Forex Fear Factor

Most investors can easily understand the stock market, even though they do not understand the complete explanation of how a stock is priced or how brokers and traders, value a stock. Earnings Ratio and P/E are not that important to a beginning investor. He knows he owns a piece of a company something tangible and real.

A beginning investor also knows that his losses though not protected are limited if he only puts his money in big well known companies. So he buys Apple or IBM and he hopes he is buying when they are low and they will go up, but he also knows in time these shares will appreciate it and when they do he will sell. He owns them and he can sit on them for as long as he likes. He can borrow against them or sell them if he needs cash. He knows what is happening because he watches the internet and checks with his broker now and then. His stocks don’t move radically and he sleeps comfortably at night.

Slowly this new stock market investor decides to reach out a bit more, he gambles a bit and buys a 100 shares of a small company that he has read about, their shares are only a few dollars so his total investment is under 1000.00 even if the company goes broke his loss is at a minimum. He watches closely, reads more and slowly learns about the market.

This same investor who slowly waded out into the stock market pool and stayed on the shallow side until he could swim is scared to death to jump into the forex market.

He is scared of intangible items, assets that he cannot hold and values that he does not understand. If I explain to him that the euro is worth $1.30 he doesn’t understand. If I try and explain that that computer that costs $1000 in the US would only cost 630euros in Europe this doesn’t calculate because it doesn’t hold true and European product have VAT tax included also so it just complicates things. If I explain, that a man who has 630 euros in his pocket and is in the US and wants to buy that computer can go to the bank and exchange his money and get 1000.00 and buy that computer, this he understands, but then he asks, how did the bank know what that the euro was worth 1000.00usd and I reply that is today’s currency rate. Again we are back to a difficult and complex explanation.

So this man decides ok, I might put my toe in the forex pool and sit on the side, but tell me why is it so big, if I swim out there how will I ever find my way back. That is what he is thinking when I explain that he has to buy 100,000 worth of euros to make a trade, even though he only has to have a small amount in his account. Know he gets up and runs for his life; he has Forex Fear in his eyes.

The only way to get past this fear is knowledge, understanding and education. You can’t just start the engine and take off. You will crash and burn. You can make money trading currencies but you need education and support. That is one of the reasons most forex companies offer account managers and training.

I Only Have US Dollars How Can I Sell Euros?

Trading in the Forex Market can be very profitable if you have knowledge and experience.  A small bit of knowledge can quickly move the profitability odds in your favor. You may not get rich, but you won’t lose your money. And with time you will become a successful trader.

A good foundation is the best way to build, like a skyscraper, without a good foundation, the building will eventually collapse.

To trade and make money in Forex, you need to understand what the markets are all about.

Currency trading is fairly simple to understand. There are two primary reasons why the value of a currency moves. The first is because of a “real” market, which is based on supply and demand.

For example, as outside investors or visitors wish to buy things within another country, they are forced to convert their domestic currency into the currency of the country in which they are buying. Similarly, as money leaves the country, people must sell their currency for the foreign currency they will need to spend or invest abroad. Exchanging currencies drives supply and demand, which causes currency value to increase or decrease. This is a very basic explanation, until there was an acceptable trading and clearing system, this was the how the markets moved. Many years ago, the markets worked based on the gold standard and all currencies were either gold (coins) or backed by gold.

Now the markets are traded through a global exchange where values are attached to currency based on demand, which today, has very little to do with visitors exchanging money to make purchases, a great deal of currency flows through central banks The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume.  

80% of trades in the currency market are speculative in nature, based on economic and technical data in the hopes that the demand of that currency will increase or decrease, this is known as selling short or buying long. Central Banks no long move currency between countries, it is all done via computers and investors never take control of these funds, they are tracked by the global exchanges and by brokers.

Currency on the open markets is not bought and sold as you were in an Exchange at the Airport, but they are a miniature version of a global exchange. They have a value assigned to each currency and when you arrive at the airport with your USD you can sell them to get Euros and upon your return home you can sell your Euros at the Airport to get USD. Unfortunately, at the stand at the airport, you lose a lot per transaction because they have to cover their overheads and make profit on your transaction. That is why global exchanges and brokers do not deal in small quantities of currency.

