Markets Stumble And Bumble To Start The Week

Australian manufacturing PMI was 49.4, the first time below 50 in this cycle. Eurozone PMIs fell further, led by Germany, as manufacturing continues to contract to an atrocious decade low level with contagion to services starting to appear broadly. Which provides a stark reminder to investors of the economically damaging effects trade wars and Brexit are having on business sentiment.

According to the IFO and ZEW survey don’t bet on a dramatic upgrade in the German economy anytime soon. However, most damaging of all is if the sub-zero borrowing cost is insufficient to get companies to spend again, it does suggest that the German economy is but a step away from mushrooming into a full-blown worst-case scenario, a full out recession.

The weak European PMI’s triggered as significant rally across all fixed income with the US bond markets leading the charge. The US curve, as it is so prone to do recently, is bull flattening, taking its cue from Europe. All of which provided a convincing signal for investors to seek shelter under a Gold umbrella

US equities ended the day flat to small down in low volume trade after US data rolled out mostly in line with expectations while placating some of those recessionary fears triggered by the European data.

As well, investors sentiment remained bolstered by the supportive Fed policy, which assuredly remains standing in the wings ready to act at a moments notice. If it were left up to Federal Reserve Bank of St. Louis President James Bullard, who resonates with many market participants these days, the monetary floodgates open next month.

Oil markets

Oil price eventually rose 1% in New York despite a battle of the repair headlines, and the ugly European PMI prints which sent oil tumbling lower initially.

Those dreary, soft data PMI’s do at minimum suggest that investors fragility over demand worries could start to compete for centre stage in the oil markets again even more so if US hard economic data starts to weaken noticeably.

Crude oil fell over 2.5% at one point yesterday after Reuters reported the Saudi Aramco facilities damaged in last weekend’s attacks would be back to full production by early next week. This conflicts with weekend media reports that it may take several months for total output to be restored.

Wherever the truth may lie, which is usually somewhere in the middle, the oil market might remain focused on Saudi spare capacity as well as geopolitical risk in the region for the next while — suggesting that oil prices could remain supported through higher risk premium, despite the dreary European data, and until there is conclusive evidence that Saudi Arabia can deliver on their repair timeline.

Gold markets

Gold rallies on global slowdown jitters despite a resoundingly strong USD dollar While geopolitical and trade war risk continue to offer support.

However, so far investors appear content to take some chips off the table on moves to $ 1525 suggesting that the thought of progress on the trade issues could be a significant barrier to breach ahead of the October US-China meeting unless of course news flows suggest otherwise.

What should be great for Gold prices and more concerning for policymakers is that contagion to the services sector is starting to appear with private sector activity shrinking for the first time in 6-1/2 years in September while eurozone business growth stalled

Indeed, if these macro conditions continue to deteriorate, there will be only one direction for gold, and that could be to the moon as the markets may continue to price in more Fed accommodation which will drive bond yields lower making gold even cheaper to own.

With the trade negotiation signal completely obscure it too suggests investors may continue to maintain a more defence risk posture until something more definitive unfolds after all one bitten twice shy continues to resonate post-G-20 in Osaka.


Asian currency markets

The Yuan

Price action continues to suggest that the markets think both China and the US are keen to make some trade concessions in October, so interbank types continue to offer up substantial resistance above 7.12 But with that said, the market remains stubbornly bid on dips possibly signalling that traders do not want to have too much short dollar risk on board with uncertain USD funding costs and even more so when Yuan liquidity turn south over the October 1st – 7th 2019 China National Holiday.

The Malaysian Ringgit

The Ringgit has been struggling to claw back lost ground after the USDCNH traded up to 7.1299 on EBS after Chinese officials unexpectedly cancelled US farm visit on Friday, which had a negative effect across all ASEAN currencies but triggered significant local equity outflows. Moreover, confirming this Bloomberg reported that Overseas investors withdrew $ 40.7 million for Malaysia equities on Friday.

However, the major elephant in the room is not just a wary retracement of the early September US-china goodwill measure, but traders may be adopting a more cautious approach ahead of the FTSE Russel decision which could see the Ringgit topple if Malaysia gets removed for its World Government Bond Index.

The Thai Bhat

The market is pivoting to the Bank of Thailand policy meeting on Wednesday so failing any trade war outbursts; range trade could persist.

In a Reuters poll, most economists (13-20 surveyed) expect the Bank of Thailand (BoT) to keep its policy rate unchanged on 25 September, but market participants will be looking if the BoT strikes a dovish chord to set up for a cut in November. Keeping in mind, the BoT surprised the market with a rate cut in August but remain very wary over the strengthening baht.

The BoT continues to express concerns that the baht’s strength relative to trading partners’ currencies could affect the economy to a more significant degree amid intensifying trade tensions. All of which suggests they could remain on an easing bias

Indonesian Rupee

The Indonesian Rupiah continues to trade relative flat waiting for the next signal on US-China trade war developments

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Is The Technology Sector About To Break Lower?

If our analysis is correct, we believe the Technology sector may be setting up for a downside price breakdown near the APEX of these Pennant/Flag formations that appear in our charts.  Near recent, all-time highs, this downside breakdown could be rather large in size, possibly as much as -20% to -35% or more, and could result in a global stock market decline that could shock most investors/traders.

The economic data that has recently been announced in the US continues to show moderate strength overall.  The jobs numbers are decent.  The consumer is still moderately active and we are getting into the Christmas Rally season.  Yet we are also in the midst of a Presidential Election cycle that continues to heat up and drive almost daily new headlines.  Our opinion is that the US consumer will become fixated on the political theater while we get closer to the November 2020 elections and may curb Christmas/holiday spending if news/perspective suddenly darken.

One of the first sectors we believe could break is the Technology sector – where foreign investors have poured billions into this sector while chasing price gains and to protect against foreign currency devaluation.  Once investors determine Technology is no longer “safe”, then a downside price event (true price exploration) will likely happen and we are concerned the downside risks could be much greater than 20~25%.

