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Forex Stop-loss & argets

Forex Price Levels: Why You Should Avoid Them

Price points in forex trading continue to be a popular tool but are they everything they promise to be?

While there is a veritable myriad of social media accounts and youtube channels out there singing the praises of knowing about and even using psychological price levels or price points, there are also those telling us traders to be wary. It is important that you get to hear this other side of the argument so you can make your own informed decisions.

What Are Psychological Levels?

So what are we even talking about here? Well, the simplest way to put it is that there is a phenomenon where the price of a currency pair will sometimes pause or bounce at a certain level and this level is a round number. In other words, prices that end in a double zero form lines across your chart where there could be significant price action in given circumstances. These numbers get called full levels or the big figure or anything imaginative forex bloggers conjure up (but full levels and the big figure are the most common).

There are a couple of other sub-categories that are worth being aware of here too even though they are even rarer than the big figure. The first is the intermediate or mid-figure (i.e. numbers between two full levels, which end in 50 rather than 00). The second is the bank level, which is a purely theoretical construct where the idea is that big banks like to use the levels ending in 80 and 20.

The idea behind these levels is that they are a tool you should keep in your toolbox and be aware of so that you can make use of them to enter into trades. This is where much of the disagreement in the forex online community occurs.

How Are Psychological Levels Traded?

There numerous ways to make use of these levels and lots of proponents or critics sitting on either side egging you on or warning you to stay away. The most common advice seems to be that these levels are useful for planning a breakout trade or a reversal. This is at best challenging or, according to some, total lunacy.

The best advice out there seems to be that you should be aware of these levels, mostly because they generate a greater volume of trading. This increases demand, if that was something that was worrying you, and does make a successful trade more likely. However, it is important that you tread extremely carefully here and use a number of other indicators and tools to ensure that price action around one of these levels is tradeable.

Problems?

Are there any problems with psychological levels? You bet!

The first of these problems is that in the vast majority of cases the price of a currency pair will simply blow through a psychological price level, whether it is a full or round level (the big figure), an intermediate mid-figure (ending in 50) or a bank level at 20 or 80. That’s it. In most cases, nothing happens. This is a problem in more ways than one. First, it means that the very significance of these price levels is called into question. If the price just ignores them on its way through then what is their value supposed to be in the first place? Secondly, if the price fails to respect these levels on so many occasions, how can you know, calculate or intuit whether this is one of those rare occasions where the price will approximate something like respecting the level?

Ah, you think, there’s the rub! It’s precisely those rare occasions where psychological price levels are useful.

Well, there’s another problem with that too. It is precisely because psychological price levels are a thing in the online forex sphere – precisely because they are so talked about – that they could actually be dangerous. When the price approaches a full or big figure level, suddenly a lot of traders are paying attention. The volume of trading spikes as lots of traders try to set up breakouts or reversals and this creates a hotspot. Suddenly everyone is on the radar of the big players in the market. It’s like sharks being drawn to a feeding frenzy by smaller fish causing a commotion. Those big players, the sharks, now have to decide whether all this activity is worthy of manipulating the price so as to crash through the stop/losses of a large number of smaller fish.

You see, when the price of a currency pair approaches a nice round number – basically any number ending in a double zero – the forex social media universe comes alive with comments about the significance of this level. And for the army of inexperienced or downright inept traders out there, a pressure to trade builds up. But the big players, large institutional traders, and big banks will know this and they have a good sense of where the majority of stop/losses will be set. So one thing you’ll often see is that before a reversal or breakout happens, the price will spike in order to first crash through the stop/losses of potentially hundreds of hopeful but misguided smaller traders looking to take advantage of a situation they had heard was going to go in their favor.

Of course, that isn’t how it always plays out, that’s merely one scenario you have to be wary of.

So What Can You Do?

Well, the first thing that is smart to do is actually see for yourself. Take a currency pair that you trade regularly and look at its historical performance. You will want to go back a significant length of time so you catch as many examples of the price crossing these psychological levels as you can. If you’re a day trader, go back a year and if you trade on smaller timescales, go back far enough to sweep up a sufficient number of cases to look at. Draw lines across your chart at significant psychological levels and then go investigating to see how the price behaves around these levels.