The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader’s account. put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.

Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged Euros for dollars and would now be “short” Euros and “long” dollars. To better understand this dynamic, let’s use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be “short” $1,000 and “long” one computer. The store would be “long” $1,000 but now “short” one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real. This is how you sell Euros when you only have Dollars.

If I have a pair of shoes I have a left and a right shoe, but if I have a currency pair they don’t match?

Currencies are always trade in pairs, when a trader makes a trade he or she is always long/buying one currency and short/selling the other.

If a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, they would have exchanged euros for dollars and would now be “short” euros and “long” dollars. To better understand this dynamic, let’s use an exact example. If you went into a computer store and purchased a laptop for $1,000, what would you be doing?

You would be exchanging your dollars for a computer. You would basically be “short” $1,000 and “long” one computer. The store would be “long” $1,000 but now “short” one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.

Now let’s get a bit more specific about why you need to purchase currencies in pairs. Since you can’t buy a physical asset on the Forex Exchange, you need to trade against another currency. Also the value of a currency is only in relationship to a specific currency. If you were sure that the USD was going to move up today, would it be moving up against all currencies or against a specific currency. It might move up against the Euro, but the Japanese Yen might be strong today so the dollar falls against the Yen, so you have to select the currency that you wish to hedge pair with. You can simply buy dollars and hold them, but at some point you will have to do something with them, but you have dollars so why would you use those dollars to buy more dollars. If you wish to buy the Australian Dollar, you would have to use your US Dollar to make the purchase so you are pairing USD/ANZ. You would not buy the Australian Dollar if you thought it was going to go down tomorrow in value, you would wait till tomorrow where you could get move Australia Dollars for your US Dollars. Now you have it. That is the Forex Market.

Let’s give you another easy to follow scenario.

You are going to London on vacation. From London you are going to France. The UK currency is known as Sterling or the Great British Pound, GBP and France is part of the Euro. If you called and booked your hotel today and they required payment in advance in their local currency. What would you do?

The agent in the UK told you that you needed to wire them 1000gbp and you checked with your bank and they told you that it was equal to 1600.00USD today and the agent in France said you needed to send them 1000euros and your bank told you that that was 1300.00. You heard on the news that the Euro was falling quickly because of economic problems in Europe, would you pay the bill today, or would you wait a few days and check with your bank again. When you do, you might find that 1000euros would only cost you 1250.00, you save or made 50.00, but at the same time they might just tell you that the 1000gbp would not cost you 1700.00 you lost 100.00. This is because currencies move in different relationships to other currencies.

We will discuss currency pairs again in another article, so keep your eyes out of our next article. Remember to make money in the forex markets; education and knowledge is the key.

Fibonacci Will Earn You Money In The Forex Market

Every keeps telling me that I can earn high profits trading currencies with Fibonacci… I just need to find out who he is.

We know him as Fibonacci, but his real name was Leonardo Pisano, because Pisa was the town where he was born. His father’s name was Guillermo Bonacci. In Latin, the common European language of the time, “filius Bonacci” meant “son of Bonacci”. This was combined to make “Fibonacci”, similar in english to “Fitzgerald” (“son of Gerald”) or “Robertson” (“Robert’s son”) or “MacDonald” (“son of Donald”).

Now Fibonacci was born around 1170AD. So, if you are trying to reach him, you are out of luck, but if you do, please have him give me a call. That was a longtime ago, way before currency and before computers and before the Forex Exchange. One thousand years later, his name is used daily by many traders, written thousands of times a day on charts, on trading sites, in newsletters. This man probably never met more than a few hundred people in his entire life.

Fibonacci, was a mathematician, and wrote his first book entitled The Book of Calculations in the year 1202.

This sounds like a history lesson, not something to do with the complex matters of the Forex Exchange and Currency Trading. Fibonacci developed a set of numbers from two studies.