This AMD weekly chart provides one of the clearest pictures of the tight Pennant/Flag formation setting up in price.  After a Double-Top type of formation near $35, any further price advance was rejected near $36.  The current tight price rotation after the August 2019 peak suggests a very tight Pennant/Flag formation is setting up.  If our analysis is correct, the APEX/breakout/breakdown event is only a few days away.  Our count of the Pennant rotation suggests the breakdown move (lower) is the most likely outcome.

This AMZN chart highlights a similar pattern to the AMD chart.  Although the current Pennant/Flag formation is a little more defined, the structure is still the same.  An August 2019 high after a Double-Top formation, downward price rotation after the August 2019 peak and a clear APEX setting up RIGHT NOW.  The downside risk in AMZN is clearly a drop to near previous support (near $1310) – -20% or more.

GOOG provides a very clear example of the price volatility that is setting up a major Pennant/Flag formation.. Although the current setup is broader than the previous two examples, the potential for a breakdown event in GOOG is still strong.  The Double-Top pattern near $1280 provides clear resistance.  The recent narrowing price channel sets up a very clear Pennant/Flag formation.  We believe the downside price move in GOOG will initially target the lower price channel, then break that channel and continue lower.

Netflix has already broken below the lower price channel.  This is what brought this entire sector to our attention recently.  If Netflix continues lower, it could draw the entire Technology sector and US major indexes much lower over the next few days/weeks.  The downside price risk in Netflix is easily -25% to -45% – or more.

Our Custom Technology Index chart shows how the overall Technology sector is struggling to stay above the lower price channel.  Our concern is that one or more of the major technology firms may break the lower Pennant channel and attempt to start a breakdown in the US stock market.  If this is the case, then a panic may setup in the markets where investors dump technology very quickly.

CONCLUDING THOUGHTS:

Skilled technical traders are adept at finding ways to profit from nearly any price trends.  A quick trade in TECS or an Inverse NASDAQ ETF would allow many skilled traders to attempt to profit from this APEX/breakdown potential. We don’t have confirmation of the breakdown event just yet, but it certainly appears that the Technology sector could come under some severe pressure over the next 30+ days

Also, take a look at all my precious metals trade signals this year (2019) with a total gain for subscribers of my Wealth Building Newsletter of 41.74% profit. More than double the return than if you bought and held GDXJ gold miners ETF.

My point here is that no matter how much you love metals or technology stocks (and I LOVE them both), you do not need to always be in a position with them. There are times to own, and times to watch with your money safely in cash.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are life-changing events in a good way if traded correctly.

Chris Vermeulen
www.TheTechnicalTraders.com

How To Trade Bonds Using Macro Indicators

Bonds; What They Are And Why You Want To Own Them

Bonds, the bond market, bond yields, and the yield-curve are important aspects of the financial markets every trader should understand. It doesn’t matter if you are a bond trader or not, understanding the nature of the bond market can provide a deeper insight into just about every other market on the planet.

First let me answer the question, what is a bond? A bond is a pledge or a promise for one individual or entity to repay a debt that can be bought and sold by the public. It is, in essence, a way to guarantee a debt, the seller is borrowing money and the buyer is lending.  Bonds can be issued by just about any type of organization but are most commonly used by governments and businesses to raise large amounts of capital.

The bond issuer agrees to pay the bondholder an amount of interest that is predetermined at the time of the exchange in return for a loan.

Governments and businesses often need to borrow more money than what they can access through traditional banking means. In order to raise this money, they use public bond markets so they can tap into a larger liquidity pool. Investors buy the bonds in return for interest payments they receive over time or upon maturity. The amount of interest the issuer pays and the owner receives depends on a number of factors including Credit Rating, Interest Rates, and Demand.

Credit ratings for bonds are similar to the credit score you get as an individual, it is a measure of the bond issuer’s ability to repay the debt. Ratings are issued by agencies like Moody’s and Standard & Poors in a range from Investment Grade through Junk. Investment Grade bonds have the least likely of default, the least amount of risk, while Junk bonds have the highest amount of risk. A higher risk of default equates to a higher interest rate for the borrower, the issuer of the bond. That is good for the owners of bonds because it means a higher rate of return.

Safety-seeking investors may accept smaller returns for guaranteed investments and focus only on investment-grade bonds.

Demand can affect a bond’s cost/return ratio the same as any trading asset. Because bonds are typically issued in batches the amount of debt available for investors to buy is limited. If there is enough demand it can drive the cost of ownership higher and lower the effective yield. This is bad news for the bond investor but good news for the issuer because it lowers their cost of borrowing.

Central Bank Policy Underpins Bond Market Conditions

Interest rates are important for bonds because they determine the cost for issuers and return for investors. What makes bond trading hard is that interest rates change over time which means there times you may want to be a seller of bonds and other times when you want to be a buyer of bonds.

The primary force behind this is the prime rate or base rate maintained by the central bank of the country in which the bond is issued. When the prime rate is high bond rates tend to be higher and when the prime rate is lower bond rates tend to be lower. The challenge for bond traders is when the central bank is the process of altering its policy and changing the prime rate.

Central banks move their target for the prime rate up and down in an attempt to maintain economic stability within their respective nations. If economic activity is too high they raise the cost of borrowing money to make it harder for businesses to borrow. If activity is too low they lower the rate in an effort to stimulate business investment and flow within the capital markets. Savvy investors can sell bonds short when rates are low and then buy them back when they are high profiting on the cost of the bonds and receive interest payments in the meantime.

Inflation – This Is Why Central Banks Change Their Policy

The number one tool that central banks use to measure the economy and determine the trajectory of their policy, whether rates are rising or falling, is inflation. Inflation is a measure of price increases over time and can be applied to many aspects of the economy. The two most commonly tracked are business and consumer inflation. To that end, two of the most tracked inflation reports are the Producer Price Index and the Consumer Price Index.

