Tag: ATR

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Forex Course Forex Daily Topic

150. The Easiest Way To Measure Market Volatility

Introduction

Introduction

Introduction

Measuring volatility enables traders to accurately identifying the significant trading opportunities in the currency pairs. An increase in the volatility of a currency pair occurs due to any of the major changes in the economy of that country. Market volatility measures the overall price fluctuations over a specific period, and this information is used to identify the potential breakouts.

In the Forex market, the higher the volatility, the riskier is the currency pair to trade. A higher volatility means that the asset value can be spread out over a larger range of values. A lower volatility means that an asset does not fluctuate dramatically and tends to be more steady. A few indicators help us in measuring the volatility of the currency. Using these indicators will show us the accurate representation of the market’s volatility when looking for trading opportunities.

Bollinger Bands

We have discussed a lot about Bollinger Bands in our previous course lessons. This indicator is specially designed to measure the volatility of an asset. In this case, any currency pair in the Forex market. This indicator consists of two lines (bands) plotted above and below the middle line, a moving average. The volatility representation is based on the standard deviation, which changes as an asset’s volatility increases and decreases. Both these bands contract and expand according to market volatility. When the bands’ contract, it tells us that the volatility is low, and when the bands widen, it represents an increase in volatility.

Moving Average

Moving Average is the most common indicator used by traders across the globe. It measures the average amount of market movement over a specific period. If we set the moving average to 30 periods, it shows us the last 30 days’ average movement. In short, any Moving average tells us the average price movement over a specific period. If the MA line is above the actual price, that implies the market is in a downtrend and vice versa.

Average True Range (ATR)

The ATR (Average True Range) is another reliable indicator used to measure market volatility. This indicator takes the currency price range, which is the distance between the high and low in the time frame, and then plots that measurement as a moving average.

If we set the ATR to 40 range, it will tell us the average trading range of the last 40 days. The lower the ATR reading means, the volatility is falling, and we can expect fewer trades. On the other hand, the higher the volatility means the ATR reading is rising. It is an indication that the volatility is on the rise, and by using any directional indicator, we can gauge the potential trading opportunities.

These are the three best tools you need in your arsenal to measure the market’s volatility accurately. Make sure to take the below quiz before you go. Cheers!

[wp_quiz id=”92111″]
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Forex Basic Strategies

Forex Momentum Trading With The Help of RSI & MA Indicators

Introduction

Introduction

Introduction

If you are a trader, you should have some good ideas about the forex market. After having the basic knowledge and related stuff, you, as a trader, need to find a profitable forex strategy. After that, you need to find a proven track record of your strategy.

Therefore, you can easily implement it and start earning through your trades within a short time. However, it would help if you kept in mind that the forex is an uncertain and unstable trading market. Therefore, you must have a profitable and excellent trading strategy if you want to sustain here.

If you search on the internet, you will find thousands of proven strategies out there. The good thing is that experienced traders or mathematicians have created most of the strategies. You have to choose the best one for you.

However, the momentum-based strategy is profitable and famous too. Lots of traders are using this one as their primary trading strategy. However, if you find another suitable strategy, you can go for it besides the momentum trading strategy to boost your probability.

What is The Momentum Trading Strategy?

Momentum is a term that refers to buying a currency pair when it goes up and selling when it goes down. It is a very popular trading strategy among most professional traders.

When a big volume starts a movement, it creates a reliable market trend. Therefore, market momentum will be towards the trend that we can identify by reading the chart. In a strong bullish momentum, the price will aggressively create higher highs with a constant speed.

Similarly, in a strong bearish momentum, the price will create lower lows. After identifying the market momentum, we will move to one timeframe lower to take the trade.

However, forex trading always has an uncertain environment. No one can guarantee a 100% movement of price. However, when the market is in a trend, we can make a decent profit by using the momentum-based trading strategy.

Momentum Trading Strategy

Here is the most important part that you are looking for passionately. You will find the best momentum trading strategy for both the newbie and experienced traders. This guideline will answer all your queries.

Let’s have a look at the step by step approach of the momentum trading strategy.

Select the Currency Pair

First, you need to determine the price change from the last three months of some selected currency pairs. Also, don’t forget to do this calculation for the weekend. Once you find the last three months’ price changes, you need to research the last 13 weeks’ price movement.

In terms of currency pair, there is no clear indication of how much pair you should choose. Nevertheless, the ideal and wise option is to go through seven major currency pairs and cross pairs. It is better to put less importance on exotic pairs as they are risky because of their volatility.

After calculating the last three months’ price changes, it’s time to select the currency pair that moved much more than the others. As it is a proven profitable trading strategy, a currency pair can provide a 17% average annual profit. As per the last seven years of market observation, three months’ price has become a reliable factor while selecting the momentum-based strategy.

Entry

As we have a predetermined trend, you need to implement a trend continuation trading strategy to improve your overall trading result better. Moreover, many trend continuation strategies are there for you; you need to select a suitable one. In this trading strategy, we will use 20 Dynamic Exponential Moving Average (EMA) as a trend continuation indicator.

You should enter the trade towards the direction based on market momentum once the price rejects the 20 EMA with its body. Moreover, there is a good and effective solution for determining the trends’ strength: RSI. RSI is a good indicator, as well.

RSI stands for the Relative Strength Index. It has a 0-100 levels indicator. If the price goes below 30 levels, the price is likely to reverse towards the upside. On the other hand, if the price moves above the 70 RSI, it is likely to move down.

For a sell trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving down from the 70 or 80 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Similarly, for a buy trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving up from the 20 to 30 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Later on, enter the trade as soon as the candle closes above or below the dynamic level.

Stop Loss and Take Profit

After taking a trade, you need to determine the strength of the trend. You can set the stop loss 15 pips above or below the reversal candle or 20 days Average True Range (ATR).

To set the take profit, you need to determine how strong the running trend is. Moreover, impulsive pressure will indicate that the price may break the near-term support or resistance level. In that case, you can increase your take profit level. Alternatively, you can book some profit once you see the price stalling at the support or resistance levels.

Summary

In a nutshell, the summary of the entire guideline is here-

  • Find out the direction by calculating the last 13 weeks of market momentum.
  • Follow the market direction using a dynamic and hourly candle level of 20 EMA with a proper candlestick pattern.
  • According to the price action or ATR, set your stop-loss.
  • Following the market movement, you can set your take profit.

