Friday, August 24, 2012
Sunday, June 10, 2012
Harami – An Important Trend Reversal Candlestick Pattern
Harami is an important trend reversal pattern. It is a two day candlestick pattern with the candle of the setup day longer than the candle of the signal day. Harami is the Japanese word for pregnant. If you draw this a pattern, it will look like a pregnant woman. The pattern can be bullish as well as bearish.
In case of the bullish harami, the first day is a bearish candle that occurs in a downtrend. On the second day, bulls enter the market and start moving the prices higher but not with much success as the price close lower than the open of the first day and the first day’s high is not surpassed. However, when this pattern appears it culminates in a trend reversal.
If you want to identify the bullish harami pattern, it should have the following features. The market should be in a downtrend. The setup day has a longer candle than the signal day. The setup day candle has an open greater than the close and the body is fairly long.
The signal day candle has an open lower than the close. The open of the signal day is higher than the close of the setup day. The low of the setup day is lower than the low of the signal day and the high of the setup day is higher than the high of the signal day. The signal day open is higher than the setup day close and the signal day close is lower than the setup day open. A bearish harami pattern is the exact opposite. It appears in an uptrend with the setup day a long bullish candle followed by a signal day short bearish candle.
When this pattern appears, it means a trend reversal. This pattern has a few variations. One important variation is the Harami Cross. In case of a Harami Cross, the setup day is a bullish or bearish long candle and the signal day is a Doji. Doji is formed when the open and close are the same. This is not a common pattern but when it does appears, it means a sudden trend reversal.
When this pattern appears and you want to trade it, you can use the close of the setup day as your stop loss. Sometimes, using too tight a stop might get you out of a successful trade. However, putting a stop loss with enough room can keep you in a bad trade too long. Where to place the stop loss is an art plus a science and it is one of the most difficult parts of trading.
The Morning Star And The Three White Soldiers Candlestick Patterns
This is a guest post by Ahmad Hassam
Three stick candlestick patterns are more complicated than the single stick and two stick patterns. These patterns take three days to emerge as a valid signal. One such three stick candlestick trend reversal pattern is the Morning Star. However, a Morning Star and the Bullish Doji Star look almost the same but are in fact two different three stick candlestick patterns. You need to know how to distinguish between them.
In case of the Morning Star and the Bullish Doji Star Patterns, the first day is a large bearish candle, the second day in case of the Doji Star Pattern is a True Doji while in case of the Morning Star it is almost a Doji. The price action behind these two patterns is almost the same.
The first day is a down day with a large bearish candle forming as happens in a downtrend. The second day starts with a gap opening indicating that bears are still in action and are continuing to push the prices down. For the rest of the day, there is a tight contest between the bulls and bears and the open and the close price are almost the same. The third day is extremely bullish with the bulls pushing the prices up regaining the lost ground on the last two days. When either these two patterns appear on the chart, it means a trend reversal.
The other important bullish trend reversal three stick candlestick pattern is the Three White Soldiers Pattern. This pattern includes three bullish candles in a row. When you spot this pattern in a downtrend, it means a quick trend reversal.
In order to identify the Three White Soldiers, look for three consecutive up days in a downtrend. Now, if the open, close, high and low of the second day are higher than those of the first day and the open, close, high and low of the third day are higher than those of the second day, you have spotted a true Three White Soldiers Pattern.
The price action that forms this pattern is often dramatic and indicates a quick trend reversal. The appearance of this patterns means that the bulls have been in total control of the market for three consecutive day. The Three White Soldiers is considered to be a pretty strong trend reversal pattern. It is always a good strategy to put the stop at the low of the Three White Soldiers pattern’s second day. This way, if there is some retracement after the new uptrend, you don’t get out of the trade soon.
Deciding on a Lot for Your Forex Trading
As a Forex trader, your natural desire is to reduce risks as much as possible. Inevitably, you develop risk management strategies to combat the side-effects of risky trades. In doing so, Forex traders must pay close attention to the size of their lots. Forex strategists assert that the smaller the lot size is, the better, consequently boosting flexibility and overall risk management. So what are the types of Forex slots? Forex slots come in three forms: 1) Micro Lots, 2) Mini Lots and 3) Standard Lots.
Micro Lots: This is essentially the smallest available size capacity tradable by the regular broker. A micro lot comprises of 1000 units of your overall funding currency. Say, for example, your account default currency was the USD, you’ll be trading $1000 worth of your regular currency. If you are using a dollar pair, keep in mind that your one pip is equivalent to ten cents. This is the least riskiest and a perfect start for beginners.
Mini Lots: superseded micro lots and have continued to be of significant to Forex traders today. However, mini lots have become an expensive commodity, for each dollar on a dollar based pair trade demands 10,000 units of currency funding. This means that each pip is worth $1 in a trade. Therefore, you need to have enough capital. Consider the insane fluctuations of the market, you can either get $100 in an hour or lose $100 in 2 minutes because the Forex market is so unpredictable. You’ll have to decide how much risk you can handle before you make comfortable and uncomfortable decisions.
Standard Lots: In order to trade using a standard lot, you’ll have to have 100,000 dollars wortth of trades. This is because each pip size is on average $10, so that means that losing $100 has a common occurrence. These are often provided and maintained by institutions. You have to invest significantly to afford this kind of lot, about $25,000 to make your trades worth while.
At the end of the day, it’ll depend significantly on your risk management, your investment, and the overall organization of your trading. The best option remains within the micro lots, since mini and standard are accompanied by significant investment needs including lots of risks.