Of the two, the Consumer Price Index or CPI is by far the most important. Consumers are the backbone of modern economies. While producer prices may bleed through to the consumer level, if consumer prices get too high there is nothing for an economy to do but collapse. In the U.S., the Personal Consumption Expenditures Price Index or PCE is the favored tool for measuring consumer-level inflation. It is released once per month and as a part of the quarterly GDP announcement.

Regarding inflation, most central bankers favor a 2.0% target for consumer-level inflation. This means that when CPI or PCE prices are below 2.0% the central banks tend to be “accommodative” toward their economies and ease back on policy by lowering interest rates. When CPI or PCE is above 2.0%, central banks tighten policy by raising interest rates.

Labor Data And Its Role In The Inflation Picture

Labor data plays an important role in the inflation picture. First and foremost, no economy can function if its people are not working. The FOMC at least is mandated with two functions and one of them is to ensure maximum employment. Figures like the non-farm payrolls, unemployment, and average hourly earnings become important in that light. The difficulty the FOMC faces is that stimulating labor markets can lead to increased wage inflation.

Economic Activity, Central Banks And Bond Trading

Economic activity is the alpha and omega of bond trading. When economic conditions are good capital markets are flush, when economic conditions turn the capital markets dry up and bonds are harder to issue. The takeaway is that economic conditions are what the central banks are trying to manipulate and they do that through interest rates. When conditions are bad, interest rates will fall, when conditions improve interest rates will rise until they reach a point the economy recedes. That is the nature of the bond market and bond trading, understanding that ebb and flow is key to bond trading success.

According to Learn Bonds, when the economy is performing badly and the stock markets are highly volatile, investors tend to switch investments to fixed income securities and this boosts the activity in the bond market. But this is not always the case. High volatility can sometimes drive investors towards short-term trading via online trading platforms. This way, they can benefit from both sides of the market without having to hold stocks for long periods.

Yield Curve And Market Outlook

There is a limitless supply of bonds but not all are the same. When it comes to bonds the safest, most trusted, and closely watched are U.S. Government Treasuries. The U.S. Treasuries are issued in a variety of maturities that range from a few weeks to thirty years. The yields on each maturity are different due to demand for time-frame, either long or short-term investment and can be analyzed for insight into market sentiment.

Known as the yield curve, in good time the spread of yield increases the further out you go. This is because investors believe that interest rates will be higher in the future so they don’t want to lock-in a low yield for too long. This phenomenon results in a higher demand for shorter-maturity bonds and a “normal” yield curve. In bad times that all changes. Bond investors believe interest rates will be lower in the future so they are seeking to lock in the higher rate for a longer duration. That creates a higher demand for longer maturity bonds and a signal known as a yield-curve inversion

This graph shows a partially inverted U.S. yield curve.

Market Sentiment has Brightened Considerably

U.S. Treasuries sold off sharply Thursday, reflecting better-than-expected August ISM non-manufacturing data and the U.S. and China agreeing to hold a new round of trade discussions in early October

ISM non-manufacturing printed 56.4 versus expectation of 54.0, and 5y and 10y yields were 12bp higher to start the morning. The positive economic data and trade calming headlines triggered a significant drubbing in the bond markets.

However, what is worrying for overextended bond market positions and other defensive strategies like Gold that were built upon recessionary fearmongering and the anticipation of a deluge of central bank easing

On the back of the surprisingly strong run of global economic data, and just as the Bank of Canada threw cold water on the prospects of aggressive rate cuts this week, the improved macro data in Europe China and the USA provides the perfect opportunity for central banks to gingerly walk back from the cliff edge of rate cut mania. Moreover, this improving economic climate allows central banks a modicum of comfort to put policy in moderation mode over the short term.

In a week filled with surprises, deescalating geopolitical tensions in Hong Kong, London and Rome, trade calming trade effect from high-level trade negotiations set for October, and with an impressive rebound in global economic data, Asia investors are heading into the weekend in a much safer investment environment than anyone’s wildest dreams.

Investors are now hoping they can take this week’s positivity over the finishing line, so fingers crossed the August US payroll report, the standout highlight today, doesn’t throw a damp towel on the proceedings.

Trade calming

There is one very good reason we should pay close attention to trade calming this time around as in the wake of the dismal manufacturing ISM reading in the U.S. this week, the economic cost of a trade war in U.S. voters eyes is rising quickly as the global manufacturing meltdown is now leaching into the U.S. manufacturing sector. Indeed, the weak manufacturing industry is not an ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard.

In this light, the trade war is no longer working for the U.S. economic interests, suggesting it could be time for the administration to change tack as the disquieting thud of covert U.S. dollar policy intervention sounds in the distance. After all, if there is one thing the Democratic left and the Trump administration agree on, it’s that the strong U.S. dollar is hurting U.S. workers.

Oil markets

Oil markets have been on a ripper the past 48 hours riding atop waves of optimism from improving global economic data and the “trade calming “effect from the scheduled US-China trade talks. Moreover, oil bulls revelled in the afterglow of EIA data that reported a solid draw to crude stocks, with refining activity at a similar pace to last week.

While the latest oil price move is a convincingly bullish, traders appear happy to take this week run of good fortune to the bank as some pre-weekend profit-taking seems to be setting in, Not to mention 24 hours in the oil pit is now an eternity in the influential realm of President Trumps Twitter account.

If there is one capital markets sector that trade war bluster hangs around longer than welcome, its the oil patch.

The apparition of weaker global demand when U.S. production is near all-time highs hangs like a constant dead weight on market sentiment, even more so as we exit peak driving season and head for Octobers scheduled refinery maintenance period where crude oil inventories tend to expand.

However, so far, the base seems well entrenched on the positive trade war signals.