In this momentum trading strategy, trade management is the most challenging part as it requires to follow the market trend strongly. Since we know the forex market is uncertain, we should follow the market trend robustly. Moreover, you should follow an appropriate money management system that goes with your personality, and for each trade, it is wise to take less than 2% risk.

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Forex Assets

Trading Costs Involved While Trading The ‘CHF/SEK’ Forex Exotic Pair

Introduction

Introduction

Introduction

The acronym of CHF/SEK is Swiss Franc, paired with the Swedish Krona. In this exotic Forex pair, CHF is the official currency of Switzerland and is also the fifth highly traded currency in the Forex market. In contrast, SEK stands for the Swedish Krona, and it is the official currency of Sweden.

Understanding CHF/SEK

In the Forex market, to ascertain the relative value of one currency, we need an alternate currency to assess. The market value of CHF/SEK helps us to understand the power of SEK versus the CHF. So, if the trade rate for the pair CHF/SEK is 9.8418, it means to buy 1 CHF, we need 9.8418 SEK.

CHF/SEK Specification

Spread

Spread is the variable between the ask-bit price that is set at the exchanges. Below are the spread values of the CHF/SEK currency pair in both ECN & STP accounts. The spread charges for ECN and STP brokers for CHF/SEK are given below.

ECN: 45 | STP: 50

Fees

For every place, a trader enters the broker charges some fee for it. A trader must know that this fee is applicable on ECN accounts only and not on STP accounts.

Slippage

Slippage is the price variation between the trader’s execution and at which the broker implemented the price. The variance is due to high market volatility and slow execution speed.

Trading Range in CHF/SEK

A trading range is the interpretation of the volatility in CHF/SEK in numerous timeframes. The values are attained from the Average True Range indicator. One can use the table as a risk management tool to distinguish the profit/loss that a trader is possessed.

Below is a table explaining the minimum, average, and max volatility (pip movement) on a variety of timeframes.  

 Procedure to assess Pip Ranges

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

CHF/SEK Cost as a Percent of the Trading Range

The entire cost of the trade varies based on the volatility of the market. So, we must find out the instances when the costs are less to place ourselves in the market. Below is a table explaining variation in the costs based on the change in the market volatility.

Note: The percentage costs represent the comparative scale of costs and not the fixed costs on the trade.

ECN Model Account

Spread = 45 | Slippage = 5 | Trading fee = 8

Total cost = Slippage + Spread + Trading Fee = 5 + 45 + 8= 58

STP Model Account

Spread = 50 | Slippage = 5 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 5 + 50 + 0 = 55

The Ideal way to trade the CHF/SEK

The two components a trader should consider while trading any security in the markets are – Volatility & Cost. With the help of the above tables, let us evaluate these two factors to trade the CHF/SEK ideally.

We can see that the pip difference is substantially high among the minimum volatility and the average volatility in every timeframe. For a day trader, the objective is to make revenue from the pip movement of the market. But, if there is barely any pip movement in the price, it becomes difficult to make profits out of the market. Therefore, it is perfect to trade when the volatility is at the average value.

The cost increases as the volatility decline, and they are inversely proportional to each other. In other words, highly volatile markets have the lowest costs. However, it is relatively risky to trade markets with higher volatility though the costs are low. Therefore, to maintain stability among the cost and volatility, traders may discover instances when the volatility is close to the average values or a little above it.

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Forex Assets

How Best To Trade The ‘CHF/AUD’ Forex Currency Pair?

Introduction

Introduction

Introduction

CHF/AUD is the acronym for the Swiss Franc against the Australian Dollar, and it is an exotic Forex currency pair. Here, the CHF is the base currency, and the AUD is the quote currency. Both CHF and AUD are major currencies and are vastly traded in the foreign exchange market. CHF is the official currency of Switzerland, while AUD is the national currency of Australia.

Understanding CHF/AUD

The price of this pair in the trade market defines the value of AUD equivalent to one Swiss Franc. It is quoted as 1 CHF per X AUD. For instance, if the value of this pair is 1.5318, these many Australian Dollars are required to acquire one CHF. 

Spread

The difference between the ask-bid price is referred to as Spread, which is charged by the broker. This value is different in the ECN and STP accounts. The estimated Spreads for CHF/AUD pair is given below.

ECN: 17 pips | STP: 22 pips

Fees & Slippage

A fee is a price that one pays for the trade. There are zero fees charged on STP accounts, but a few pips are charged on ECN accounts. Slippage is the difference calculated between the price by the trader and the price the trader received from the broker.

Trading Range in CHF/AUD

The trading range is represented in the tabular format to showcase the pip movement of a currency pair in various timeframes. These values are useful in ascertaining the profit that can be generated from trade in advance. To discover the trading costs, we must multiply the below volatility value with the pip value of this pair.

Procedure to assess Pip Ranges

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

CHF/AUD Cost as a Percent of the Trading Range

The trading range is obtained by identifying the ratio between total cost and volatility; it expressed in terms of percentage. Below is the representation of the cost differences of traders in various timeframes and volatilities.

ECN Model Account

Spread = 17 | Slippage = 5 |Trading fee = 8

Total cost = Slippage + Spread + Trading Fee = 5 + 17 + 8 = 30

STP Model Account

Spread = 22 | Slippage = 5 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 5 + 22 + 0 = 27

Trading the CHF/AUD

When the percentage value is higher, the cost of the trade gets more expensive. From the above tables, we can conclude the values are significant in the min column and relatively less significant in the max column. It means that the costs are high when the market’s volatility is low. It is not advisable to trade when both the volatility and cost of trading is high. Balancing both these factors is ideal to trade when the pair’s volatility is in the range of the average values.

Additionally, to lower your costs even further, you can place trades using limit orders instead of market orders. By executing limit orders, the slippage will not be involved in the calculation of the total costs. And this will set the cost of the trades low by a decent number. An example of the same is given below.

STP Model Account (Using Limit Orders)

Spread = 22 | Slippage = 0 |Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 0 + 22 + 0 = 22

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Forex Assets

Analyzing The ‘ADA/USD’ Crypto-Fiat Asset Class

Introduction

Introduction

Introduction

Cardano is a decentralized platform allowing programmable transfers of value securely in a scalable fashion. It is the first blockchain created out from a scientific philosophy. It is also the first research-driven cryptocurrency that is built on the Haskell programming language.

