter more often than not signifies some form of a program (either 1:1 or group work).

While mentors can offer coaching to traders, they need not offer structured programs per se, since the whole idea behind their work is knowledge sharing. The vehicles of this information transfer can be different, as some professionals share their expertise through videos or podcasts, while others prefer some other, written forms of communication. The materials young traders are then exposed to can diverge significantly as can different people’s approaches to trading. Forex mentors who sell various coaching programs may decide what the best learning method for a particular trader is or suggest additional learning materials.

On the other hand, mentors you see as your guide or a person you look up to will be sharing the content they feel is the most relevant as they please, without necessarily accommodating to the viewers’ preferences or needs. Personal preferences may also differ fundamentally, but mentors should essentially serve to save you time and prevent you from making some common mistakes and lose money as a result. You should expect your mentor to have experience in trading currencies and provide information on skills and tricks to become a successful trader.

What is more, a good mentor is always someone who shares their experience without holding back information that would help you grow. Your mentor should be someone who will want you to test and assess all facts they share with you, as assistance should be given without the expectation to stop searching. On the contrary, your coach should encourage you to keep exploring the market and assessing the tools you have been taught about. While some of the best and most prosperous forex traders do accredit their success to their mentors, you really need to see the difference between coaching as a program and a mentor as a guide or a role model. 

What Should a Forex Mentor Have to Offer?

Firstly, your mentor should be a person who will be happy sharing their knowledge and seeing you succeed. This individual must have relevant experience to base their judgment on or draw upon when giving advice and knowledge you require to achieve your goals. Many traders are people who are accustomed to formal education, as they come from backgrounds where academic certification is considered to be a requirement. Forex trading, however, is based on different principles, so you should rather look for other proofs of these professionals’ success, such as whether they have been hired or offered a job by a prop firm for example. Many traders nowadays did not have the luxury of relying on other people’s advice when they first started in this market, so they did not have the opportunity to read or watch any content that would help them evade or tackle some common forex challenges.

Your coach should be the type of trader who experiences the ups as well as the downs of trading in this market and a person who can justify why a certain approach is simply not going to work. A Forex trading mentor should possess the necessary know-how to effectively trade the market, based on which he/she can suggest how you can improve your trading performance. Whether your meaning of the word mentor implies paid or free content on one hand or structured programs or randomly following some professional’s content on the other, your mentor must have a structured system they follow in trading.

Such a system should be based on tools, skills, information, and mindset that together form a specific approach to trading. Sometimes we will be able to learn about excellent indicators from one person, while someone else will teach us about specific psychological skills traders need to adapt to become successful. We cannot expect one person to know everything, although there are a number of professional traders whose algorithms and trading styles reflect their comprehensive knowledge of the forex market. Do not fear looking for additional information elsewhere because it is your money that you will be investing and you have all the right to seek clarification.

While forex experts do commonly share the challenges they have faced in the past, the explanation or the content need not always coincide with your current needs. Moreover, a mentor should always explain for whom their content is meant as beginners may not naturally know as much as some more experienced traders. Always look for practical and applicable information that you can immediately apply to your trading. What is more, be mindful of the content which has been copied and shared as a mantra because retail traders for example, whose success rate is quite low, always rely on some popular information that is shared in the community.

Look for original and specific rather than popular and well-advertised. Search for testimonials to discover what traders who follow the individuals in question say about their individual growth, as good mentors will always have the support of the followers. You can also look for some Q&A sessions where different professionals discuss their approaches to dealing with some problematic areas. Whomever you choose to be your mentor, always do thorough analyses beforehand, invest in learning as much as you can about the person’s capabilities, and, most importantly, test everything you learn.

Should Traders Pay?

The topic of money is always a sensitive one especially because we know that experts devote a great amount of time to learn what they willfully share with others. Sometimes you can discover a book praised by many traders, which you will either order online or buy from the nearest bookshop. Other times, you will look up a company’s website to search for forex training courses you may find suitable. Aside from these paid materials, you can find some invaluable advice on YouTube or Twitter, which are common free online learning hubs. Regardless of the form or the medium, all these sources have one goal in common – to teach you how to do profitable trading.

We know how these items of knowledge and information you need will be the basis of your future success, so the decision of whether you should pay or not should be based solely on the practicality and applicability of the provided content. Some of the best professional traders have decided against charging for their content, whereas others of equal understanding and skills ask for donations or specific fees. There is so much free information available nowadays that you should again be looking for traders who are committed to one specific style of coaching and who are ready to point you in the right direction. Whether this is paid or not does not necessarily talk about the material’s quality as it does talk about individual preferences and choices.

If you pay, you may expect to learn about the entire system these mentors use in their trading, while some professional traders on YouTube, for example, would rather have you follow hints to be able to grow more profoundly and independently. Whatever you choose to do, remember that time is money and that your mentor is there to make this road easier for you, without needing to waste time and wander in the market not knowing what to do. Be mindful of possible scams and instant gratification that many false experts like to use to get to beginners hoping to quickly become successful. No one can teach you to become successful in a matter of weeks as learning how to be a good trader can take a few months, if not years.  

What If A Specific Approach Is Not Working for You?

An experienced forex trader should know what information to share so that beginners would know what to do next. Nonetheless, sometimes after spending time and effort into understanding what someone is saying, we still find that such an approach is not doing us any good. Therefore, we wonder if it is us who should be worried or can we blame it on the mentors. Even some professional traders who are known for their videos, podcasts, and blogs explain how they only developed their approach after they had realized that they could not be successful following someone else’s system. Some systems suggest that you should be awake all night, waiting for some important news event, only to go to bed not knowing if the move you took is the right one.

Others will tell you to stop relying on the community as much and be as independent as possible. Naturally, there are as many approaches as there are traders, but if you find that whatever system you were taught is not working, move on. Whether you initially paid for it or not, your individual personality and skills may require a different approach, so do not limit yourself or torture yourself with something that is not working. Trading is a skill, just like any other, but this market is extremely specific in comparison to other markets, which is why the information you receive from a stock trader will rarely work in reality.

Some traders like to trade lower time frames for example, while others insist that it is a waste of time providing facts to back this opinion. If you see that some approach is not working for someone else, research this phenomenon and the reasons why you should decide to follow some other approach. If you made a mistake while trading when you applied the advice you received from your mentor, go to the comments section or ask them directly why that happened. Sometimes traders overlook some minor move they made that put the whole trade at risk, so sharing and looking for similar experiences may help you a lot. If you have done all of this and still feel that a specific system is not leading you to the results you are meant to have, it is time to find another mentor and approach.

Should Traders Consider 1:1 Coaching?

Traders’ individual needs, abilities, and preferences may differ, but is there a uniform approach that all forex enthusiasts should take into consideration? When we think of some professional traders’ statements, we cannot but think of the concept of time. Some of the experts who refuse to provide this form of one-on-one coaching state how one of the main goals for growing as a trader in this market was to have more time. While they willingly provide lessons in the form of videos, podcasts, and social media/website posts, they still refrain from committing to coaching sessions of this type.

The reasons behind this decision are two-fold: on one hand, they primarily do not wish to engage in activities that would limit the amount of their free time; on the other hand, however, they fervently believe that mentorship involving such intense collaboration between the educator and the learner may do more damage than good. Education can come in many forms, but we need to ask ourselves what we are looking for. Are we in need of knowledge or a clutch? Many beginners assume that they would cut the time needed to absorb all important pieces of information by taking 1:1 classes. However, with the ability to explore various educational resources that the most experienced individuals in the spot forex market provide (often for free), this requirement would reflect the desire to enjoy special treatment. Such a desire need not necessarily be defined as bad, but it could potentially endanger your future trading.

If you do not equip yourself with skills and knowledge that are supported by critical thinking, you may have difficulty managing your trade at some important points in the future. Once your external support is gone, what do you envision your trading will be like? Some sources go as far as to say that a mentor should be a companion, which shifts the focal point from independence to a friend-like form of support. While some assistance and knowledge sharing can be positive, traders must think about mental skills and psychology as inseparable and indispensable parts of trading. Unless you incorporate self-sufficiency and analytical thinking, you will discover how sooner or later any other mindset proves to be insufficient.

If you invest in growing as an independent trader who has mastered the skill of impartial decision-making, you will be creating a solid long-term foundation that will serve you regardless of news or any other external factors. Education is truly essential for anyone who aims to be a forex trader, but paying for someone to hold your hand at all times will inevitably make you heavily reliant on external support. Therefore, when assessing education opportunities, always analyze your intentions and aims because you may find yourself in dire straits once the helping hand goes away.

After all the advice and the questions, we really need to think deeply about all the professional traders who managed to find their way to becoming successful in the forex market. How did they get to this stage when they had very few resources to rely on? Most of them claim to have many countless mistakes that were not only grave in terms of numbers but in terms of the impact on their finances as well. Nonetheless, they still managed to learn from their mistakes and build on their critical thinking and money management skills along with growing their experience. Most of them now say how there is no single situation they cannot handle or understand in a short period of time, which they attribute to the steep learning curve that shaped their personalities and skills.

If traders fail to acknowledge the lessons that originate from their mistakes or fear making mistakes so they keep clinging on to coaching companions, they will hardly grow as an independent thinker who makes lucrative decisions. What you must never do, if you want to become a professional forex trader, is to say how learning takes too much work. It reveals that you are unprepared to devote whatever is needed to be good at this type of business and, to become good (and financially stable), the exact opposite is required. What you do want to do is maximize your chances of becoming successful. Learn how to say no and make hard decisions and forget about instant gratifications. Hard work will pay off after a while, but scarcity in terms of mindset will only block any attempt to develop. Your impatience can only make the matters worse than they are at this stage. Build your confidence through knowledge accumulation and remember that many forex traders across the globe can barely speak English, yet they still succeeded.

What is more, remember that you do not need to feel pressured to take everything from a single mentor. You can always combine several pieces of advice from different professionals that you can follow to develop your own approach to trading. Sometimes it will be of technical nature, and other times, more theoretical or factual, such as the lesson concerning the involvement of the big banks. Sometimes some coaches can tell you to read trading books, while other professional traders will insist that mindset books are a much better investment. There is no bad knowledge as long as it is applicable.

Let your mentors guide you, but never lose sight of your independence and freedom, as you will be fighting in the arena alone in the end. Finally, aim to establish your own system consisting of a tested algorithm, money management, and crucial thinking skills that will be the support who may be currently asking for on the outside. Go within and build that independence that will propel you right to the top. 

Categories
Forex Indicators

The Application of the Moving Average on Indicators

Traders worldwide have shown interest in the Moving Average Convergence/Divergence indicator that we all know as MACD. Praised as a two-line indicator that has generated quite a few pips to many content creators, MACD can certainly point us toward the direction of discovering other amazing tools that we can incorporate into our trading systems. Since traders are constantly in search of the best components to help build their own algorithms, they inevitably come across a number of low-performing indicators from which their trades can hardly benefit. As a result, these traders immediately cast off the tools that they believe cannot make it to their favorites’ list, which may not be the approach that you will always want to take. Today, we are going to see how adding a moving average on various MT4 indicators can not only improve a tool’s performance but also prove to be the right move towards lucrative trades. 

Many beginners fail to acknowledge the importance of adjusting settings and learning about the ways to make some changes to the existing indicators in order to gain more profit. While MACD indicators’ fame grew due to the diversity of its functions, few actually know how using the moving average on other indicators can truly generate new and unexpected possibilities in many cases. If you are keen on growing a unique system and testing different options, then the use of moving averages can really become one of your favored solutions down the line. By adding a moving average on some of the less efficient indicators, you can have an entirely different experience with tools that you once defined as utterly futile for trading. Naturally, in some cases this approach will not seem to be applicable or useful; however, by incorporating moving averages in your system, you are introducing an additional layer of protection, as all traders look forward to finding indicators to prevent them from making bad decisions while trading in the forex market.

Today’s selection of indicators is meant to serve as a lesson on how you can improve some of the tools which overall do not provide desired results, rather than tell you which tools you should use in your everyday trading. You can later go back to the indicators you saved on a flash after you had stopped using them, as we will show you how some of the indicators that are already built on MT4 miraculously change after the moving average has been added. You can also open the MT4 while you are reading this article and make the same adjustments as we do while you are reading. Be prepared to take notes on some specific settings as well as remember a few key pieces of advice you should follow when you are attempting to carry out this process yourself. 

Accumulation

Accumulation is one of the indicators that are generally considered as bad in the forex trading community, especially due to the fact that traders cannot make any adjustments that could improve its performance. As you can see from the first image below, Accumulation is essentially a one-line indicator, which barely appears to be able to give any relevant information. However, once we apply the moving average, although you cannot expect drastic changes, the overall performance of this tool immediately improves.

In order to make the most of this, you will need to follow a few rules. Firstly, you should not alter the moving average of oscillators, yet expand the Trend tab in your Navigator window inside Indicators. Once you find the moving average there, you will need to drag it down to the indicator window you wish to apply it on. Then, a new window will pop out where you will be able to make further adjustments. What we did is we left the period where it was (10) and changed the settings from Close to First Indicator’s Data. If you, however, decide to apply the changes at Close, you will not see the line in the same place as in the right picture above, it will simply be applied to the price chart. Therefore, the two essential steps to take are to drag the moving average down and apply it to First Indicator’s Data.

The results these steps can deliver are much better than what you can hope to achieve without. The moving average is mostly going to tell you where the trend is, and after we applied this to Accumulation, we discovered five to six entry signals just by glancing over the chart. A better indicator would naturally offer more quality entry signals and, consequently, serve you better. However, the idea behind this is to change a one-line indicator to a two-line-cross one, which is believed to be one of the best confirmation indicators you can use. Even though these changes prevented you from quite a few problematic points, Accumulation is still not recommended to be used for everyday trading purposes. Some professional traders even claim to have tested this tool and every possible variation only to discover that it is not a viable, long-term option for them.

i-BandsPrice

Similar to the Accumulation indicator, i-BandsPrice is also a single line that does not perform very well in general. You can change this tool into a zero-cross indicator by following the steps we previously described. Although it does not truly get to zero, you can still see some benefits from these changes. What you should first do is alter the period and see the results this solution provides. Naturally, you will not go after every opportunity in the chart because you will want to avoid reversal trading. Nonetheless, what you do gain from making these adjustments, in this case, is the ability to discover when you can enter a trade. As with any other zero-cross indicator, i-BandsPrice can now also tell you to start trading when the indicator crosses over the zero line towards the negative or the positive.

Rate of Change (ROC)

In order to see more benefits from using the Rate of Change indicator, we first moved the period to 70. Then we added the zero line because it will tell us to go long if the line crosses the zero upward and vice versa. However, to make the most of it, you will need to add the moving average and look for the places when the lines are already both below zero: when the indicator crosses down again, you will have the opportunity to enter a continuation trade, which some experts see as their most lucrative trades. As ROC is one of the lower options on the performance spectrum, you will not be able to get many good trades despite the changes. Nevertheless, you can alter the period, moving it from 8 to 10 as we did, and see how it begins to resemble the MACD indicator is thought to successfully provide the greatest number of signals to enter continuation trades. Therefore, if you happen to come across a zero-line-cross indicator that seems to have a lot of potential, you can actually grant yourself more lucrative opportunities just by adding the moving average.

Average Directional Movement Index (ADX)

ADX can serve as an example of how you can apply the moving average to a volume indicator. Whenever the line goes above, trend traders receive the signal that they have enough volume to enter the trade. Likewise, whenever the line plunges, it is a signal to stay out of the market. In the example below, we kept the period of 14 and added another line (like we did before) at level 25. ADX has proved to be performing better once the changes have been applied, although it has also proved to give a lot of false signals as well. Another reason why professional traders typically dislike this tool is that it often lags. However, despite the opportunity to test how this tool performs after adding the moving average, we still have some other better options we can use to trade in this market. 

Once you remove the additional line and add the moving average, you will naturally not bring about some unforeseen, alchemical-like change, but you will be able to improve almost any volume or volatility indicator. Drag the moving average down as you did before and change the option from Close to First Indicator’s Data (we kept the period at 10), and you will see how fruitful the results your volume/volatility indicator gives are. If you kept the line we had before, you would have potentially taken a great number of losses because ADX would need too much time to go below. This way, however, you are improving the overall condition because the moving average always adjusts to the volume indicator. Therefore, you could get a signal to take a break at some point in the chart and another one to resume after a while, which is by far better than what the original, unchanged version of this indicator can provide.

As a forex trader, you will naturally be experiencing passing moments of consolidation and stagnation after trading for a period of time. You will then want your indicator to let you know when and how to avoid these troublesome points in the chart. Since the moving average can limit the negative effect a poorly performing tool can have on your trade and expand its functions in terms of quality, you can immediately start testing the indicators you discovered before but for which you could not find the right use. Now the indicators which could not help you seem to have a newfound potential to help you trade more successfully. What is more, the moving average can be applied in such a vast number of cases that it immediately increases the opportunity to win. You only need to take time to test and find a way to use a specific indicator after the changes have been made. Some indicators can only be improved to a certain degree with the MA, yet some others can truly illustrate a distinct difference in your trading.