Gold Markets

Gold markets took an absolute drubbing overnight as overextend positioning caught up with the reality of the massive uptick in risk sentiment triggering waves profit taking and stops as newly minted defensive strategies hurriedly ran for the exits.

Corrections are bound to happen, especially with gold fever built into the current narrative. However, given that the buying data over the last 12 months suggests an excellent chunk of long-term strategic buying is thought to be in at much lower levels, so theoretically these positions are in no immediate danger.

Long term investors remain buttressed by global central bank demand who stay in a constant state of de dollarizing while perhaps anticipating the U.S. administration to embark on a weak U.S. dollar policy

Short term trading influence.

From a risk-reward perspective overnight, with Gold market making new highs on Wednesday then long positions getting sideswiped by trade war calming headlines, selling above $ 1540 made sense while playing the odds for a stronger ADP number given that the deluge of weaker longs in the market could easily get spooked. After all, discovering and then aggressively pressing against the weaker hand is what trading is all about.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

Trade Talk Doubts Surface

While global equity markets sentiment continues to be the major casualty of escalating trade tensions, there’s a staggering amount of cross-asset collateral damage due to the negative footprint each escalation leaves.

USDCNH continued to press higher overnight zeroing in on the critical USDCNH 7.20 level on the “no deal in sight” narrative.

The Tariff turbulence and the uptick in risk-off sentiment buttressed and helped the yellow metal rise overnight as the S&P sagged below the psychological 2900 level.

Moreover, oil markets continue to struggle under the weight escalating trade tensions.

Yuan watch

For the most part, price action suggests the mood is unchanged, as Interbank traders continue to buy USDCNH dips likely positioning for a move to 7.25-7.40 as at this stage trade war appears to have no end in sight.

Also, over the weekend, however, Vice Premier Liu He chaired a meeting of the Financial Stability and Development Committee, Chinas top financial regulatory body. Also, representatives of the Peoples Bank of China and the Ministry of Finance attended signalling to the markets there could be some policy easing in the offing.

Over the short term, lower domestic interest rates could negatively impact the Yuan.

The weaker Yuan will continue to have a domino effect on other ASEAN currencies, but once Yuan weakness becomes more sensitive to slower growth in China, this is where the cascading force pulls down commodity currencies and the Euro since it has high FX beta to global growth.

The Malaysian Ringgit

Local Traders’ are trying to position currency risk ahead of Malaysia’s trade numbers on Wednesday but the omnipresent overhang from negative trade war sentiment amidst another dramatic Yuan sell-off overnight, suggests the Ringgit sentiment will continue to be influenced by external concerns, particularly the weaker Yuan.

Oil markets

Oil prices continue to struggle as demand concerns weight heavily on near term sentiment as the market remains wary of turning positive while the trade overhang persists.

Hurricane Dorian looks set to leave a swath of carnage along the U.S. East Coast which could dampen gasoline and diesel demand over the near term which too will weigh negatively on oil prices.

It’s oil products that are driving the bus since the Hurricane will not impact the Gulf Coast U.S. oil production or refining.

However, mother nature can be predictably unpredictable, so sentiment could shift on a dime if the forecast or hurricane path changes.

Gold markets

Gold markets continue to move reactively within the broader range to the ebb and flows of US-China trade headlines, but prices are struggling to make significant headway above 1530 so far this week as the boisterous US dollar is likely keeping gold investors honest

Gold is most closely tied to the underlying movement of the US dollar and real interest rates, and these will continue to be the critical factors in gold’s reaction function over the medium term.

The markets have fully priced in a Fed cut in September. The CME FedWatch Tool is showing 95% + probability for a 25bp reduction on September 18, but gold traders will be paying attention to Fed speak this week especially dissenter Rosengren who speaks on Wednesday at 5 PM EST and has been an advocate of holding rates steady. Market participants will be particularly curious to see just how committed his hawkish views are considering the further escalation of trade tensions with China.

With little signs of a looming US recession, there has been some concern amongst gold traders; this could trigger more dissenting votes in the Federal Open Market Committee.

Europe

Eurozone manufacturing activity contracted for a seventh month in August, which bolsters expectations for European Central Bank to deliver a comprehensive easing package on Sept. 12. However, it was German August Purchasing Managers Index which made for a graphic read as shockingly the manufacturing downturn seems to be accelerating

The Euro

The Euro continues to fall under pressure as traders now focus on economic growth differentials which have EURUSD FX flows skewed to the downside ahead of the European Central Bank policy meeting on September 12

This article was written by Stephen Innes, Managing Partner at VM markets LLC

Psychology and Trading

Psychology Is The Most Important Factor For Your Trading Profits

When folks begin trading, the first instinct is to focus on the charts. After all, the charts are where all the action is. That’s where you find the Double-Bottoms, Reversals, Break Outs, and Trends that make big profits. What many traders come to realize, the successful ones at least is that there is more to trading than the charts, more than just making trades.

What you may have also realized is that finding winning trades isn’t enough. There’s something standing in the way to profits and that something is psychology.

Psychology is the study of the mind, behavior, and behavior patterns; what makes us do the things we do, how do we overcome the obstacles that are holding us back. Believe it or not, trading is mostly a head game. It’s not the market you need to beat, it’s yourself.

Trading Discipline Is The Foundation For Your Success

Trading discipline is the foundation for your success because it provides a set of rules for you to follow that will help prevent unnecessary losses. I say unnecessary losses because you can’t cut out all of your losses, as a trader, you must be prepared for it or else it will drive you mad. The root causes are Fear and Greed. Fear and Greed are the two strongest emotions felt by traders and not easily overcome.

What does discipline mean? It means coming up with a set of trading rules, rules you always follow so you don’t make decisions based on fear or greed. Rules can be as simple as only trading once per day, they can be as complex as only making trades when the asset price is bouncing from support after a bullish breakout and confirmed by a bullish crossover in MACD and rising RSI.