Cardano is traded with the ticker ADA. It has a market capitalization of $2.2 billion. It can be bought, sold, and exchanged in several cryptocurrency exchanges. Apart from USD, it can be traded against other cryptos such as BTC, ETH, USDT, etc.

Understanding ADA/USD

The price of ADA/USD depicts the value of the US Dollar equivalent to one Cardano. It is quoted as 1 ADA per X USD. For example, if the market price of ADA/USD is 0.086112, then each ADA will be worth 0.086112 US dollars.

ADA/USD specifications

Forex brokers allow trading of only a few popular cryptocurrencies like Bitcoin, Ethereum, Ripple, etc. The other cryptos must be traded via cryptocurrency exchanges. And the working of these exchanges is different from that of forex brokers. As a major difference, cryptos are not traded in lots, in cryptocurrency exchanges.

Spread

Spread is the difference between the buying and selling price of the cryptocurrency. Crypto exchanges match these prices between induvial traders. Thus, there is no fixed spread. Also, typically, the spread is negligible in trading cryptos.

Fee

There are different fees charged by cryptocurrency exchanges for trading any coin. The various forms of fees include

  • Execution fee (Taker or Maker)
  • 30-day trading volume fee
  • Margin opening fee, if applicable

Note that the taker or maker fee will be considered for opening as well as closing the trade, and will depend on the value being traded.

Example

  • Short 10,000 ADA/USD at $0.085800
  • 30-day volume fee is $0
  • Order is executed as Taker

Total cost of the order = 10000 x $0.085800 = $858

Assuming the taker fee to be 0.26%, the opening fee will be – $858 x 0.26% = $2.23

Assuming the trade is opened with leverage, and the margin opening fee is 0.02%, the fee is calculated as – $858 x 0.02% = $0.17

If the order is closed at $0.095800, the total cost of closing will be 10,000 x $0.095800 = $958. And the fee for the same obtained is – $958 x 0.26% = $2.5

Thus, the total fee for the opening, maintaining and closing the trade would be equal to – $2.24 + $0.17 + $2.5 = $4.91

Trading Range in ADA/USD

The trading range represents the number of units moved in the pair in a specified time frame. For example, if 10,000 ADA/USD is traded and the average unit movement in the 1H time frame is 0.000778, then it means the pair will yield 10,000 x 0.000778 = $7.78.

Note: the above values are for trading 10,000 units of ADA/USD. If X units are traded, then the ATR values will be,

(Above ATR value / 10,000) x X units

Procedure to assess ATR values

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

ADA/USD Cost as a Percent of the Trading Range

The following tables depict the variations in total cost in terms of percentage based on the change in volatility and time frame.

Taker Execution Model

Opening = $2.23 | Margin fee = $0.17 | Closing = $2.5

Total fee = Opening + Margin fee + Closing = $2.24 + $0.17 + $2.5 = $4.91

Maker Execution Model

Opening = $1.37* | Margin fee = $0.17 | Closing = $1.53*

Total fee = Opening + Margin fee + Closing = $1.37 + $0.17 + $1.53 = $3.07

*Assuming maker fee to be 0.16% the trade value.

Trading the ADA/USD

Cardano stands 10th in CoinMarketCap in terms of market capitalization. Thus, making it a tradable pair in the crypto market. Almost all forex brokers do not ADA enabled for trading, so it must be traded through cryptocurrency exchanges. The fee structure here is quite different from forex brokers. However, the overall fee is more or less the same.

Comprehending the above tables, the magnitude of the percentage depicts how expensive/cheap a trade will be relative to the time frame and profit/loss. Let us understand this with an example.

The average values in 4H and 1D are 26.65% and 9.73%, respectively. The percentage in the 4H time frame is greater than the percentage in the 1D time frame. This means that the total cost for both is the same ($4.91), but relative to the generated profit, it is higher in the 4H time frame. A detailed reason for this can be given from the trading range table.

In the trading range table, the corresponding values are $11.52 and $31.55. This can be interpreted as, an average of $11.52 will be generated in trading the 4H time frame, and $31.55 when trading the 1D time frame. The fee in both cases is the same. Thus, we infer that the fee that is paid to generate $31.55, the same fee is deducted for generating $11.52. And hence, this is exactly what the higher percentage value depicts.

Reading through the row, the percentage values for a time frame is highest in the minimum column and least in the maximum column. So, if you’re are able to deal with higher volatility, it is ideal to trade when the volatility is around the average or maximum values. And if you cannot deal with the high volatility, you may trade the higher time frames to reduce the relative costs.

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Forex Course

90. The ATR Indicator & Its Corresponding Trading Strategy

Introduction

Introduction

Introduction

ATR (Average True Range) is a popular volatility indicator in the market. It is used to find how much the instrument moves on an average over a given period of time. This indicator is introduced by J. Welles Wilder Jr. in his book, ‘New Concepts in Technical Trading Systems.’ Apart from ATR, this book also includes some of the most famous technical indicators such as RSI, ADX, and Parabolic SAR, etc.

The ATR indicator was originally developed to trade the commodities market, but it has been modified in such a way that it could be widely used for stocks, indices, and the Forex market as well. This indicator is not developed to indicate the price direction. Instead, it is used to measure the volatility of the instrument, which is caused by the gaps, up & down moves. ATR is a boundless indicator, unlike the other indicators we learned till now. Higher the ATR level, higher is the market volatility, and lower the ATR level, lower is the volatility of the underlying asset.

Below is an illustration of how this indicator looks on a price chart.

Trading With The ATR Indicator

The image below represents the ATR indicator on a GBP/AUD Forex chart. The orange box indicates the pullback phase, and at this phase, we can see the ATR indicator keeps going down. This means that there is currently low volatility in this pair. Conversely, the uptrend in the Green box indicates high ATR value. This means the big players are back in the business, and they are accumulating big chunks. As a result, the instrument is quite volatile. Furthermore, the yellow box again shows a decline in volatility.

Traders can use this indicator to get an idea of how far the price of an asset is expected to move on a daily basis. We suggest you use this way of trading only on higher timeframes such as daily, weekly, and monthly. If the last closed candle of a daily chart shows 50 ATR value, it means that the last candle has moved 50 pips, and we can expect the next day price movement to move similarly.