What you will mostly see when you do this is that in a huge majority of cases the price just crashes through these psychological levels as though they weren’t there. And remember, that is ultimately the biggest criticism of this whole approach. In those cases where the price does linger at a level that you’ve picked out, explore whether your trading process would give you an entry point. The critics will say that even those times that appear tradable will ultimately be of little or no use. They will tell you that even price movements that appear, at first glance, to be somewhere you could enter a trade behave in reality more like traps that will draw you in but lead to failure.

The best thing to do is to see for yourself.

Takeaway

If there is one thing to take away from this, it is that psychological levels certainly exist in the minds of the forex chattering classes. People on social media and running trading blogs or websites talk about them a lot and, in that sense at least, they exist. Purely as a result of that chatter, it is useful to be aware of them.

But also be very aware that there are a growing number of critics of psychological price levels as a trading tool. The most ardent critics will tell you that the best advice is to simply ignore them. Trade as though they do not exist. This might be a little extreme as it is always good to be aware of various market phenomena, even if you don’t end up using them to actually enter trades.

Regardless of your level of experience or know-how, you should know that you only make use of any trading tool once you have put it through its paces by backtesting and demo testing it. These psychological levels are no different and you should not rely on others promoting them as the next big thing unless you are sure you can carefully and methodically incorporate them into a system that works for you.

Categories
Forex Technical Analysis

Why Trend Lines Are Not Trendy for Swing Traders

Twitter accounts and websites offering educational material on trading currencies appear to have little awareness about the role they play in traders’ development. While eagerly sharing captivating content, giving comments, and advice on various forex-related questions, these sources successfully lure beginners into the community. By not addressing real, state-of-the-matter problems and challenges such complete novices are soon to encounter, not only do the information providers falsely glorify the effectiveness of poor-performing tools but they thus also deny their responsibility for generating an apparent high rate of failure.

Considering how the recommendation is nowadays seen as one of the strongest marketing means that can practically charm any individual into believing in an asset’s quality, there is little doubt over what excessive and, more importantly, unfounded praise can do in a community of individuals eager for learning and exchanging experiences. The same can be said for the extensively lauded trend lines, a charting tool drawn over highs and lows that traders use to detect the prevailing direction of a price. Regardless of its vast application in trading and the presupposed analytic value, trend lines may not be the salvation traders seek and thus need to be further assessed so as to gather additional evidence of their effectiveness.

The first time beginners encounter trend lines, they have already gone through blogs and videos discussing the topic. They may have also consulted traders coming from other markets, e.g. the stock market, or have previous experience in trading various equities themselves. When they start applying the tool in their own charts, they hope to estimate how the price is going to react, whether it will break out of the trend line or bounce off of it. What traders find particularly appealing is the ease and convenience that come with drawing the lines. Nonetheless, some professional traders strongly object to the level of effectiveness of trend lines in charts, claiming that finding proof of their usefulness is harder than what one may expect. These traders go as far as to say that it may be quite difficult to find areas in the chart where trend lines fulfill the purpose of predicting where the price is going to go owing to the fact that they essentially lack any predictive value.

The situation becomes more alarming once we take into consideration the fact that traders do not base their judgment on analysis, but often post information about how the price bounced off or broke through on social media sites once a trend is already over. Some experts even believe that people behind websites and twitter accounts win every time, hinting at the belief that success has little to do with their knowledge about trend lines.

Forex traders need to know which direction the price will take beforehand, but the assumption that trend lines function as a safe method of trading may be fundamentally flawed. People love trends and what they also find particularly interesting is the ability to offer their own opinions and views regarding the future outcome. Based on such an approach where subjectivity plays the central role, we may freely put forward the idea that trend line-based predictions then uncannily resemble the world of sports betting. Interestingly enough, trends are also used by professional sports betters, but only sparingly. Whenever we do notice a trend, we know that there is a certain likelihood of it leading to a specific outcome, but are we truly ready to accept this level of randomness when investing our precious money and time?

Roulette wheel boards in casinos, for example, show approximately 15 numbers that last appeared (see picture on the left), based on which people make specific decisions concerning their next step. Casino goers typically assume that a specific number or color is due and that they are in fact following a trend, which cannot be any farther from the truth. In a world somewhat similar to casinos, markets, or important market players will never take any action in order to intentionally lose money. Hence, they will strive to make every single trader believe that randomness is not randomness at all, playing with your lack of knowledge and analytical skills. More often than not, what traders assume to be a trend proves not to be a trend at all, and they cannot thus serve as a direct confirmation of what will eventually happen with the price.