You may not believe me but the market will make you mad. It will infuriate you by not doing what you think it should. Your rules are intended to keep you from making trades based on the madness. Grudge-trading, revenge-trading, trying to get back at the market by making wild bets with valuable trading capital is a real thing.

Here is a list of sample rules for speculative traders. These rules can be used for Forex, CFDs, Options, Commodities, or Cryptocurrencies.

  • Every trade will always be 1% (or 2% or 3%, 5% is getting risky and 10% very risky) and no more or less (as close as can be had on your platform). Using a % instead of a fixed amount will allow the trade size to grow or shrink along with the account balance to maximize profits and minimize losses.
  • I will always trade with the trend. I will determine trend by price action, trend lines, moving averages, and MACD.
  • I will only enter on confirmed entry signals. My signals are bullish/bearish crossovers in stochastic and MACD, confirmed by a break of the 30-period moving average.
  • I will not enter if price action is within 3% of resistance (for bull trades) or support (for bear-trades).
  • I will use support and resistance targets as exits targets for my trades. If price action reaches a target I will exit to take profits. Some profits are better than no profits and infinitely more satisfactory than losses.
  • I won’t have more than one trade open on one asset at a time.
  • I won’t have conflicting trades open on the same asset at the same time.
  • I won’t have more than five trades open at the same time, that’s 5% of the account at risk at one time.
  • I will always follow my rules.

That last rule, I will always follow my rules, is the most important rule of all. It doesn’t make much sense to have rules if you don’t use them. I can say without a shred of embarrassment that I learned that last lesson myself more than once. Like I said before, the market will infuriate you and drive you to do things that are self-destructive to your account and trading capital.

Factors That Affect Your Trading Psychology

There are millions of factors that can affect your trading psychology. This list is intended to be a guide to what may drive you to make bad trades. The key to understanding your psychology and improving your list of rules is to be aware you can be driven to make decisions and recognize when that is happening. If you can do that you can take yourself out of the equation, step back from the situation, and regroup without losing money. The name of the game is consistent wins and capital preservation.

  • Fear – Fear is one of the most vicious emotions a trader can face. Fear can keep you from making a trade, it can also keep you from taking profits. Fear of losing money in your account will keep you making trades but you can’t let it, you have to make trades in order to make profits. If you keep your trades small no one loss will hurt you and you will still be able to trade again. Fear of losing profits you might make can keep you from taking profits you already have. What I’ve learned is that if you don’t take profits in favor of waiting for more, more often than not the profits you have will evaporate. You have to close your trades when the profits are showing.
  • Greed – Greed is the second most vicious emotions a trader can face. Greed is the other face of fear. Greed is the fear of losing profits you don’t have, or the desire to make huge trades and even huger profits. What takes traders by surprise is that greed rears its head when you are doing well. A string of wins can get your confidence up and that can lead to making aggressive trades and big losses.
  • Ambition – Ambition is a trait that all traders shares. It takes a certain  amount of desire to succeed to embark on the journey that is a trader’s life.The problem with ambition is when it leads you to make bad decisions, like when you compare your results to another trader’s and let that influence your trading.
  • Losses – Losses, a trader’s worst nightmare. Losses occur when trades don’t go your way. They are an inevitable part of trading but can be managed. The trick is not letting them become too large, always use proper position size (the 1% or 2% in my rules), and not to throw good money after bad. If a trade goes against you don’t double up on it and don’t reverse it. If you feel yourself getting frustrated from a string of losses the best thing you can do for yourself is to walk away from the market.
  • Hope – Hope can lead traders to do bad things just as bad as fear or gree. Hope is good but it can turn against you. It’s one thing to go into the market hoping all your hard work will pay off. It’s something else entirely to go into the market hoping this one trade with your rent money will pay off huge. That’s gambling and the worst kind, it’s desperation and that’s not a good place for a trader to be.

Understanding Psychology Is The Path To Your Trading Success

Understanding your trading psychology is the path to your trading success. To put it bluntly, you have to remove all emotion from your trading if you want to be truly successful. Successful over the long-term.

Successful in a way that means you can live off of trading. In order to do that you have to have some rules, the discipline to follow them, and the ability to take yourself out of the market when emotions overtake your decision-making process.

A Word On Algorithmic Trading Versus Human Trading

Algorithmic trading is the use of computers to perform trading tasks. The big-money algo-traders have billions in money-making hundreds, thousands, and even millions of trades a day as they try to scalp whatever profits they can while waiting for the big score.

Smaller traders use Expert Advisers (MT4) and other trading software to determine trading entry and exit points. What I have to say is that the algorithms are usually good but not something you want to rely on blindly.

Algorithms are based on rules and only work while the market conditions match those rules. When market conditions change the algos stop working and losses can mount quickly. At no time should a small trader ever let an algorithm trade their account unsupervised. 

That being said, social trading accounts allow you to tie your returns to professional self-disciplined traders. Using this service you are not blindly relying on algorithms but instead, you essentially let proven successful traders execute trades on your behalf.


This article is brought to you by the courtesy of Multibank Group.

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Investors Are Also Taking a Brief Respite Early This Week

The speculative length has been pared back as the robust NFP print caught investors leaning far too dovish. So, the moderate unwind is consistent with US rate cut expectation now intersecting with the economic realities.

But with Chair Powell critical Monetary Policy Report to the Congress slated this week, and after a bullishly breathtaking performance during the past four weeks, Investors are also taking a brief respite early this week. And rightly so as the swift and sudden change in market views, from no hike to 50 bp cut in and now back to 25, is enough to exhaust anyone.

In the meantime, Investors will turn focus to this evening FOMC minutes where they could get a glimpse into the Fed thinking and at a minimum, the report should provide appreciably more insight on exactly what risks the FOMC sees and the amplitude of policy needed to neutralise those risks.