Many traders are having a hard time finding the right exit indicator, for example. However, an exit indicator that a professional trader would find to be really good is typically a two-line-cross indicator. Luckily, with the help of the moving average, any one-line oscillator can become a two-line-cross indicator and, therefore, also an exit indicator that you can discover to be a really good solution for you. Improvement sometimes implies tweaking the settings, whereas it may also entail adding the moving average so as to give the tools that have not worked well in the past the chance to make a positive difference. The moving average can be applied to almost anything, as we said before, so it does bring a new sense of hope to traders who have had difficulty finding the right elements to complete their technical toolbox. This knowledge simply opens up a number of tremendous possibilities, as a single oscillator changed to a two-line-cross indicator is the proof that tools that were not very useful can be adjusted so that traders can actually make use of them. Whatsmore, indicators with two lines have first and second indicator data. In this case, you can apply MAs to both and have a kind of momentum gauge in an already established trend, for example, on line cross.

Go to your list of indicators that you considered as poor samples and start testing this solution to find out just how much the moving average can improve your trading. At least then you will know that you can write off a tool for good without having to go through periods of hesitation or doubt. Luckily, sometimes the improvement comes just after adding this second line, so you will never again need to question a decision you made with regard to indicators. According to professional traders, some of their most lucrative deals stemmed from continuation trades which these changes made possible. Hence, just by making these adjustments, you can turn a below-average indicator is a tool that is similar to MACD and experience numerous benefits long term. There are many variations and improved versions of MACD, RSI, and others, with a different type of calculations. Playing with MAs on these tools is a definitive winning combo. All you have to do is try it out.

Categories
Beginners Forex Education Forex Assets

The Fundamentals of the Euro (EUR)

The euro (symbol: €/code: EUR) is said to be used by approximately 341 million individuals each day, thus making it the second most-used currency in the world. The currency’s name was formally adopted in 1995 in Madrid upon then President of the European Commission, Jacques Santer, receiving a letter by Belgian Esperantist Germain Pirlot offering the suggestion. Like other currencies, the EUR used to be a commodity currency before becoming a fiat currency in the 1900s.

The idea of creating the EUR commenced in 1992 when certain documents were signed to initiate the process. Years passed and in 1998 a number of countries officially decided to gather around the same currency and adopt the EUR. Before this happened, each European country used a different currency: Germany – German Mark, France – French Franc, Italy – Italian Lira, Span – Peso, etc. These old currency notes were after 1998 exchanged over the new currency we now know under the name euro. This change allowed for easier migrations, travels, and commerce within the continent where an hour or two can get you from one country to several others.

Having a central currency helped the member states overcome and bypass many of the barriers that had previously existed. The EUR unites 19 of the 27 European Union member states in a monetary union called the eurozone or euro area. Many countries in the European territory have decided against using the currency, such as the majority of the Scandinavian countries and the United Kingdom, among others. The following Euro area member countries use the EUR: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Some countries are part of the EU but have yet to meet certain conditions to be able to adopt the EUR: Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, and Sweden. The following European microstates also use this currency: the British Overseas Territory of Akrotiri and Dhekelia, Montenegro, and Kosovo. The EUR is used outside Europe as well, in special territories of EU members, further complemented by other currencies pegged to the EUR. Countries can join the euro area through fulfilling convergence criteria that are binding economic and legal conditions stipulated by the 1992 Maastricht Treaty. The European Commission and the European Central Bank together decide on a country’s candidacy preparedness to adopt the EUR.

After the publishing of the reports stating their joint conclusion, the ECOFIN Council can rectify this decision upon consulting with the European Parliament and Heads of State, formally allowing the adoption process to start. A country’s readiness for euro adoption, the preparedness for the eurozone accession, or the member status may still not grant the full benefits of being a part of such monetary union due to the existence of certain individual financial irresponsibility which causes other countries to suffer. History has shown us how the more responsible member states had to step in in order to help the other struggling countries, and the period between 2008 and 2010 truly pointed to some concern whether the EUR could endure any longer. Greece, Spain, Ireland, and Italy, for example, were debated upon with regards to the question of keeping the membership status or discontinuing the use of the EUR.

Cyprus is another example of a country that would have collapsed a long time ago were it not for the European Central Bank’s approval of emergency funding. The future still has several questions to find answers to – can so many countries with different cultures, ethics, history, economies, and overall individual differences maintain this union, and can the currency survive the continual struggles it undergoes? While the future alone holds these answers, the idea behind so many countries united under the same currency still prevails even in the EUR banknotes ranging in denomination from €5 to €500. The seven colorful bills, Austrian artist Robert Kalina’s work of art, do not display famous national figures but feature Europe’s map, the EU’s flag, and arches, bridges, gateways, and windows, symbolizing the unity of Europe.

European Central Bank (ECB)

European Central Bank (ECB) is one of the seven institutions of the European Union and the governing body responsible for the 19 EU countries which have adopted the EUR. Headquartered in Frankfurt, Germany, the ECB employs more than 3,500 individuals coming from different parts of Europe and collaborates with the national central banks within the euro area (Eurosystem). Unlike the government of the United States, which in contrast only needs to consider its personal interests, the ECB must create monetary policies in a way that would best benefit all countries connected by the EUR. Although directly governed by European law, this institution resembles a corporation due to its structure of three decision-making bodies: the Governing Council, the Executive Board, and the General Counsel.

The ECB is a single-mandate institution tasked with setting the interest rates for the eurozone, managing the eurozone’s foreign currency reserves, ensuring the supervision of financial markets and institutions and the functioning of the payment system, authorizing eurozone countries’ production of the EUR banknotes, monitoring price trends, and most importantly assessing price stability (inflation). Unlike other central banks, the ECB is not responsible for promoting employment or growth; however, this approach appears to be slowly changing, realizing the need to foster economic development. With regards to decision-making, the main body within the ECB responsible for this task is the Governing Council and all decisions are based on the majority of the votes of the body’s members. It consists of the six members of the Executive Board, accompanied by the governors of the national central banks of the 19 eurozone countries.

The Governing Council typically meets twice a month at the premises of the ECB, yet the monetary policy will be announced in only one of these meetings. The current President of the ECB, Christine Lagarde, who was born in Paris, France, has been performing this task since November 2019. The ECB President, who has the tie-breaking vote, bears a variety of responsibilities: heading the executive board, governing different bodies within the ECB, and representing the bank abroad.

Key Economic Reports

Eurozone’s economic reports differ greatly from the ones of other countries outside Europe. Australia, for example, creates a report that only concerns the country in question. When it comes to the Eurosystem, there are as many reports as there are member countries. Nonetheless, only the reports of France and Germany are said to be of importance for forex traders, as the former holds 40% and the latter holds 20% of the eurozone’s GDP, making the two countries 60% holders of the entire GDP of the Eurosystem. Therefore, due to the previously mentioned percentage, the occurrences within Germany and France should carry more meaning than those in smaller countries.

The main reports traders should be concerned with are then the GDP and employment reports of France and Germany. Moreover, apart from these independent reports, traders should also look into the Eurozone’s employment reports, providing information for the entire Eurosystem. Last, French, German, and eurozone inflation reports (CPI and PPI), are also vitally important as the ECB’s main goal is to combat inflation and its monetary policy will cover all territories governed by the EUR. As the eurozone tends to be growing, the reports in question will cover more and more territories, and traders should keep up with the relevant information in order to be on top of the events pertaining to the EUR.

The Most Traded Pairs

The most traded pairs involving the EUR are EUR/USD, EUR/JPY, EUR/CHF, EUR/GBP, EUR/CAD, and EUR/AUD. As the most traded pair in the world, EUR/USD 36% of all trading volume in the world, which is almost half of all transactions worldwide. As traders interested in news events primarily define liquidity, such great interest in this currency pair probably originates from the fact that it has the most liquidity. The second currency pair in line, EUR/JPY, is said to have the most liquidity, alike EUR/CHF which rounds up the three most traded currency pairs that overall do the most business. The other crosses, EUR/CAD and EUR/AUD appear to be quite popular in the currency market due to their overall good movement and predictable patterns, but the liquidity is not as good as with the first three pairs. Unlike EUR/USD, EUR/JPY, and EUR/CHF, these two currency pairs are increasingly more prone to slippage and volatility. Finally, EUR/GBP is believed to be less volatile than other EUR- or GBP-based crosses owing to the economic closeness and mutual dependence, but changes in the currencies’ respective central banks’ monetary policies could render this pair highly sensitive.

EUR Correlations

  • EUR/GBP

A vast quantity of trade the United Kingdom does is with Europe and vice versa, which is what brought on this prominent correlation in the first place in addition to the two both belonging to the eurozone. Despite them using two different currencies, we can with almost absolute certainty predict that if Europe is struggling at a specific point in time, the UK will most likely follow. In the past few years, this correlation has been impacted by various events that took place across Europe. The 2007/2008 financial crisis affected the entire world, but the UK managed to quickly take action to preserve its economy and currency. The UK’s official currency did plummet and the British economy was on the path of collapsing when in late 2008 the GBP reached its all-time low of €1.02. However, they considered revising their monetary policy and offering quantitative easing which eventually helped the country stabilize the economy.

Europe, on the other hand, took more time to come to terms with what had happened and, in the first two years after the crisis had occurred, Europe created the laws that would later prevent them from enacting bailout plans. Changes had to be made and soon after, between 2013 and 2015, Europe would face the emergence of great debt problems in Portugal, Greece, Spain, and Italy. With the announcement of Brexit in June 2016, the GBP suffered the greatest one-day fall of 6.02% against the EUR. Before the COVID-19 pandemic, the GBP was slowly getting back on its feet, but the current ongoing viral threat and the expectation of a new trade deal between the EU and the UK still make the EUR/GBP imitate the strained relationship between the two. The currency pair even went from its worst (1 EUR equaled 0.8301 GBP in February 2020) to its best exchange rate (1 EUR equaled 0.9427 GBP in March 2020) in one month. 

  • EUR/CHF

The correlations between the two currencies have been said to near 100% in particular due to the Swiss policies that have tied the CHF to the EUR. In the times of the EUR crisis, when the currency was plummeting, a great amount of money was directed to Switzerland. The Swiss banks are said to be some of the strongest ones in Europe and their neutral government was believed to be extremely stable, which is why many decided to send their euros in that direction. Owing to this great sell the EUR-buy the CHF movement was reflected in the currency pairs huge moves. At the peak of the crises, the pair would move from 1.40 to 1.05 in a matter of a few months. The moment this happened, the Swiss National Bank (SNB) decided to take action, particularly because their currency was that strong at the time. They put a peg at 1.20 and the chart moved 1500 pips up in approximately one hour. The correlation is still quite high and this generally indicates that the currency pair in question is not the best pair to trade. The EUR/CHF is currently believed not to be the pair from which traders can earn the most because if the EUR moves up, so will the CHF and vice versa. These simultaneous moves will often be of the same amounts and the opportunities to make money are thus limited with this currency pair. Instead of trading this pair, some professional traders believe that one should simply choose to trade other EUR-based pairs due to the greater liquidity of the currency.

Trading the EUR

Country Stability

The JPY and the USD are believed to be the safe-haven currencies, yet the USD may at times exhibit some unfavorable behavior. Traders would in such cases naturally divert to the other currencies with the greatest liquidity, i.e. the JPY and the EUR. The USD generally performs well in times of crisis, while in times of economic prosperity these currency pairs such as AUD/USD or USD/JPY seem to be too small liquidity pools. Naturally, the EUR is a favored alternative due to its high liquidity.

Interest Rates

The interest rates within the eurozone averaged 1.84 percent between 1998 until 2020, with an all-time high of 4.75% reached in October 2000 and a record low of 0% in March of 2016. Currently, the ECB’s interest rate is still set at 0%, last confirmed in July this year. The EUR is typically expected to be in the middle compared to other central banks’ rates (available below) and according to some econometric models the Euro area’s interest rate is projected to trend around 0.00 percent in 2021 as well.

Inflation

The topic of inflation is the European Central Bank’s most important aspect and is, thus, an extremely important indicator to which traders should be attentive when looking into Europe’s reports. Each European country has its individual CPI and PPI, but the same of the eurozone is also extremely important and informative. If inflation is below 2%, the ECB is likely to ease the monetary policy, while the approach may change towards the other end of the spectrum should it exceed 3.5%. 

Trade Deficits

Unlike the GBP or the USD, the EUR generally does not suffer from trade deficits, as this has traditionally not been a cause of concern in trading with foreign countries with regard to this currency.

Economic Activity

In terms of the overall economic activity within the Eurosystem, traders should look into GDP reports discussed earlier in the text and, in particular, Germany as the largest European economy and the biggest driver.

Market Analysis

Currently, we are witnessing a decline in overall market volatility with an impactful momentum building up across the markets. As the market keeps moving up, the volatility appears to be further declining. The pattern we are witnessing now, forming towards the end of the chart below, shows how the price broke out and pulled back only to change direction upwards. The EUR crosses rarely appear to be short of such interesting patterns and they seem to be preferred to the upside.

The EUR crosses seem to be developing really well and the EUR/NZD chart, for example, reveals some moving average crosses towards the end of the chart (see all charts below). The EUR/AUD pair also demonstrates this positive development, although we could potentially see a turn of events should the AUD weaken. The EUR/JPY is revealing a momentum taking place, especially when assessing a wider time frame. The EUR/USD activity is unfolding slowly and should it break at some point soon, the price could potentially exceed 1.20. Generally looking at the EUR basket, there seems to be a great possibility for a breakout very soon.

The market has not been showing a great deal of action in the previous few weeks, thus not pushing traders to enter new trades each day. As the final week of August is about to complete the month, we are looking into September expecting more volatility to break the previous consolation and calm periods. Traders interested in trading news events may need to patiently wait out this quiet period, awaiting new rounds of important reports to come out. The EUR currency pairs are doing well during this period, as it seems from the charts above. Nonetheless, for the time being, it is quite difficult to completely interpret the long-term effects the COVID-19 is going to have on the currency.

The EUR has already undergone crises in the past and yet it has lived to become an even stronger currency. The monetary policy of the ECB seems to be slowly adapting and Europe appears to be working hard to promote the currency and ensure its autonomy. The EUR has never challenged the USD and the EUR’s share in international is significantly lower. Still, the media shows an interest in the development of the EUR in these times of crisis, highlighting the belief that the currency’s potential has not been fully reached on a global scale. The EUR has certainly struggled in the past, in particular when the stronger countries had to step in and provide assistance to the weaker ones.

Despite the global viral threat and the history of this unusual currency, the ECB maintains a positive outlook with regard to the EUR, hoping to further promote the currency through a series of vital steps as well as fiscal and monetary policy changes. Currently, we are looking into the future where the EUR is directed towards stabilizing the monetary union, increasing the currency’s influence, and granting more benefits to the eurozone’s member states.

Categories
Forex Daily Topic Forex System Design

Trading System design – Manual Backtesting your Trade Idea

We have a potential trading idea, and we would like to see if it is worthwhile. Is it really critical to code it? No. But very convenient? Yes.

Manual historical backtesting

There is no need to code the strategy to do an initial validation test. All we have to do is pick a chart, go back in time and start performing trades manually. But how to do it properly?

  1.  Use a trading log spreadsheet, as the one forex.academy provides.
  2. Thoroughly describe the methodology, including the rules for entry, stop-loss, and take-profit settings. 
  3. Use a standard 1 unit trade size ( 1 lot, for example) in all the trades.

Once the rules of the game have been set, we position the chart, start moving the action one bar at a time, and trade the chart’s right side. It is critical to take all the signals the strategy offers. Cherrypicking spoils the test.

Market Condition

The financial markets move in phases. We should think it has two main phases and three directions.

 

 

The two main phases are impulses and corrections.

The three movements are Upward (Bullish), downward (bearish), and sideways (consolidations).

Bear and bull directions are mostly similar in the Forex market because currencies are traded in pairs, so the quote currency’s bear market is the base currency’s bull market and vice-versa. 

With commodities, precious metals, and cryptocurrencies against fiat, this does not hold.

To properly test your strategy, you should apply it in all market directions and phases. Even better is performing a different evaluation for each market state. That way, your evaluation will tell you in which market conditions it works best and in which is not acceptable to apply it; thus, you could create a complementary rule to filter out the market phases in which the strategy fails.

Different markets

You must apply the strategy to all markets you intend to trade using it. As with the market conditions, you should test each market separately. After having all markets tested, you will find useful information regarding how markets the strategy works best and the correlations among markets when using it. That applies, of course, if you use the same timeframes and periods in all markets, which is advisable.

If you do it as said, you can also perform the summation of all markers date by date and assess the overall performance, its main parameters, and system quality.

Pros & Cons of manually backtesting 


 

  • No programming skills are required.
  • It helps you perceive how a real market evolves trade by trade.
  • You will find the potential logic errors, such as stop-loss wrongly set, take profits too close to the opening, thus 
  • You will be able to correct most of the gross mistakes of the strategy.