Even if we take a look at some definitions of the word, we would know that trend generally indicates a development or change, not a final destination. We then need not rely on trends to tell us whether we are seeing an uptrend or a downtrend, we can just look at the chart to gather data and draw conclusions. Instead of having a predictive quality to them, trend lines, in fact, rather reflect a statistical anomaly or a deviation. It is truly remarkable how we can choose to draw a trend line basically on any random chart, anywhere, and anytime. Nonetheless, what is peculiar is that there are as many places where we can draw these lines as there are places where we simply cannot.

Any chart has a trend happening somewhere, but seeing areas with highs and lows you can connect with a straight line is not an analytical advantage but a game of flipping a coin. If you can draw a connection between a coin landing on a particular side and a price breaking the trend line, then you certainly know how we are playing with a 50—50 proposition or even far less. Trend traders are often amazed at the predictions given on Twitter, but as we said before, the way someone looks smart is not equal to the level of luck you will have using the tool they advertise. As the price will inevitably have to go one way or the other, moving up or down, they will only later reveal the results they accredit to the trend line, which will push you to believe in trend lines’ ability to help you reach your goals faster.

What do you want a trend line to show you? As traders typically look for signs whether the price would break out or bounce off, we can expect to see three different scenarios: a) breaking out, passing the trend line, and starting a new trend; b) bouncing off of a trend line and continuing on the trend they are on; or, c) false breakouts and false reversals that appear to be similar to the previous two. In the end, we are not really looking at an actual trend, but a statistical anomaly because trend lines have little to do with the question of whether prices move up or down. The only ones possessing this kind of information always turn out to be the big banks and institutions, which are constantly on the lookout for market activity. They eagerly look for the areas in the chart where the majority of retail traders are going on any currency pair only to take the price the opposite way and earn a profit. If you are already participating in the market, your success will undoubtedly and indisputably depend on your ability to get off the big banks’ radar, which means evading the places where the greatest number of individuals are trading.

This further implies that tools such as support and resistance lines often prove to be completely useless since, unlike trend lines, they do reflect some consistency due to which every trader can have access to the exact same information, immediately sparking the big banks’ interest. Traders assume than these major players pay attention to diagonal support and resistance when they in fact only wait for the majority of traders to move into one direction so that they can redirect the price. Whatever you expect a trend line to show will not eventually provide you with enough security and keep you away from the areas in the chart which can get you to lose a lot of money.

Despite the fact that some people claim to know everything about trend lines, if you ever try to find a specific standard for drawing them correctly, you will discover a great degree of inconsistency. If you take a look at the image below, you will see the extent of discrepancies between the rebound and break out points. Whereas support and resistance lines have very defined areas where people are trading, trend lines significantly differ from one trader to another. So, how can we draw them then? Do we focus on the highs and the lows or do we see them as noise and disregard them as a result? Are we to connect any two points or several ones? How many points make a single line then? Should we connect the bodies or concern ourselves with the opens and closes?

As you can see, every combination is a possibility, but we still wonder at what point a trend line stops serving us. When is it no longer legitimate and should we still keep it or erase it from the chart after the price has gone some other way? Because of the existence of countless possibilities, people can have different views on where entry and exit points are on a particular trend line. With zero consistency across charts, we can safely assume that trend lines are essentially whatever traders desire them to be.

Examples of Different Approaches to Drawing Trend Lines

Since we cannot firmly state that any line can determine whether a price is going to move up or down, we should truly aim to follow the advice of the best traders out there and move on to tools that can actually grant us success. What many traders may think here is that they could use trend lines together with RSI, stochastics, or Fibonacci. However, instead of using two low-level tools, which are not only useless but dangerously overrated as well, you can give yourself the opportunity to search and test out thousands of other more modern tools created solely for the purpose of trading in the spot forex market. From its conception in 1996, this market has witnessed a turnover of approximately 10 thousand indicators and tools we can use in everyday trading as well as an incredibly high rate of failure at the same time.