Oil prices

Oil markets had remained supported overnight on heightened Geopolitical risk, but prices erased earlier gains during the NY session.

The weaker global economic outlook is keeping oil prices under downward pressure, but tensions in the Middle East are enhancing awareness to possible supply risk and should keep a floor under oil in the medium term. But the fact that Iran tension is not boosting prices more considerably continues to emphasise the markets singularly focused nature on the demand side of the equation.

It is challenging to hold a strong bullish conviction when the markets continue to overplay lousy economic news into the demand side of the equation.

Gold Markets

Demand from the official sector continues to underpin gold prices. The PBoC reported earlier on Monday that their gold reserves rose by 10.3 tons in June, making it the seventh consecutive month of inflows. This news follows on from Poland’s announcement on Friday that it had bought a chunky 100 tons YTD

But the robust US payrolls data suggests there is more than enough gas in the tank to keep the US economic firing through 2019 which has investors paring back dovish rate cut bets, strengthening the USD which are both weighing on gold sentiment.

However, with global economic risk skewed downward and should keep central banks in a dovish mode so Gold markets should continue to benefit from a shift in policy from the Fed and other central banks.

But eventually the money drip runs dry, and the central bank “PUT only gets the economy so far before we will need to consider longer-term trends such as recession, so look for strategic buying to remain dependable on any extended dips.

Currency markets

Funding pressures remain at the start of the week, which continues to work in the USD favour.

G-10 traders had shifted into USD buy on dip mode in the wake US employment data on Friday. Given the recent ECB developments and the convincing break below 1.1250 last Friday, the EURUSD sees the lion’s share of the flow so far. But with no joy below 1.1200 traders have turned to wait and see mode ahead of the FOMC minutes as EURUSD options have a deadly quiet start to the week.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC

Gold Technical Analysis – How do the Experts Trade Gold

The experts use several technical, fundamental and sentiment indicators to determine the future direction of the yellow metal. Gold is viewed as both a commodity and a currency. Gold is generally quoted in US dollars, and trades both as an exchange traded instrument as well as over the counter.

How the Experts Trade Gold

Gold is considered a safe-haven asset that gains in value when markets are looking for an alternative to other currencies that are losing value. When interest rates are declining around the globe, the demand for a currency that will sustain its value provides a backdrop for rising gold prices. Gold has a forward interest rate, like dollar rates or Euribor rates. This interest rate called the Gofo rate, increases relative to the US dollar when gold demand rises. Expert traders will evaluate three dimensions that provide them with a view of the gold market. These include the technicals, the fundamental backdrop and sentiment.

The Technicals of the Gold Market

Experts attempt to analyze the long-term trend in gold prices by evaluating a weekly chart. Gold prices trend and trade sideways like other capital market instruments. By using different tools you can determine if the price is likely to trend or remain in a range.

Gold prices in June of 2019 are bucking up against the upper end of a 6-year range, and are poised to test the upper boundary. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. The MACD is a very useful momentum index that uses moving average to generate a crossover signal that describes when positive as well as negative momentum is accelerating. A weekly MACD crossover on gold prices tells expert traders that gold price momentum is accelerating upward.

Momentum is Important

Another momentum indicator is the relative strength index (RSI). This momentum oscillator describes whether prices are accelerating relative to the last 14-periods. The RSI surged in June of 2019 and has broken out, which shows accelerating positive momentum. The only caveat is the current reading on the RSI is 77, which is above the overbought trigger level of 70 and could foreshadow a correction. The key to using the RSI is to look at prior highs to determine how far momentum has accelerated in the past. The weekly RSI has hit levels near 84 in the past, which means that positive momentum can still accelerate as gold prices break out.

The uptrend is also moving higher. The 10-week moving average crossed above the 50-week moving average in early 2019, and the 10-day moving average continues to rise which shows that a medium-term up trend is currently in place.

Gold Market Sentiment

There are several ways to determine market sentiment within the gold market. One of the best indicators is using the Commitment of Trader’s report released by the Commodity Futures Trading Commission (CFTC). This reports to helps traders understand market dynamics.

The COT reports show position data that is reported by category. This information is reported to the CFTC by brokers and clearing members. While the actual reason that a trader has a position is not reported, experts make certain assumptions that provide information about those positions.

Positions are reported by category. For gold futures and options, the categories include swap dealers, managed money and other reportables. Swap dealers include banks and investment banks as well as industry specific merchandisers. Managed money includes hedge funds, pensions funds and mutual funds. Other reportables is retail trade.

The CFTC staff does not know specific reasons for specific positions and hence this information does not factor in determining trader classifications. For example, the CFTC does not know if a swap dealer is taking a speculative position or hedging risk. What experts need to evaluate is why positions are increasing or decreasing.

Expert traders generally assume that all the swap dealer positions reflect hedges from deals transacted with gold producers and refiners. Those positions are offset with speculative positions taken by managed money. Managed money takes positions that provide you with information about sentiment. There are two concepts that you need to evaluate. The first, is a trend in place. If the COT information shows that managed money or large specs are increasing their long positions, sentiment toward gold is increasing. If they are increasing their short positions, then negative sentiment is increasing.

The second concept is whether the open long or short positions in managed money is overextended. If managed money is overextended, sentiment is too high and prices could snap back quickly.

Gold Fundamentals

The most important gold fundamental is whether the US dollar is likely to rise or fall. Since gold is priced in US dollars, when the dollar rises, it makes gold more expensive in other currencies. This means gold prices need to fall to accommodate the higher cost of purchasing it in dollars. The reverse is true when the dollar declines. Traders generally follow how the dollar is performing against the Euro and the yen as these make up the bulk of the transactions that occur around the globe on a daily basis. Gold is also viewed as hedge against higher inflation. When inflation is on the rise, gold prices will offset increases in a basket of goods or services.

