What I’ve Decided to Do in the Markets

TREND FOLLOWING IT IS!

“The trending market is an ideal market to trade and make money. What trend following is not is prediction or forecasting about how the markets will go. Trend following is based on reacting to price, price and again, price. It is not based on trying to predict price directions.” – Michael Covel

Hello:

Perhaps the most crucial aspect of the dynamics of the market is their current bias whose relevance is due to the reality that it causes the nexus between trend development and the mindset of both Smart Money and Dumb Money. Obviously, secret purchases in a northbound market is far more upwards than secret purchases in a southbound market and shorting in a southbound market is far more downwards than shorting in northbound market. Because of this, the dynamics of the market proffer crucial explanation of the popular ‘trading mentality,’ i.e. a field of study that attempts to expatiate on market reactions by analyzing the psychology of Smart Money and Dumb money. Owing to their characteristics, market biases proffer some speculative methods.

Biases happen any moment, and as such, they’re what we need to realize desired gains. Vividly, the bias ought to be in place, therefore positions sometimes mayn’t be opened in an extremely bearish trend or smoothed in an extremely bullish trend. Trading against the extremely bullish trend or extremely bearish trend isn’t the most crucial thing for a trader – the pundits of this style would merely have you misguided. The most crucial thing is the general trend. Our belief is that if a bias has started, it should keep on going. It’s much more for that to hold than it to be void especially when positions have been opened. At times, a bias may last more than expected. It can thus be challenging for speculators to keep on riding their profits when the bias still holds and not to exit based on fear.

When an analyst thinks a market is oversold, it isn’t oversold. Being oversold or being overbought is simply something imaginary. This should be construed to mean a similar thing from a financial newscaster who announces that an economic item is rated a ‘buy’ due to a turning level. No matter how logical the explanation is, or the kind of ‘degree’ they hold, whether they’re wearing a $5 tie or $50 tie, in most cases they’ll only achieve 50% accuracy in their analyses. If they’ve more than that, it means that they short weak markets and buy bull markets.

An adept rule-based speculator enjoys more free time than a mechanical trader. Adeptness has to do with the tendency to go with the flow of the markets. Mean reversion speculation is anti-trend (selling in an uptrend and buying in a downtrend, looking for turning points). Many traders feel that an overextended bearish market could be ready to rally and do so protractedly. But the reality is that it might still fall by 600, 800, 1000, 1300 pips before it even goes up. One of the major reasons traders buy renowned and world-famous pairs is that analysts talk about them and investors are often aware of them. If the overextended market continues in the direction that people don’t expect, then investors get whacked. As a result of this, everybody would be looking forward to strangling the prime economic forecaster, as investors holding other instruments are apprehensive. Invariably, you’d see some suave ape who’s shown on the screen or other type of media, often a forecaster whose studies were published in the previous year and adjusted some days prior to the occurrence, safeguarding his studies by reducing the likelihood while announcing that he still prefers the scenario since it remains overextended. Or it might be that the pair displays a temporary halt in its journey and some speculators feel it’s now great to enter contrary to the established trend and realize gains in counter-trend or mean reversion trading. They may not realized, yet they’ve fallen in love with a wrong direction and would go on opening positions against the trend, usually with heavy losses, till they receive a margin call or forfeit their portfolio.

I’ve experimented seriously with over 120 trading ideas, but trend-following has stood the test of the time. Thomas Stridsman (CTA), who’s been developing strategies for

model-based investing since the early 1990s, declares that he’s decided to do only trend-following. The notion behind this idea is plausible, anywhere the strongest trend is, is where returns can easily be realized… For trading purposes, I’ve decided to do only trend-following; and only trend-following I’ll do. This kind of trading approach has proven timeless. We make gains while the trend is still extant. 

Could I say I’m better than other traders? I feel I’ve an advantage in believing that any trader can be successful, myself included. That’s what my methodology is all about. As a result of this, I shrug off all misleading moves and noises regularly. I’m not misled by incongruous financial data that have no long-term effect, since I stay focus on my time-tested analysis, which has to do with offering myself with high-risk, low-reward opportunities that would ensure my ultimate victory in the markets.

Those going with the flow of the markets are aware that even if a trend has been happening for a long time, and they think there are still more gains to make, they may still trade in that direction, and as often as not, they’d win. Never forget that the Forex market is the best trending market that exists, and therefore the best trading method to use on it is trend-following. It’s no secret that trading with the trend will normally provide the best results.                                     