 

 

  • Cherrypicking. Discipline is key. If you start cherrypicking, you no longer are testing your original idea.
  • Most people doing manual backtesting do not properly trade all phases and markets. Not always thoroughly test all markets and their conditions, as it would require a lot of time. Thus the test is incomplete.
  • Time-consuming. A complete manual backtest takes much longer than a computer-generated backtest.
  • Awkward optimization. Optimization is also tricky and time-consuming. That is so because a parameter change would need another backtesting.

Final words

Manual backtesting allows us to have a first impression of how a new trade idea would fare in real trading, but a thoroughly manual backtest and optimization are time-consuming. Therefore, serious traders should start developing basic programming skills to automate both processes.

Categories
Forex Assets

The Fundamentals of the Japanese Yen (JPY)

In terms of popularity, the Japanese yen (sign: ¥, code: JPY; meaning: circle, round object) ranks third among the eight most traded currencies in the world, only preceded by the USD and the EUR. This currency forms some of the most traded crosses as well, such as the USD/JPY currency pair that holds an 11% volume of all trades worldwide. As such, the JPY is also one of the most liquid currencies and enjoys the status of a reserved currency in many countries around the globe.  

Created in the late 19th century by the Meiji dynasty, the currency was part of the government’s goal of unifying Japan and modernizing the country’s economy. From the historical perspective, the JPY is not as old as the GBP, yet it has also undergone some tumultuous periods to this day. In particular, during the time of the Second World War, the Japanese official currency lost its value, which resembles what Germany had experienced in World War I. After the war ended, the YPY was pegged to the USD in the reconstruction period, as many European currencies before the EUR were (except for the GBP). Most currencies have at some point in history been tied to the USD especially because the fiat money’s worth is only of its perceived value since there are no hard assets to back it up. 

Therefore, due to the post-war state of the JPY, the ability to exchange Japanese money for the USD generated some stability to the currency, which is what all other currencies pegged to the USD aimed for. At the time 360 JPY was enough to buy only 1 USD, yet it still transformed the JPY’s instability into a more stable state, which is probably why this fixed relation between the two currencies lasted for approximately 28 years. Upon the US leaving the gold standard in 1973, the JPY was left to trade freely. This led to the Japanese economy booming in the 80s and early 90s, which not only recovered but also became the top manufacturing country on the planet. Since 2009, yen coins of 1, 5, 10, 50, 100, and 500 have been used, whereas there are currently 1,000, 2,000, 5,000, and 10,000 yen notes in circulation.

Bank of Japan

The central bank, called the Bank of Japan, has governed the currency since 1882. The bank consists of 30 members, whereas its Monetary Policy Board numbers 9 members who are responsible for managing interest rates. The governor represents the bank in public and has the tie-breaking vote. The current Governor, Mr. Haruhiko Kuroda, was appointed in 2013, replacing a conservative predecessor, Mr. Masaaki Shirakawa. The previous governor’s rule was marked by great dissatisfaction among the citizens due to the general lack of action, quantitative easing, and ideas to improve the economy and the currency since the 90s’ downturn. In the early 1990s, the Japanese stock market, Nikkei (or Nikkei 225) was 41,000 JPY. This bubble burst down to approximately 6—7000 JPY, and the market traded between 7 and 10 thousand JPY for more than 20 years after. Only after 2013 did Nikkei start to consistently exceed these values to now stand at a much higher level of above 20 thousand JPY (see the chart below) pointing towards tangible economic growth brought upon by the new plan. When the current (31st) governor was appointed, he was promised to bring about a change and propel the Japanese economy away from the several-decade-long sleep.

The investment of trillions of Japanese yen into the country’s economy, finally setting off inflation, jump-started the currency and the growth. The chart below also reflects how the financial crisis of 2007/2008 affected the Japanese market when a number of countries were running toward safe-haven currencies such as the JPY, which will be further discussed later in the text. Now, in the midst of the global pandemic, the Bank of Japan again took action to safeguard against the impact of the COVID-19 on the country and its economy. As of March, when we could see some larger drops not only in Japan but in other countries across the globe as well, the Japanese central bank enhanced monetary easing, implementing several measures to stabilize the economy. These measures have proved to be successful so far, with the country’s financial system maintaining the overall stability and functioning of financial institutions. Under the circumstances, the highest increase in the last 30 years was registered for bank lending in May, along with a significant increase in CP and corporate bond issuances as well as a decrease in the tension in financial markets.

Carry Trade

Between 2002 and 2007, the world experienced tremendous changes in economies, such as the one brought up by the expansion of the internet. Then in 2001, the S&P 500 value dropped by approximately 22% and the world economies seemed slightly unstable for a while. After 2004 and until 2007, there was a great boom in the economy, supported by massive moves in real estate as well as exorbitant prices of oil and gasoline. The JPY, however, weakened during the same time, making Japan the sole country unable to reflect the overall growth. Everyone seemed to be more interested in taking risks and, at the same time, great expansion was noticeable in Canada, Australia, and New Zealand due to their production of resources such as gold, silver, and copper, whose prices then started to increase.

The trade between China and Australia was also a good example of how the exchange of the commodities connected two economies: Australian mining supported the Chinese infrastructure investments before the Olympics. During that time, the price of some commodities, e.g. copper, doubled and inflation was particularly high in countries such as Australia, whose central bank increased interest rates to almost 10%. Japan, however, whose economy was stagnant at the time, had its interest rates at 0.5%. This led to investors displaying the tendency to borrow low-yielding currencies and sell high-yielding ones, which only weakened the former. Currency pairs such as the AUD/JPY cross were interesting not for the sake of trading, but for the benefit of the swap.

Since one currency’s rate is 10% and one goes short on the currency that pays 0.5%, the swap rate would actually be 8% for the year with fees removed, which is an amazing return. As many found this to be a great opportunity, the massive interest in this pair caused the AUD to appreciate, and so did the CAD and the NZD, whereas the JPY’s value decreased and kept going down as a result. Once this entire bubble burst, the stock market did crash, but currencies suffered even more with an unbelievable AUD/JPY 55% plunge over a few months. Many JPY-based pairs reflected massive drops at the time which largely contrasted the previous growth.

The years between 2004 and 2007 seemed to be focused on building and, finally, 1 trillion USD was estimated to have been staked only in short yen carry trades. Many say that such movements in the currency market were unprecedented when traders were able to get around 500 pips In AUD/JPY trades in a single day. Carry trades are not single currency phenomena as they occur when there is a high-yielding currency and a low-yielding one, leading to trades lasting longer than expected because of mass interest in such pairs.

Key Economic Reports

Japanese economic reports seem to have had little impact on the movement of the country’s official currency in the past and there generally appears to be little interest in the economic numbers of Japan. While the US’s economic reports end up affecting all currencies, some other countries, e.g. Australia, do not have such a comprehensive, widespread influence. As opposed to Australia, however, Japan’s reports barely even influence its own currency. Even the Bank of Japan’s Outlook Reports and the meetings they hold in April and October prove to have little effect on the JPY.

Despite the fact that the currency does not undergo massive or meaningful changes upon the release of these documents, traders should still be educated on some basic economic numbers that might have some impact on the currency. Some of the common reports that might concern forex traders are GDP, Retail Sales, Tankan Manufacturing Survey, and core CPI. Among these, the Tankan Manufacturing Survey, which is essentially a quarterly survey revealing the manufacturing strength of the Japanese companies, may be the most important document of all. In July this year, due to the COVID-19 pandemic, the report reflected the biggest low since the last quarter of 2009 when, for example, we could see this plunge in the currencies market as well (see the two charts above and below).

The Most Traded Pairs

The most-traded JPY crosses are the following: USD/JPY, EUR/JPY, GBP/JPY, CHF/ JPY, AUD/ JPY, NZD/JPY, and CAD/JPY. The USD/JPY currency pair equals 11% of all currency trades across the world, preceded by the 37% volume of the USD/EUR cross. JPY crosses, unlike the USD/based pairs, for example, are specific in that the JPY is always the recessive currency, which implies that once paired, all other currencies are against the JPY. This allows traders to easily assess relative strength and weakness in all JPY crosses, which is often much more difficult with other currency pairs that do not involve the JPY. Just by looking at the currency pairs listed in the first sentence of this paragraph, we can immediately tell that the GBP/JPY is the strongest pair, whereas the AUD/JPY is the weakest, due to the other two currencies’ relation to the JPY.

How to Trade the JPY

The JPY is primarily seen as one of the safe-haven currencies due to its stable, exporting economy backed up by the possession of major reserves and trade surplus. Some other countries, such as the US and the UK, still seem to be battling trade deficit difficulties despite having strong (or stronger) currencies than Japan. The fact that Japan has more exports than imports influences its economy and brings more money into the country, preserving the status of the JPY as one of the favored reserve currencies. This stability of the country is believed to make the JPY withstand economic stress even better than the USD for example. Japanese interest rates have historically been some of the lowest ones in comparison to other central banks, currently standing at -0.10%. An interesting fact about the Japanese currency concerns the fact that inflation has never truly been a major challenge for Japan, whereas deflation has. As discussed above, the extensive exportation has led to a massive trade surplus, and even the current Governor’s goal was to surpass this issue and raise inflation to at least 2%. 

Current Events

This currency has been moving downwards for a while now although it has not broken down yet. Some professional traders suggest that, should there be stimulation from the equities market in the form of a push upwards, the JPY could respond with a descending movement. The currency has been subject to volatility in previous weeks and a number of JPY-based crosses have come near major technical levels, putting longer-term trends at risk. Nonetheless, few actual breaks have been made with ranges remaining mostly intact. Should volatility still arise, traders may easily witness some price swings. 

Just prior to the onset of the coronavirus pandemic, the Japanese economy experienced in 2019 the biggest plunge since the second quarter of 2014 of 6.3%. Following this biggest GDP contraction in more than five years, the previously discussed Tankan survey revealed the first drop into the negative after many years. The volatility peaked in March, yet has slowly drifted lower since in particular to the world central banks’ decision to inject great amounts of liquidity into the financial system. Geopolitical tensions and a slow global economic recovery may still affect the JPY in the following months. The country’s neighbor’s strained trade relation with the US may lead to a sustained risk aversion period, driving the JPY higher against other major currencies.

In order to help with the impact of the virus, the Japanese government put into effect a massive stimulus plan, amounting to the value of 20% of the nation’s economic output. With the estimated 60% debt issuance in 2020, the Bank of Japan may need to increase its purchases of Japanese Government Bonds due to a lack of global demand so as to be able to keep implementing yield curve control effectively. The interest rates are still way under the mandated 2%, yet the accommodative approach of the Japanese government and Bank of Japan may help the JPY withstand periods of volatility in the future and stop the currency from declining. Whenever there was any instability in the past, traders naturally diverted to the currencies with the greatest liquidity such as the JPY, which appears to still have the potential to keep the safe-haven status.

Categories
Forex Indicators

Incorporating the Right Indicators Into Your Trading System

Technical traders are not making decisions on any other input but their set of indicators and rules. As a holistic approach, it is a trading system that combines position or risk management, chart analysis, and volatility/volume parameters, producing three types of signals: enter a trade, exit a trade and do not trade. Technical traders’ decisions are therefore based on a black and white mindset. In other words, their mind is not different than the trading systems they have made.

On a professional level, their mind is just thinking about testing out more to improve the system effectiveness on the forex market. This article will reveal an important view of how to add on an element or an indicator to a system that already has a few synergetic elements, each playing their role, and measure various categories from the market numbers. Using an example from one professional prop trader system structure, we can give an understanding of what to look for when improving your own trading system. 

Technical traders may follow a certain theory, using just John Ehlers’s indicators, for example, but it is proven that risk is mitigated by diversification. Even though the indicators from this researcher are somewhat predictive in nature, having another indicator from other theories that base on historic confirmation might be not only risk-mitigating but also create special chemistry when combined. Traders that are advanced already have a system and are probably familiar with the theories or how their indicators are made. Beginner traders are not familiar with this, and actually, they do not have to be to create effective systems. We will present you with a few shortcuts to finding this special indicator combination.

As an example, a trading system can have a volatility indicator based on which position size and risk management are based on. Having such a variable and adaptive way of controlling risk is imperative as discussed in other articles. ATR indicator is one such volatility measure. The next element in the system is a specialized volume or volatility indicator whose role is to tell us when there is not enough momentum in the market or trend and to just ignore signals from other indicators as the risk of price changing direction is increased. We are looking for quality trends to follow, a scientifically proven method of trading with the best results. When we are looking to exit a position, technical traders also make decisions after an indicator. This type of indicator should be great for finding points when trends exhaust and some think oscillators and reversal indicators are a good pick for this role.

A separate article also explains this in more detail. At the core of the system is the confirmation indicator, when to enter a trade is a starting point when we look at charts. Finding an indicator that proves to be very effective at finding emerging trends is a precious element but we all agree none is close to being right even 70% of the time. As this is the core of the system, why not make it better by adding an additional confirmation indicator? Having two different experts will generate better solutions than just one. Now, if we go on we might think more is better, but there is a thin line after which adding more indicators creates a detrimental effect on the system. It is too complicated. So adding just one additional confirmation indicator is enough. The point here is to make sure that the first trend confirmation signal is not a fake market move that just a whipsaw, so add another one that needs to produce a signal in the same direction before we make a trade. Eliminating losses from these fake moves has the same effect on our account as when we win. 

Confirmation indicators have various calculations, formulas, and ideas behind them, and that is great. As an analogy let’s say your system is a team of players. Each player has its role but we have all witnessed a magic bond between two or more players that are just extremely effective when combined. Of course, having a bad player and another bad player is going to be better but it is no-brainer because we want to have two greats. Finding great indicators is a long and tedious work, once we have one with the best backtesting and forward testing results, it is priceless. The ones that got to the top 10 of your list might be the ultimate additions to your number one. The good thing about these indicators is that they are abundant, unlike the volume indicators, and they are easy to test. 

Trend confirmation indicators can be categorized to make this process beginner-friendly. Starting with the Zero Cross indicators, they are generating signals based on a line crossing a horizontal zero value line. A typical example of this is the Chaikin Money Flow (CMF), an indicator using volume and other market values in its formula. After all, traders are interested in how good it is for their system after backtesting and forward testing. When the main signal line is crossing the zero line it means a new trend or continuation is starting. If your main confirmation indicator is from the same category, you will need to change one to get the diversification effect.

The second category is the Line Cross-type. These are probably the most common type of indicators. MACD can be one example of this, although MACD also has a zero line. If you want to diversify, you will need to pay attention to different signals even the  MACD, for example, belongs to the Zero Line and the Line Cross category. The third category is the on chart indicators. Now, these indicators are the ones when applied are represented on the MT4 chart itself, not in a separate window below it. Moving Averages are a simple example of this type of indicator, and there are many ways you can classify a trade signal with them. Many systems have them and they can be an extremely effective tool. Finding the right Moving Average indicator is surely going to be worth the time. 

Now when we understand how to combine and diversify indicators, understand that the second confirmation indicator is there to filter losses made from the main one. Since cutting losses is the same as generating wins, we are looking for synergy results where the second indicator is filtering the losses but not filtering the wins. Volume indicators have a similar role here but know it is hard to find a volume indicator that does not filter a win in the way. The nature of measuring volatility or volume simply needs more data to be effective, consequently, they lag. Lagging may cause your system to miss the right moment to enter a trade and therefore a possible big win but this is just something we have to accept.

Additional confirmation indicators are not necessarily like this but they still add value to your system. Traders’ focus should be on cutting the losses, it is the main problem once you make your first system. When we find and adjust our second indicator, aim to cut a lot of losses. If a winner is filtered, try to adjust settings a bit but not at the cost of letting the losers in. As we have discussed in previous articles, your indicators should be recent, do not latch on to the popular ones, you will soon find others have better results in your testing. Combining different type indicators with great results is the way to go but know that sometimes the synergy might not be there. Similar to sports, you may collect the best players together in a team but the result can be disappointing. On other occasions, two great players that understand each other can beat the opposition alone. Interestingly, case studies have shown each had a different specialized skillset that adds value to the other. The goal is the same but the formula is based on different measures and the representation is different. 

You will find many times that your two confirmation indicators do not align, and this is good. Pay attention to the main setting adjustment you can make, the period. By having one faster and one slower confirmation indicator, you may find that sweet spot of filtering losses and keeping the winners. Whatever confirmation indicators you find, only testing will show you if this combo is worth keeping. The more pairs you test, the better the odds you will find a golden team. Other elements in your trading system should not be messed with during testing, you need to have control and compare only this confirmation indicator combination.

Here is an example provided by one prop trader demonstrating how this idea works in practice. We are going to use the EUR/USD currency pair. It is the most traded pair with many news, reports, and event that could push the trend the other way. As such it is considered the riskiest pair you can pick and should provide a lot of losses and wins. Losses we should cut by introducing a second confirmation indicator. From the picture below we can see our Aroon indicator is really having a hard time finding a winner. This chart is very nasty for trading trends with many whipsaws.

