Categories
Forex Assets

Analyzing The USD/BND Forex Currency Pair

Introduction

USD/BND is the abbreviation for the US Dollar against the Brunei Dollar. Brunei is located on the Asian continent, and this pair is classified as an emerging currency pair. In the USD/BND, USD is the base currency, and BND is the quote currency.

Understanding USD/BND

The market price of this currency pair specifies the value of BND equivalent to one USD. It is quoted as 1 USD per X BND. For example, if the value of this pair is 1.3711, then these many units of the quote currency (BND) are required to purchase one unit of the base currency (USD).

Spread

The difference between the bid and the ask price is called the spread. The spread varies from broker to broker and also by execution model used.

ECN: 5 pips | STP: 8 pips

Fees

A fee is a synonym for commission. This is similar to the one that is paid to the stockbrokers. Below is the fee on ECN and STP brokers.

Fee on ECN – 0 pips | Fee on STP – 5-10 pips

Slippage

The difference between the price requested by you and the price you actually received from the broker is called slippage. There are two reasons for slippage to place:

  • Market volatility
  • Broker’s execution speed

Trading Range in USD/BND

A trading range is a tabular representation of the minimum, average, and the maximum volatility of this currency pair. And these values help in determining the profit/loss of a trade in a given timeframe. Hence, this is a great risk management tool for traders.

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/BND Cost as a Percent of the Trading Range

The cost as a percent of the trading range is the representation of the cost variation in a trade for different volatilities are timeframes. This variation is represented as a percentage. The magnitude of these percentages depicts the highness and lowness of a trade.

ECN Model Account

Spread = 5 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 5 + 3 = 11

STP Model Account

Spread = 8 | Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 8 + 0 = 11

The Ideal way to trade the USD/BND

Trading the USD/BND is simple. This pair is not so volatile, like the other emerging pairs. Moreover, the spreads are low too.

From the above tables, we can see that the percentage values are pretty high in the minimum column, and comparatively lower in the max column. This means that the costs are high for low volatile markets and low for high volatile markets. So, traders who need high volatility may enjoy low costs. And trades who want to minimize their risk and trade low volatile markets will have to bear higher costs. Finally, traders who need a balance between the two may trade when the volatility of the market is around the average values. This will ensure the equilibrium between volatility and costs.

Moreover, there is a way through which you can cut off the slippage on your trade. Placing orders as limit orders instead of market orders will take away the slippage and bring down the total cost on the trade. So, in our example, the total cost would reduce by three pips.

We hope this article will change the way you trade this currency pair. Happy trading!

Categories
Crypto Guides

What Problems Do Stable (cryptocurrency) Coins Solve?

Introduction

We have learnt a lot about cryptocurrencies and their properties in our previous guides. Even though this financial instrument has gone through a lot of up & down in the last three years of the past decade, many financial experts believe that this asset class can still be considered a potential investment. Some experienced crypto traders believe that Bitcoin, at its peak (~$18,000 in Dec 2017), is still undervalued. This is because of the strong fundaments Bitcoin possesses. Not just Bitcoin, the entire crypto market has enormous investment potential in this decade.

The Need for Stable Coins

But there is one thing that concerns both short-term and long-term crypto investors – which is undoubtfully the volatility. Most of the cryptos currently present in the market possess huge volatility. This is one crucial reason why most of the investors are not confident enough to invest in this space. This volatility is also the reason why cryptos cannot be used as a standard medium of exchange. Hence the need for a Stable Currency or Stable Coin has risen.

A Stable Coin is a currency that has all the critical properties of typical crypto while achieving price stability. This stability in price is achieved by pegging their value to the major fiat currencies like USD & Euro in a 1:1 ratio. One of the very first and famous stable coins is Tether, and its value is pegged to USD. So the value of one Tether (₮) is always equal to one US Dollar ($). The main goal of any stable coin is to achieve maximum decentralization while maintaining price stability. But in the case of Tether, even though it has most of the properties of crypto, it is highly scrutinized ever since it is pegged with the USD.

Significance of Stable Currency

Stable Currency, as the name suggests, provides both short-term & long-term stability for the traders and investors. Short-term stability allows users to make day to day transactions just like fiat currencies. While the long-term stability provides confidence for the investors to include these stable coins in their portfolio. For instance, in the case of extreme bear markets, crypto traders and investors must need some stable storage where they can protect their portfolio from significant losses. The only other way is to convert all these cryptos to desired fiat currencies and convert back to crypto again once the downtrend is over. This sounds redundant. Isn’t it?

But with the help of stable coins in their portfolio, investors can just trade the cryptos that are bleeding for stable coins and hold them without having to worry about the volatility. Apart from the investment point of view, stable coins can also help short-term crypto traders to confidently keep their profits that they have gained within the exchange wallets (in the form of stable coins). But in the absence of stable coins, they will have to continuously worry about them losing their profit value due to the high volatility.