First of all, we must find out the ATR value of the last closing candle on the daily chart. Then we can look for buy/sell opportunities at the opening of a new day’s candle. The profit target should be based on the last day’s ATR value. Some traders also use double the value of the ATR indicator to place their take-profit orders. It all depends on what kind of trade you are. If the ATR value is 50, we can go for 50 pip target (conservative move), or you can even go for the 100 pip target (aggressive move)

We can also use the ATR indicator for placing Stop-loss orders. When the ATR gives us the value of the present day, we can use those values to place the stop-loss orders below or above our entry points. If the market hits the stop-loss, it means that the daily price range is moving in the opposite direction. Hence we must exit our positions as soon as we can. The major benefit of placing the stop-loss orders by using the ATR value is that we can avoid the ‘market noise.’ That is, the unusual up and down moves will not stop us out.

Changing the Settings of this Indicator affects its Sensitivity

The standard setting of this indicator is 14, which means the ATR indicator will measure the market based on the last 14 candles. If we use a setting lower than 14, it makes the indicator more sensitive, and it will show us a choppier ATR line. On the other hand, a setting above 14 makes the indicator less sensitive to the price action and shows smoother reading.

In short, most of the Traders use the ATR indicator to check the market volatility and to place the stop-loss & take-profit orders. The higher value of the indicator implies that we must go for deeper stops, and the low value means we must go for smaller stops.

That’s about the ATR indicator and its use cases. Try using this indicator to check the market volatility and place accurate stop-loss orders. There are traders who use this indicator to enter the market as well, but those are advanced strategies that we will be discussing in the future. Cheers.

[wp_quiz id=”68339″]
Categories
Forex Course

88. Trading The Forex Market Using The Amazing ‘Parabolic SAR’ Indicator

Introduction

Introduction

Introduction

Parabolic SAR is a trend following indicator that was developed by ‘Welles Welder.’ The SAR in the name stands for the ‘Stop and Reverse.’ Welder introduced this indicator in his 1978 book “New Concepts in Technical Trading System.” In this book, he also introduced many of the revolutionary indicators like RSI, ATR, and Directional Movement Concept.

As the trend of the currency pair extends over time, this indicator trails the price action. If the indicator is below the price action, it means that the price of the currency is rising, and when it goes above the price, it indicates that the market is in a downtrend. In this regard, the Parabolic SAR stops and reverses when the trend of the instrument changes its direction.

During the volatile market, the gap between the price action and the indicator widens. In a choppy or consolidation market, the indicator interacts with the price quite frequently. Most of the technical indicators represent the overbought and oversold market conditions, whereas the Parabolic SAR visually provides us an insight on where to exit our position.

Parabolic SAR – Trading Strategy

The basic strategy while trading with this indicator is to go long when the dots move below the candlestick and go short when the dots go above the candlestick. It is advisable to use this way only in a strong trending market. If the trend is choppy or if the price action is continuously being pulled back, this indicator will continuously give us the buy-sell signal. All of these trading signals won’t be genuine and can produce many losses if we trade all of those signals generated.

As we can see in the below EUR/NZD price chart, the market was in an uptrend. But the momentum of the buying trend was quite weak. That’s the reason why this pair gives a lot of buying and selling opportunities in this pair. If we trade every opportunity, we will end up on the losing side. This is the reason always we must always find the pair which is in a strong uptrend or downtrend.

Buy Example

First of all, find a currency pair that is in a strong uptrend. While the price is in an uptrend wait for the indicator to go below the price action when the price pulls back. If this happens, we can take buy entry. We can expect a ~ 50+ pip movement if the market is trending. Place the stop-loss just below the dots of the Parabolic SAR.

As we can see in the above image of the EUR/USD Forex pair, the market was in a strong uptrend. We have identified two trading opportunities, and both the trades gave us 150+ pip profit. One crucial thing to remember is, in an uptrend, only go for the buying trades and ignore all the sell signals. Place the stop-loss just below the parabolic dots and book the profit when the market gives an opposite signal.

Sell Example

For identifying sell opportunities, we must first find out a strong downtrend. When the indicator goes above the price action, we can activate our sell trades.

In the below chart, we have identified a couple of selling opportunities in the EUR/USD Forex pair. We can see that each trade travels a significant amount of time before we see the next trading opportunity. This is because the sellers were super strong. Parabolic SAR provides amazing trading opportunities in strong trending markets only. This is the only way to use this indicator for buying and selling.

That’s about the Parabolic SAR indicator and how to use it to trade the markets. This indicator can be combined with others to find the accuracy of the trading signals generated. Try using this indicator and let us know if you have any questions in the comments below. Cheers.

[wp_quiz id=”67826″]
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Forex Assets

Analyzing The USD/KRW Forex Currency Pair

Introduction

Introduction

Introduction

USDKRW is the abbreviation for the US Dollar against the South Korean Won. This pair comes under the branch of emerging currency pairs. Here, the US Dollar, being on the left, is the base currency, and the KRW is the quote currency.

Understanding USD/KRW

The market price of this determines the value of KRW equivalent to the US $1. It is quoted as 1 USD per X KRW. So, if the market price of USDINR is 1199.70, these many units of the quote currency are required to purchase one unit of the base currency.

Spread

The algebraic difference between the bid price and the ask price is referred to as the spread. This is the primary source through which brokers generate their revenue. The spread varies from broker to broker and also the way through which they execute the trades.

ECN: 24 pips | STP: 25 pips

Fees

A fee is nothing but the commission that you pay to the broker on each trade. It is similar to that one that is paid to stock market brokers. Below is the fee on ECN and STP accounts.

ECN – 5-10 pips | STP – 0 pips

Slippage

Slippage is the variation in the price that was intended by the trade and price that was executed by the broker. Market volatility and the broker’s execution speed are the sole reasons for slippage to occur.

Trading Range in USD/KRW

A trading range is a table of volatility values in different timeframes. It shows the minimum, average, and maximum pip movement in USDKRW.

Procedure to assess Pip Ranges

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

USD/KRW Cost as a Percent of the Trading Range

This an application to the above range table. Here, we determine the variation in the costs for changing volatility and a set of timeframes. With this, we can figure out the ideal times of the day to enter and exit this currency pair.

ECN Model Account

Spread = 19 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 24 + 3 = 30

STP Model Account

Spread = 20 | Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 25 + 0 = 28

The Ideal way to trade the USD/KRW

Though the Forex market is a 24-hour market, it is not really ideal to trade anytime during the day. This is due to the changes in the costs as the volatility changes.