I’d prefer to conclude this article with these quotes:

“…A truly great trader will learn to take his money off the table and be satisfied with what he made.  It is the greedy trader who overextends himself.  It is the novice trader who fights the trend.  It is an even greater novice who believes that there is such a thing as “support.” – Joe Ross [Paraphrase]

“The trending market is arguably the type of market that best lends itself to being traded and offers the greatest earnings prospects… The trending market is an ideal market to trade and make money… You should only trade in the direction of the main trend” – Thomas Wacker

The Basics Of Forex Trading

The Basics Of Forex Trading
The Basics Of Forex Trading
Though most people who attempt to get creative with their finances and investment opportunities understand the basics of financial investment, there are fewer who understand less traditional types of investment. The fact is, there are seemingly infinite numbers of ways to invest, trade, and adapt your money, and the best way to do so effectively is to find something that you truly understand and enjoy. For example, one creative type of investment opportunity that some people enjoy more than basic stock investing is forex trading, which essentially involves exchanging currencies in an attempt to profit. Forex trading is done all over the world every day, and ultimately is somewhat simpler than many other forms of investment. Here are a few words on the basics.

Essentially, forex trading is taking advantage of the different economies around the world, and how their different respective currencies shift in value. Basically, in order to profit, you would exchange your currency for another, and then hold onto that foreign currency until a time came at which it would be profitable to exchange it back. For example, if the dollar to euro value were such that you could purchase 500 euros with 700 dollars, you could make that transaction, resulting in your possession of 500 euros. If then, six months later, the shifts in currency values resulted in your 500 euros being worth 800 dollars, you could exchange them back to dollars, resulting in what would effectively be a $100 profit. Of course, it is never quite as simple as that example, but that outlines the basic concept.

What some people don’t realize is that this same style of trading can be applied to other things, rather than simply to currency dealing. For example, some people who invest in gold do so with much the same strategy as forex traders exchanging currencies. Gold investment is actually a very simple practice – all you need to do is go to a website like bullionvault.com that allows you to buy and sell any amount of gold bullion and store it as you please.

Because gold bullion operates independently of any single world currency, it can effectively be used for forex trading in the same way that foreign currencies can. Consider the same example listed above, substituting the value of gold for the value of euros, and you have the same basic principle. Again, ultimately there are literally thousands of different ways to invest and trade your money for financial gain. But if you are looking for something relatively simple that a lot of people actually enjoy doing, this sort of forex trading and investment may be worth learning more about.

How to Choose a Forex Trading Spread

Sometimes it becomes necessary to help traders learn all there is to know about a Forex trading spread. However, in order to do so, there are some basics that will need to be understood. First of all, the primary goal of the trader will be to learn how to make money placing trades whether the market rises or falls. In order to do this, they will need to learn more about Spread betting cash-back. This form of trading is not difficult to understand as long as you have some understanding about the Forex markets, and how they work. In the following information, you are going to discover some important details that will shed some light on this process.

Learning More about Spread Betting Cashback

First off, there are a lot of myths floating around about foreign exchange trading. One of those myths plainly states that this form of trading is associated with a lot of risk taking. Well, that may have been in the beginning, but that certainly isn’t the case now. In fact, once you’ve learned more about Spread betting cash-back, you’ll find that there is no more risk in this form of trading than there is in any other type of investment trading available. In fact, some will say that regardless of the trade you make, you can make cash back on a consistent basis.

The way spread betting works the best will be to let a broker handle this form of trading for you. Some of you may not understand forms of managed Forex accounts, but this is a form of trading that will allow someone that is more skilled and experienced to place trades on spreads in order to get cash-back. For those that insist on placing their own spread bet, then you’ll find that there are a number of programs available which will allow you to do this as well. Spread betting is not a difficult process; however, there are some things that will need to be learned. Once these things have been learned, you’ll be able to place bets on spreads in gain cash-back in the process.

What is CFD Trading Cashback?

For those that aren’t exactly sure what CFD trading is, it’s simply a term used for Spread betting. Contract for difference is what you will need to engage in win you perform this type of trading. Some will refer to this as CFD trading, or CFD trading Cashback. In addition, some will also refer to this as CFD pip rebates or pip rebates acquired by a contract for difference.