How to Be a Top Forex Trader
In the Forex market, everyone wants to become the infamous powerhouse broker with an unending stream of money coming out of their pockets. The reality is, according to Forex brokers, 90% of traders fail terribly because they just do not know what they are doing, how things work, or that they aren’t prepared enough. The other 10 percent, well, consider that only 5% comes even while the other 5% experiences repeated success. How do they do it? In this post, I’ll explain five key principles required to become a power trader:
1) Education: these traders aren’t your everyday traders, they know the ins and outs of the Forex market and so they have significantly invested in their knowledge to the point where they know each aspect of the Forex system. They also learn from each successful/unsuccessful trade and develop strategies to decrease their risks–they are constantly learning.
2) A Trading System: these brokers have a solid Forex system whereby their trades are enacted with as much strategy as possible. They are on a system that pushes them towards discipline and are very aware that if the Forex market signals their system, then they probably have a higher chance of success.
3) Price Action: based on the market trends effecting prices, repeatedly fluctuating, these Forex traders know that if their prices match according to their strategy (often using Candlestick method), they can fully do their trade.
4) Manage Money: these brokers are knowledgeable about Forex market to the point that they exercise humility and diligence because not all Forex trades become successes. They have a way to manage their risks and avoid as much loss as possible.
5) Psychology: Forex requires a lot of hardcore unemotional behaviour because being a hypochondriac is simply not the way to be successful. They don’t cry after every failed attempt, for they know it’s been a gamble. So they are understanding that each trade can give them success and failure, there are two sides to every action.
These five factors are important, I believe, particularly the psychological aspect for Forex trading can become emotionally devastating. In the end, what makes you successful and what makes you lose is pretty obvious, the success is governed by rigorous determination and emotional control.
Keep A Trading Journal
Why you need to keep a trading journal? Trading is all about being disciplined. Successful traders don’t have any holy grail of systems or indicators. What they have is a lot of common sense and discipline. The importance of keeping a trading journal cannot be overemphasized if you want to become a successful trader. This is how hedge fund managers train their new traders. No doubt, leading banks are able to train and breed successful and pro traders using this simple strategy of inculcating the habit of keeping a trading journal and being disciplined in trading.
As an individual trader, keeping a trading journal is even more important as you are trading with your own money that you can’t afford to lose. Capital preservation should be your number one strategy. Live to trade another is what you need to learn and inculcate in yourself.
For every trade that you make, you need to have a strong rationale for entering into the trade with clear cut entry, exit, take profit and stop loss strategies. When you enter into a trade, you should know beforehand when you are going to exit in the worst case scenario. Learn to manage risk first and only then think about taking profit.
Many traders think of the profit first and risk later. It should be other way around. First manage risk, once you have managed risk, only then you should think about take profit. Learn to take a calculated risk each time you enter into a trade plus develop the habit of learning from your mistakes. Now your trading journal need to have at least the following three parts. Let’s discuss them.
Currency Pairs Checklist: This part should include your daily outlook on the different currency pairs that you trade. Calculate the daily range of the pairs that you trade using pivot points. Predict how the currency pair is going to behave in the next few days. Mark those currency pairs that are ranging with their support and resistance as well as those that are trending.
Potential Trades: This part should include the list of trades that you plan to trade in the day plus the strategy that you will employ.
Completed Trades: This part should audit all your completed trades. Try to learn from your mistakes. Analyze each completed trade. Figure out where you went wrong in case of a losing trade. In case of a winning trade, think if you could have done it better.
Bad Risk Management in Forex Trading
Bad risk management can create stress and ruin your forex trading career. You might have the best forex trading system in the world but it will fail if you don’t practice good risk management. Losses are inevitable with any forex system. But what if you have bad risk management? You will blow out your account soon and most probably don’t have enough money to make those profits that you had dreamed when you started trading forex.
Bad risk management is one of the main reason that fails the budding career of many new forex traders. Many people start trading forex dreaming of making a million in just a few months. They overtrade, take on too much risk and get blown out by the market.
Many buy a great forex system, make a few trades that are way too big for their equity in the account. When the first few of these trades go wrong, they lose almost all their equity. After this they think that forex trading is a lie and quit.
What is more important for you? Capital preservation or capital appreciation? Of course capital preservation. Learn to survive the market and trade another day. Suppose, your system makes only 10% return per month with a risk of only 1%. Is it better or is this system better that gives a 50% return per month with a risk of 10%. Naturally the first one is a better system. Let me explain.
Suppose, you have a coin and you have $100. Your friend want to bet $10 dollars for every flip of the coin. You and he agree to make 1000 flips. Ideally if you win all the 1000 flips, you will be making $1000. But if you lose all the 1000 flips, you lose $1000. But you have only $100 in your pocket. So, how much maximum to bet on one single flip of the coin?
If you bet $10 on each flip, you will have 90% chance of getting wiped out in 1000 coin flips. In those 1000 flips, you just need 10 losing flips to lose your $100. So, what to do? Let’s say, you tell your friend that you are ready for the bet but with only $1 per flip.
Now, what are your chances of losing all your $100? Only 5%. You see, you need 100 flips in a row to lose $100. This makes your risk of losing only 5%. This is exactly how you need to take the game of trading.
It is risk management that is going to determine how fast or how slow you grow your equity. Your equity can grow very fast if you take too much risk but you might as well get blown out soon too. On the other hand, take too little risk, your equity may grow slow but you have very little chance of getting wiped out. Whatever, you need to understand that it is not the pips that you make that determines how much you make with a forex system but risk management that determines how much you will end up making with those number of pips.