The best explanation I can offer comes from a history on the life of Fibonacci.

“In his first publication, Liber Abaci*, Fibonacci presented the problem:

A certain man had one pair of rabbits together in a certain enclosed place, and one wishes to know how many are created from the pair in one year when it is the nature of them in a single month to bear another pair, and in the second month those born to bear also. Because the above written pair in the first month bore, you will double it; there will be two pairs in one month. One of these, namely the first, bears in the second month, and thus there are in the second month 3 pairs; of these in one month two are pregnant, and in the third month 2 pairs of rabbits are born, and thus there are 5 pairs in the month; ..

And so on, he explains each month in turn. Finally, he concludes:

You can indeed see in the margin how we operated, namely that we added the first number to the second, namely the 1 to the 2, and the second to the third, and the third to the fourth, and the fourth to the fifth, and thus one after another until we added the tenth to the eleventh, namely the 144 to the 233, and we had the above written sum of rabbits, namely 377, and thus you can in order find it for an unending number of months.

So the zero we now place at the start of the sequence arguably doesn’t belong, especially considering it wasn’t part of Fibonacci’s puzzle problem that made the sequence famous.”

From this study he developed the Fibonacci sequence 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377…

I know it sounds like a bunch of malarkey, but this sequence and these specific numbers have been tested and tested over and over again, and continually appear throughout nature and in mathmatic equations.

Many technical analysis experts rely on the use of Fibonacci numbers. We will take a more in-depth look at these strange numbers in a more advanced paper.

Believe me, many traders have used Fibonacci numbers to trade the forex markets and have earn high profits.

Take a look at this chart and see if you can find any magical numbers.

What are Economic Indicators?

When trading in the forex markets, there are there are two types of analysis. There is technical and fundamental analysis. Technical analysis is done by looking at price and other numeric values, such as volume, along with charts and graphs to develop trading cycles and forex trading strategies. We will look at this in another article on technical analysis and strategies.

Fundamental analysis is done by looking at history, news, economic data and information such as weather reports or political environments. If we were evaluating a company’s stock, we would look at their balance sheet and their profit and loss statement, their cash flow and their assets. In the currency markets, we cannot look at a balance sheet of a country or their financial statement, or analyze their assets; we have to look at economic indicators. And this is done through reports and data that are released by government agencies and private organizations that gather data about specific markets, such as ADP payroll reports, ADP is the largest private payroll processor in the USA, or a private organization such as the National Realtor Association, who reports on housing sales and pricing. There are also trade organization and associations, such as the National Bankers Association who provide information on credit card debt, loans and delinquencies. In Europe for instance, we watch for reports from the European Central Bank and comments drom the EU.

Data comes from many places. This data is very important to be able to predict the movement of currencies in relationship to one another. A currency trader needs to know what reports and data are coming out in China that might affect the price of oil that in turn might cause a change in price of the USD currency rate even though they are not directly related. A poor unemployment report might cause an effect on the value of the Japanese yen or as we have seen lately, the debt crisis in Greece has pushed the dollar up in value, only because investors were looking for a safe haven to place their money. Today, there is a strike in oil workers strike in Nigeria, pushing up the price of oil, this will ultimately effect currency values around the globe.

Each report and each country is inter-related and you cannot say I am only trading US dollars against the Australian dollar so I only need to watch those two currencies. The USD might surge because of totally different factors in another region of the globe pushing it up, while the Australian dollar remained the same.  A perfect example, came about just a few days ago. The USD was strong, the Sterling was weak, but the Euro was collapsing. If you were trading the USD/GBP, you would be buying, but if you were trading the GBP/EUR you would be selling. Against the dollar the pound was falling but against the euro the pound was rising. This was a classic situation, that happens often but is not usually obvious until it is over, In the case of the recent S&P downgrades of 9 european countries after the market session on a Friday evening. This began investors paradise.

There are several standard economic indicators that traders and investors rely on.