So, if you are a trader that wants to learn more about the Forex trading spread, you will find it necessary to understand the information provided above in order to select a program that has a broker that can help you place these types of trades. If you learn to be successful, you’ll be able to take advantage of learning about Spread betting cash-back, CFD trading Cashback, and CFD pip rebates that will help you earn cash for trading regardless of which direction the market is headed.

The Frequent Misconception of Price That Disillusioned Investors

What is the big deal about price? Prices tend to fluctuate over time, and occasionally have a sudden rise and drop that results some people to conclude that prices are deviating from their “Real Value”. But the price under normal condition is no more real or valid than their higher or lower levels under extreme conditions. The new and higher/lower price reflects the new reality just as well as the previous price reflected the previous reality. Often you may hear that people forecast a trend and said price has deviated from the “real path”.

The most fundamental of all is that there is no such thing as an objective or “real value” as there would be no rational basis for any transaction to take place if there were.

Let me give you an example: take me as a stock seller and you as the buyer. When you pay $50 for that stock, apparently the only reason you do so is that the stock is more valuable than the $50 is (will go up in time). For me, the $50 is more valuable than the stock I am holding is worth (will go down in time) that’s why I am selling it to you. If there were a real value to that stock, neither you nor me would benefit from making a transaction equal to that real value, since what acquired would be of no greater value than what was given up. You may think why bother to make the transaction at the first place!

On the other hand, if either you or I was getting more than the real value of the transaction, the other one must be getting less. In this case, why would the other party carry out the transaction continuously since he/she is being cheated? Continuing transactions between you and me make sense only if value is subjective, each getting what is worth more subjectively.  The value that is in your mind will never be objective or real, only plain subjective. That is why it is always a behavioural game when you approach the market. It is always important not to be too objective as a famous Economist named John Maynard Keynes once said, “The market can be more irrational than you can stay solvent”.

Read the market as it is, the price that you see on the screen reflects exactly the market conditions. The fact that people got into losing trades is because they think what the market should do and why it is not doing (Price is getting too low from the mean, it will revert back to the mean soon) rather than thinking the market is doing what it is doing (Price is getting low simply because supply has outstripped demand).

The Frequent Misconception of Price That Disillusioned Investors
The Frequent Misconception of Price That Disillusioned Investors

One good example of such practice is exemplified in the post: EUR/USD – The Positive Tales in Price as we talk about the market as it is not a forecast about how far this pair will move from here to there.

The $100K Challenge is not a Good Idea Until You Understand

Here’s the challenge, blindfold yourself and walk across a busy highway, if you made it across safely you earn yourself $100k. At this moment, you may be thinking it will take you 2-3 years of hard work to earn this amount.

Before you take up this challenge, think about the risks. In most Forex Trading account, brokers may offer you leverage of 1:100 or even 1:1000. The plus side, you can start your investment dream with  just $50USD. Immediately, the idea of holding on to $50,000 with a $50USD comes into your mind. Keep it in your mind and never do it (Over leveraging). A $50,000 lot size reward/costs you $5 per pip. It is tempting to tell yourself I just needed 10 pips from this trade and I made $50, a 100% return in just an hour of work beating the stock market and anyone else. Making those 10 pips may be easy but the mental energy used up in monitoring the trade is way too much.

Remember Reward is always symmetrical to risks, going for the 100k challenge is just not worth it. The market just needed to move 10 pips against you and you are out. By the time the market move just 2 pips against you (plus 2 pips as spread), you are down to $10USD in your account, a 40% decrease. You are trapped in this trade thinking of holding on, in hope that it will help you realize the $100k challenge or cut it now to face a 40% loss in account. You are stuck in making a decision, your mind is in a mess, your ego is question, and you are at a lost.

Why keeping losses low is important? If you read my first post you will understand. Here’s another piece of tip:

% Loss in Capital    % Required to breakeven based on current account value   
2 2.04
20 25
30 42.86

 

 

 

The table above shows that a % loss we experienced required us to pay back more. At 20% loss, we needed a 25% return. Now here’s the trick, if you have read my first post and actually measured the performance of your system, you will know whether your system is able to breakeven or not. If the answer is no, keep your losses per trade at 1% or even 2%. A 20% loss is simply too much for an average investor, you will need to beat the market indices by attaining a return of 25%.

Still thinking of the challenge? May be by night time there are lesser cars and your chance of surviving may be greater? That is true!