Top 4 Reasons Forex Traders Fail
Most forex traders fail. While we don’t have completely accurate statistics to back up this statement, it is estimated that 90% – 95% of forex traders lose more money than they make.
The question that unprofitable traders continue to ask is, “Why can’t I make money in the foreign exchange?” Sometimes it even seems like the whole world is against you – your broker, your government, and, many times, even yourself.
But fear not. There are some common reasons why traders tend to lose money in the forex, and with a bit of knowledge, experience, and discipline, most of the reasons can be overcome. Let’s take a look at 4 common reasons for trading failure now.
1. Being Impatient / Expecting To Make Money Immediately
If you are the type of person that “always has to be doing something”, the forex is going to expose that personality trait immediately. Trading the forex is a waiting game – period.
Beginning traders have this glorious fantasy of making dozens of trades a day, always standing near the edge of disaster, but then finding that amazing deal that makes $10,000 at the end of the trading session. This idea is preposterous.
In real life, forex trading is about studying the markets, understanding technical and fundamental indicators, and researching what others have to say. All of this research should culminate into a few profitable trades each week or month depending on your trading timeframe.
Sure, there are traders that make dozens of trades a day and realize incredible profits doing so. But, let’s be truthful, those traders have a lot more experience than you do, and many more people lose money rather than make money trading that often.
Don’t expect to bring in hundreds of dollars a day to begin with. It will take months, and maybe even years, to realize such a consistent profit from the forex. In essence, learn to trade just like you learned anything else – slowly and consistently. There are no shortcuts.
2. Not Having a Systematic Trading Strategy
You cannot be a consistently profitable forex trader by sitting down in front of the computer, taking a look at the charts, and saying, “Hmmm….this looks like a good place to get it.”
It just doesn’t work that way.
Rather, you must have a definite trading system with defined rules that you follow every trade.
Your trading system doesn’t have to be set in stone like always using a 45 pip stop loss. The market doesn’t move in defined pip ranges, so you don’t have to trade using defined pip ranges. But your strategy should have pre-conditions for entering a trade, for determining your lot size, and for exiting your trade.
Where do you get such a system? I was listening to the radio this morning as they were interviewing a chef. They asked the chef if he would mind sharing his recipes. He said he didn’t mind because 10 people can cook from the same recipe, and the result will be 10 different tasting dishes.
The same goes for trading. The strategy that works for one person may not work for you.
You don’t “find” a profitable trading system as much as you “build” your own system. To start, find a strategy from someone you trust and trade it. As you trade using that system, you will begin to alter that trading strategy until it becomes your own.
3. Jumping From Trading System to Trading System
I’ll just make a real quick note here. Most unprofitable traders lose money over and over because they don’t stick with a trading strategy through the losses. Every single trading strategy in the world experiences losses – some for even months or years.
If, when you experience a string of losses, the first thought in your mind is to see what other trading strategies are out there, chances are you will always lose money in the foreign exchange.
4. Trading On Emotions
You should never, ever trade the markets to get even. Whether you are getting even with the market itself, your boss, or your girlfriend – emotions ruin traders.
I have heard profitable traders say that trading isn’t fun. They say that if you still get “excited” after good trades, then you are probably still losing money.
Why?
Because profitable traders trade with a trading strategy. If the market meets their conditions, they enter the market. They set stop loss and take profit levels based on their trading plan and market research, and then they let the market play out. In essence, they don’t trade on emotion.
Do they still watch the market? Probably. But they are watching the market to gather information for their next trade, not for information to influence their current trade.
To make money consistently in the forex, you have to be patient, calculating, and free from emotions that affect your ability to trade.
Basic Forex Strategies
The multi-billion-dollar per day Foreign Exchange Currency Market (Forex) is appealing to the individual investor because it is one of the most liquid investments available. In a way, it is a very simple, straightforward type of investing. Prices can either go up, down or sideways.
That is not to say that you can simply open a Forex trading account with a broker and start placing trades, unless your goal as a Forex trader is to become what’s known as, in Forex jargon, a “donor.”
Assuming that you are going to engage in Forex trading with the goal of making a profit, it is helpful to develop some strategies that will enable you to trade logically, calmly and without freezing or acting irrationally in the heat of the moment.
Many successful strategies have already been developed, so you don’t have to start from square one, or reinvent the wheel. There are practically innumerable strategy developers that hope to sell you their strategy or strategies. Any reputable strategy developer will give you a free trial period. Testing strategies is a lot like trying on shoes. You may see some that look right, are priced right, and are available in your size, but if they don’t feel good, you’ll regret buying them and will never wear them. When sampling Forex strategies, the most important criteria is to make sure that you’re comfortable with it.
Some of the elements that make up a Forex strategy relate to which markets you want to trade, the amount of your available trading funds, the amount of time you have to devote to actively trading, and your trading goals.
As stated before, Forex prices can either go up or down, which is referred to as a trending market, or they can go sideways in a narrow channel, which is called a trading market.
Many experts have concluded from years of observation and research, that the Forex markets spend 80% of their time trading sideways and 20% of their time trending.
A strategy that performs well in a trending market is therefore going to be effective only around 20% of the time. For the other 80% of the time it is necessary to have a strategy that will perform well in a sideways market.
Further, it is a good idea to have variations on each of these two strategies so that you can best customize them to match your trading goals, abilities, and most importantly, your trading equity. The greatest trading strategy of all time will not work for you if it necessitates $100K of account equity and you plan to start trading with $10K. That’s because a trader with $100,000 can afford to stay in a trade much longer and not panic when the market forms its inevitable peaks and valleys that might cause a trader with a $10,000 account to abandon a trade, sustaining a loss, often just right before the market changes direction and turns a loser into a winner.