These are from each country and you can easily find these on economic calendars:

  • Gross Domestic Product (GDP)
  • Manufacturing
  • Retail Sales
  • Industrial Production
  • Consumer Price Index
  • Payroll and Unemployment Reports

Every developed nation releases these reports on scheduled dates. They are available on all economic calendars. These are the prime indicators that a good fundamental trader relies on. There are other reports that effect the currency markets, even more dramatically when economies are unstable.

 

Simple comments and policy changes from the central banks can throw the markets into turmoil or send a currency skyrocketing. We have also learned recently, how important a countries debt ratio as compared to GDP can be. All of these indicators should be evaluated and reviewed when trading currency and foreign exchange. For more information you can find articles about each of the indicators, what their numbers mean and how to use these to make good solid trades.

Simplify Your Analysis

Using technical analysis can be as easy or difficult as you choose it to be. Far too many traders have found trading to be a very difficult endeavor when it really doesn’t have to be. It really comes down to figuring out two important things: What direction the market is moving in overall, and where buyers and sellers are. It really is that simple, but people tend to get confused by the various timeframes, salespeople out there willing to sell information, and general market noise. The beauty of the currency markets is that you can make them as simple or difficult as you want them to be. The choice really is up to you.

Looking at the first important piece of information, we need to understand the overall direction of the marketplace. There are plenty of people that will say things like “The daily chart in is an uptrend, the 4 hour chart is flat, but the 15 minute chart is in a downtrend.” This leads to confusion, and quite frankly, does no good for the trader unless the idea is to drain the account of funds. The truth is that you can make this fairly easy, and know that you are with the overall trend in a simple manner: looking at the weekly chart, notice if the price is going from the lower left to the upper right. If it is, you are in an uptrend, no matter what price is doing over the last several hours. Many traders will get sucked into shorting this market because of what is essentially a minor pullback, a blip on the screen in a long sea of green candles. Of course, the opposite is true: buying in down trends can happen as a result of the bounce or pullbacks you see from time to time.

When you look at the following chart, you can see that for a majority of the time from 2002, the USD/JPY has been falling. So in that scenario, you are going to have much more momentum and strength to the downside in this pair. Knowing this, you can simply your trading by looking for weakness in the pair.

Simplify Your Analysis
Simplify Your Analysis

While knowing the trend is important, you also need to know where price is most likely going to move in that direction. This is where the concepts of support and resistance come into play. The main reason we are marrying the two concepts is that you are following what the larger participants in the market are doing. Who would you rather follow in this arena: large banks and funds, or some guy down the street? Obviously, there is only one true answer to this question.

Support and resistance will form when large orders from buyers or sellers appear in the market. The reason that support will often repeat itself is because of the sheer volume of buy orders there are at that level. In other words, if you see $25 billion in orders in the 1.30 – 1.3010 zone all $25 billion of those orders have to be taken out of the marketplace. In other words, all of those orders have to be stopped out or closed. This takes a significant amount of sell orders needless to say, and because of that, it will often hold up. Also, you must remember that other traders are aware that these areas are out there, and they want to join in the move. When price pulls back to that level, they feel that they have a chance to profit from the area. Of course, the opposite is true about resistance: sellers are there in volume, and it takes a lot of buy orders to clear them out.

Now that we have established the trend, and we know which direction the market favors, we can begin to make educated decisions about the flow of money from one country to another. (The essence of FX trading.) For example, the GBP/CAD has been in a downtrend for some time. Knowing this, we want to sell Pounds against the Canadian dollar. We want to look for places that were once support, but have given way to the sellers. When these areas get retested, they will often turn into resistance. You can think of it like a high-rise building, if you are on the 14th floor, and drop down one level – you we standing on the floor that is now your ceiling. You will see this over and over in the FX markets. Take a look at this chart and notice how this played out over time:

You can see that at all of the breakdowns, price came back to retest it for resistance. Knowing that this happens time and time again, and that the market favors continuation of the trend, we can begin to make wise trading decisions. As a side note, further pushing for this simplistic analysis is the fact that markets tend to trend for 3-5 years at a time. This can lead to massive profits over time, but you have to be one thing most traders aren’t: patient.