Understand Market Volatility: Know your battlefield

Usually at Sydney and Tokyo session, volatility will be low due to lower volume compared to the session’s overlap of Europe and USA. This means that you have more room (trade slightly bigger lot size) with your 1-2% or even 3-4% if you have decided your system capability.

Let your lot size = 1-4% risks of account value/ 2 x market volatility (ATR or Standard)

How do you measure volatility? You may use either Standard Deviation or Average True Range indicator as a measurement. This is to make sure that you take into account of market volatility while also risking just nice.

Let me sum it up by saying leveraging your reward is as good as leveraging up your risks. Leveraging slightly is not a bad idea provided that you cut your trade at a predetermined amount (1-4% of account) and also taking into considerations of market volatility. Hope you understand leveraging better now and its implications to your trading system, not to forget its application.

Who Are the Rating Agencies and What Do they Do ?

Who are the ratings agencies? ‎

The big three agencies are Fitch, Moody’s and Standard & Poor’s. 

What they do is assess how likely a borrower is to be able to repay its debts and help those trading ‎debt contracts in the secondary market.‎

That means for those trading debt contracts such as Treasury gilts after they have been issued, ratings ‎agencies help assess a fair price to charge. Ratings agencies have been criticized for having too much ‎clout in jittery markets during the financial crisis. They were widely attacked for failing to warn of the ‎risks posed by certain securities, in particular mortgage-backed securities.‎

Losing your rating or being downgraded can have a fatal effect on your country’s ability to borrow ‎money on the markets.‎

Thanks to the three big agencies, we can bring you the ratings of countries around the world as of ‎today. Because each agency’s approach is slightly different, we have color-coded them in three broad ‎categories too. ‎

In layman’s terms, the 2008 crisis started when thousands of US homeowners stopped paying interest ‎on their mortgage. The crisis spread because thousands of bankers and fund-managers had foolishly ‎backed those mortgages, and so lost a lot of money themselves. They did this partly through their own ‎lack of foresight, but also because of the ratings agencies’ failure to warn them of the risks involved. In ‎the run-up to 2008, a staggering proportion of mortgage-based debts were rated AAA, when in fact ‎they were junk. The same goes for groups such as Enron, Lehman Brothers and AIG. Days before they ‎went bust, Moody’s, S&P, and Fitch all still rated these failing companies as safe investments. ‎Shockingly, more than half of all corporate debt ever rated AAA by S&P has been downgraded within ‎seven years.‎

Part of the problem is that ratings agencies are funded by the very companies they rate. If you want to ‎be rated, you must pay an agency between $1,500 and $2,500,000 for the privilege, depending on the ‎size of your company. In theory, this creates a conflict of interest, because it gives the agency an ‎incentive to give the companies the rating they want. It could explain why, for much of the past ‎decade, agencies seemed happy not to question either the risks banks were taking, or the accuracy of ‎their accounts. ‎

There are more than 150 ratings agencies worldwide, but in order to have any credibility, companies ‎really need at least one of Moody’s, S&P and Fitch on their side, and preferably all three. The first two ‎firms each control around 40% of the market. Fitch has about 15%, and is usually engaged when S&P ‎and Moody’s disagree significantly about the creditworthiness of a debt. This generally happens ‎because S&P measures how likely a debtor is to default, whereas Moody’s rates how long the default ‎is likely to last.‎

At the beginning of the 20th century, there were no ratings agencies, and very few ways of telling ‎which of the many emerging securities were worth investing in. There was a gap in the market, and ‎the first person to fill it was a Wall St errand boy called John Moody. In 1900, aged 32, he published ‎Moody’s Manual of Industrial and Miscellaneous Securities, a compendium of information on ‎thousands of financial institutions. The book sold out in months, and an industry was born. Poor’s ‎Publishing Company emerged in 1916, Fitch in 1924.‎

For countries such as Britain, the USA and France, the threat of a downgrade is not as serious as it has ‎been for other European countries. Moody’s negative outlook did not hit the pound or government ‎bond prices hard, and the FTSE 100 was affected only slightly. Even if Britain’s rating fell to AA1, the ‎state is unlikely to be seriously affected because most other countries are in the same situation.‎

An Introduction to Precious Metals

We’re a fiat money society, but, recently the recession and economic downturn has brought with it significant threats to the value of paper money, and this has led many people to start to appreciate the inflation beating trade in precious metals. The precious metals we’re interested in here are gold, silver, platinum and palladium. Not only are these metals traded as stocks and shares (in the companies that mine them) but there is a worldwide trade in physical precious metals. The most common example of trade in precious metals is buying and selling gold coins.