Why the Amount of Pips Made in a Day May Not Matter At All
This post is a guest post
The internet is saturated with cheap marketing and advertising ploys aimed at reeling in new forex traders. Most of them promise huge returns with the promise of thousands of pips per month. Many of the marketing schemes on the net boast things like, “Learn how to make 100 pips a day!” or “Our trading strategy yielded 2,000 pips last month!”
First of all, there are all sorts of ways these numbers are fabricated, but the reality is that pips don’t really matter. In this article, we are going to discuss why, and then we are going to discuss what really matters.
How To Make Pips And Lose Money Every Day
Let’s break down a typical trading day for Joe Forex Trader. Joe opens his charts in the morning, conducts technical analysis for a few minutes, sees the market beginning to move, and jumps in with a new market order. When Joe gets into the market, he’s not exactly sure where he will get out with profit or where he will place a protective stop. Therefore, Joe’s position size is not based on anything but how he feels or what size position he typically takes.
Let’s assume that Joe buys $100,000 EUR CHF and, for argument’s sake, let us assume that each 1 pip movement is $10. Shortly after Joe enters the market, price begins moving against him aggressively, and suddenly Joe is down 30 pips. Thus, Joe decides to cut his loss, so he closes out the position for a loss of $300 ($10/pip X 30 pips).
Joe is now a bit perturbed that the first trade of the day was a loss, so he looks at the market and sees a potential scalp setup. Joe decides to run a super tight stop of just 10 pips, so he increases his position size to $400,000. He thinks that with just a quick 10 pip scalp he can earn back the money he just lost and get back into positive territory on the day. Joe buys $400,000 of EUR USD, and all of a sudden price spikes hard against him. Joe is down 10 pips in a matter of seconds. He finally closes out the trade at a loss of 12 pips. Joe lost $480 ($40/pip X 12 pips) on the trade. Now, Joe has lost $780 on the day, and he has lost a total of 42 pips (30 + 12).
Joe decides to take a break for a few minutes. He grabs a drink, gets some fresh air, comes back in and begins to analyze the market again. This time, Joe sees a great setup that could yield around 50 pips, but Joe’s psychology is under stress and he is a bit fearful. He doesn’t want to go into any deeper of a drawdown on the day, so Joe opens a position of just $100,000. If price moves against him 20 pips, Joe will get out. Therefore, he buys EUR USD again with $100,000. This time price begins to move in Joe’s favor. In just a matter of about 30 minutes, Joe closes out his trade with a nice 50 pip profit and makes $500 on the trade ($10/pip X 50 pips).
Now, Joe has made 50 pips on the day and he has lost 42 pips, which means he is net positive 8 pips on the day. But what about the money? Joe is actually down $280 ($780-$500)! This is why pips don’t really matter at all. All that matters at the end of the day is if a trader has made or lost money. If a trader loses pips, but makes money, that’s great. However, if he makes 100+ pips on the day, but loses money, then those pips don’t really matter anything do they?
The moral of the story is that position sizing is a huge key to long-term trading success. Consider risking the same percent on every trade instead of executing subjective position sizes based on emotion. Forex trading does contain a significant risk of loss and education, professional advice and choosing the right broker are things all traders must consider.
Is Forex Trading for You?
Forex or foreign exchange is a way you can invest your money. It works by taking advantage of the daily fluctuations between different currencies. When the forex market changes, the movement in points translates to dollars that you either make or lose, depending on your position.
You may be interested in investing in the forex market. However, it is not for everyone. It may look simple enough, but there are actually a number of social, political and economic factors at play that affect the value of a currency in a given day.
For example, during 9-11, the US dollar dropped to an all time low, although it later rebounded, only to drop again during the recession. As for the Japanese yen, it dropped several points immediately after the recent 8.9 earthquake and succeeding tsunami hit, only to rebound the following day.
Forex trading is more volatile compared to other investment options such as a mutual fund or investing in bonds. There is movement on a daily basis, so it needs to be constantly tracked or monitored. Also, because the economic markets are so closely interrelated, simple events have repercussions on a country’s currency, which has a domino effect on other currencies.
The forex market may be a good idea for you if you are willing to stay on top of your investment. If you’re the type of investor that prefers to sleep at night and simply look at your statements on a quarterly basis, this investment option may not be the best choice for you.
Assess you risk tolerance. If you are a conservative investor, this may not be the best investment option for you. After all, the currency markets can move dramatically in a space of a few hours. If you are willing to endure a bit of risk, you can easily make hundreds or even thousands of dollars a day in Forex trading, if you know what you are doing.
Also, you must have other investments other than forex trading. If this is your only investment vehicle, it may be a better idea to spread you risk and have other investments. Forex trading may be a part of your portfolio, but it shouldn’t be the only one in it.
Also, you must have enough money invested to be able to ride out drops in currencies, so you have enough time to recover your loss. While most responsible forex traders will set a stop gap loss, it’s better to have some cash at hand to be able to infuse your account as needed. If you have a limited amount of available cash, you may want to forgo investing in the forex market.
You need to educate yourself on the different terminologies on the trade, such as points, lots and so forth, to be able to manage and monitor your investment. Also, you need to stay on top of current events of various countries, since political and economic moves directly affect different currencies.
For example, if a specific currency is quickly devaluating due to economic or political events, then the central monetary board of the country may decide to intervene and infuse money into the system to stop a downward spiral. To be aware, watch the news and read the paper, not just for activities domestically, but stay on top of worldwide current events.