From the table, we can observe that the cost percentage values are higher in the minimum column and comparatively lower in the maximum column. This means that the costs are high during less volatile markets, and low for highly volatile markets. So, choosing the right time to trade is dependent on the type of trader you are.

For instance, if a trader is concerned about the costs and ignorant of the volatility, then he may trade the market during high volatilities. But, if you’re a trader who’s concerned about both the factors, then you may trade during those times when the volatility of the market is around the average values. This will provide you with decent volatility with pretty low costs as well.

There is another way through which one can lower their cost much more. And this is through taking trades using limit orders instead of market orders. Considering the above-mentioned example, the total cost now would be reduced by three pips.

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Forex Assets

Analyzing The USD/HUF Forex Exotic Currency Pair

Introduction

Introduction

Introduction

The US Dollar versus the Hungarian Forint, in short, is represented as USDHUF. It is an exotic currency pair in the forex market. It has got high volatility and lower volume compared to major and minor currencies. Here, USD is the base currency, and HUF is the quote currency.

Understanding USD/HUF

The value of this pair represents the number of HUF that are required to buy one US Dollar. It is quoted as 1 USD per X HUF. If the current market price of USDHUF is 307.72, these many Hungarian Forints are needed to purchase one unit of USD.

Spread

Spread is the primary way through which brokers generate revenue from their clients. The pip difference between the bid price and the ask price is their revenue, which is referred to as the spread. Spread is different on ECN accounts and STP accounts.

ECN: 16 pips | STP: 15 pips

Fees

On ECN accounts, one has to pay some pips of fee on each position you take. The fee is usually high on exotic pairs and comparatively less on major and minor pairs. However, on STP accounts, the fee is nil.

Slippage

Slippage in trading is the difference between the client’s intended price and the price the broker actually gave him. Slippage is affected by two factors:

  • Broker’s execution speed
  • The volatility of the market

Trading Range in USD/HUF

The representation of the minimum, average, and maximum volatility of a currency pair is the trading range. It shows the volatility of the market in different timeframes. And these values help in figuring the profit that can be gained or loss that can be incurred on a trade.

Procedure to assess Pip Ranges

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

USD/HUF Cost as a Percent of the Trading Range

Cost as a per cent of the trading range is the representation of the cost discrepancies for different volatilities and timeframes. With these values, we can determine the moments of the day when the costs are less. And this shall be discussed in detail in the next topic.

ECN Model Account

Spread = 16 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 16 + 3 = 22

STP Model Account

Spread = 15 | Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 15 + 0 = 18

The Ideal way to trade the USD/HUF

We know that exotic currency pairs typically have high volatility and low trading volume. Also, the total costs on trade are pretty expensive. Hence, one must be choosy while deciding when to enter the market.

The higher percentage values in the min column represent that the costs are high when the volatility of the market is low. And the opposite is the case for lower percentage values. However, it is not ideal to trade during any of these times.

One may trade these currency pairs during those times of the day when the volatility values are around the average values. This will ensure decent volatility as well as low costs on the trade.

Furthermore, another simple way to reduce costs is by trading using limit orders and not market orders. Because this will take away the slippage on the total cost, and this will, in turn, reduce the total cost significantly. An example of the same is given below.

With slippage

Spread = 16 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 16 + 3 = 22

Without slippage

Spread = 16 | Slippage = 0 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 0 + 16 + 3 = 19

Categories
Forex Assets

AUD/NZD – Everything About This Forex Currency Pair

Introduction

Introduction

Introduction

AUD/NZD is derived from the full-form of the currency pair, the Australian dollar, and the New Zealand dollar. It comes under the classification of cross currency pairs. In this pair, AUD is the base currency, and NZD is the quote currency.

Understanding AUD/NZD

The value of AUD/NZD depicts the value of NZD that is equivalent to AUD. It is simply quoted as 1 AUD per X NZD. For example, if the current value of this pair is 1.0405, then these many New Zealand dollars are needed to purchase one Australian dollar.

AUD/NZD Specification

Spread

Spreads are a typical way through which brokers make money. The pip difference between the bid price and the ask price is their profit margin, which is referred to as the spread. It varies from the type of account model.

ECN: 0.9 | STP: 1.8

Fees

The fee is basically the commission on a trade levied by the broker on each trade. Again, it varies from the type of account model.

Fee on STP = 0

Fee on ECN = 6 to 10 pips (starts from as low as one pip)

Slippage

The slippage is the difference between the broker’s executed price and the trader’s execution price. There is this variation as the order is executed using market execution. There are two reasons for slippage to take place.

  • Broker’s execution speed
  • Market’s volatility

Trading Range in AUD/NZD

Assessing the profit/risk is a great add-on to one’s trading analysis. With this, the trader can know how long he must before his trade performs. And below is the table that enables the analysis of it.

Procedure to assess Pip Ranges

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

AUD/NZD Cost as a Percent of the Trading Range

This is one great application of the above table. By combining these values with the total cost of trade, one can determine variations in the costs by varying the parameters like volatility and timeframe.

ECN Model Account

Spread = 0.9 | Slippage = 2 |Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.9 + 1 = 3.9

STP Model Account

Spread = 1.8 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.8 + 0 = 3.8

The Ideal way to trade the AUD/NZD

Before getting into finding the best way to trade this pair, let us comprehend what the above table has got to say.

The higher the magnitude of the percentages, the higher is the cost on the trade for that particular volatility and timeframe. The min column represents low volatility, and the max column represents high volatility.

It can clearly be ascertained from the table that the percentages are comparatively higher on the min column and lower on the max column. This means that the costs are high when volatility is low and vice versa.

But, it is not ideal to trade in neither of the two situations mentioned below.

When the volatility is high -> because of the risk involved
When the volatility is low -> because the costs are high

Now, to maintain a balance between all the parameters, it is best to trade when the pip movement is around the average values.

Furthermore, another simple way to reduce cost is by trading using a pending/limit order instead of market orders, as it will nullify the slippage on the trade. And this, in turn, will reduce the total cost of the trade as well.

Categories
Forex Assets

Everything About EUR/CAD Currency Pair

Introduction EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR. […]

Introduction EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR. […]

Introduction

EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR.

Understanding EUR/CAD

The current market price of EURCAD determines the required Canadian dollars to purchase one euro. It is quoted as 1 EUR per X CAD. For example, if the CMP of EURCAD is 1.4700, it is as good as saying that 1.4700 CAD is needed to buy one EUR.