Precious Metals Are a Commodity

It’s not possible to discuss precious metal trading without first understanding that gold, silver, platinum and other precious metals are considered to be commodities. Brokers who trade in commodities usually trade in futures, but you can find independent brokers that have specialised in the trade of precious metal commodities. Not stocks and share certificates, but physical precious metals.

Recession Proof

Precious metals have acted as a hedge against the ever weakening dollar. Because the dollar is the world standard currency it affects every market and every economy. Weaker currencies cause precious metals and in particular, gold ETPs (ETFs & ETNs) to be considered an essential part of any portfolio. The financial crisis of 2008 and beyond led to central bank ZIRP (Zero Interest Rate Policies) and QE (Quantitative Easing—or, money printing) which left the value of the dollar as the primary casualty. To gain protection it was essential for wise investors to gravitate towards gold and other precious metals.

Exchange Traded Funds

The issuance of a wide variety of precious metals based ETPs has made adding these to investors’ portfolios relatively easy. Previous to their existence it was cumbersome, time-consuming and off-putting to deal with these products for most investors. Back then, you either bought gold coins, ingots, futures or options, and, when all else failed gold stocks. Gold coins are an inefficient market with illiquidity and serious price spreads for buyers and sellers. Futures and options involved more leverage, qualified investors and a lot of paper work not to mention more trading.

People who are involved in the financial world may have heard the same refrain many times: from big financial institutions to the smallest trading desks, forward-thinking traders are looking at buying into gold and silver markets or other precious metals equities or financial products. This is mainly because of concerns about the possible devaluation of national currencie, but also for a variety of other reasons. For those who are interested in getting into gold, silver, platinum, palladium or other valuable commodities, some basic guidance will help individuals invest in precious metals in ways that can help their overall finances in the future.

  • First, get access to a broker. Whether it’s an online brokerage account, or a personal broker who you can call on for help, the individual investor will need some kind of broker service in order to get involved with precious metals investing. Of course, each of these options will carry the expected pros and cons. Online brokering will prove very convenient, while face-to-face brokering will maximize your opportunities to ask questions and get advice.
  • Secondly, you’ll have to look at all of the options for investing in precious metals. These days, the financial market has spawned a great variety of resources for investors who want to cash in on changes in gold and silver prices, or other valuations for precious metals, so make sure that you’re well educated on which choice is best for your investment plan.
  • Evaluate precious metals ETFs and ETNs. Exchange traded funds or exchange traded notes are active funds that are traded throughout the market day. They are much like stocks, but they bundle equities for specific yield and risk ratios.
  • Take a look at other precious metals funds. From precious metals index funds to various mutual funds for gold and silver, the variety of precious metals funds out there means there’s something for just about every investor who wants to get involved. Understand that funds exist that will effectively help individuals profit from decreases in gold or silver value, which is classically called “shorting” these commodities.
  • Compare raw versus numismatic values for precious metals investments. One of the very critical aspects of investing in gold, silver or other kinds of precious metals is whether or not the investor wants to trade into raw materials or other items like collectibles that have intrinsic value.
  • Assess raw metals opportunities. Some of the most basic precious metals investments are offered in major national exchanges or in the global Forex market. The South African Krugerrand is an example of a coin that holds raw value as gold bullion, where the value (measured in troy ounces) will be equivalent to the value of raw gold. Other coins and collectibles may have their own numismatic values and trading risks associated with those values.
  • Track precious metals investments. When the individual trader has bought into either basic precious metals commodities, gold or silver futures, funds like ETFs and ETNs, mining operations or anything else based on precious metals value, tracking these investments is key to profit.
  • Think about profit taking. Every investor has his own strategy for benefiting from increases in price. Some want to hold onto their gold, silver or precious metals for a very long time, hoping that in future unforeseen events, those prices will spiral up into the stratosphere, creating vast wealth. Others want to profit annually from increases in equity values. Having a concrete strategy will help a single investor succeed when the idea is to invest in precious metals wisely.

What is FOREX ?

Forex is simply foreign exchange.

Only developed countries could expect to use letters or documents or forms of money. You had to carry something that had value in far off lands. Many times the equivalent value was unknown, perhaps a trader, would trade a bag of spice for a crate of tea and when he arrived at his destination port, they had no need for tea, or another ship had just arrived, so the value of the tea had gone down, or perhaps it was a British colony and there was a shortage of tea so the demand was up.