Red and green vertical lines are added once the indicator gives a signal to go short or long. Aroon was able to give us approximately 3 wins and 8 losing trades. We can see Aroon is a line cross indicator type, signals are generated once the red line crosses above the blue for short and vice versa. Let’s see what happens when we add a second confirmation indicator not belonging to the line cross-type. 

We have added an Exponential Moving Average for 20 periods as the on chart type indicator. Now if you use the EMA for generating signals only when the price crosses it, you will find many conflicting signals with the Aroon. When they are in conflict, we do not take that trade. When we take this rule to the chart, many of the losses are filtered. 

Now we have kept the winners and have only 6 losses. EMA might not give us great loss reduction but the end result is still better than before. Let’s try to find a better indicator. 

We have added the Force Index indicator and adjusted its period to 26 from the default 13. Additionally, a horizontal line is added at zero effectively making this indicator a zero line cross type! The result is we still have 3 winners and now only 2 losses. Before all this, we had 8 losing trades. So we have transformed our system from a 27% success rate to 60%. Note that your system still has a volume filter and other elements that boost this rate to a much better percentage. With good position sizing, money management, you should be profitable. You now have better odds than a 50-50 coin flip.

By the way, having proper money management and using a 50% success rate system can still yield profits. Just pay attention, what is presented is just a couple of trades on a single currency pair. What you need to do is test your indicator combinations on longer periods and other assets. We are aiming to create a system that works on every currency pair, without adjustments. The final product is a universal system you can use professionally for a long, long time. 

To conclude, the hard work you have to put in is necessary to find that perfect combo. Treat it like a treasure hunt, a game with real treasures behind. If this is exciting to you then it is just a matter of time when you complete your trading system and just trade as it says, consistently providing you with treasures. Your score list of tested indicators is useful, you can pick up your second confirmation indicator from there without searching through the forums and indicator websites. Use the tricks described here, add a line, test different periods and settings, add an MA to the indicator. Finally, the synergetic effect is easy to test, as demonstrated, you will not spend too much time to figure out you have a high % combo in front of you.

Categories
Forex Basics

Complete Trading Procedure Example (Courtesy of a Professional Technical Prop Trader)

When you start your journey into forex trading, there is so much to know you do not know where to start. The internet is so full of information and yet sources that show you where to go are rare. What is abundant is the marketing mechanisms whose point is to extract more cash out of you, offering education that is otherwise free. You will undoubtedly on your first searches find multiple channels, websites, brokerages, and investment platforms full of attractive numbers and “professional” traders promoting their story as skilled promoters. Very rarely you will find a real example of what a prop trader does practically every day, how a trader’s day looks like. Based on these examples you can mold your own trading strategy or have an overview of what to develop first. 

The First Steps

The first steps are not easy to find among all the material without substance. Whatsmore, the material you find will likely point to a direction where 90% of traders end – giving up on trading after a very fast account busting. Even though forex trading is hard to master on a psychological and technical level, once mastered it offers a very attractive lifestyle most would put into the ideal category. Getting there is the hardest part, but it does not take long, especially if you have great educational and forex technical sources. Beginners always have good motivation once they find something interesting like forex trading. The motivation becomes a mix of many other emotions after failures, eventually giving up because they have followed bad advice. In this article, we will present an example of how a developed prop trader trades, the complete process on a developed algorithm based on indicators. Your future actions can be built on the same or give you an idea of what to aim for. 

On the forex market scene, traders behave as the most disciplined soldiers. They have structure and procedure before trades are entered. This structure is the algorithm and the procedure is a plan. Even though beginners should start developing a concept by concept, in the end, they build a system. Each element has a role, and each element needs to be found, tested, and incorporated into the system. So as a starter, trading education is done in small steps. Consequently, you may lose sight of the zoomed out picture of the complete system put in action. 

From A to Z

Taking the information from our previous articles, let’s present the procedure from A to Z. You should be familiar with the previous topics to understand what is really going on here, yet it is not required, it is also an intro into the forex trading end result. Note that the exact system elements will not be disclosed, and it does not have to be. Traders develop according to their personality, lifestyle, mindset, and psychological context. No trader system is the same, you will likely fail if a system is given to you. If the need arises, there are already made systems you can download and plugin as a template in the Metatrader 4 and 5. Some other platforms also have this ability but you will find that availability is an issue. Additionally, copying another’s work is a shortcut leading to failure because you have not developed the two most important aspects of trading – psychology and money management. 

This example is focused on the daily timeframe only. Of course, you do not have to trade on the daily only, the system is good for all, it is just this system is designed for it. The benefits of the daily chart lie in a good life-work balance, trading sessions avoidance, and so on. The daily timeframe is also a topic in one of our previous articles. Since this is a technical analysis algorithm, it is based on indicators. You probably know about the negative talk about them. Negativity comes from bad results with them and it comes from people who did not go beyond the popular indicators which are actually bad performers.

Pure Price Action Trading

Another group against indicators are pure Price Action traders who rely on blank charts to make a decision. Some of these traders are the best in the industry although it requires a special psychological set to trade this way, it takes a long time (experience) to develop such skill and it does not prove to be better when compared to technical traders. However, Price Action traders still have a procedure and a plan, similar to our example. After all, our technical prop trader example does not spend more than 15 minutes to trade per day and still have better performance than shorter timeframe trades according to testing. As per his words, you can spend a day trading on a 15-minute chart or spend 15 minutes on a daily. Trading should not own your time, and you do not have to sacrifice results to do so. 

Each of the system elements has an article (on our website). After you have tested them, classified them as the best, and incorporated them into your system, it is time to apply the plan and the procedure. Backtesting is a necessary prerequisite, and it is what you can work on when not trading. Exploring interesting tools, methods and ideas are what you will do as a professional, it is how you stay at the top in this business. Testing them for your system is a must. Improper back and forward testing will cause future losses, be it by mistake or in purpose, forex will reflect your work. The procedure for backtesting is explained in detail in previous articles, it is adapted to the system structure we are using but it can be applied to other systems. 

Technical Trading

Our technical trader does not look at the charts until the day session is about to close. It is the time when all the day trading activity is recorded in one candle since we are on the daily chart. We have all the data we need to make a decision. 30 minutes before closing there is not much activity on the market, most of the trading volume has subdued as banks are closed around the world. 30 minutes before day close is all we need to do all the trading per day. Depending on where you are or what is your broker server time, it can be during the working hours or in the middle of the night. If the timing is not convenient for you for various reasons, there is an alternative of course. You can trade a bit later the next day but using the data from the previous period or use pending orders instead of the market.

The first thing to check is the $EVZ, VIX Index, or other global forex volatility benchmark. It is our first information about the market conditions that affect our money management mode. Markets move in cycles, from chaotic to calm. Flat markets do not have trends we need to produce the difference or profitable trades. Calm markets also lack the momentum to push the price and trigger our Take Profit after which we are safe from losses (according to our system money management). This is a riskier environment so we adjust accordingly. Using the VIX levels we also set up exact rules on how large our position sizes are. According to our rules, if $EVZ is below 8 we risk 1% per currency, below 7 – 0.5%, and below 6 we do not trade at all. Whatsmore, our Take Profit orders close 100% of the positions, we do not follow scaling out methods we usually do when the $EVZ is above 8. Refer to our article about money management to know more about where we initially set up the Stop Loss and Take Profit orders and how it affects our position size entry. 

The next step is checking the news events. We want to know if there is an event that can affect our potential trades or active trades. Such events are mostly classified as of high importance. Forex Factory is a good source for the events calendar where you have enough filters. Of course, some events are not reoccurring or recorded in a calendar, such as trade wars, Brexit, and so on, so you need to pay attention to these too. For example, we have avoided the GBP during the Brexit process, you cannot foresee a speech or some agreement result that has an immense effect on the trends, better to avoid this risk altogether. If an event is due in 24 hours that is important, you skip on that currency. If you have active trades, you exit before the event.

Tool Options

Some traders like to customize their MetaTrader platform with a plugin tool like an indicator or EA that pulls the feedback from other sources about the upcoming events and see them on the chart. These tools are not uncommon and can be found on forex-station.com, for example. Avoiding what we cannot control is just as important as getting into the right trends. Note that trading on the daily chart absorbs any small impacts less important events cause. You can write down the currencies which have an event coming up if you do not want to import any MT4 tools and keep the list with you for the chart analysis step.

If you like have a whiteboard with key info to consult before the charts are opened. Write down your active trades here. You will have them visible on the platform but writing them down and putting them in front has a positive effect on your mind. The next column is potential trades. Here you can write down pairs that are very close to generating a signal such as a volume indicator lag clearance, possible continuation trades, and similar that require attention our system does not explicitly alert. Pullbacks require a special column. All currency pairs that have shot past our baseline-ATR range can be written down for a pullback entry one candle later, if applicable. Trading other asset categories, such as Metals, Commodities, Indexes, etc, write them separately. Your whiteboard can also have your favorite quote to keep you on, companies often do this on a wall their employees can see. 

Now we open the platform and first we take care of our active trades. We need to adjust the levels to new conditions. Make sure your Stop Loss and Take Profit levels are executed properly. These pending orders rely on server execution if you do not use any EA that keeps them internally. Cases where your pending orders are not executed because of the broker issues are rare, and it is most likely our mistake when entering them. Any issues with the broker need to be resolved right away, it is your capital. The broker should revert the trade if it proves it is their issue. Consider if the broker is reliable enough if these errors continue, though these are extremely rare issues.

Entry & Exit Decisions

The next step with the active trades is to check our system exit indicators. Take a look at your whiteboard, paper, or the platform and see if you need to exit. Exiting a trade does not come into question here, follow your system to the letter. Do not exit sooner or later, only when a signal is given. Your active trades might still be running and reached Take Profit level. Consider moving your Stop Loss to breakeven if it is, you can celebrate now, you can only win. Scaling out like this is done only when the market is flowing enough, you can set multiple scaling out levels if needed but do not overcomplicate trade maintenance. Setting up Trailing Stops is also an option, especially if your trade is following a long trend. You can try various trailing methods just try not to complicate, the differences are not substantial. 

Once the active trades management is done we can move on to looking for new opportunities. Our whiteboard will show what currency pairs we should pay attention to. On the platform, we have a list of all currency pairs, we focus on the majors and crosses. Exotic currency pairs are not a very good proposition when it comes to risk, although if you are familiar with any adjust the risk management accordingly, and include them into trading. The first thing we look at when looking at the charts one by one is the baseline.

Once the price crosses it and about to close for the day, it is the moment we make trade entry decisions. For that, we need confirmation indicators signals to give us a green light. If not, we move on. It does not take more than a few seconds to decide, even if there are 28+ currency pairs to trade, the whole process does not take more than about 15 minutes per day. When the system generates a signal to enter, including the volume filter, we measure the ATR range from the baseline. If the price has moved beyond the 1xATR value from the baseline, we do not trade. We might write down this pair as a pullback opportunity if the price moves back into the ATR range but for now, we move on. 

The system will tell when it is good to go when all elements agree, only then you enter trade if everything is according to the money management plan and our rulebook. And you do not enter a trade immediately once you find the currency pair, write it down. There might be more signals for that particular currency and splitting the risk on two or more positions is always good. Risk is proportionally lower with better diversification. Remember not to overexpose, too much capital on one currency can be easily entered by mistake.

Whatsmore, a common mistake is also to buy and short one currency at the same time by trading two pairs. You end up basically with one trade but with two different positions. For example, trading short GBP/NZD and NZD/USD. The NZD is canceled out here, better just short GBP/USD. An overexposure example is when we short GBP/NZD and buy NZD/USD, the NZD has double investments. Writing the pairs down will eliminate overexposure and redundant trades. Additionally, you will have better efficiency, organization, and overview you need to refrain from entering into the first signal you stumble on. 

Continuation trades, of course, do not have baseline cross signals, they are eligible for trends that continue after a break but the price is still above or below the baseline depending if the trend is downward or up. As per our rulebook, we only check our confirmation indicators for a new signal here, ignoring the volume filter and the ATR-baseline range. Continuation trades are common, pay attention not to miss them and write them down with the rest of the signals. 

After all of the assets are checked, we move on and enter the trades from the list. Now the money management plan is applied. We need to know how big the position needs to be for each pair to have optimal risk. Where our Take Profit and Stop Losses are going to be. For this, we use the ATR indicator on each currency pair to determine volatility based on which we calculate the exposure. According to our example, we use 1.5xATR for Stop Loss and 1xATR value for Take Profit level, but you can adjust this to your preference. For more details on how exactly we calculate the position size, consult our previous articles about money management. We end the process by entering the market order with the Stop Loss and Take profit levels, make sure that the trade is correct and close the platform. The rest of the day is yours, do not look at the charts, the decision has been made. Do not let market movements also move your emotions that lead to messing around with the system. 

In conclusion, be like a soldier. Have a structure, build one, now you have the recipe. Take the above example and the system how you see fit. The structure you make has to be followed to the letter to get on top of the forex game. If you keep changing the structure, or the system, you will not get the consistency. Day to day procedures have to be as crisp as the algorithm, which is also an excellent way to control your emotions. Come back to this article if you ever need a guide on what to do next when you are starting your forex journey.

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Forex Basics

Professional Technical Trader’s Guide to Increasing Your Odds

General guides on trading outline what you need to have if you want to have a career but will not solve problems every trader will face. The experience calls for mistakes no guide will save you from even if you are warned about possible setbacks. Reading about trading alone will not make you a good trader but knowing where to focus will inspire some ideas and probably spark the initiative in an open mind. This article will cover some trading elements typical for professional technical traders although it could be a guide for any trader type. 

People who are yet to make a plan out of their trading attempts or experiments are always looking for a guide and could be lost in so many resources pointing to very diversified ways of trading and personalities. For such is forex trading, endlessly deep and yet very simple depending on what you make out of it. The common question is where do I start? Yet once you know your destination and basics understood, you need to pack for the trip. We will cover what you need to have to have above-average attempt probabilities on forex. 

There are no shortcuts to becoming a trader, there is no substitute for experience so if you are looking for a guide to set you up and ready to go you may be disappointed. If you are looking for guidance on your determined long way of becoming a trader, get ready for putting the work before you even take a step into forex. Every percentage on your side has to be earned with careful analysis, discipline, and lots of ideas testing. Trading is fun and exciting, the part before that winning percentage above 50% is hard work, which is essentially the biggest part of professional traders’ activity. The difference between 50% sports better and 51% is extreme. If you are playing poker that 1% is also decisive in the long run. 

Forex is the same long-run statistical or odds game, but with more complexity. When you do not have one of the must-haves, such as optimal money management, 50% trading is not a very slow way to account default but a very fast one. Once your odds are 55% and you have all measures in place, the system, you can be called a pro. Wherever you trade, you are consistently winning in the long run. Casinos typically ban such players after they realize they have a system, luckily forex does not have anyone above your head. Sports betting with a 55% system can also be a career if you have enough capital to work with. That 5% is a big difference you need to work for. Some prop firms dare to say you can do a coin flip decision making for every trade direction and have optimal money management to have some success on forex. Yet it is likely you would need a lot of time to have any benefit out of that system. 

Have a guide in your eyesight as a reminder. Having a physical presence of such a guide affects your mind subconsciously, you will have all the details in your head without reading it again. The whole setup you make will be in your mind because the memory of it will refresh every time your eyes see it. It is so easy to get off track, you will forget an important step that makes 1% odds in your favor. This trick will keep you sharp especially when you are new to trading coping with so many factors. Now let’s dive into the guide and know there is no particular ranking to each of the elements. All of them are important and give you the edge. 

Having a structure. There are three names for this structure.  Money management, risk management, or account management. It comes down to optimize your risk, positions sizing, when and why you are putting that capital percentage at risk. A rule set that will guide you so you do not stray from a good decision but with bad risk management. You can be the best, high percentage trader but without the money management to keep your losses in control you do not stand a chance. A structure technical traders follow for their money management is very strict, based on indicators or additional measurements (typically volatility) that define how much their position sizes are going to be for that trade on that currency pair at that moment. Whatsmore, they will have a structure on how much to close after their trade has progressed. So it will be a mix of pending orders, rules, measurements, and fundamental factors. 

Emotional control. You will develop your money management to the point it is worthy and on the pro level. It will increase your odds to endure the long game and retain consistency. Piece by piece your money management will leave no cracks but all of it is for nothing without emotional control. Developing this element could be the hardest as it is tied to your personality which is already defined. You now need to change your habits with an adverse effect on your account. First, you need to recognize them and then create methods to “bend” them so they do not stay in your way to profitable trading. Prop firms like to start with personality tests so they can tell right away what emotional control flaws you will likely have when trading. Most people do not have this element, the stress is too high or habits too deep. 

The emotional control level is easy to spot. People who complain, rant, conflict, are the loudest and probably most present on social media. It is easy to understand their emotional control is nonexistent, and are consequently unsuccessful traders. It is logical to conclude their comments or advice are not worth taking.