EUR/CAD Specification

Spread

The algebraic difference between the bid price and the ask price set by the broker is known as the spread. Spread varies from time to time and broker to broker. The approximate spread value on an ECN account is 0.8, and on an STP account is 1.8.

Fees

For every position that a trader opens, there is some fee associated with it. And it depends on the type of account model. It is seen that there is no fee on STP accounts and a few pips on ECN accounts.

Slippage

Slippage is terminology in trading, which, by definition, is the difference between the trader’s wished price and the real executed price. That is, the trader does not get the exact price he had intended for. There is some variation due to the volatility of the market and the broker’s execution speed. It usually varies from 0.5 to 5 pips on these minor currency pairs. The slippage is typically lesser on major currency pairs.

Trading Range in EUR/CAD

The trading range is an illustration of the minimum, average, and maximum pip movement in EURCAD. It determines the volatility of the market. The volatility of the market is a vital piece of information in trading, as one can assess the time that can be taken on each trade. And by applying more variables to it, one can determine the cost varies on the trade as well.

Procedure to assess Pip Ranges

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

EUR/CAD Cost as a Percent of the Trading Range

Cost as a percent of the trading range is a simple yet very effective application of the above volatility table. There is a cost on every trade you take. The total cost of a trade is the sum of slippage, spread, and trading fee. This total cost is divided by the volatility values and is expressed in terms of a percentage. And the percentage values are used to figure out the best times of the day to enter and exit a trade with marginal cost.

ECN Model Account 

Spread = 0.8 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.8 + 1 = 3.8

STP Model Account

Spread = 1.8 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.8 + 0 = 3.8

The Ideal way to trade the EUR/GBP

To determine the ideal way of trading the EURCAD, let us first comprehend what the percentage means.

High percentage => High cost

Low percentage => Low cost

Min column => Low volatility

Max column => High volatility

From the table, we can infer that the percentages are high in the min column and low for the max column. So,

Min column => High percentage

Thus, Low volatility => High cost

Max column => Low percentage

Thus, High volatility => Low cost

It is not ideal during low volatility as costs are high. Also, trading during high volatility is not a good idea as it is quite risky. Hence, to have a balance between both volatility and cost, it is ideal to trade when the pip movement on the currency pair is at the average values.

Another simple hack to reduce the costs is to trade using limit orders instead of market orders. Doing so, the slippage will be automatically cut off from the trade, and the total cost will significantly reduce.

Categories
Forex Assets

What Should You Know About USD/CAD Forex Pair?

Introduction

Introduction

Introduction

USDCAD is the short form for the US dollar against the Canadian dollar. USDCAD, just like the EURUSD, GBPUSD, AUDUSD, etc. is a major currency pair. In this pair, the US dollar is the base currency, and the Canadian dollar is the quote currency. Trading this currency pair is known as trading the “loonie” because it is the name for the Canadian one-dollar coin.

Understanding USD/CAD

The exchange price of USD/CAD is basically the value of 1 USD in terms of CAD. It is quoted as 1 US dollar per X* Canadian dollars. For example, if the value of USDCAD is 1.3300, it means that it takes 1.3300 Canadian dollars to buy one US dollar.

*X is the current market price of USDCAD

USD/CAD Specification

Spread

The difference between the bid price and the ask price mentioned by the broker is the spread. Typically, this differs from the type of account.

Spread on ECN: 0.7

Spread on STP: 1.2

Fees

There is a fee (commission) on every trade a trader takes. This again depends on the type of account registered by the user. There is no fee on the STP account, but a few pips on an ECN account.

Note: We are considering fees in terms of pips, not currency units.

Slippage

Sometimes a trader is executed at a different price from what he had intended. This variation in price is known as slippage. Slippage takes place when orders are executed as a market type, and it depends on the volatility of the currency pair and also the execution speed of the broker.

Trading Range in USD/CAD

Trading analysis is not all about predicting when the prices will rise and fall. Sometimes, even though a trader knows the prices are going to rise/fall, it might not be ideal to jump on the trade without the knowledge of volatility of the market. Volatility range plays a major role in managing the total cost of a trade. Hence, it is vital to know the minimum, average, and maximum pip movement in each timeframe to assess the trading costs.

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

USD/CAD PIP RANGES

Procedure to assess Pip Ranges

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

USD/CAD Cost as a Percent of the Trading Range

With the min, average, and max pip movement, the cost range is calculated in terms of percentage. This percentage has no unit and determines if the width of the cost. That is, if the percentage is high, the cost is high for the trade, and if the percentage is low, the cost is low too.

Below are two tables representing the range of cost for an ECN account and an STP account.

ECN Model Account

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

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1 = 3.7

STP Model Account

Spread = 1.2 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.2 + 0 = 3.2

The Ideal way to trade the USD/CAD

As mentioned earlier, the higher the percentage, the higher is the cost for a trade. Applying this idea to the above tables, it can clearly be inferred that the percentages are high on the minimum column. This means that the costs are high when the volatility of the currency pair is very feeble.

Similarly, the costs are considerably low when the volatility is quite high. However, this does not mean that trading during high volatility is the ideal way. This is because the volatility is quite risky to trade volatile markets. Therefore, one must trade during those times of day when the market volatility is around the mentioned average. The costs are decent enough, and the risk is maintained just fine.

Another point of consideration is that costs are reduced significantly when the slippage is made nil. This can be made possible by entering and exiting a trade by placing a pending/limit order instead of executing them by market.

Below is the same cost percentage table after making the slippage value to 0.

Now it is evident from the above table that slippage eats up a significant amount of cost on each trade. Hence, limit orders are the way to go.

Categories
Forex Market Forex Risk Management

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

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

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

Introduction

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

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

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

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

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

Fixed Lot Per Amount

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

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

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

Percentage Margin

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

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

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

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

Degree Of Volatility

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

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

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

Conclusion

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

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

Cheers!

Categories
Forex Basic Strategies

Learning The Art Of Fading In Trading

What is Fading?
Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade

What is Fading?
Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade

What is Fading?

Fading involves placing trades against the trend to profit from a reversal. Using the concept of fading, a trader will short sell, expecting the momentum to fade when the market is in an uptrend. Likewise, he/she will buy a currency pair with the expectation that the move will fade away and reverse when the market is in a downtrend.