Summary

Gold prices fluctuate daily, and over the long term either trade within a trend or consolidate. There are several technical indicators, such as the MACD, RSI and Moving averages that can help you determine the future direction of gold prices. In addition, expert traders use a combination of technical analysis, sentiment analysis and fundamental analysis to determine the future price of gold. Sentiment analysis can include the Commitment of Traders report released weekly by the CFTC. Additional, expert traders will track the value of the US dollar, which is a driving force behind the value of gold. It doesn’t hurt when a broker has a convenient, efficient and reliable trading platform, such as forex4you.


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How To Evaluate Leading Economic Indicators

The leading economic indicators are a set of factors that provide information that is current and foreshadows future changes to the US economy. This compares to lagging indicators such as job growth or GDP. Leading indicators can help economists predict changes in the US economy before they occur. Leading indicators are not always accurate predictors of future economic activity but they can work in conjunction with other indicators to provide data about the future expansion or contraction of the US economy.

What are the components of the Leading Economic Index

The US Conference Board created an index of leading economic indicators, that are part of a broader analytic system that is geared to point to inflection points in economic growth. There are three different indicators including leading, coincidental and lagging economic indicators. The conference board was established in the US in 1916. The group is a non-profit organization that can be described as a think tank.

The index of leading economic indicators is constructed to summarize future economic performance. The goal is to reveal inflection points in economic data that show when the US economy is poised to turn.

The ten components of The Conference Board Leading Economic Index include:

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods, and materials
  • ISM Index of New Orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions

The goal of the Index of the leading economic index is to forecast potential changes to the trajectory of US economic growth. The 35-year chart of the leading economic indicators shows that the leading indicators begin to decline ahead of the 3-most recent recessions.

The recessions are reflected by a gray bar. The leading economic indicators show a dip in performance ahead of a recession and then a rebound as the US economy begins to expand. Recessions occurred in 1991, 2001/2002, and 2008/2009. Not only do the leading economic indicators forecast a recession, but it also helps determine when the US economy is poised to rebound.

What Does Each Component Tell You?

Many of the components of the leading economic index describe employment. Average weekly hours in manufacturing, as well as weekly unemployment claims, are employment components. Although both of these components are helpful, jobs data is generally a lagging indicator. When companies begin to hire or layoff people it is because business is either running at a brisk pace or declining sharply. Rarely due companies foresee that there is a need for expansion or contraction before it affects their business.

The second grouping of components that are associated with the leading economic index is orders related. These data points are very helpful in predicting future economic activity. The three orders components are Manufacturer’s new orders of consumer goods and materials. The ISM index or new orders and Manufacturer’s new order of nondefense capital goods excluding aircraft orders. This last component is a proxy for business capital investment.

US Housing Building Permits is the next component and it provides the index with information about future housing starts. Prior to building a home, a builder needs to secure a building permit which will provide him with the proper licenses to build in that area.

The next component is stock prices. The leading economic index uses the S&P 500 index prices to determine market sentiment. The leading index also uses a leading credit index to determine if people are attempting to increase or reduce their borrowing, which provides the index with information about future spending.

The next component of the index is the yield curve. The index calculated the difference between the 10-year US treasury yield and the Federal Funds rate set by the US Federal Reserve. The yield curve tells the index if borrowing costs increase or decrease with time. In general, a borrower will pay higher interest rates for longer tenor loans. This is because there is more uncertainty for longer periods of time. If you are looking to trade debt or currencies the yield curve is very important.

If short term yields are higher than long term yields, such as the fed funds rates at a higher level than the 10-year treasury yield, the yield curve is inverted. An inverted yield curve means that the investor believes there is more risk in the short-term than over the long term. This type of scenario usually points to a recession. The last component is the average consumer expectations for business conditions. This is a measure of sentiment and can be very helpful in determining the short term movements in economic activity.

How to You Trade Around the Leading Economic Index

The leading economic index has 10-subcomponents that can be gauged ahead of the release. Similar to other economic releases, this index will provide opportunities if it comes out above or below expectations. Since most of the subcomponents can be calculated by analysts in advance, a surprise should not be taken lightly. Both better than expected or worse than expected numbers should tell you that the market might be positioned incorrectly, which could generate a move in many underlying securities.

 

Summary

The leading economic indicators are a set of ten individual data points that are used by the US Conference Board to forecast future changes to the US economy. Leading indicators can help economists predict inflection points in the growth of the US economy before they occur. Leading indicators are not always accurate predictors of future economic activity but they can work in conjunction with other indicators to provide data about the future expansion or contraction of the US economy. The components consist of jobs data, manufacturing orders, housing information, stock and bond prices as well as credit and consumer sentiment information. Since most of the sub-indices can be calculated before the number is released, a report that reveals a greater than or less than expected index should be taken seriously.


This article is brought to you by the courtesy of SimpleFX. SimpleFX is a leading online trading provider, offering financial instruments including, Forex as well as CFDs on Bitcoins, Litecoins, indices, precious metals and energy. Our mission is to providing trading conditions that are simple and transparent.

Technical Analysis MACD – How Professional Traders Use it

When momentum begins to fall it signal to traders that prices could begin to consolidate or reverse. One of the best and most complete momentum indicators is the MACD (moving average convergence divergence) index. Many traders also use the MACD histogram to forecast MACD crossover signals.

History of the MACD

The MACD was created by Gerald Appel in the late 1970’s. The MACD measures momentum by measuring whether certain moving averages are converging or diverging. The MACD is considered one of the simplest and most effective momentum indicators available. The MACD calculates momentum by subtracting the longer moving average from a shorter moving average.

The Components

The nuts and bolts of the MACD consist of a 12-day exponential moving average, and the 26-day exponential moving average. The MACD line, is created by subtracting the 12-day exponential moving average from the 26-day exponential moving average. The MACD signal line is the 9-day exponential moving average of the MACD line. The MACD histogram is the difference between the MACD line and the MACD signal line.