You have to have the patience in order to only trade where it matters, and in the direction that matters over time. Have you ever looked at a chart like the EUR/CHF over the last few years and asked, “Why didn’t I just sell over and over again, it looks so easy!” That’s because it is. You have to be willing to wait for the market to give you clear and concise signals to enter in the direction it wants to go. One of the most famous traders of all time, Mr. Jesse Livermore once said, “In the marketplace, we get paid to wait.” This is what I believe he meant buy this statement. There are times when there is nothing going on in the markets, and as a trader, you have to be able to accept that. If you are patient enough however, you can place trades in areas that will offer fairly steady profits.

If you start with this very basic foundation in your trading, you will find it makes the indicators that you choose much more effective when used in conjunction. However, you may also find that you may choose to forego those indicators altogether.

Getting Comfortable – Something We All Must Do

One of the greatest tools that a trader has available to them is also the one they often ignore the most: Their own psychology. The Forex world has plenty of great books and articles about trading psychology, but many of them are broad-based, and often aren’t completely actionable after reading them. While it is fine to say certain things like “You should learn the behavior of a pair by studying it, and it will make you more comfortable in placing a trade”, the truth is that there are a lot of “clues” that your brain will give you if you are willing to listen.

One of the biggest issues that traders will have to come to terms with their trading careers is the idea of position size. While there are a lot of studies on the maximum benefit that a particular percentage risk that you take can greatly influence your profitability over time, they overlook a few important aspects of the psychology involved.

Many trading books will use a “2% rule” when it comes to position size. Basically, they go on about how only risking 2% of your account on any single trade will ensure that you don’t blow the account quickly if you have a few bad trades. The idea is that you have to be solvent in order to take advantage of potential opportunities in the markets. Certainly, this is something that I cannot argue with, and mathematically it does make complete sense. But it ignores the trader’s comfort, and that is absolutely vital.

I have friends w only risk 1% per trade. Why? Because they aren’t comfortable trading sizes larger than that. In fact, I even know people that only risk 1/2 % per trade as well. I know it sounds like it would be impossible to make money that way, it’s not. Compounding interest is magic, and even risking just 1% – you can clean up over time.

The point is that you have to be comfortable with your position size in order to benefit from it. You cannot trade effectively if you are far too nervous about the trades you are in. For example, if I were to risk 10% of my account, I know that for me it would be almost impossible to walk away from the computer and let the trade do its thing. I tend to take profits far quicker when I am risking more, and as a result: I leave money on the table. I also get nervous and cut out of trades when I am risking too much. I often will pay far too much attention to the P/L and not to the trade and market action itself. Remember, the market will do what it wants – and has no idea or care that you are risking 5%, 10%, or even 15% of your account. The variable is you, and how you react.

So how do you learn to deal with risk? It’s a simple process, really. I learned that if I couldn’t place a trade and walk away from the computer, it was a sign that I was trading in sizes that were too large for comfort. I went through a series of trades and found a percentage level that I was completely comfortable with, and found that the percentage amount allowed me to concentrate on the rest of the world, and not sit there glued to the monitor as the trade ebbed and flowed. Once I got this part down, I found that executing my trade plan was much simpler.

Once the execution of my trading plan was no longer hampered by fear and anxiety, I saw an immediate increase in my results. Once I knew my particular risk tolerance, the rest of trading is simply waiting for the appropriate signals and placing the trade. Do I still have losing trades? Of course. But what I don’t have is a lot of stress trading, and that in itself has made the entire experience much more enjoyable.

First Hour Breakout Strategy for Euro

In order to achieve success in the Forex markets, a trader must make sure he has enough tools in his toolbox to take advantage of the different situations the markets present. At times a market may be at an extremely high or low and indicating a possible reversal. Other times it is showing accumulation or distribution and suggesting a change in trend. Sometimes it is technology driven and other times it is headline driven. Having several trading weapons available to use helps the trader act quickly and efficiently so that he can exploit the opportunity.