The fading strategy involves three assumptions:

  • The price is either at the overbought or oversold condition.
  • Early buyers or sellers are getting ready to take profits.
  • Current position holders might be at risk.

Overbought and oversold conditions can be identified using technical indicators such as the Relative Strength Index (RSI). Momentum shows the signs of shifting of forces from bulls to bears or vice-versa. And as these signs develop, current holders of the asset start to rethink their positions.

These conditions get exaggerated after an earnings announcement or news release. This may lead to a knee-jerk reaction on the part of other traders to sell the currency pair. As a result, this reaction gets overextended, and a mean-reversion takes place.

Now let us see how does the strategy work and what are the necessary steps you need to take to profit from the strategy:

The Fading strategy

Step 1 – Identify market extremes from the daily time frame 

The first step is identifying overbought and oversold zones using technical indicators or chart patterns.

The popular indicators used for identifying the zones include:

The overbought and oversold conditions are indicated by reading above or below a certain level. For example, the market is said to be in an overbought condition if the RSI is above 70, and it is said to be in oversold condition if the RSI is below 30. This can help traders in identifying fading opportunities.

In the above chart, we can see how the RSI indicator was crossing the normal range when the market gets into the overbought zone. One can find trading opportunities just using the RSI indicator stand-alone. But to trade like how professionals trade, we need to use a lot more tools.

Traders may also use familiar chart patterns or analysis based on price action and watching the price continuously.

Step 2 – Look for signs of capitulation

The second step in the strategy is to look for early signs of capitulation or change in the short-term trend using momentum. This can be mostly done by using candlestick patterns or price action with a volume indicator. We suggest looking for price action signals.

Some other signs to watch for include:

  • When technical indicators start to fade or move away from their extreme overbought or oversold levels.
  • The volume of the significant trend starts decreasing, or the volume of the opposite trend starts increasing.
  • Bearish candlestick patterns appear (in case of an uptrend), or critical support and resistance are broken.

It’s essential to identify these signs early to maximize profit and avoid mistakes.

The signs mentioned above can be explained better with the help of some figures.

Image 1

In the above image, we clearly see that the market is in an uptrend and has been trending from a few days (as it is a daily chart). The volume of the significant trend is also high with the decreasing volume of the sellers, which is a good sign for bulls. But in the end, the volume starts to decrease. The RSI declines sharply after entering the overbought zone for a while.

Image 2

Immediately we see an increase in the volume of sellers with a drastic drop in the RSI indicator (Image 2). The signs are getting stronger for a reversal, and this trend can continue. All the traders who are holding the currency pair start exiting the market. This could be one of the most reliable signs for us to take appropriate action. 

Image 3

Finally, we see a break in the ‘support’ by the bears with high volume. Now we have combined all the tools, and each of them is indicating a reversal. Hence, we should take a position in the opposite direction. This is precisely the kind of setup that you need to be looking for every time.

Image 4

In order to find the exact entry, we need to magnify the chart. For this, you need to go on a lower time frame to analyze and set your stop-loss or target based on that time frame. This is mandatory for getting precise entries. The above figure is the lower time frame chart of the explained example.

Note: Images 1, 2 & 3 belong to the daily timeframe, whereas Image 4 belongs to the 4H timeframe.

Step 3 – Enter the trade with a stop-loss and take-profit

The last step is to enter the market with a compulsory stop-loss and take profit to ensure risk management is in place. In this strategy, a stop-loss order can be placed above the price where the RSI enters the overbought/oversold zone. Avoid putting small stop-loss as you can prematurely get stopped out from the trade.

Profit can be booked when the volume of your trend starts to decrease. Now, the stop-loss and target would be placed, as shown in the above chart. This trade would result in a risk-to-reward ratio of a minimum of 1:5. Traders can also use a moving average or any other indicator to set a profit-taking price level. Limit orders are almost used by all traders to avoid any slippage or other issues, particularly in less liquid assets.

Bottom line

Fading strategies can be considered as risky as you are going against the trend. It is always a good idea to take a trade if the risk to reward ratio is favorable. These strategies are commonly used by short to medium term traders to capitalize on short term reversals. Even though it seems risky, it can be extremely profitable if appropriately used. This is because the market has reached a saturation state, and there has to be some balancing force. This is why fading strategies are also known as contrarian strategies. Because they work on the assumption that prices deviating far from the trend, tend to reverse and revert back. That’s about Art Of Fading. If you have any queries, let us know in the comments below. Cheers.

Categories
Forex Basic Strategies

Understanding The Volatility Breakout Strategy

Introduction
Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which

Introduction
Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which

Introduction

Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which is volatility. In a volatility breakout, we determine the movement of prices just before the breakout and also their reaction at important support and resistance levels. After analyzing the market, we will decide which breakout is safe to trade and which is not.

Volatility cycles

We have built the volatility breakout strategy in a very simple way. The principle of this strategy is that, when the market moves from one level to another (support to resistance or resistance to support) with strong momentum, the momentum is said to continue further. The other characteristic of the price is that it moves from periods of sideways movement (consolidation) and vertical movement (trend).

Price breaking out of a consolidation prompts us to believe that price will continue in that direction, which might last for one day, one week, or one month. The market after trending downwards gets choppy and reduces directional movement. Traders can use technical indicators like Bollinger Bands, which helps them to determine the strength of the breakout. Breakouts that happen with low volatility are ‘real’ breakouts; on the contrary, breakouts with high volatility can result in a false breakout. We shall look at each case in detail in the next sections of the article.

 

High volatility breakout

When we are talking about volatility, we mean the choppiness of the price, i.e., the back and forth movement of price. There are traders who like this kind of volatility, as they feel price moves very fast from one point to another. But this isn’t necessarily true in case of a breakout. If you don’t have the required strength in a breakout, you could be trouble.

In the above chart, we see that the price has been in a range for a long time. This means a breakout could happen anytime. Much later, the price tried to break above resistance and stayed there for quite a long time. The price is just chopping around without moving in any particular direction eminently. All these are indications that the breakout, if it happens, will not sustain. Hence, one needs to be extra cautious before going ‘long’ after the breakout.

There are many traders who are willing to take the risk and want to try their luck in such conditions. In that case, after you buy the forex pair, always keep a tight stop loss. The reason why we are suggesting a tight stop loss is that there are high chances for the trade will not work in your favor, and you should avoid making a big loss in that trade. The setup would look like something below.