Forex psychology subjects are not popular unfortunately because people focus on technical or analysis thinking this is the main part of trading. Luckily, you now know trading is a holistic project. Take interest in other pro traders’ management structures once you find them, and build on that. This step will take you to the pro level very quickly.

Your next development point is finding your target time frame. For some prop traders, the daily timeframe has advantages over other standard timeframes. Your selection should be based on your personality but here is what is considered for the daily time frame example. The chart is slow-moving, one candle represents 24 hours price movements. This means you have enough time to react and prepare your next move right before the end of the day session. It is also stress friendly, you do not have to monitor the market, just focus on other things during the day, and see the results at the end of the session.

Also, prop traders think the daily timeframe is better for trading. News events are absorbed better, do not have to worry or wait for certain trading sessions, and it is even easier for trend following. The transition to the daily timeframe is harder than moving from, for example, 15M to hourly. If you like the thrill of action during the intraday moves over the easy-going and to some better performance on the daily, then this is the timeframe matching your personality. Again, as trading is a holistic project, your timeframe selection will also mean different strategies, emotional control, money management, and so on. 

Trade entry system. This part of trading is the most popular. Traders want to improve their odds by creating a system for trade entries, exits, and staying out of trading. Finding things that could increase your odds is fun but sometimes the fun can cloud the importance of other elements. However, the hard work of testing and backtesting your interesting finds is rewarded by having a high percentage trading system that stays with you forever. Such a system should be universal, strict, that does not leave you second-guessing any decision. Some prop firms like to stick to the KISS method, Keep It Simple, Stupid. Overcomplicating your system with too many indicators or prerequisites creates diminishing effects.

More often than not, the simplest trading entry systems are very simple but strict. As you develop your system, try to stay original. If you are using the MT4 platform, you may find many made systems by other traders. Plugging these into your MT4 might look like an easy solution so you do not have to work on your own but you will find there are no shortcuts to forex trading, this system will probably not fit your personality or more likely not be profitable. Still, taking some elements out of it you think would fit yours is one of the best ways to create custom high percentage technical systems. Additionally, understand that eliminating losses is as important as creating good entries. 

Avoid or accept what you cannot control on the market. You cannot foresee the price action after the news event. Even if the trade direction is logical according to the report result, the market will not obey logic. This is an uncontrollable risk we can avoid. Avoidance cuts the losses we make out of these moments where our odds are lower than usual. Consequently, this brings our odds higher. If you do not know by now, there are actors on the forex market that move the prices, these are the big banks mostly. We cannot control or know how they will react.

The risk out of the most important events can be avoided simply by not trading before them. Create a rule set to manage this risk, it is quite enough to avoid trading 1 candle before the news announcement if you are trading on the daily chart. Pay attention to the most important events, like Brexit, elections, NFP reports, and so on. Recognizing the periods or environments where many unpredictable factors can mess with your trades is paramount to increase your odds. Just play where you can win. 

Having a source for support. Trading can be lonesome, if you are following and working alone as most of the traders, you may feel you need some clarification on the particular structure you are trying to implement. When you apply to a prop firm, you can easily evaluate them by how supportive they are. Providing a structure without support is not going to get you moving forward. When you do not understand an element in the system, you are missing out on part of the high percentage trading you need. Now, there is a thin line when you need support, and when you abuse it.

Every professional had or still has a mentor. Mentorship will help you get to the pro level fast but when you rely on support on every problem, you become dependent. You will not know how to manage alone once the support is gone because you have not developed a trading problem-solving mindset. Your trading is at risk of becoming a disaster, you panic when you lose the support you once had and make terrible trading decisions as a result. To avoid this, ask for support only when you really need it when you have exhausted all other sources and no one has faced the same problem (unlikely) before. 

There is another positive side of having support or belonging to a trading community. Every trader will face losing streaks, doubts, and other psychological issues. A prop firm, a community that provides support in such times is invaluable to traders. They come out of much better traders with a steel mindset, beneficial to the prop firm and the trader. On top of all this, belonging to a community or a prop firm will generate a lot of ideas, tools, and strategies out of which some could be critical to your winning odds increase. 

After all, know that your guide should contain specific instructions covering these general areas, especially if you rely on technical analysis. Each of these areas is covered in separate articles.

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 3

GBP/AUD Exogenous Analysis

  1. The UK and Australia Current Account Differential

In this case, the current account differential is derived by subtracting Australia’s current account balance from that of the UK. The current account shows the net value of a country’s exports. Remember that the value of a currency is determined by its demand. Theoretically, the country’s domestic currency with a higher current account balance will have a higher demand. Therefore, its value will be higher in the forex market than in currencies with lower current account balances.

In this case, if the current account differential is positive, it means that the GBP is in higher demand than the AUD, hence a bullish trend for the GBP/AUD pair. Conversely, if the differential is negative, the GBP/AUD pair will have a bearish trend.

Australia had a $7.5 billion current account surplus in Q3 2020, while the UK had a $20.97 billion deficit. The current account differential is -$28.47 billion. Consequently, the current account differential between the UK and Australia has a score of -4.

  1. The interest rate differential between the UK and Australia

This interest rate differential is the difference between the interest rate in the UK and Australia. Typically, investors prefer to buy currencies with a higher interest rate. Therefore, if the interest rate differential for the GBP/AUD pair is positive, it means that the UK offers higher interest rates than Australia. Traders would then sell AUD and buy the GBP, which implies that the GBP/AUD pair will have a bullish trend. Conversely, if the interest rate differential is negative, Australia offers a higher interest rate. Thus, traders would sell the GBP and buy the AUD, which will force the GBP/AUD pair into a downtrend.

In 2020, the Reserve Bank of Australia cut interest rates from 0.75% to 0.25% and finally to 0.1% in December. The BOE cut interest rates from 0.75% to 0.1%. As of December 2020, the interest rate differential for the GBP/AUD pair is 0%. Thus, we assign a score of -1.

  1. The differential in GDP growth rate between the UK and Australia

The differential in GDP growth rate measures the difference in domestic economic growth in the UK and Australia. It is expected that the domestic currency of the country whose GDP is expanding at a faster pace will appreciate faster. Therefore, if the GDP growth differential between the UK and Australia is positive, we should expect a bullish trend for the GBP/AUD pair. Conversely, we should expect a downtrend in the pair if the differential is negative.

The Australian economy has contracted by 4% in the first three quarters of 2020, while the UK has contracted by 5.8%. Thus, the GDP growth rate differential is -1.8%. Hence, the score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Australia Current Account Differential -4 10 A differential of – $28.47 Australia has a current account surplus while the UK is running a deficit. The differential is expected to increase as COVID-19 restrictions ease
The interest rate differential between the UK and Australia -1 10 0.00% Neither the RBA nor the BOE intends to change the interest rate policy in the near term. The differential of 0% is expected to persist in the near term
The differential in GDP growth rate between the UK and Australia -3 10 -1.80% The Australian economy contracted slower than the UK’s
TOTAL SCORE -8

Since the cumulative exogenous score for the GBP/AUD pair is -8, we can expect the pair to continue a bearish trend.

According to the above picture’s technical analysis, this pair is trading below the 200-period MA and attempting to breach the lower Bollinger band, supporting our fundamental analysis. Cheers.

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 1 & 2

Introduction

This analysis will look into endogenous factors that influence economic growth both in the UK and Australia. We will also analyze the exogenous factors that impact the exchange rate of the GBP/AUD pair.

Ranking Scale

We will conduct correlation analysis, which we will use to rank the endogenous and exogenous factors on a scale of -10 to 10.

In ranking the endogenous factors, we will conduct a correlation analysis against the GDP growth rate. If the score is negative, the endogenous factor has resulted in depreciation of either the GBP of the AUD. Conversely, if the score is positive, then the factor has resulted in an appreciation of the local currency.

When the exogenous analysis is negative, the factor has resulted in a decline of the GBP/AUD exchange rate. If the score is positive, then the factor has led to an increase in the exchange rate.

Summary – GBP Endogenous Analysis

-15 score indicates that the Pound has depreciated since the starting of 2020.

Summary – AUD Endogenous Analysis

A score of -8 indicates that the Australian dollar has depreciated as well since the beginning of 2020.

Indicator Score Total State Comment
Australia Employment Rate -3 10 61.2% in October The employment rate hit 20-year lows during the pandemic. It’s expected to continue recovery as the economy recovers
Australia Core Consumer Prices 2 10 117.49 in Q3 2020 The inflation rate still lower than Q1, but the demand is increasing in the economy
Australia Manufacturing Production -3 10 Q3 projected to drop by 3.5% Q2 dropped by 6.2%. Production expected to improve in Q3 as business operation resume some normalcy
Australia Business Confidence 6 10 NAB business confidence was 12 in November It’s the highest level since April 2018. This shows that businesses are highly optimistic about their future operations
Australia Consumer Spending -3 10 Was 253.648 billion AUD in Q3 2020 Q3 levels still lower than Q1 domestic expenditure. Expected to increase further when the economy recovers to pre-pandemic levels
Australia Construction Output -3 10 Q3 output dropped by 2.6% Q3 drop caused by a reduction in residential and non-residential construction, engineering, and building works
Australia Government Budget Value -4 10 a budget deficit of 10.974 billion AUD in October The government budget deficit is improving. This shows that the revenue stream is improving as businesses resume operations
TOTAL SCORE -8
  1. Australia Employment Rate

This indicator shows the number of working-age Australians who are employed during a particular period. As an indicator of growth in the labor market, the employment rate shows if the economy is adding or shedding jobs. Thus, it is used to show periods of economic growth and contractions.

The Australian labor market has been recovering from the coronavirus pandemic shocks when the employment rate hit a 20-year low of 58.2%. In October 2020, Australia had an employment rate of 61.2%, up from 60.4% in September. However, it is still lower than January’s 62.6%. Australia’s employment rate has a score of -3.

  1. Australia Trimmed Mean Consumer Prices

This indicator is also called core consumer prices. It measures the price changes of goods and services that are frequently purchased by Australian households. The computation of the trimmed mean consumer prices excludes goods and services whose prices are volatile.

In Q3 2020, the core consumer prices in Australia rose to 117.49 from 117.04 in Q2. Q3 levels are also higher than the 117.17 points recorded in Q1. This shows that the economy is recovering since an increase in prices implies an increase in domestic demand for goods and services. We assign a score of 2.

  1. Australia Manufacturing Production

This indicator shows the YoY change in the value of output from the manufacturing sector. The Australian economy is heavily dependent on industrial production; hence, manufacturing production changes provides invaluable insights into the domestic economic growth. It also shows how the economy is recovering from the impact of COVID-19.

In Q2 2020, the YoY manufacturing production in Australia dropped by 6.2%, compared to 2.7% growth in Q1. Q3 YoY manufacturing production is expected to drop by 3.5%. Consequently, Australian manufacturing production has a score of -3.

  1. Australia Business Confidence

Business confidence in Australia is measured by conducting a monthly survey of about 600 businesses. They include small, medium, and large companies operating in non-agricultural sectors. The survey gauges the businesses’ expectations in terms of profitability, trading volume, and employees. The index is derived by considering the percentage of respondents who have good and very good expectations and those who have a bad and very bad outlook.

In November 2020, the NAB business confidence increased to 12 from 3 in October, which has been the highest since April 2018. Australia’s business confidence has a score of 6.

  1. Australia Consumer Spending

The indicator records the quarterly change in the value of goods and services consumed by domestic households. It includes expenditure by non-profit organizations that provide goods and services to Australian households and the value of backyard productions.

In Q3 of 2020, consumer spending in Australia rose to AUD 253.648 billion from AUD 235.131 billion in Q2. Although it’s lower than Q1 expenditure, domestic demand in the economy is rebounding from the slump of COVID-19. Consequently, Australian consumer spending has a score of -3.

  1. Australia Construction Output

This indicator shows the quarterly change in the value of construction work in Australia. The total value involves both private and public sector building and engineering work.

In the third quarter of 2020, Australia’s construction output dropped by 2.6% from a 0.5% growth in Q2. This drop was caused by output drop in residential and non-residential construction, engineering, and building works. Thus, we assign a score of -3.

  1. Australia Government Budget Value

The government budget value measures whether the Australian government has a budget surplus or deficit. A budget surplus implies that the government’s expenditure is less than its revenue. Similarly, a budget deficit means that the government spends more than it collects in terms of revenue.

In October 2020, Australia had a budget deficit of AUD 10.974 billion, up from a deficit of 33.613 billion in September. We assign a score of -4.

In the next article, you can find the Exogenous analysis of the GBP/AUD currency pair and also our forecast on its price movement in the near future. Cheers.

Categories
Forex Basics

How NOT to Sabotage Your Own Forex Trades

You are in a trade, you have managed your settings prior to the entry, and everything seems to be running smoothly when all of a sudden the price starts plunging downward fast. The tension may be building up and you are now faced with two options to resolve this situation – you can either get involved and tweak the settings or stay put and refrain from making any changes. While the fear is usually quite real, there is only one correct answer to this challenge – do nothing.

Even though such manner of conduct may seem to be foolish on the outside, the implications of your actions at this crucial step will inevitably determine the future of your trading. Naturally, this may be easier said than done, maintaining the sense of discipline will turn out to be of vital importance for each trader’s forex career. In this article, you will be able to learn how not to sabotage your own trade and understand why most traders cannot surpass this hurdle.

You may be taking a course with a trading company or consulting with a professional trader with the hope of becoming better at forex, but in the end, no one can constantly be there to hold your hand. We all seek to accumulate as much information as possible and learn about the ways to acquire more pips; however, in order to be an excellent trader, you do need to be an independent one too. Any form of dependence is a prerequisite for failure, which is why the compulsion to make a move in some critical stages in a trade in an attempt to control it can also have disastrous consequences for your trading as a whole. 

The First Step

In order to better yourself and overcome the issue of not finding support within, you firstly need to create a solid, functioning system, which will take over some responsibility off your back and save you from needing to get involved. Unfortunately, many assume that the only effort they need to make is to create a system that will direct the entry and exit points in each trade they enter, yet they easily forget that the whole idea behind creating a system is so you need not worry about these steps yourself. Therefore, once they finally manage to put together an effective system, many traders fail to practice consistency.

If you have already invested time into assembling your own system and you put effort into proper testing, you should know by now that it functions well. Any divergence from what you built is then only counterproductive and will lead to inconsistency and thus disappointment due to failure. This is, in actuality, a key moment where one needs to separate emotions from logic because your decision-making must not, under any circumstances, depend on your feelings.

Impact of Emotions

Emotions can always fluctuate and they are colored by our own prejudiced, biased perspective, whilst a system is a structure that is aimed at navigating through this $4—5 trillion/day market. The system is there to both support you and help you steer clear of letting your emotions get the best of you and your trading. In addition, if you allow yourself to recollect and go back in time mentally, you will probably be able to remember the unfortunate part your emotions had in some important decision-making processes. You may think of all the anger that caused the people you know to utter words that they regretted later in life or the choices they made to stay in bad relationships for too long for example both have to do with one mutual culprit – emotions. Whenever traders allow emotions to rule their critical thinking, they are in fact making themselves vulnerable to misjudgment, subjecting their trades to the impact of the fleeting nature of their feelings.

The only way for any trader to truly feel in control of trading in this market is to make a clear distinction between their emotions and logical thinking. If we allow ourselves to enter and exit trades solely based on how we feel, we are then making vital money-related decisions grounded in our subjective idea of where the market is going to move. This sentiment-governed action is not based on any actual plan or structure, which is why a system is very much needed to bypass the dangers of our human nature. If you have developed and tested one, you have a tool that can certainly work and get you to where you wish to go, unlike this emotion-driven, reckless approach that will undeniably make all your fears come alive sooner or later. 

Doctors cannot carry out surgeries based on what they at first glance believe will happen with the patient or refuse to conduct a proper examination giving in to anger because that patient offended them upon meeting. You will always find these healthcare workers take a look at the blood results and use special medical instruments to assess the situation, leaving their personal opinions behind. Whichever job involving a great deal of responsibility you can think of requires this approach to decision-making, and certainly no doctor, army general, or president will ever allow himself/herself to put the future of people or countries in the hands of a passing sensation. 

Solution for Success

The proposition of action sounds quite simple – choose the one vehicle that will lead you to financial prosperity and leave the emotions out of the equation. Trading psychology is the very essence of trading that you will ever do and is responsible for the success acquired by professional traders too. While systems, algorithms, preferred tools, or charts may differ, the strong sense of what a “difficult” decision looks and feels like is something all experts share. No one can deny that a price spiraling downward brings up a negative feeling, but we can all agree that the only way traders can get to the exit with a smile on their faces is by ignoring that red alert button that is blinking from the inside.  