One of the most common trading tools is the trend indicator. Like a screwdriver in a toolbox, it can come in many forms. Some traders prefer to use a swing chart to show the trend, other traders use moving averages. Two overlooked trend trading techniques are the opening price breakout and the First Hour Breakout. These are likely to be of particular interest to the day trader who needs to know the tone of the day before he begins to trade. Using the Euro as the preferred Forex market for this article, the Opening Price Breakout and First Hour Breakout technique will be explained.

Although the Forex markets trade 24-hours a day, let’s face it, no one person is actually watching the charts for 24-hours. Depending on where he is in the world, a trader will pick up the market where it is at the time while in his own time zone. For the U.S. traders, this means 8 a.m. Eastern Time. So for that trader on the East Coast of the United States, his reference for the Euro opening is 8 a.m.

Other openings include:

Tokyo 7 p.m. to 4 a.m. ET
Sydney 5 p.m. to 2 a.m. ET
London 3 a.m. to 12 p.m. ET

Typically when a trader starts to watch the Euro, he is picking up activity from the entire trading session. The high or low for the day he is referencing is high or low of the entire trading session. This may sometimes be deceiving since various events are hitting the Euro at different times during the session. In order for a Euro trader to get a good grasp of the tone or trend of the market at the time he is trading, it is suggested that he use the most recent opening as his reference.

Two of the most powerful day-trading strategies are the Opening Price Breakout and the First Hour Breakout. Because of uncertainty about the market’s direction, traders often wait until the first hour’s range is created before committing to either side of the market.

The occasional false breakout when using either entry methodology makes it necessary to combine the two separate techniques into one more powerful indicator. If one observes how many times a market crosses above and below the opening price before finally settling on a direction, one will realize the necessity of a breakout confirmation filter, in this case, the first hour’s high.

The strategy is described in this article combines the key features of these two traditional breakout strategies. If the main trend is up then the strategy will be to go long in the direction of the trend when the market breaks out above both the opening price and the first hour’s high.

Experience has shown that the narrower the spread between the opening price and the first hour’s high the better. If the spread between the opening and the high is too wide, then scalpers will likely exit on the first test of the high price because they will read this level as resistance. This can cause a whipsaw swing.

Breakout strategies are usually entered on stop orders in the direction of the move. When trying to catch an intra-day trend trade, the trader may have to allow for a retracement back to the breakout level in accordance with the old saying “old tops tend to become new bottoms”.

Watch for markets that may be gaining upside momentum shortly before the turn of the first hour. These candidates may allow the trader to “hit the ground running”. It is also suggested that volume activity is watched. Markets trading under compressed volume may be getting ready to expand on the breakout.

Traders have to remember when applying this entry strategy that some traders will be in for a short scalp and others will be trading for a continuation move under the assumption that the day will be a trend day. If treating the breakout as a momentum trade then stops should be moved to breakeven as soon as possible. Other possible exit strategies include setting specific price targets or using swing chart theory to stop out the position when the intra-day trend has changed.

As one can see (Fig.1), by breaking up the EUR USD into trading sessions a trader can clearly see the trend and various support and resistance points. Since the key to trading, the trend is having the confidence to buy strength even if the price is relatively high, a trader can set up fresh entry points using the first-hour breakout of each session.

By bracketing the EUR USD’s Opening Price and First Hour High (Fig.2) a trader may be able to gauge whether the session will be range-bound or a trending session. Like any momentum or breakout trading strategy, it is suggested the trader move his stop to break-even when the upside momentum begins to slow down and trail a stop if the trend resumes.

In summary, traders often focus on price when trading the trend. This technique attempts to tie price with time. In addition, it encourages the trader to watch for momentum. If it is going to be a trending session then the tendency of the Euro is to move through the day posting a series of higher-tops and higher bottoms. This technique also helps to determine if a trading session is in an uptrend or a downtrend. Although the EUR USD may be posting again for the day, it is possible that an individual session identified by location may be forming a downtrend.