If you don’t know what you are doing, place your money elsewhere and find an investment scheme that is safer and more stable, such as a no-load mutual fund or buy stock in a blue chip company.
If you decide that you want to consider this as part of your investment portfolio, talk to a trader or a broker who can help set up an account for you. Research the company carefully, as there are many scam account managers out there. Be careful of off shore based forex fund managers or companies. Place your money only with established and reputable forex trading companies.
5 Characteristics Of Successful Traders
Based on my experience, trading the financial markets, I have identified five characteristics that differentiate professional traders from new traders. Generally speaking, professional traders typically do the following:
- Keep a record of all trades Successful traders are continuously looking to enhance their market edge. A trading journal allows a trader to analyse all winning and losing trades away from the heat of the moment and evaluate the trade setup with a clear mind. This ongoing self improvement process helps successful traders eliminate anything that is not adding money to their trading account.
- Never chase a trade – Professional traders know exactly what it takes for them to enter a trade and only pull the trigger when this happens. Chasing a trade on the basis that the market is moving quickly in a certain direction is highly unlikely to provide a statistical edge over time. Whenever we enter a trade we are competing with highly motivated individuals and institutions who are in the business to take our money this is the reality of trading. Bearing this in mind and in order to mitigate against unnecessary losing trades – we need to find a system with a statistical edge and stick to our plan.
- Only trade the markets when you are in the right frame of mind for the job at hand – The market will always be there to tomorrow so if you are feeling anything less than 100 percent are you acting in your best interest by risking your capital? Illness and personal problems should be dealt with away from the markets when ever possible.
- Testing new trading strategies – Trading of the financial markets allows an opportunity not present in many other business ventures. We can test our trading strategies before committing real money. Other businesses do not always have this luxury and often need to commit to inventory in order to gauge the profit potential. I always test new trading strategies on a demo account in parallel with my live trading activities. Once a system has proved its worth a percentage of the trading account can be assigned as appropriate.
- Keep in touch with the markets – Any break form the trading should be followed by a period of time to get back into the “dance of the markets”. The market is a fickle place that is driven by sentiment and it is essential that we as traders are in tune with what is actually moving the market. Even purely technical traders need to have an understanding of what news the market is sensitive to at any given time in order to mange risk appropriately around economic data releases.
Why an Economic Downturn is the Best Time to Trade Currencies
This is a guest post by Ally T
It’s true that the stock market on average tends to return meagre profits during economic slow times, but for the clever investor, an economic downturn can sometimes signal a good opportunity to trade in foreign currencies, on what is commonly know as the Forex market.
A quick overview of how Forex trading works
The Forex market, which stands for “Foreign Exchange” is a marketplace where investors can conveniently and quickly buy and sell currencies from around the world. The purpose of buying or selling one country’s money in favour of another is essentially to take advantage of their relative rise and fall in value. On any given day a US dollar might be worth anywhere up to several cents more or less than it was worth on the previous day, and by using this system of buying and selling, successful Forex traders are often able to greatly multiply the amounts of money they are trading with.
It’s a little like playing the stock market
In some ways Forex trading is like playing the stock market – experts are often able to predict when a country’s economy will boom (typically making its currency rise in value), or fall into recession, resulting in a weaker currency. And just like playing the stock market, it can be extremely confusing working out who to listen to and trust for advice.
Banks discourage you from trading currencies through their system
Really, trading on the foreign exchange market is just like going to your local bank and asking them to exchange your cash into another country’s money. Except you’re doing it without the bank. Now, if you were using the bank, then you could hold onto that foreign cash and wait until it becomes worth more, and then take it back to the bank and change it back making a profit (although in practice banks discourage this by applying hefty fees to cash money exchange). The difference when trading on the Forex market is simply that all trades occur electronically, on a centralised system which is very fast and accurate.
Medium and long-term trades are best for the layperson
Some people like to trade currency with a high turnover rate, preferring to conduct trades every day or even several times a day. Others prefer a buy-and-hold strategy. Both methods have advantages, but generally, only professional traders make significant gains out of constant small trades. Medium and long term trades, where a currency is held for anything ranging from a few weeks to a few months, is the best way to begin trading on the Forex market.
How can you use economic downturns to your advantage?
So how exactly can you use an economic downturn to your advantage when trading in money? As already mentioned, it all revolves around the relative values of different currencies, and the key to making money in this business is to buy currency when it is weak, and sell (or just cash it) when it is strong. To understand why times of slow economic growth can work out as an advantage, let’s have a look at what makes a currency weaker or stronger.
What makes for an economy that is weak, or strong?
A country’s currency is a reflection of its economy. A strong economy is one which can maintain a strong cash flow – generally from taxes based on being able to produce and export goods or services to other countries. With strong cash flow a country can invest in its infrastructure, education, and healthcare, and continue to grow and care for its population. As the country becomes more productive, it becomes more valuable as a whole, and as a result its money becomes worth more in a global sense. On the other hand, a country which has excessive debt to foreign banks, or has a high unemployment rate, or has no valuable goods or services to offer, will NOT generate a strong cash flow. Being unable to repay international debts and with no money to invest in employment opportunities for the future, this country becomes “worth”less – and as a result its currency becomes less attractive.
In the event of a widespread recession, where there is reduced economic activity, a strong economy should be able to preserve the value of its currency, since it has not only reserve cash, but an infrastructure that allows it to continue supplying to its own population and other countries with products they want or need. Unfortunately, an economy that is already weak can often suffer doubly under a recession – with even less money flowing, taking on more debt and hoping to ride out the downturn is often the only solution.