The battle is simply ever-present and we need to constantly remind ourselves what our purpose is, ensuring the conditions that help us offer our very best. Therefore, in order to go about this sensitive topic carefully and systematically, traders should think of the following steps: first, they should thoroughly develop their own system, which further implies that they should always know when you should enter or exit your trades; secondly, all traders should learn how to recognize the trade that can prove to be beneficial and execute it; last, traders must allow the market activities to envelop naturally without any interference, as it is a display of distrust in one’s own system and inevitably involves a higher degree of possibility to make things worse. 

The last step is of immense importance especially if you turn out to be right because your success in trading should be largely predicted by the efficacy of the system you worked hard to develop. Therefore, if your subjective impression of the current market situation leads to the predicted outcome and you end up being right, it will only give you green light to pursue trading by feel. Such an approach will surely prove to be detrimental to your future as a forex trader largely because forex trading requires mathematical precision that is free of any bias or preconception. The event where the close of your last trade aligns with your fear may even arouse more fear of your system being greatly flawed and that all the work you invested before was all in vain, and this is a vicious circle that can only draw you in deeper and deeper. 

If you are certain that you properly tested out your system, simplify all these steps in your mind and allow the events to unfold naturally. While a series of passing feelings of doubt and anxiety may come and go, the most important step is to refuse to listen and simply follow the process. The key here is to repeat the same steps each and every time, without giving in to the need to execute more control over the trade that is needed. Even if you feel tempted to step in and make adjustments, go back to this list and remind yourself of the ways in which you can help or endanger your trading.

Biggest Trading Mistakes 

Naturally, all traders are prone to making mistakes and these can creep up in a rather subtle fashion. Nonetheless, this does not give any trader the right to evade the educational segment of trading, especially due to the assumption that the job is done once the system is set up. There are a few typical mistakes that many traders make because, in terms of involvement, they often forget that in forex trading less is more. What is more, many traders forget that, apart from the technical aspect and the required precision, the trading is carried out by humans which are simply imperfect beings susceptible to emotional reactions. A number of traders thus only invest in learning about the market and the tools, failing to recognize the impact of their own psychology. 

Intraday trading is a perfect example of how traders easily sabotage their trades because they are pulled towards checking the progression of their trades, which leaves more room for doubt and makes them take action they would otherwise not consider. The best strategy in terms of trading applications and easy access to information is to completely ignore their existence and carry on as if they never existed. While this may seem like a silly idea, you are in fact allowing the market to perform the way it would naturally do on its own. By not looking at the apps and your trades, you are preventing yourself from meddling in and thus making huge mistakes. Professional traders around the world choose to trade just shortly before the close of the daily candle precisely because they understand their human weakness and the need to reduce the risk of doing something they could regret later. 

If they have already made some mistakes or lost more than they planned to, traders also tend to overcompensate by trying to do more than they should. In such cases, traders find themselves trying hard to find trades that would bring their account to where it was prior to losing. This way, traders actually chase losses while unfortunately, more often than not, the whole dissatisfaction with one’s account slowly but surely lures the individual into sinking deeply and fast. The lesson here is that losses are an inevitable part of trading in this market, and, the sooner you learn how to deal with them, the better you will be at keeping your account. Money management is not about compensating for your losses but preventing them. Therefore, the more you try to go back and return what is lost, the greater the chance for amplifying the loss is. 

An essential part of making mistakes such as the ones described above is panicking because traders are generally less likely to make an irrational decision willingly or consciously. Rather, traders are easily pushed into thinking that they better make a move because of the cold sweat going down their necks. This exact way many traders assume that taking money off the table once they start losing many pips is the best solution when, in fact, their accounts would most probably do much better without making this choice. Taking losses is an essential part of trading in the spot forex market and your task is to learn how to process the anxiety that stems from taking drawdown. Many a time, traders cut bait just because they start panicking and particularly as a result of looking at their traders more often than they should. 

On the other end of the spectrum, we have another situation where traders find themselves entering a particularly satisfying trade that is generating a great number of pips. Now, after a 2.5% gain, these traders can start feeling markedly satisfied with this outstanding achievement that they end up not making the crucial decisions that would keep their account safe. At this point, they are probably looking at their accounts, hoping not to fall below their new totals, so they completely disregard their proven system and money management process that they would naturally use under different conditions. What this often means is that these traders would take everything off, admiring the great sum appearing in their accounts, when in fact they would fail to recognize the possibility of the trade moving much further than that. Many experts have shared their past experiences where they missed out on long trades because they feared to keep going once they earned a great amount of money. 

Fearing risk can be a blessing in disguise as much as it can make your worst nightmare real. Therefore, just as we say that one swallow does not make a summer in terms of losses and your account being finished as a result, so we can move towards understanding that one big win cannot possibly imply that a trade is over. Instead of failing to earn a few additional hundreds of pips next time, learn to trust your system to tell you when to exit the trade. As you can exit too early while losing, you can do the same when winning, so the perfect solution for traders to stop doing anything prematurely is to simply allow the system to process information without micromanaging the trade or ignoring its signals. Traders must not, under any circumstances, deviate from their tested, proven systems and accept the imperfection of the human mind. 

Last but not least, among the greatest mistakes made in trading, forex traders increasingly fail because they simply do not understand the concept of playing the long game. Unlike other mistakes listed above, this one implies more of a process than a single mistake one can make in one second. What this essentially means is that earning an impressive percentage of the money you started out with should not make you feel entitled to winning. Many traders often earn great amounts of money quickly, increasing their total unbelievably fast, only to go back where they were in the beginning even more quickly. At this point, after feeling so proud of yourself and after putting so much effort into trading, you end up losing everything you earned, feeling completely shattered. This is such a sensitive spot for many traders because they are incredibly prone to acting impulsively at this stage and the least sensible and rational decisions are made precisely when one starts losing. 

The point after losing is the moment where even good traders need to keep their eyes open and control themselves so as not to let their emotions lead the way. While also common among experts, this issue can be tackled easily just by understanding the relevance of the data you get after a 12-month period. If you have completed the testing process and you are done with demo trading, you should feel pressured to experience wins constantly. Just like currency pairs, our trading accounts naturally oscillate up and down and this is an innate part of the forex market. Even if your account goes down more than you expected, you should aim to stay on the course, understanding the decline as a natural fluctuation. The main idea that you should constantly remind yourself of is that you are playing the long game which requires that you keep the same course as before, maintain a sense of direction despite the passing losses.

The top traders are precisely the traders who can maintain a clear picture of their goals regardless of the short-term losses. The best traders are those who know how not to quit or sabotage their trades by making rash decisions. These are the key points that will either place you among the losing majority or the winning minority. Even if you find yourself slipping in the unwanted direction, you can always consciously choose to correct yourself and return to the course you wish to follow. The winners are also those individuals who know how to recognize and accept that they have slipped because this is the mentality that will propel you, as well as every other trader, towards success. 

Actual Steps to Take

If you are a self-aware trader who understands his/her shortcomings, you are also probably the type of person who is ready to invest in psychological growth. As we have come to witness in this article and in real life too, sabotaging one’s trades often has to do more with discipline than any other aspect of trading, which is why reading useful material on this topic has proved to be extremely beneficial for a great number of traders. Discipline Equals Freedom by Jocko Williks, for example, is an essential read that has helped numerous traders get out of the slump of succumbing to their habits and impulses which often prove to be fairly unhealthy and unproductive. While many people assume that self-help books are light reads that are meant to make you forget your troubles, mindset books such as the one mentioned above are vital educational materials that will surely change your life for the better and thus your trading as well.

If you wish to be proactive and are at the beginning of your trading career, make sure that you leave enough time to set up and test out your system. The internet and various social media outlets provide numerous resources that will help you start devising your own system. Start applying the advice shared online and, most importantly, choose to give yourself the chance to demo test everything you learn before you actually invest your own money. The desire to make money is what we all share, but do not let it get the best of you if you are looking forward to achieving and maintaining sustainable, long-term success in the spot forex market. 

Another important piece of advice to consider is to make yourself aware of your own criteria because you will eventually need to make decisions based on your needs and standards. If you have a list of indicators that you need to use to get a green light to enter a trade, you should not by any means ignore your system and try to take a shorter path. Exercise discipline in every aspect of your trade and do not let yourself sabotage your success just because you are eager to earn more money. Wait for all of your indicators to tell you to proceed and, once you enter a trade, let it run its course naturally. Refrain from giving yourself the chance to check the trades you are in and possibly interfere, whilst nurturing a sense of trust in your system.

Lastly, do not allow yourself to be triggered by passing losses, understanding that your only point of reference should be the number you get upon the completion of a 12-month period. These steps may certainly turn out to be slightly more difficult to follow in real life, yet they are absolutely vital if you are a committed and self-aware trader who wishes to evade the common, repetitive mistakes that make many forex enthusiasts sabotage their trading. 

Categories
Forex Market

Is Volume Enough to Beat the Big Banks?

Traders hoping to become successful at forex constantly strive to improve their trading skills and, even more so, the variety of indicators that they use in trading. While the list of indicators is difficult to number precisely, forex enthusiasts often look for indicators in the hope of acquiring specific information. Volume, one of such important aspects of the forex trading experience, does not only pose as a relevant but also necessary item of information that gives traders a green light to enter a trade. Although volume indicators are many and are generally assumed to be a crucial part of each trader’s algorithm, this variety leaves much room for equally varying degrees of success. Naturally, in connection with this topic, the question of whether we can use indicators such as the Depth of Market or the DOM indicator to obtain more information about the overall market activity and be ahead of the big banks comes along.

DOM Indicator

DOM is popularly described as a very potent indicator that has been promised to provide traders with the potential to stay on top of the competition, which explains the high search frequency for this topic on Google. While still part of the MT4, this tool is located outside the common list of indicators and can be accessed by pressing ALT+B or clicking right and scrolling down. With regard to its performance, simply put, this indicator gives traders insight into the price levels with the heaviest volume. All the information DOM presents traders with stems from the brokers’ data that understand exactly where the clients’ orders are at any given moment. However, while sharing this information with others, the question of whether this allows us to trade like the big banks, or in other words have equal power, still remains unanswered.

Any trader interested in accessing the information discussed above can easily discover a price level with an abnormal amount of volume with the help of DOM, which can indeed seem quite appealing to anyone aspiring to become a successful and affluent trader in the forex market. Nonetheless, issues arise once we become aware of the fact that any dealing desk broker’s information is limited to levels and does not stand for the overall volume. Therefore, if a trader is interested in gaining an understanding of the volume and how the market is going to respond to any strange concentration at any point in time, this indicator already seems to be falling behind its promised ability.

Whereas many traders use DOM to enter trades, as a simplified version of such tools, this indicator also fails to do everything else a trader should expect from a fully functioning indicator. If we take into consideration the facts that traders need indicators for three purposes – to tell them whether they should go long or short, to help them with money management, and to assess if there is sufficient volume, to begin with, it becomes apparent that DOM is far behind satisfying all criteria that any trader should hold on to while using indicators. What this further entails is that not only the indicator in question cannot perform well but that volume alone makes only one of many relevant data that makes us feel assured that we can proceed with the trade. 

Trade Volume

When one is looking into the volume at any point in time, he/she should also be aware of the fact that seeing the list of the prices is not indicative of the overall volume. For example, a dealing desk broker such as Oanda will even fail to do as much because the only item of knowledge one actually acquires, in this case, is the numbers, which are highly unreliable and insufficient for determining the direction of a price. Even if traders choose to use other indicators to access volume-related information, they in fact still never acquire the data on the long-term volume, which directly questions the sustainability of any given currency pair one may be interested in. Therefore, the only tool that can grant this type of information that goes beyond current values is an actual volume/ volatility indicator as DOM simply is not of much use in this respect.

In order to understand any given information concerning volume, traders need to learn how to read the numbers they are presented with. For example, should a trader see that the DOM indicator reveals a price that is several pips higher, he/she still cannot fully trust the indicator or what numbers it is giving. Such feeling originates from the fact that some of the crucial questions are still looking for an answer, as we do not truly know anything about the type of orders that comprise this volume, whether they are limit or stop orders, or if the majority is entering long or short trades at the time. The missing information is much required as qualitative support owing to the fact that numbers alone have no meaning unless we are able to interpret them meaningfully.

Long and Short Trades

Traders should also be invested in discovering the predominant percentage of long and short trades because it will help them determine the correlation between volume and the types of trades forex traders are typically entering at the time. In addition, only once they get hold of such information will they be able to tell if the big banks will react at all because the main requirement for their involvement is precisely the impact volume has on the above-mentioned percentage. Unfortunately, the DOM indicator is unable to provide the data required and traders will never be able to tell the quantity of long and short trades or the price level above or below either, which makes the use of this indicator increasingly futile. 

Aside from understanding volume, its relevance in trading and the type of information traders need to possess so as to expect any success in forex, trading should generally not be intended to beat the traders’ greatest competition – the big banks. The reason for this remark lies in the understanding that the majority of traders attempt to do exactly what the big banks are doing and such an approach is exactly what makes so many traders lose most trades and accounts. The role of the big banks has always been clear and attempting to outsmart the one entity with more information than anyone else in the forex market possesses at any given time is a sure way to experience great losses. Hence, in order to beat the competition, you should learn how to use and interpret the information you come by rather than strive to be in the midst of the greatest concentration of activity in the chart.

Understanding Market Activity

The focus on the numbers has, as we explained above, never been the best of allies simply because we do not really understand the activity even when we can see that the concentration is extremely high. There is a number of indicators that can provide the same types of information, yet they lack the key ingredient to really be of any use. Interestingly enough, much of such data actually reflects past activity, which can only confuse you and blur your vision with regard to future activity. Therefore, the ability to see heavy trading does not reflect true volume nor does it indicate any future development. The sole reliance on indicators in the hope of them fulfilling all our intentions, goals, and needs is not going to lead to sustainable success and the same can be said about the reliance on volume alone.

Many traders are passionate about beating the competition when, in fact, their greatest opponent is their own lack of knowledge or understanding. In the forex market, we can say that everyone is fighting their own battle, so we cannot really discuss competition as we can do in the world of sports. Fighting against the big banks in the literal sense has been proven to be in vain, but understanding how to rise above their radar and focus of attention is most likely to bring you to where you want to go.

In order to achieve the expertise of not falling in the majority group, both in terms of the concentration in the chart and the number of people losing, traders must learn to take the road less traveled and attempt to take a different approach. As the use of one indicator alone, focus on one aspect such as volume, reliance on numbers alone, and hope to outsmart the big banks all seem to be inadequate, traders can turn to some other highly effective activities that have a much greater chance of helping them succeed long-term. The intention to grow and ensure sustainable development by far outperforms any quick fixes the majority of traders are interested in, which is why indicators such as DOM are so often used and why so many traders keep making the same mistakes.

Instead of putting all of your eggs in one basket, strive to dive deep into the psychology of trading, understanding why you keep experiencing losses and invest in money management so that you are a stable and balanced trader first and foremost, and the success will follow. Traders commonly assume that their careers should reach a peak the moment they come up with an algorithm, but the reason they still fail lies in the lack of understanding that some criteria are far more important than using the right tools.

Challenging Traditional Beliefs

Another important piece of information regarding the volume is that traders always believe that the higher the volume, the greater the success. Nonetheless, low volume, which is a usual part of the natural oscillations in the forex market, can allow traders to learn about the nature of the market and invest in testing their systems. Human beings can get extremely greedy, but forex requires a different perspective from its participants who are intent on reaching the expert level. In that respect, the greatest goal is not only to gain wins but also to mitigate losses and the same broad perspective can allow traders to see outside the narrow world of perfect tools and quick solutions.

And, finally, to return to the title of this article Is Volume Enough to beat the Big Banks?, traders should by now see through this the ideology and beliefs forming the basis of this question. Neither volume nor a volume indicator can be said to be the sole savior in the battle, especially when the battle is similar to that of Don Quixote. What you as an aspiring forex trader can do is learn to interpret the numbers you obtain and work on yourself as an individual, and any desired success will surely stem from these fruitful and sustainable decisions. 

Categories
Forex Trade Types

Technical Trader Algorithm Guide Example – Trend Continuation Trades

Trend following strategies is the best method of trading according to research studies. Traders will pick a trading method that is the most comfortable or profitable to their living style and psychology. Therefore, your best method does not have to be trend following. On the other hand, most professional traders believe you can adapt trend following strategies to any trader personality type. It is just a matter of how well you improve your psychology part once money management and technicals are in place.

Trends are mostly not consistent and predictable so traders devise ways to have better odds in this environment. Trends can be parabolic, mild, and long, with pullbacks, low and high bases, or switches in momentum. Your trading system will need to have a mechanism to generate a signal to continue following the trend. This article will present one example of how you can implement a ruleset, indicator measurements, and algorithm to have a definitive decision when any of the above trend characteristics manifest. Your systems can take exact values although as every trader has different trading styles, you should adapt it to your preference. 

Prop traders employ a set of indicators and elements to know when to enter a trade –  at the best moment when a trend has started. That trend needs to have momentum. For this purpose, they measure volatility or volume. This trend is confirmed by confirmation indicators we wrote about, and money management tells us how much to risk according to the currency pair or other asset volatility. Other elements also have their roles so we catch the best probability trends once they emerge. But more often than not, our exit indicator can signal us to exit, only to find out the trend just had a pause a day or two, just two candles if we trade on a daily chart. Whatsmore, the trend continues for a week with great momentum.