If the trade works, it can give a decent profit with risk to reward of more than 1.5, which is really good. Again this strategy is only for aggressive traders.

Low volatility breakout    

When a breakout happens with a lot more strength, it is said to be a low volatility breakout. The price here does not face much of hurdle and crosses the barrier with ease.

As you can see in the above chart, the price does not halt at resistance, and the breaks out smoothly, which is exactly how a breakout should be. After that, you can see that the breakout happens successfully, and the price continues to move higher. When such type of volatility comes into notice, we will see a higher number of traders being a part of this rally because they are relatively risk-free trades. This strategy is recommended by us to all types of traders, irrespective of their risk appetite. The next question is where to take profit and put a protective stop.

Stop-loss can be placed below the higher low, which will be formed near the resistance, and profit should be booked at a price which will result in a risk to reward ratio of 1:2. Some money management rules should also be applied while booking profits. The setup would look something like this.

Measuring volatility

Since this strategy is mostly based on volatility, it is important to know how to measure volatility.

  • Bollinger bands are excellent volatility and trend indicators, but like all indicators, they are not perfect.
  • Average true range (ATR) measures the true range of the specified number of price bars, typically 14. ATR is a volatility measuring indicator and does not necessarily indicate a trend. We see a rise in ATR as the price moves from consolidation to a strong trend and a fall in ATR as market transitions from strong trend to choppiness.
  • ADX is also a prominent indicator that measures the strength of a trend based on highs and lows of the trend over a specified number of candles, again typically 14. When ADX rises, it indicates that the volatility has returned to the market, and you might want to use a strategy that fits that market condition.

Bottom line

The market does not always be in trending and consolidation phases, and we also have to learn to deal with different types of volatility. This is where most of the strategies can be used at their best, and using volatility indicators can help you trade more effectively. A breakout, when accompanied by the right amount of volatility, can be highly rewarding. Hence this is an important factor in any breakout trading system. Cheers!

Categories
Forex Daily Topic Forex Range

Hidden Wisdom Behind Range Measures

People coming to the Forex markets usually learned new vocabulary. The first special words they learn maybe are, margin, profit, risk-reward, and candlestick. Perhaps, afterward, they learn new concepts such

People coming to the Forex markets usually learned new vocabulary. The first special words they learn maybe are, margin, profit, risk-reward, and candlestick. Perhaps, afterward, they learn new concepts such

People coming to the Forex markets usually learned new vocabulary. The first special words they learn maybe are, margin, profit, risk-reward, and candlestick. Perhaps, afterward, they learn new concepts such as Volatility. Also, along with other technical indicators, they get to know one study called Average True Range. However, later, they forget about it since they usually consider it unimportant.

The Average True Range (ATR) is one way to measure Volatility. Volatility is, as we know, a measure of risk. Therefore, ATR can be used as an estimate of our risk. This measurement is essential for us as traders, especially if we are trading on margin. And I’ll explain why.

 

What tells the Range?

A range is a measure of the price variation over a period of time. It is measured between the High and the Low of a bar or candlestick. For instance, the range of figure 1 below (a 4H chart) is 357.9 points. If each point/lot were worth $1, a short position started at the Low of the bar would have lost $357.9 in four hours on every lot traded. Conversely, a long position would get this amount of profit.

True Range

True range is similar to a normal Range, but it takes into consideration possible gaps between bars. That happens a lot in assets that do not trade all day. Not always the close of a session matches the open of the next one. A gap may form. A True range accounts for that by considering gaps as part of the range of the bar if the gap is not engulfed by the range.

Average True Range

As we can see, in the figure above, every bar’s range varies depending on the particular price action on the bar. Some bars are impulsive and move considerably. Other bars are corrective, and their range is short.

Therefore, to measure the average price range an average is taken, usually, the 14-period, although traders can change it. Below we show the 10-bar ATR of the Bitcoin.

On this figure, we see that the ATR gets quite high at some point on the left of the figure, and it slowly decreases in waves. That is normal. Assets move in a series of increasing and decreasing volatility waves, which describes the interests and power of buyers and sellers.

Average True Range and Risk.

Retail traders usually have small pockets. The first measure a retail trader should know is how much his account would endure in the event of an adverse excursion.

As an example, let’s examine the EURUSD daily chart. Observing the 10-ATR indicator in the chart below, we see that the maximum level on the chart is 0.01053 and the minimum value is 0.00664. Since we want to assess risk, we are only interested in the maximum value.

Let’s assume that we wanted to trade long one EURUSD contract at $1.1288 and that, on average, our trade takes one day to complete. How much can we assume the price would move in a single day?

If we take the 0.01053 as its daily range value and multiply it by the value of a lot ($100K) we see that the EURUSD price is expected to move about $1,053 per day. We don’t know if that will be in our favor or not, but from the risk perspective, we can see that to be on the safe side we would need at least $1,053 of available margin for every lot traded.

If the average trade, takes 4 or 8 hours instead, we should set the timframe to 4H or 8H and proceed as we did with the daily range.

For not standard durations, we could use the following rule: For each doubling in time, the average range grows by a factor of the square root of 2.

That is handy also to compute the right trade size. Maybe we do not have the required margin level, but just one fourth. Thus, if we still wanted to trade the asset, we should trim down our bet size to one-quarter of the lot.

How much time our stop-loss will endure?

Based on ATR figures, we could assess the validity of a stop-loss level. If the stop-loss size is too short compared to the ATR, it might be wrongly set.

What profits to expect?

We could assess that as well, on average, of course. If the dollar range of an asset is $1,000 in a 4-hour span, we can expect that amount on average in four hours, and $1.410 (√2 * $1,000) on an 8-hour lapse.

Deciding which asset to trade

We could use the True Range to assess which asset is best for trading. Let’s suppose, for instance, that you are undecided about trading Gold (XAU) and Platinum (XPT). So let’s examine them.

Gold:

Spread: 3.2

$Spread cost: $32

Digits: 2

contract size: 100

MAX Daily ATR: 16, $ATR: $1600

Spread cost as Percent of the daily range: 2%

Platinum:

Spread: 12.9

$Spread cost: $129

Digits:2

Contract Size: 100

Max Daily ATR: 22, $ATR $2,200

Spread cost as Percent of the daily range: 5.86%

After these calculations, we can see that it is much wiser to trade Gold, since the costs slice only 2% of the daily range, while Platinum takes almost 5% of the range as costs before break even.