Traditionally strong economies have included the Japanese Yen and the German Mark (which has obviously now been replaced by the European Union’s Euro). So during an economic downturn, if you happen to own a lot of strong currency (which isn’t likely to take a downturn) then you are able to buy plenty in the weaker economies. (As we said, during tough times a weaker economy’s money essentially becomes worth even less.)
So what’s the point of buying stacks of money that isn’t worth much?
Economies typically behave in a cycle – what goes up must come down, and what goes down eventually comes back up again. The idea of a long-term (anything more than a few months) currency trade is that when the financial climate improves again, the money that you bought a lot of (that wasn’t worth much at the time) will again become quite valuable.
An example of how an economic downturn can be a good time to trade currencies
Here is a good example of a medium-long term trade that would have paid of handsomely:
Let’s go back to 2008, into the heat of the Global Financial Crisis (GFC) and let’s say you held American US dollars. Maybe 10,000 USD for a nice round figure. During 2008 Australia was being hit hard by the GFC, with their traditionally-strong mining industry and primary industries unable to preserve the value of the dollar. The USD on the other hand was holding its value quite well. Towards the end of 2008 you could have afforded to buy at least 1.30AUD with every 1.00USD, so your 10,000USD would have bought 13,000AUD. Half way into 2009, the AUD recovered significantly, climbing back to being worth over 94 US cents. Your money is now worth 12,220USD. This is a gain of $2,220 over about half a year, or a growth of over 22% – not bad at all!
5 Negative Habits That Could Be Affecting Your Trading
Successful traders constantly strive to improve themselves and will do whatever is required to extract more money from the markets.
Controlling our mindset is crucial if we are to grow as effective traders. This article looks at 5 negative habits that could be affecting your bottom line and gives suggestions on how to counteract them.
1. No pre-defined rules.
Trading can be very stressful and successful traders try to minimise the "live trade" decision making process in order to militate against bad judgement caused by the "heat of the moment". A common, and wise, saying is "plan the trade and trade the plan". It is a good idea to commit to a trading strategy and not deviate from this plan wherever possible.
Modify the plan only during times when you’re not trading live. Without pre-defined rules we are susceptible to making bad judgment calls which could ultimately have a negative effect on our account balance. Any rules are probably better than none as they can be fine tuned over time.
2. Revenge trading.
The trading plan discussed above can help on this front. Many traders have a rule to stop trading for the day after “X” losses in a row. The tendency is for us to want to win back any losses and this can cause us to enter sub optimal trades. A good trader enters trades when a series of events gives an edge, not when losses need to be gained back. Each trader should monitor their trade results and pay particular attention to how losses affect their subsequent trades. Only then can they optimise the approach to stopping for a fixed length of time after a string of losses
3. Not having a flexible approach.
Having a bias with regards to future market direction is not always the best approach. If the bias has been gained from detailed analysis by the trader and is accepted as valid until this analysis is proved wrong then there is a certain amount of merit in this approach. However, many traders will have a bias on trade direction after reading other peoples analysis and stick by this even in the face of a strong trend to the opposite direction.
A trader should find a system which suits their personality and trade it without being too concerned with analyst "chitter chatter". Some of the strongest moves come about when everybody is positioned in one direction and there is nobody left to buy/sell at the level.
4. Adding to losing trades.
The temptation is to add to a trade which has moved against us if we believe that the current price is still offering value. When adding to a trade it should be part of the overriding strategy as risk can then be defined accordingly. Novice traders will enter a full risk position and add additional size as price retraces. If a trader finds they are often correct in terms of market direction, but lousy when it comes to timing, a scaling in approach can be adopted. Scaling in as a strategy is not the same as randomly adding to losing trades.
5. Chasing the market.
Allow me to set the scene. A novice trader has just lost the previous two trades and is no longer confident in the strategy they are deploying. A sell trigger is seen on the chart and ignored. The market hits what would have been a 3:1 take profit and the trader is angry! The trader proceeds to enter short "chasing the market" just as the trend direction changes. This is probably more common than you would imagine and goes to show why chasing the market is an approach that novice traders in particular should avoid.
If you find yourself doing any of the above it may be worth taking some time away from the market and fine tuning your approach. The markets will always be there and preservation of capital while learning how to trade is of paramount importance.
A Very Simple Breakout Strategy for Beginners
This is a guest post by Ahmad Hassam
This is a very simple breakout strategy. This simple breakout strategy uses only a line chart and RSI indicator. Line charts are the most simplest of charts. So, when you trade using this simple breakout strategy, you don’t need to get confused with candlestick patterns.
Line charts just shows the closing price of each bar. So, just switch to the M15 line chart on metatrader when using this strategy. Get a little bit familiar with the concept of support, resistance and the trendline. Now, here are the rules to apply this strategy:
- Support is broken below or resistance is broken above and the RSI breaks below the 50 line or above the 50 line. RSI break above or down the 50 line is very important. It can happen that the support or resistance is broken earlier and the RSI 50 line is broken a few bars later or the other way round, both are valid signals as long as the price action is above the resistance or below the support when you take the trade. When this happens, it means a big move something like 20-50 pips is about to take place.
- Now, you can easily draw a trendline on the line chart by connecting the bottoms and in the same manner draw a trendline on the RSI indicator as well. When both the trendlines are broken, it means a big move is about to take place. This simultaneous break of the trendlines is a much more stronger signal than the break of the support or resistance.
The Top 5 Forex Trading Web Communities
Traders speculate on international currency values before exchanging currencies on the Forex market – the world’s foreign currency exchange.
Traders use Forex web communities to share useful tools and insights before trading.