This was a gamble to the traveler, and merchant alike. Or perhaps a goat herder took his goats to the market and sold them, he needed to exchange the goats for something of value that he could carry and keep and use when he needed, such as money. Eventually most societies developed a monetary system, which worked just fine inside of their territory, but how did a Roman pay for food and horses in a foreign land. Would a merchant accept his Roman coins and if so at what value.

This was the beginning of foreign exchange. Traders began to realize that they could work as intermediaries and take advantage of shifts in the markets and the demand for goods. A smart trader would know where there was a shortage of oil and an abundance of corn. As time passed, neighboring countries and trade areas, such as colonies and protectorates developed a monetary exchange system, so that a Spaniard could exchange his coins in a French territory for a set value and an Englishman could use his coins anywhere around the world.

The gold standard was developed and countries would tie their money to the gold in the coins or the value of the paper money was backed by gold. Each country would set the value of their currency and would only make changes due to major changes in agriculture, war, weather, or growth and demand. There were no regulatory agencies, and a money broker could change the value for which he exchanged depending on his own requirements. But there was at least an assumed value. This was the beginning of currency conversion and foreign exchange rates.

The world of business developed and expanded across borders, governments realized that they needed a way to exchange large amounts of money so that they could expand their export and import markets. They also knew they needed to set standards to value their currency and their economy and their national debt and budgets.

For many years it was the job of the central banks in each country to monitor their currency value, process the exchange of currency from their local banking systems. Many governments even began to invest in other currencies, for instance holding their dollars instead of exchanging them gambling that the dollar would grow or the demand for dollars would increase, they could then sell these dollars back to their account holders at a profit.

At a conference in Jamaica in 1976, the world governments agreed to accept a new floating currency system replacing the gold standard, this was the birth of the foreign exchange markets. Within a short time, you were able to buy and sell currency, and options on currency, in global markets, similar to stocks or commodities. The prices of the currency fluctuated and you could buy and sell currencies on the open market to take advantage of these shifts in value.

How Does Price Move and Where Does It Go?

The first thing a trader needs to know and understand in the fx market is the way in which prices move. Knowing this will determine what you do when trading currencies. You have to be able to understand what’s going on in the market in order to make smart decisions. You should be able to look at the price charts of the assets you are trading and know what is happening with them. Prices move in two directions. That is simple up and down… rarely sideways, but sometimes.

Price can move up, which means it is rallying or a bull market or it can move down which means it’s consolidating or a bear market. Price can also move sideways. This is often referred to as the price being stuck or on a plateau. You usually do not want to be trading a when the price is doing this. Based on the prices moving up down or sideways, will determine how you will make the trade.

If you fail to understand these principles, you will lose all of your money. In an effort to make it up, you will lose more money. This is why it is so important for you to know this information.

One of things you should do is to practice reading online forex charts you need to be familiar with basic charts so that your eyes are accustomed to them and your mind can quickly digest the information. Remember when you started to drive and you had to stop and think about everything you were going to do and you had to worry about people and cars and traffic and parking… Eventually it became familiar and your mind was able to grasp the situations quickly and you did not have to think about it much anymore so it was no longer occupying your mind, this allows you to see farther and evaluate other actions. This is true with charts and graphs after a while you mind will grasp the data quickly and you will begin to notice patterns and movements.

Get a whole bunch of different price charts and drill whether or not the price is going up, going down or moving sideways. This should be one of the first things you need to learn how to do. In summary, the prices in the Forex market move up, down or sideways. Make sure that you know exactly what is happening or you will lose all of your money. The best thing to do is to practice reading the charts. If you do this, youwill be well on your way to being a great success at trading the foreign exchange market.

To be successful you need to be well educated and well equipped and familiar… familiarity will make you comfortable and you will see soon you will start to trust your judgment.

I’m a Pip, You’re a Pip, and everybody is a Pip… so what is a Pip?

“Percentage-In-Point” is known as a PIP and is used to define a currency rate to a very small amount well below whole numbers. Different currencies are traded around the world and using this system helps equalize each currency against the other for much more accurate measurement. Ok, now you have an explanation that doesn’t really tell you much, so let’s look at a PIP.