Now, we can feel we missed out on a dramatic profit, but we have a rule set we do not deviate from. Continuation trades are also rule-based, and since trends are not consistent, continuation trades are common, so common they can even make the majority of the trades we make. Some prop firms take into account higher and lower time frames signals to pinpoint the best entry or exit. Yet, for continuation trades, it is enough to stay on one if it is a daily time frame, since higher time frames, weekly and monthly can have many significant events for a currency. A daily time frame is used in our algorithm example, including the previous articles.

In our MACD indicator article, we gave an example of how the MACD can be used for continuations. However, there are a few rule modifications once we have a trend below or above our baseline element. Additionally, other elements such as the volume filter, are completely ignored. Now you may think you spent so much time on finding and testing the volume indicator only to ignore it now is not a rule you want to implement. If you remember the article we talked about the lagging indicators, you will notice every volume or volatility indicator we know needs data to measure to have a conclusion if the price action is flattening out.

You may rely on chaos theory and look at the charts alone to determine if the market is going into the flat period before any volume indicator signals. These decisions are predictive, it is hard to backtest your decisions like this and they are prone to previous trade success and emotional state. If you use a volume indicator, continuation trades will likely be too late, you will enter a trade once a trend is in a pause or reversal moment. Consequently, we are eliminating the volume filter from our algorithm for continuation trades only. You can backtest this decision if you have better results without it. In our testing, it was always the case. 

The Baseline is our ultimate major trend filter. It tells us where a higher scale momentum direction is. Using a baseline we filter one trade direction, short or long if the price is below or above the baseline at the end of the day trading session. Based on this rule, we enter only the trades in the same direction as the major trend momentum. Clearly, there is a higher probability a trend will push the price more in the same direction than turn around, even though reversals happen and cut a part of our profits from our trades or cause a loss if our take profit levels are not reached. This is what the baseline element is for when we talk about continuation trades. 

In forex trading, it is easy to find certain market conditions that do not fall into our rule book. Such does not happen often if our plan is already developed and tested. However, there is a common condition that may confuse beginner traders if they follow our guides. It is a condition when the exit indicators call for an exit even though the trend confirmation indicators still show the trend is still going on. As mentioned above, we do not blindly ignore the exit indicator or blindly listen to the exit indicator. We create an additional continuation rule that says to enter a continuation only when the confirmation indicators show a new entry signal. This means they have to show a counter-trend signal before a continuation can happen once they generate a trend-following signal again.

If you have a confirmation indicator that also doubles as an exit indicator, then it has to show an exit before a new continuation signal, in this case, it is easier to find continuation trades as the signals are at the same moment. Yet, in most cases, exit indicators act before confirmators, so you need to watch for an alignment. Once you do some continuation trades, it becomes easy to follow the algorithm, even if it may look complicated.

Money management also needs to be adjusted for the continuation, not just the volume. You may notice the ATR money management is always in effect, for all trade types your algorithm shows. You will still use it as described in the previous articles and guides without exception. However, the part that does not include position sizing measures, is ignored. So not only do you ignore the volume for continuations, but also the 1xATR price level (values used in our example) that is past the baseline. Trends that continue are often way past the baseline, so the rule when we enter a trade that prohibits fast movers past the 1xATR range from our baseline does not make sense. Otherwise, we would never have the benefit of continuation trades that happen a lot.

Continuation trades do not have this ATR – baseline rule but it does not mean you should ignore the crisp money management position sizing setup we have described in a separate article. Only when the price cross-closes the baseline we apply the ATR range rule. So we define a trend in the continuation mode only when it never crosses the baseline again but the confirmation indicators show another signal to go. 

Now we can present examples of how we manage these conditions with the simplified system according to some prop traders. Again it is all defined, we do not have to think if the trend is continuing or not, the system covers this situation, all we have to do is follow it. It is easy to backtest and forward test it too. Let’s take the MACD indicator we have used first as it has a few parts combined to generate signals – two moving averages intercrosses and a zero line cross. It is good as an example of a continuation trade idea. In the picture below we see AUDNZD daily chart with the MACD on default settings without the baseline or any other system element. 

The zero-line of the MACD (gray dashed line) is like our baseline, a higher scale major trend gauge. Once both MACD moving averages cross it, this signals that a major trend is starting, the grey vertical line on the chart marks the moment. So this is a short signal, but we have a signal to exit once the faster, blue MACD MA crosses the red one. Both MAs are still below the zero-line telling us this is probably a small correction and we are still in the major downtrend. Soon, we had our first continuation trade, the faster blue MA crossed the red down again, marked by a blue vertical line. An exit signal was generated again and a new continuation until the major trend was over later when both MACD MAs crossed the zero-line at the far right end of the picture.

Some of the continuation signals might be a loss but these are losses we have to take. We do not account for the volume filters here so we have to be careful about these trades and maybe avoid taking them if the forex market overall is not moving much. Such conditions can be assessed with the mentioned $EVZ or VIX Index we wrote about before. Combined, continuation trades capture the biggest part of the major trend, but not all, this is the price we have to pay if we want to control the risks. 

Now, let’s add a baseline and change the main confirmation indicator for the same chart. We are still not going to include other algorithm elements, such as the volume and exit indicators you should have included. For the sake of simplicity, we will use the Chaikin Money Flow indicator for entry and exits, set on the 8 periods. We also include the 20 SMA as the baseline. The Chaikin Money Flow also contains a zero-line, once the signal line crosses it down, it is a trade entry signal. Also, once the line crosses it up, we exit. As in the previous picture, the major trend started once it close-crossed our blue 20 SMA baseline, the moment marked with a gray vertical line. Chaikin Money Flow agreed and we entered the trend. Pay attention to the ATR entry rule here as well as the volume conditions your system should have. Chaikin Money Flow gave us a signal we need to exit for the first time, marked with a red vertical line. This was probably a winner trade if we put our take profit at the 1xATR level.

Three days later, Chaikin Money Flow gave us a short entry signal again, the price level closed below our baseline so this is officially a continuation trade, no ATR-baseline rules apply for trade entry, we do not look at our volume indicator, we just place our usual risk management (position size, take profit and stop-loss orders) according to the ATR levels. A candle later we have an exit signal with a small profit and then Chaikin Money Flow shows to enter once again without exit until a few weeks later. This captured more profits than the MACD even though we now used more sensitive indicator settings. Interestingly, we had another continuation trade that ended in profits until the price close crossed the baseline, marking an end to the major trend and our current trade.

Again, we have not included system elements you should have to cover the most important aspects of the forex market. The examples above are only to demonstrate how to handle trends that more often than not have inconsistent momentums. You should always test how your system performs, including all trade types – continuations, pullbacks, new trend entries, including trade exits, and the trading rulebook. As you may have noticed, reversals are not the trading type for trend-following methods. Hopefully, now you can have a complete system structure you can follow and come back to if you need clarification. Of course, you can add-on to the mentioned example and build your own structure while exploring the world of forex. 

 

Categories
Forex Assets

Fundamentals of the Australian Dollar (AUD) and the New Zealand Dollar (NZD)

The two currencies, the Australian Dollar and the New Zealand Dollar are quite highly correlated, which is why this article will deal with them both at the same time. Here, we’ll cover their historical backgrounds, economic impacts, correlation, recent market activity, and much more. 

Historical Background

Australia was populated by the British in an attempt to alleviate the overcrowded capacity of British prisons and grow the British Empire. The new colony grew to the extent that they created their own government in the end. The Australian Dollar, which is also known under the ISO symbol of AUD, is one of the top 10 currencies in the world. When compared to the country’s size, as well as that of its population and economy, the official currency of Australia is truly impressively ranked among other world currencies. This currency replaced the Australian pound in 1966 and is now considered a proxy for some vital strategies in the currency market. As opposed to the EUR/USD or USD/JPY crosses, which entail a number of goods and services trades that get intertwined with currency trades, the AUD’s privileged position mostly stems from forex trading alone.

Apart from the name and the symbol, the currency is nowadays also referred to as $A, $AU, or Aussie. Similar to the AUD, the New Zealand Dollar (ISO symbol: NZD) is one of the most traded currencies worldwide, which is again an interesting fact considering the quantity of goods and services exchange between New Zealand and the rest of the world. Another manner in which the NZD resembles the AUD is the impact of forex trading on currency strength. The other terms the NZD is also known by are NZ dollar, kiwi, or $NZ.

Most Traded Pairs

The most traded pairs are the two currencies against other major currencies, in particular against the USD, JPY, EUR, and GBP. Most liquidity of these two currencies and their most common pairs is generated from trading. Compared to the EUR/CHF cross, which is influenced by the goods and services (money) exchange between Europe and Switzerland, the liquidity in AUD and NZD pairs is an important difference. Currency pairs such as AUD/CAD or NZD/CHF involve very few trades of goods and services, so the money exchange mostly comes from traders, who are also not so great in numbers when it comes to these crosses.

Whenever liquidity is low, traders are faced with wide spreads and increased volatility especially with regard to news events. News announcements greatly impact the currency market’s trades of NZD and AUD, which is why crosses such as AUD/CHF and NZD/CHF are considered dangerous around the time any news comes out. Therefore, the most important question in terms of trading these two currencies is liquidity, which is why professional traders mostly focus on the crosses including the USD, JPY, EUR, and GBP.

Central Banks

Before the establishment of Australia’s central bank, the Reserve Bank of Australia (RBA), in 1960, the country relied on the Commonwealth Bank of Australia to issue the currency for the country. This task was moved away from the private bank into the government, which is responsible for the monetary policy at present. The RBA numbers nine employees who are all appointed by the government. The current Chair of the RBA is Mr. Philip Lowe, who took over the position from Mr. Glenn Stevens in 2016. The RBA holds 11 meetings per year on the first Tuesday of the month (all except January) when traders can expect announcements will be issued. The bank has a trifold mandate, with the stability of the currency, i.e. price stability and fighting inflation, being their primary goal. Their second aim is to maintain employment across the country, whereas the last one is the economic prosperity and welfare of people in Australia.

Unlike the ECB, whose mandate is more singular (inflation), the mandate of the RBA is quite wide. This comprehensive list of goals and tasks enables them to be rather flexible with regard to monetary policy. Australia and New Zealand are generally likely to show similarities in terms of economic policy. New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ), was established in 1934. The RBNZ comprises 10 members/governors who meet eight times a year. As of 2016, Professor Neil Quigley has been working at the position of Chair of the bank. The bank has a single mandate – price stability, yet unlike the ECB, the RBNZ seems to be more flexible. 

Economies

Australia, the 10th largest economy in the world, is strong in mining and agriculture, which make more than half of the country’s exports. Australia is a major commodities (iron, gold, etc.) exporter to Asian countries. Australia’s largest trading partner is China, which is an important fact for the currency market traders. The Chinese yuan (CNY) is, like the Indian rupee (INR), not allowed outside the country, which is why Australia and New Zealand are the means to get to this currency. This is why there is so much volume in these currencies despite the fact that they are not the largest economies in the world. Traders interested in the AUD are always advised to think of the strength of mining in Australia, commodity prices, and China. New Zealand’s economy is slightly behind Australia, ranked 16th in the world. Their economy is mostly focused on agriculture, which is why the country largely exports food and textile. New Zealand’s largest trading partner is China as well.

Economic Reports

The reports traders should focus on are rather similar to those of the United States: quarterly GDP reports, monthly Employment Report, Retail Sales, and Producer and Consumer Price Index (CPI and PPI) for both the AUD and the NZD, including Westpac Consumer Sentiment for New Zealand. 

The AUD/SPX Correlation

Australia is not the biggest economy, but the AUD is used extensively in the currency market as a proxy for growth. If economies are growing, there will be a demand for natural resources, causing the Australian exports to be strong and the country’s relationship with China, as one of the greatest economies in the world, comes into place here as well. Some of the greatest correlations we can see are found between the AUD and the USD as well as AUD and the S&P 500. Since the AUD is perceived as a proxy for growth, if traders assume that economies are going to grow, this will be bullish for the equities market and the currencies such as the AUD. As we can see from the chart below, the nature of this correlation has changed, but it is still quite high, exceeding 50%. Correlations can in general vary in strength during different periods; however, the AUD/SPX correlation can allow traders to draw some conclusions and expect changes in the prices of the AUD should the price of equities increase.

Another important AUD/USD correlation concern is gold, which has historically been one of the most prominent correlations. Therefore, the increase in the price of gold has traditionally been bullish for the AUD. Any decrease in the price of gold is then bearish for the AUD.

With regard to the NZD, one of the strongest correlations exist between the AUD and the NZD, which is why many young traders make the mistake of going short on one and long on the other. Although the two tend to move in different directions at times, these currencies are still highly correlated. Therefore, due to their strong correlation, the insight into what is happening with the NZD should provide information on what is happening with the AUD and vice versa. 

Owing to the similarities described above, if equities prices start to move up, this change will likely be bullish both for the AUD and the NZD. Should you come to the conclusion that a change in the price of gold is going to be bearish for the price of the AUD, the same conclusion can be applied to the NZD as well. 

Trading the NZD and the AUD

Both currencies require traders to take liquidity, proper selection of crosses, and avoiding news events into consideration. Currency pairs such as GBP/NZD can be great for traders, but they tend to get really volatile around the news announcements, leading to unpredictable moves and wide spreads. It is also important to remember that both New Zealand and Australian economies are focused on commodities and Asian countries. Concerning interest rates, both Australia and New Zealand keep their rates at 0.25%, which places them right in the middle among all major currencies’ central banks. Inflation in both countries tends to vary according to CPI and PPI reports. The two countries typically do not have any challenges with the trade deficit, as they are large exporters that typically carry a surplus. What is more, as these two currencies are tightly connected with global growth, commodity prices are important factors that determine what is happening to the AUD and the NZD. 

As a proxy for global growth, the NZD and AUD pairs will reflect any global panic. The 2008 AUD/JPY chart below reflects a large drop (a 50% loss) in the midst of the crisis that was affecting the entire world. Traders use these currencies to trade growth as well as to short and sell when there is a recession.

Recent Market Activity

The AUD has been quite resilient lately with the price action slowly building up towards the end of the chart. While the chart did give a few breakouts in several places, they would simply fall. What is more, as we can see from the chart below, the past three months the price has been consolidating and this consolidation is likely to break out sometime soon. However, the CAD for example has shown how the breakdown itself is not as relevant, since the price of the Canadian dollar did break down for it to go up the very next day. The near future of the AUD may reveal similar tendencies, with the price either going straight up and growing even more or, on the other hand, going up and then pulling back in the opposite direction.

The longer the consolidation, the more difficult for the trader to assess the chart’s future movement as much resistance has been building up. Likewise, the shorter distances do allow the price to break out more easily, and the break-out and pull-back tendencies are generally much more often in such cases. The chart below shows how the currency has been doing well lately in 2020 from the technical point of view, with its strength supported by the equities and gold markets experiencing all-time highs, strong risk-on sentiments, and a weak USD. The end of the August 2020 chart reveals how the current trend should be bullish, but it is not, so it is a sign that something is wrong at the moment and that the currency should be handled with care. 

As the chart below reveals, the volatility seems to be on the low when it comes to the NZD lately. Compared to March, for example, the volatility level is much lower now. The NZD lost its momentum going upwards and in August 2020 started moving steadily in the opposite direction. The big move down may easily reach the bottom end, i.e. the support line, which would require a change in the overall outlook on behalf of traders.

Traders have been able to see some divergence with the AUD/NZD pair in the last few weeks. If traders are thinking of whether to go short on one or the other currency, the NZD is currently a much better pick. The AUD and the NZD are similar, but if they break the level they have been approaching for a while now, traders might be able to witness a more significant divergence happening. Should traders encounter a slowdown, the AUD may turn out to be a better choice after all. Owing to the current progressions, traders are advised to pay close attention to this currency pair in the time coming.

So, what does the future hold for these two currencies? It’s tough to know, the same as with any currency pair, as there are simply too many factors that determine how the market moves. What we can say with certainty is that at this time the pair is delivering some excellent trade opportunities if you only know where to look.

Categories
Forex Basic Strategies

Trend Trading When There Are No Trends

During a larger part of 2019 traders have witnessed probably the least volatile forex market in history. These periods are often followed by steady bullish equities markets when most of the capital goes on this side of trading. Forex traders that use trend following methods have two options in these situations. Trade as they are still in trending markets and give back what they have earned during the previous year or use this environment to their advantage. The situation from 2019 is perfect grounds to learn, test, and separate consistent traders from the rest. 