Read on for more on currency trading and the top 5 Forex web communities.
What is Forex?
Forex is the world’s foreign exchange market. Open 24/7, Forex is also the world’s most traded market.
Who trades on Forex?
Banks, businesses and individuals each trade and exchange currency on the Forex market after speculating on international currency values.
What are Forex trading web communities?
Forex trading web communities are online resources utilised by many currency traders.
Forex web communities are typically used by traders to share useful tools, news and insights. Many web communities provide a source of breaking currency market news, or areas in which traders can engage with one another and share the benefit of their experience trading currency on the Forex market.
Why use a Forex trading web community?
• Many Forex trading web communities feature breaking currency news and RSS feeds, meaning members can speculate and profit from using the latest market information
• Some Forex trading web communities feature informative webinars, blog posts, tutorials and support forums, which can help new traders get a handle on Forex trading
• Some Forex trading web communities also have helpful calendars detailing events and workshops which might be of interest to traders
• Traders of all experiences can communicate using Forex trading web communities to share information and best practices
The top 5 Forex web trading communities:
1. Forex Magnates
2. FX Street
3. Forex Factory
4. Forex Pros
5. Mataf.net
A closer look at the top 5 Forex web trading communities:
1. Forex Magnates
The Forex Magnates web trading community appeals mostly to experienced online traders. The community features news, RSS feeds, Twitter updates and free webinars targeted to trades, brokers and software developers.
2. FX Street
The FX Street web trading community features news, webinars, broker-specific items, advice on currency market trends, platform comparison services and more. FX Street, however, is not impartial and is linked to the Forex platform GFT.
3. Forex Factory
The Forex Factory web trading community is aimed towards traders of all experience, with forums, market insights, news and an industry events calendar.
4. Forex Pros
The Forex Pros web community features charts, technical advice, news, tools and forums. Over 8,000 traders contribute to Forex Pros’ forums and users can initiate private messaging when discussing Forex, stocks and spread betting with other traders.
5. Mataf.net
The Mataf Forex web community caters to traders of all experience levels, and features news, market analysis, shared tools, forums and a currency convertor.
Using a Forex trading web community:
While Forex trading web communities can be viewed as a valuable currency trading resource, traders are advised to use trading web communities alongside accredited Forex trading platforms and services, which provide market analysis, charting and industry news
Who Wants a Simple Forex Strategy?
This is a guest post by Mark Richard
So you just want a simple Forex strategy to trade? Okay, let’s see what we can do…
Firstly, you want to get the probabilities in your favour; this means making sure you’re trading WITH the trend. Yes, I know, you’ve heard it before – but it’s true; trading with the trend will increase the probabilities for you.
The first thing we do is place two moving averages on the chart. The first moving average is a 50 Period Exponential Moving Average of the Highs; and the second is the same, a 50 EMA, but this time of the Lows.
You should have something that looks like this:
Now, we add another Moving Average, this time it’s a 15 EMA of the Close:
Now, there is an indicator for Metatrader4™ to download with this article (you should find it at the end) called ‘QFF-MACDv1.ex4’. Leave the default setting on this indicator. Once you drag it on your chart should look like this:
The first rule is:
We only BUY when the 15-EMA is ABOVE the 50-EMAs.
We only SELL when the 15-EMA is BELOW the 50-EMAs.
This chart should help give you a better idea:
The second rule is:
We only BUY when the MACD bars are green.
We only SELL when the MACD bars are red.
Here’s a chart of how this rule works:
Combining the first and second rules we are almost there with our strategy:
Although very simple, the core of the moving averages is just to keep you on the right side of the market; In other words, the side that is with the trend.
The specific entry:
(for a BUY) – If any part of a candle is BELOW the 15-EMA and that candle CLOSES ABOVE the 15-EMA… we BUY when the HIGH of that candle is broken by a few pips.
(for a SELL) – If any part of a candle is ABOVE the 15-EMA and that candle CLOSES BELOW the 15-EMA… we SELL when the LOW of that candle is broken by a few pips.
Here’s a trade to show a typical setup:
Now, this is just an article, I don’t really have time go into every detail; I just wanted to give you an idea of a way get probabilities on our side with a solid strategy.
I’m not going to go into exits for this strategy. I recommend you take a look back through your charts with this strategy – I’m sure you’ll like what you see.
One last thing – yes, it can be traded on any timeframe.
Download the ‘QFF-MACDv1.ex4′ indicator.
Mark Richard is the developer of the Quick Fix Forex™ system. Quick Fix Forex™ is based on the same logic and principles as the above strategy but is a lot more detailed and powerful. Learn more about Quick Fix Forex™ here.
Things You Never Knew About Forex Success
This is a guest post by Mark Richard, the creator of the simple, easy and powerful Quick Fix Forex™ system.
It’s funny how, in this crazy world of Forex; success seems so close… yet so far away. Do you get frustrated why you buy a Forex system – and it seems like a “re-hash” of something you’ve seen before?
Well, if I may ask you a question… What are you expecting in a “new” Forex system?
Are you expecting some revolutionary, latest-technology, never-before-seen system like you’ve never seen before?
If so, then you may have a long time to wait before you finally start getting success in Forex.
Here’s a shocking secret that no one tells you:
The principles, concepts and strategies that MAKE MONEY in Forex are almost all “dull”, “boring” and “old”.It’s absolutely true! Why do you think you keep hearing about “trading with the trend”? Because it increases the probability of any trade you take working out.
Did the last system you checked out look like all it did was trade pullbacks in a trend? Well, you know, trading a pullback (as opposed to a breakout) increases the probabilities again. There’s a reason that the systems you’ve seen before trade pullbacks into trends – it’s because that’s what works!