In trading the U.S. Dollar, the pip is the smallest amount by which it may be traded against another currency, in this case $.0001! Other currencies using other types of units but using this system of pips helps to bring about nearly exact exchange rates by considering both currencies to a very small unit of measurement. Currency on the whole only fluctuates a very little amount, but when you multiple that amount by the volume traded, it is a great deal of profit and loss. When the USD moves just one PIP and you are trading 100,000usd, you could have profited or lost 10.00dollars, now just think that if the currency moved 5 PIP, that is 50.00 for doing nothing. There is over 2 trillion dollars traded daily on the Forex Exchange. That is 2,000,000,000.00 now if we multiply that by 1 PIP, we have a whole lot of money going up and down.

When trading Forex Currency, the trader is leveraging their account, in other words, they may be buying 100,000USD but they are only using 100.00 of their money. (This is a hypothetical example; leveraging and margins are governed by the exchanges and set by your broker). The smallest amount that can be traded is a contract for 100,000usd, so every little PIP counts.

Traders look to make a profit by betting that a currency’s value will either appreciate or depreciate against another currency. Trading down to such a small unit or pips helps protect investors from huge losses by allowing specific places for trades to occur. Instead of waiting for a whole number such as 1, or even 5 dollars, for instance, when the market reaches a specific small unit, trades may occur. If a trader can trade the dollar down to 1.0001, it is easy to see that large volumes of dollars trading at 1.0001 instead of at the next whole number, $2.0 can mean vast amounts of money are at stake.

Trading one whole unit of one currency may result in a lot of whole units of another currency. Since one US dollar may represent hundreds, thousands, or even more of another currency, using pip increments helps match the currencies together and maximize the attempt to equal one to the other exactly.

Once we identify the two currencies this is known as a “pair” and use pips to match up the values of each to such an exact degree, it becomes a small step to use the system itself to identify and quantify a trade between currencies! This is how you make money trading the Forex Market.

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.

Understanding What Influences Currency Prices

Forex prices are currency prices. Currencies are issued and controlled by governments. Currency does not have a set price or a suggested retail price or a manufactures price. You cannot break down the components of a currency to find its value and sell of parts of it.

Currency used to be on a gold standard, meaning that some coins were actually made from gold so they had a marketable known value around the world. Most currencies were backed by gold and were assigned value of gold and each country maintained gold reserves to equal the value of their currency.

As global trade markets grew the central banks needed a way to track and calculate the value of one currency against another and to allow international business to move funds from one country to the next, for example to purchase inventory or pay employees in another country.  In the latter half of the 20th century an international agreement was reached to allow currencies to go off the gold standard and to apply values to currencies and allow them to be traded on the open market.

This was the birth of the Forex market. Originally designed to allow central banks, governments and business to move currency more easily, today only 20% of the transactions are for actual use, 80% of the currency exchange is for investment purposes.

Once the countries and currencies were openly and easily traded a global exchange was open. The value of currency is based on the demand for a currency by the market, as it is no longer tied to any real asset value. Currency rates move freely.

There are all sorts of investors in the forex market, day traders, speculators, long term traders, investor’s pension funds and institutional as well as banks. Everyone is looking for profit. Each investor is hoping that the markets move in their favor, in this market, there is a loser for every winner. Each currency trade is matched with a counterpart. If you purchase 100usd there needs to be someone willing to sell you 100usd and at what value.

In order to make a successful trade you need to be able to predict market movement as well as determine entry and exit points and value. This is done by what is known as analysis, and there are two main types of analysis, these are fundamental and technical. Fundamental is based on news, information, facts, reports, and data. This information comes from many sources and the better the sources, the better your analysis. Most of the information comes from government economic data and reports and comments by acceptable sources such as the Director of the Federal Reserve, and then there are new sources, which affect the markets. If you knew the news from Libya, before it made the airwaves and internet sets, you could have bought oil before it moved up due to the shortage created a reduced production due to the war in Libya. There are government reports such as Jobs Report, Unemployment reports, Consumer Price Index and Consumer Confidence. Lately a lot of press coverage has been on GDP and debt.

Technical analysis is based on charts, graphs, historic information about price and movement. Technical analysis use charts and graph and apply formulas or rules to determine their results. These include Fibonacci Numbers, Pivot Points, MACD, Stochastic and Resistance/Support.

There are traders who only use Fundamental Analysis and there are traders who only use Technical Analysis. Good traders use both but rely heavily on one style or the other, but they know and understand each.

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.