To some degree, trading forex does not put you in a position where you feel out of control, like in the stock market with reports or crypto with so many unannounced events, etc. In forex, even when trades do not go your way, you still have some control. There are a few ways to recognize dead markets, some are quite obvious but beginner traders may need more clarification. Taking advantage of dead markets does not come from trading, it is by adjusting our trading systems to avoid them. Experiencing dead markets in real-time is a great opportunity to secure our future results. So traders will need a plan, and we will put in place one as an example of what you should do when you enter flat waters. 

First, a tool is needed to measure how volatile the forex market is. Volatility can also be substituted with volume, what we want to measure is the activity on the market. One such example tool used by prop traders is the Euro FX VIX ($EVZ), Index created by CBOE. Pay attention to our Volume articles about incorporating filter indicators into your system. This tool is just another filtering method that can be applied to your plan outside the usual MT4/5 indicator combo. Now, the $EVZ Index is published by a few charting sources, one can be Yahoo Finance, barchart.com, TradingView or you can even go to the CBOE site. If you notice the “Euro” in the Index name, do not think it applies to the EUR currency only, it is a good indicator for the overall forex market volatility. 

$EVZ presented as a histogram on Yahoo!Finance:

In the picture above we can notice a sharp jump in the activity once the world was hit with the COVID-19 pandemic. Just a few weeks before, the $EVZ was bottoming below the 5 mark for quite some time. The whole of 2019 was one of the quietest long periods in forex history. The Index can also be represented as a bar chart but you should not pay attention to the highs and lows, just focus on the close value. The 2019 anomaly created a stir as trend traders found their systems losing more than usual and just after the dead period traders experienced the pandemic shock. To adapt, a completely different instruction has to be used for your trading plan. Another interesting correlation to dead markets is the movement of the equities market. What some traders have found is that when S&P 500, for example, is trending but slowly, in constant small increments each day, forex markets start to die out. 

In the picture above we can see whenever a gradual S&P 500 (red line) increase is present, the $EVZ (blue line) Index is slowly waning out. Immediately after a disruption in the equities market, the forex is full of currency flows. Downward equity moves are especially sensitive as people move the money out of equities and move into forex or other markets where investing is more lucrative. The negative correlation is evident, since 2017 the S&P 500 is slowly moving up and forex is not what it has been before 2014 where trend traders’ standard gain was around 200 to 300 pips a day. 

If we take a look at the ATR indicator, calm periods can also be spotted which can drive trend followers impatient. They will not get signals, the signals are not resulting in long trends or more likely they are fake moves. Trend following strategies have only one weak moment and that is until the Take Profit target is hit. After that, prop traders secure their wins by scaling out and moving Stop Loss orders to breakeven. Signals that end with a reversal before the TP is most likely a loss and are more common in dead markets. 

Trader’s psychology is at the test here. When you are in a dead market and you are losing, this is a good thing! It is time to take advantage of this. Understand these conditions happen and will happen again. The next time it happens your trading plan will be ready. Chaos theory applies, the order goes into chaos, and chaos back to order. In case you are a beginner and just testing your system for the first time in 2019, know your system will be adjusted to this dead market and may even be not as successful as you would want. On the other hand, since you are a beginner, you should be trading on a demo without any real capital to lose. To some traders, if you are trading in dead markets and still on breakeven, your system is on a good track to endure dead markets and reap consistent gains when it is not. When you are testing your volume indicators or tools, dead markets are extremely good for forwarding tests. Once you have picked your favorite volume indicator it should filter most of the flat mini periods in a dead market by keeping you from taking any trades and even give you small winners sometimes from rare trends worth taking. This element is crucial but some may find it is the hardest to find. 

If you are still struggling to find a good volume indicator then just go and use the $EVZ we have presented. Create a set of risk management rules for your trading and apply them to your trading system. As an example some prop traders use, whenever $EVZ value is below 8, reduce your positions to 50% of what you normally take. If it goes below 7, use only 25%, stop trading below 6. This measure alone will benefit your end line and filter 90% of bad signals when combined with your volatility indicator. When you realize you are losing consistently at some game or market, avoidance is one great and simple measure that will help. Avoidance or filtering your signals in an environment where you lose is the same principle, just formulated into a strict trading plan. Even though it is fun to be in action, your ability to avoid it is what will separate you from others. 

Another interesting conclusion prop traders made during the dead markets is that the USD pairs are just not good even for small trend signals. So their suggestion is just to avoid all signals from these markets once you measure a dead market. Sticking to cross pairs is also going to be tricky but you can make one adjustment to increase your odds. Scaling out principles explained in one of our articles where you leave out a part of a position to continue riding the trend may not be a good idea in dead markets.

Since trends are not going to last for very long, it is just better to take a whole position at your first take profit target. So whenever $EVZ is below 8, for example, make this adjustment to your system. Those 200+ pip trends are not going to happen, so all of your high percentage setups may just lack that extra mile that makes all the difference on your account. Just avoid aiming for big and cut everything at your first price target. If you are following our ATR based money management, your risk to reward ratio will be 1:1 in these conditions. This is not good money management for normal conditions and will not provide you with a positive account, it is just temporary. The risk of a reversal is increasing as you keep your position longer, so based on testing it is just better to end sooner.

Once the market is active again know that your volume indicator and system are still calculating historic movements and the signal is not there yet. More often than not, the first trend after the calm phase will be missed since your indicators are lagging. As mentioned in the Volume articles, these indicators need data and would be useless if too sensitive. Be ready to accept missing out on first movements after the dead market. Do not attempt to make indicators more sensitive just to grab the first trend, it will make your system susceptible to fake breakouts frequent in calm markets and you will face new losing streaks. Experts even say the first strong moves are likely to be corrected after a day or two, and that means 1 or 2 candles if you are trading on a daily chart. Relax and know your account endured the storm (calm market) of fake moves where other traders not accounting for the volume (which is quite often) lost their morale and most of their accounts. Robust trading plans with these elements are only a result of your hard work majority of traders just lack. 

Lastly, there is one more adjustment you can make when you are close to being out of the game. It is an extreme indication something went wrong with your plan, money management, or psychology part, but if you are on the line for some reason try changing your target timeframe. Daily charts may lack conviction but smaller time frames are certainly better. Here, your daily chart trading system (for example) will be performing in an environment it is not designed to so expect less impressive results. However, the system you have designed should be universal, if you are following the structure we have provided before. Smaller time frames have a lot of other factors you need to pay attention to. This also means you need more time, more nerves, and less sleep. News event moves here are bigger and more unpredictable, then we have trading sessions and more factors. The smaller time frames we go to, the more nuances can get our trends to reverse.

However, here is also where you will find your volume if you desperately need to trade. Such needs may come if you are expected to trade by your client or a prop firm and you are in a dead market. Sometimes it may happen because you need income. If you need income by trading forex with money you cannot afford to lose, know you will fail in the long term. Other reasons to change your timeframe such as impatience will also lead to failure. Simply know forex does not forgive, it can only serve those who put in the work in the system and train their mindset.

Categories
Forex Basics

20 (More) Quick Answers to Common Forex Trading Questions

We’re back again! This time with twenty more simple answers for very common questions related to Forex trading. If you haven’t yet read our first twenty, we invite you to check that article out! Now let’s get to it…

Q1: How many people trade forex?

A1: It is estimated that there are around 10 million traders in the world, with the number growing higher every single day.

Q2: Why do so many traders give up?

A2: Most traders walk away because they have unrealistic expectations and realize that they won’t get rich overnight or because they blow their account balance due to trading with no idea of what they’re really doing. 

Q3: How much money can you make as a forex trader?

A3: This depends on a variety of factors, including the amount of money you’ve invested, your trading plan, how educated you are, how much time you have for trading, etc. 

Q4: What are the best currency pairs to trade?

A4: Many traders stick with major currency pairs, while EURUSD, GBPUSD, USDJPY, USDCHF, and AUDUSD move most often. Gold (XAUUSD) is also very liquid. 

Q5: Which forex pairs are the most volatile?

A5: GBPJPY, AUDJPY, and NZDJPY (currency pairs with the Japanese Yen).

Q6: Is it hard to learn how to trade?

A6: While some claim that trading is difficult, we would say it is simply more time consuming to learn everything you need to know. Those that just want to make money with little effort often walk away because they do not want to invest the time needed to learn what they need to know. 

Q7: Are demo accounts rigged to convince you to open a real account?

A7: Conditions on demo accounts are not rigged. However, some traders get better results on their demo accounts because real-world emotions are not involved. Things change when real money is on the line. 

Q8: What percentage of traders lose money?

A8: Every trader loses money at some point, but an estimated 20% wind up losing money when you’re talking about the big picture. 

Q9: How can I limit the amount of money I lose trading?

A9: You’ll need to practice risk-management by setting a stop loss for your trades, monitoring your position sizes, etc. Also, be careful when using high leverages. 

Q10: How do I know when I’m ready to open a trading account?

A10: Start by trading on a demo account and checking for consistent profits over time. You can also try taking quizzes online to test your knowledge. If you come across anything that you don’t know, be sure to look it up. 

Q11: How much money do I need to start trading?

A11: This depends on the broker you’re looking at, although many brokers offer very low entry minimums of around $1-$100. 

Q12: How much money does it cost to learn to trade?

A12: You can actually learn everything you need to know online for free, although you might want to participate in a paid course or spend some money for one-on-one training if you feel it is needed. 

Q13: What if they decide to ban trading? 

A13: While some countries don’t allow forex trading, it is highly unlikely that every single country would ever ban it. Some countries, like the USA, enforce stricter rules, but trading will never go away. 

Q14: Are there benefits to trading forex full-time?

A14: Trading is considered to be a great job because you can be your own boss, work from home, and take advantage of flexible hours. However, it does require self-discipline that some may not possess. 

Q15: Can I really rely on forex signals?

A15: This depends on whether the signal provider is reliable or not. Try to do research beforehand to check on the validity. 

Q16: Can forex robots make me rich?

A16: Some Expert Advisors do make money for you, but none of these systems can predict the market 100% accurately. You also have to be careful considering that most providers want you to pay for their systems and be very skeptical if something is “guaranteed” to make you money. 

Q17: Can the money I make trading be taxed?

A17: The answer differs based on the country you live in, so be sure to look this question up directly. 

Q18: How many brokers are out there?

A18: If you’re looking at regulated brokers, you’ll find more than 200 options, while there are thousands of unregulated brokers with new options opening every day.

Q19: What’s the best forex trading platform?

A19: In our opinion, MetaTrader 4 and 5 are the best, but this doesn’t mean you shouldn’t consider other options as well. 

Q20: Will trading always be available?

A20: Traders won’t have to worry about losing the opportunity to trade forex because it isn’t going anywhere – ever. You’ll be able to trade until the end of time so don’t let this stop you from opening an account. 

Categories
Forex Basics

20 Quick Answers to Common Forex Trading Questions

Without a doubt, the topic of Forex trading brings with it many questions. There are questions related to strategies, brokers, fund management, and much more. Here, we’ll answer many of those questions for you in a clear and concise manner. Watch for a follow-up with additional questions and answers to come soon after!

Q1: What is forex?

A1: The term forex refers to the foreign exchange market, where traders buy and sell currency pairs in an attempt to make a profit.

Q2: How do you start trading?

A2: You’ll need to find an online broker, open a trading account, and make your first deposit.

Q3: How do you learn to trade forex?

A3: The internet is filled with resources, from articles and courses to videos, seminars, webinars, and more interactive options. Try starting with a google search for “beginner trading courses” and go from there.

Q4: What drives the price in the forex market?

A4: The price is driven by multiple factors, including economics and geopolitical factors. Central banks, politics, disasters, wars, and other news events have a huge impact on the forex market.

Q5: Isn’t trading the same as gambling?

A5: Trading is different than gambling because you’re using real information to make informed decisions about what and when to trade. It’s true that you can’t predict what the market will do with 100% certainty, but trading decisions are much more structured than gambling.

Q6: Is it legal to trade forex?

A6: In some countries, like North Korea, Israel, France, etc., trading is illegal. It is legal in the US as long as your broker is regulated and is legal in most other countries.  

Q7: Can you make money trading forex?

A7: Absolutely, so long as you know what you’re doing and you have a solid trading plan behind you. 

Q8: Do you have to be rich to get started trading forex?

A8: You can actually open a trading account with as little as $1 to $100 through some brokers. Just remember that the amount you make does depend on how much you invest.

Q9: Is trading really worth it?

A9: If you’re willing to invest your time into trading, it can be a great way to earn extra income or even to support yourself or your family, especially in retirement. 

Q10: When do the forex markets open and close? 

A10: The market opens at 00:00 GMT on Monday and closes at 00:00 GMT on Saturday. 

Q11: What pairs should you trade?

A11: This is a personal decision, although beginners might want to start with major currency pairs like EURUSD, GBPUSD, and so on. 

Q12: Do brokers scam people?

A12: Some do, but there are many trustworthy options out there. This is why it’s important to do accurate research before choosing a broker. 

Q13: What kind of people trade forex?

A13: Many forex traders are simply regular people with smartphones or laptops. You don’t have to be a billionaire investor to do it!

Q14: What is leverage?

A14: Leverage allows you to trade with much more money than what is actually in your trading account. This can help you grow your account balance quickly, but leverage is often the downfall of many beginners that don’t know how to use it safely. 

Q15: Why does trading get such a bad reputation?

A15: Many people rush into trading without proper education and lose their money quickly. This can be avoided if you educate yourself and start with a plan and realistic expectations. 

Q16: What’s the best forex broker?

A16: You’ll have to decide this for yourself but do know that more popular options tend to be safer. Try looking online for articles that outline some of the best brokers out there. 

Q17: How many trades should I make per day?

A17: As many as you want, but you’ll want to avoid overtrading. Different strategies call for a different amount of trades to be entered, so this varies widely.  

Q18: Is forex a 24-hour market?

A18: You can trade 24 hours a day from Monday up until Friday night at midnight. 

Q19: How will my broker make money?

A19: Your broker makes money by charging you commission fees and through the spreads that you pay when you make trades. 

Q20: Can trading make me rich?

A20: It can, but you’ll need to invest time and money into trading if you want to get rich. This isn’t something that can be done with no effort – but it is an achievable goal for those that are determined. 

Categories
Forex Fundamental Analysis

GBP/NZD Global Macro Analysis – Part 3

GBP/NZD Exogenous Analysis

  1. The UK and New Zealand Current Account Differential

The current account differential between the UK and NZ is the value of the subtraction of the NZ current account balance and the UK’s current account. For the GBP/NZD pair, if the current account differential is positive, it means that the UK has a higher current account balance than NZ. Thus, the price of the GBP/NZD pair will increase. Conversely, if the differential is negative, NZ has a higher current account balance than the UK. Theoretically, this means that traders would be bullish on the NZD; hence, the GBP/NZD pair price would drop.

In Q3 2020, NZ had a current account deficit of $2.48 billion while the UK a deficit of $20.97 billion. This means that the current account differential is -$18.49 billion. Thus, we assign a score of -5.

  1. The interest rate differential between the UK and New Zealand

The interest rate differential for the GBP/NZD pair is the difference between the UK and NZ’s interest rate. Carry traders and investors would direct their money to the currency, which offers higher interest rates. Therefore, if the interest rate differential for the GBP/NZD pair is positive, it means that the UK offers a higher interest rate than NZ. Hence, traders will be bullish on the GBP/NZD pair. Conversely, if the interest rate differential is negative, it means that NZ has a higher interest rate than the UK. This means that traders would be bearish on the GBP/NZD pair.

In 2020, the Reserve Bank of New Zealand cut its official cash rate from 1% to 0.1%, while the BOE cut the interest rate from 0.75% to 0.1%. In this case, the interest rate differential is 0%. Thus, we assign a score of 0.

  1. The differential in GDP growth rate between the UK and New Zealand

This differential shows which economy is expanding faster between the NZ economy and the UK economy. Comparing domestic economies using their GDP growth rates is more effective than using absolute GDP figures since they vary in size.

If the GDP growth rate differential is negative, the NZ economy is growing faster than the UK economy. This would result in a bearish trend for the GBP/NZD pair. Conversely, the pair will have a bullish trend if the differential is positive since it would mean that the UK economy is expanding more than the NZ economy.

The first three quarters of 2020 saw the NZ economy expand by 0.4% and the UK contract by 5.8%. In this case, the GDP growth rate differential is -6.2%. Hence, the score of -4.

Conclusion

Indicator Score Total State Comment
The UK and New Zealand Current Account Differential -5 10 A differential of – $18.49 NZ has a lower current account deficit than the UK.
The interest rate differential between the UK and New Zealand 0 10 0.00% The 0% interest rate differential is expected to persist in the short-term. That’s because neither the RBNZ and the BOE have scheduled changes in the monetary policy
The differential in GDP growth rate between the UK and New Zealand -4 10 -6.20% New Zealand’s economy expanded by 0.4% in the first three quarters of 2020, while the UK contracted by 5.8%
TOTAL SCORE -9

GBP/NZD exogenous factors have a cumulative score of -9. It means we should expect a continued downtrend in the pair for the short term.

In the above image, we can see that this pair’s weekly chart trading below the 200-period MA for the first time since August 2019. Cheers.