If you are interested in adding stable coins to your portfolio, we have mentioned some of the most promising ones below.

TetherMakerDAOTrue USDCarbon

Many stable currency projects like these have come to existence after Tether, and some of them showed promising results. However, a completely decentralized stable coin that can be used for day-to-day transactions securely is yet to come.

Categories
Crypto Guides

Knowing The Risks Involved While Using & Investing In Cryptocurrency

Introduction

Bitcoin, being the world’s largest virtual currency in terms of market cap, is aiming to give the financial space a new look. Also, blockchain technology, which is digital, distributed, and decentralized, has been powering transactions without the existence of intermediaries. With these features, it is believed to be a game-changer for the financial industry in the near future. However, apart from its primary features, it is essential to have a light on the risks involved in them.

Potential Risks Involved In Using Cryptos

Yet, cryptos have been the evolved way to look at currencies; there are ever-growing risks and concerns. Here are some reasons which show that using and investing in cryptocurrencies might not be a smart step.

Unavailability of traditional fundamental metrics

Cryptocurrencies lack the existence of fundamental metrics, which is useful for assigning value to an asset. In a stock, investors can get info about balance sheets, income statements, earnings reports, and many other fundamental factors to analyze a stock. However, with cryptocurrencies, there are no fundamental metrics that can be used by investors. Apart from processing speed and average daily transactions, the investors virtually get nothing about the power of digital currencies needed to analyze cryptocurrencies.

The SEC shall be of no help

A December 2017 statement from SEC chairman notes that decentralized trading can occur outside the confines of the US borders. And, as the transactions are considered to be anonymous, recovering the invested coins may not be possible.

Volatility

Though the cryptocurrencies have been in the market for quite a long time, the price fluctuation is still an issue. This could be due to the fact that people do not yet tend to trust these intangible funds. Moreover, even though a single entity doesn’t govern it, any major world news can the price of the cryptocurrency.

Lack of acceptance

While Bitcoin is welcomed in many countries, there are a few countries that still do not accept them due to its volatility and decentralized nature. Some nations have put a complete ban on it, and some have tried to cut off support from banking systems for its trading and use. Some countries that said ‘No’ to cryptocurrency are

🇨🇳 China

Bitcoin is officially banned in China. All financial institutions are prohibited from transacting with Bitcoin. The crypto exchanges in China are put to ban as well.

☭ Russia

Bitcoin is unregulated in Russia; however, its use as payments for goods and services is illegal.

🇻🇳 Vietnam

Vietnam’s government and its state banks claim that Bitcoin is not a legitimate payment method.

Thefts and Scams

Though cryptocurrency is intangible, there are possibilities of thefts and scams through hacking. Hackers have sophisticated tools that infiltrate cryptocurrency wallets and trading platforms to intercept transactions and send money to their wallets. Some of the Bitcoin scams with examples include,

Fake Bitcoin exchanges: BitKRK from South Korea
Ponzi schemes: Bernie Madoff
Fake cryptocurrencies: My Big Coin

Final Words

It is no doubt that cryptocurrencies have eased out the way of transactions. One can transfer coins to anyone, anywhere, and anytime anonymously of its decentralized nature. Having that said, the volatility, lack of acceptance, and thefts and scams can be viewed as a disadvantage and as a factor of risk.

Categories
Forex Assets

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

Introduction

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

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

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

GBP/USD Specification

Spread

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

Spread on ECN: 0.7

Spread on STP: 1.3

Fees

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

Slippage

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

Trading Range in GBPUSD

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

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

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

EUR/USD PIP RANGES

Procedure to assess Pip Ranges

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

(originally posted in our article here)

GBPUSD Cost as a Percent of the Trading Range

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

  • Slippage
  • Spread
  • Trading Fee

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

Total cost = Slippage + Spread + Trading Fee

Note: All costs are in terms of pips.

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

ECN Model Account

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

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

Total cost = 3.7

STP Model Account

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

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

Total cost = 3.3

The Ideal Timeframe to Trade GBPUSD

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

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

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

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

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

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

Total cost = 1.7

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

Categories
Forex Market

Advantages & Risks Involved With Volatility Trading In The Forex Market

Introduction

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

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

The volatility of a major currency pair

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

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

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

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

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

Risk of trading in low volatile hours

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

Why is it important?

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

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

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

High volatile hours – London & New York Sessions

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

Risk of trading in high volatile hours

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

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

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

Bottom line

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

Categories
Forex 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 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 Market

Dealing With Liquidity & Volatility In The Forex Market

What is liquidity?

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

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

Liquidity and Risk

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

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

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

Volatility

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

Eliminating the risk of volatility

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

Volatility strategies

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

Stay diversified

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

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