But perhaps there is something else missing; if you’ve traded a system like this – but still don’t have the Forex trading success you desire. Okay, I can’t tell if the system you’re trading is solid or not (hopefully what I’ve written so far should help you figure out if it is or not), but there is a good chance that your lack of success stems from one or both of the following:
#1 – Not trading the system for long enough.
If you’re trading a system, and it does not go well in the first week, do you stop trading it? You have to give a system a chance. In trading, having a bad week (no matter how good the system), if to be expected!. Trade on demo for a while if you’re not totally comfortable with a system at the start.
#2 – Not Having Strict Rules
Even with a system that only trades pullbacks in a trend; you’ll still get more trade setups that you know what to do with. Every pullback is different; some are higher-probability than others. Taking every pullback is a route to the poor-house!
You need to make sure you’re filtering out the less good trade setups with a strict set of rules. Take a look back at your previous systems. Can you see if they have the attributes of a solid system? Perhaps that system you bought last year is actually a money-maker – just waiting for you to trade it!
Mark Richard is the creator of the simple, easy and powerful Quick Fix Forex™ system. Mark has used his years of experience in the Forex markets to develop a step-by-step system that anyone can trade. Check out Quick Fix Forex™ here.
The Simple 20/20 Channel Breakout System That Made Many Millionaires
This is a guest post by Ahmad Hassam
20/20 Channel Breakout Trading System is a simple system that was first suggested by Richard Donchian. Richard Donchian is considered to be a pioneer of technical analysis. He was the first person to talk about channel breakouts. He suggested a 4 week rule for trading channel breakouts. It was Richard Dennis who used this channel breakout trading system extensively and made a fortune in the commodities market.
Amazingly, Richard started with only $450 and in the next few years made a fortune of around $150 million trading mostly channel breakouts. Trading Channel Breakouts is a proven and tested trading strategy that has made many millionaires and should be the most important part of your trading toolkit. This system lets you catch the big moves in the market.
This 20/20 Channel Breakout System is the basic part of the Turtle Trading System that Richard Dennis gave to his Turtles. Many turtles also made millions trading with this simply 20/20 system. So, let’s go into the details of this 20/20 System.
20/20 means 20 day high and 20 day low. Richard Donchian had suggested the 4 week rule for trading channel breakouts. 4 weeks translate into 20 days. So, this is how this system works! Every day, find the 20 day high and the 20 day low on the currency pair that you want to trade. Place a buy order just above the 20 day high and a sell order just below the 20 day low. Check again the next day. If the entry orders have not been filled, again find the new 20 day high and the new 20 day low and replace the previous entry orders with new entry orders. Do it every day till the entry orders get filled.
Suppose, you find the buy order filled. The sell order on the other extreme of the 20 day channel will work as your stop loss. Add one more sell order at this level. The first sell order will take you out of the long trade when this price level is hit and the second entry order will make you go short at this price level. In case of a short entry, the buy order will become the stop loss and you will need to place another buy order. So, if you are short, the first order will take you out when that price level is hit and the second order will make you go long.
This is how classic channel breakout works, you go long and short.
This 20/20 Channel Breakout System still works but over the years some improvements have been made like instead of 20/20 some use the 55/22 Channel Breakout System in which you enter on the 55 day high and exit on the 20 day low. You can practice this 20/20 Channel Breakout Strategy on your demo account and see how it works.
5 Trading Myths Busted
In recent years, as Forex has become more popular, a mythology has sprung up around the foreign exchange markets, mostly propagated by people who don’t really understand what they’re talking about or worse, do understand what they’re talking about and deliberately mislead people. Here are a few of the popular myths busted.
A Successful Strategy is a Complicated One
Whilst it’s true that forex markets are complicated and at any one moment thousands of variables are in play, you don’t have to have a complicated strategy to succeed. Many successful traders use simple, old strategies and make consistent profits…the key is not so much the strategy, but being disciplined and having good money management.
To Make Money with Forex You Have to Predict the Future
This is an overly scientific approach to the markets, there is no way of telling what is going to happen next, so don’t get hung up about predicting the future. The key is to work out a strategy and stick to it, every strategy will give you incorrect signals, the difference between a good strategy and a bad one is simply that a good one will give you a lower percentage of incorrect signals.
If You Can Make Money on the Stock Market You Can in Forex
Whilst the graphs sometimes look the same, and you can often use similar analytical tools, it does not follow that if you are good with stocks you’ll be good with Forex trading. The key to both types of trading is knowing your markets, and quite simply, whilst knowledge in stocks might give you a broad background, it doesn’t teach you to deal with 24 hour stock patterns.
I Can Make Profit Whenever I Want Because Forex is 24 hours a Day
Whilst the markets are open all the time, experienced traders will tell you that you’re only likely to make a profit in certain, broad, windows. Whilst you might know a lot about how the markets react during western trading hours, there’s an entirely different set of factors at play when the eastern markets are in full swing, so it’s best to restrict yourself to smaller windows and learn how these react in certain situations.
I Need A Lot of Money to Trade Forex
Forex trading is almost always leveraged in some fashion, so you can trade with very small amounts of capital and get good returns. Of course, this means you can make significant losses without a lot of exposure, but that’s the risk you take when getting involved in forex trading. A large amount of capital is not required.
There are hundreds of other myths around Forex and the more you trade Forex, the more you’ll encounter them. Remember that the most important parts of Forex trading are: money management, discipline, and keeping a cool head. Everything else is superfluous.
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