Expert traders claim to have tested more than one thousand indicators only to find what serves them best, which is a clear indication of the fact that a popular tool is not always a good tool. Therefore, if you search hard and test vigorously, you can confidently expect to find some excellent tools that you will be able to use for good. Then, once you have discovered a few of such tools which prove to give great results, you may start to combine them, creating a stable system with an incomparably higher chance of predicting whether the price is going to go up or down. What we are seeing here still involves a portion of randomness, but we are also including the momentum which your set of tools will be able to recognize. It is precisely due to the mathematics within your toolbox that you will have the chance to trade on an above-average level. Your tools will predict if the momentum in the market is real and which way it is most likely to take the price, based on which you can stop making completely random predictions and starting earning a real profit.

Whichever tools you end up using, you should never lose focus over the importance of entering and exiting a trade on time, which trend lines fail to do over and over again. If you want to become a successful trader, do not fear the evident stigma of being different in the market. We have already seen in some other markets how news events and lack of independence play out, and the best way to avoid the staggeringly high failure rate is to build yourself as an independent trader. Use your analytical mind to assess whatever information you come across because writing and recording are always profitable, both to their creators and to the big banks eventually. Following trends is essential, but the fact that this tool has that word as part of its name has no relevance and certainly no power to provide you with the information you need. Whenever you encounter vagueness, start asking yourself whether it is testable, logical, and profitable.

With so many outdated tools, traders are not only entering trades when trends are already over, but they are entering trades that will get them right under the big banks’ radar. If you are still convinced that trend lines are your perfect companion, can you answer the question of whether you experienced a situation where a price did not align with your trend line? If the answer is yes, then you should know that the reason behind such a phenomenon is the fact that diagonal support or resistance simply does not exist, further supporting the claim that trend lines are not to be used in charts to predict the behavior of the price. Strive to construct an algorithm that will consistently and transparently send signals that will lead to successful trades, thus steadily building your trading account.

Categories
Forex Assets

What Should Know About The AUD/JPY Currency Pair?

Introduction

AUDJPY is the abbreviation for the Australian dollar and the Japanese yen. It commonly referred to as “Aussie yen.” It is one of the cross-currency pairs in the forex market. AUD, being on the left, is termed as the base currency and JPY as the quote currency.

Understanding AUD/JPY

The market price of AUDJPY corresponds to the value of JPY that needs to be paid to buy one AUD. It is quoted as 1 AUD per X JPY. For example, if the value of AUDJPY is 74.571, then these many units of the yen are to be produced to purchase one Australian dollar.

AUD/JPY Specification

Spread

Spread is the medium through which brokers generate their revenue. They set different prices for buying a currency and selling a currency. The difference amount becomes their profit margin. The spread usually changes from time to time and varies on the type of execution model.

ECN: 0.7 | STP: 1.6

Fees

Apart from spreads, one needs to pay a charge for every execution a trader makes. It is essentially the commission levied by the broker on each trade. As a matter of fact, there is no fee on STP accounts. But, on ECN accounts, there is a fee of few pips.

Slippage

Going by the definition, slippage is the difference between the price executed by the trader and the price he actually received. It could be in favor of the trader or against him. It all depends on the broker’s execution speed and the change in the volatility of the market.

Trading Range in AUD/JPY

A trading range is a tabular representation of the minimum, average, and the maximum pip movement in a currency pair on different timeframes. These values help in determining the profit that can be made or loss one must bear in a given time frame. And this can be found out by simply finding the product between the pip movement and the value per pip ($9.15).

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 determine 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/JPY Cost as a Percent of the Trading Range

Cost as a percent of the trading range is an illustration of the cost variation by considering the total cost and the volatility of the market in different timeframes. These values are expressed in a ratio that is converted to percentages. And the magnitude of these percentages helps in determining the cost variation in each trade.

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 = 1.6 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.6 + 0 = 3.6

The Ideal way to trade the AUD/JPY

Though Forex is a 24/7 market, it is not ideal to enter any time in the market. There are certain times when you must enter the market, which can help reduce costs significantly. Let us determine that using the above tables.

Note that the higher the magnitude of the percentage, the higher is the cost of the trade. From the table, it can be ascertained that the values are high in the minimum column, implying that the costs are high when the volatility of the market is low. Similarly, the costs are low when the volatility is high. However, it is not ideal to trade during these times. To ensure optimum volatility and affordable cost, one must trade during those times when the volatility is around the average range.

Furthermore, there is another way through which you can reduce your costs. Trading using limit orders instead of the market orders brings down the total cost significantly, as the slippage becomes zero. The decline in the costs on the trade when slippage is made zero is shown below.