The Crossover Signal Strategy

Divergence occurs when the 2-exponential moving average moves away from one another. Convergence occurs when the moving averages move towards each other. The shorter moving average (the 12-day exponential moving average is faster and responsible for most MACD movements. The longer moving average (the 26-day exponential moving average) is slower and less reactive to price changes.

When the MACD line crosses above the MACD signal line positive momentum is accelerating. When the MACD line crosses below the MACD signal line negative momentum is accelerating. You can use the crossover signal as a straight buy signal, but you can also incorporate this signal with other technical analysis tools.

You can see from the chart of gold prices that there are several MACD signals that are generated and when the price of gold is moving sideways the signals made it difficult to generate gains. On the other hand, when a trend breaks out, the MACD quickly exposes accelerating momentum, as does not turn back.

MACD Histogram

The MACD signal line can also be viewed in histogram form. The MACD histogram oscillates around the zero-index level. When the histogram crosses above the zero-index line a buy, a signal is generated. When the MACD histogram crosses below the MACD zero index level a sell signal is generated. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Trading the MACD Divergence

MACD divergence occurs when prices are rising or falling at a decelerating rate. This concept is important as you want to ride the trend of the market when price changes are accelerating. When prices begin to decelerate the market is moving into equilibrium and will likely consolidate until new information moves it again.

The way to measure a MACD divergence is to look for a situation where prices are rising and the MACD trajectory is falling. It could also occur when prices are falling and the MACD trajectory is rising.

Examples of Divergence

If you look at the chart of gold prices you can see that a MACD divergence occurred in February of 2019. Here the prices of gold were rising but the trajectory of the MACD line was declining. You can draw a trend line of the MACD line to determine the trend of the MACD line. You can also perform this analysis using the MACD histogram. If the price of gold is rising but the MACD histogram is flat or declining than a divergence is occurring.

Prices in these situations are rising while momentum is falling, which means that prices are experiencing a blow off. A good way to think about this is when you take your foot off the gas of a car when you are climbing up a hill. At first, you would continue higher, but as your rate decelerates, you eventually get to a point where you might begin to slide backward.

Using the MACD histogram to Forecast a Crossover

The MACD-Histogram can help you forecast a signal line crossover in MACD, when divergences are started to occur. These divergences signal that MACD is converging on its signal line and could be poised to generate a crossover signal. There are two types of divergences, peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important. Slant divergence i like the divergences you see when you draw a trend line through the MACD line.

Summary

The Moving Average Convergence Divergence index is one of the best and most efficient momentum oscillators. The index is formed by deriving the difference between two moving average to determine if prices of an asset are accelerating or decelerating. The most common signal used by traders is the crossover buy and sell signal. In addition, many traders use the MACD histogram. This is the difference between the MACD line and the MACD signal line. When prices crossover the zero-index level a signal is generated. Traders also use divergence. This is when prices are moving one way and the MACD fails to confirm acceleration. There are two different types of divergence, the first is peak through and the second is slant.


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Investors Are Confident, Bullish And Buying Stocks, But…

The calculations required to compute the VIX index are composed of a number of factors. That final value of the VIX index is reported on an annualized basis. This means that VIX index as already internalized the past 12 months price volatility into the current VIX levels.

We believe this increased VIX volatility expectation could be muting future VIX spikes and trading systems focus on the VIX Index.  The fact that the VIX as likely to internalized that large October to December 2018 price rotation and will not move beyond this price range until well after April or May of 2020 creates a unique problem for VIX systems and analysts. In short, the VIX has normalized a 20% price volatility expectation, or more, and will not reduce this expectation until well after April or May of 2020.

Taking a look at this weekly VIX chart clearly highlights the large 472% increase in January and February 2018.  The reason why the VIX increased by this incredible amount is that the prior 12 months price volatility was extremely muted.  The price rotation in the SPX was -343, for a total of -12%. The second VIX Spike between October and December of 2018 resulted in a 227% increase while price rotated more than 600 points, -20.61%, in the SPX. Obviously, the larger price movement in October through December 2018 would have likely resulted in a large VIX move if prior volatility expectations had remained the same.

It is our belief that the January to February 2018 price volatility rotation increase the VIX volatility expectations by at least 30 to 40%. The second, much larger, price rotation during October to December 2018 pushed the VIX volatility expectations higher by at least 10 to 15%. Our researchers believe the normalized VIX levels representing current price volatility are likely to stay above 12 or 13 until well after November or December 2019 if price volatility and expectations stay rather muted. Any additional large price rotations, to the downside, will likely continue to normalize or internalize increased VIX level volatility expectations.

This SPX chart helps to compare the relative VIX price increases in relation to the true SPX price volatility. We’ve also drawn a 12-month price window, as a red box on this chart, to highlight how the VIX attempts to normalize the past 12 months volatility going forward. It is our belief that a move above 500 to 600 points in the SPX may only prompt a rally in the VIX to near 28 to 30. Whereas, the same price swing from October to December 2018 prompted a VIX move to about 36. We would need to see the SPX move at least 900 points before the VIX will spike above 25 again.  Remember after January or February of 2020 the VIX may begin to contract again as price volatility stays muted for the rest of this year.

We currently believe a large price rotation may be set up for near the end of 2019. Our proprietary cycle modeling systems and extended research are suggesting this downside move may begin sometime near August or September of 2019. Remember, this new VIX research suggests that any large price downswing may result in a very moderate VIX price increase at first. In other words, things could get very interesting towards the end of 2019 for traders.

Please take a minute to visit www.TheTechnicalTraders.com and see how we have been navigating, trading and profiting from the market over the past 17 months, I think you will be pleasantly surprised. Our research team believes the US stock market will likely form an extended pennant formation over the next 60+ days.  Now is the time for us to plan and prepare for what may become a very volatile second half of 2019 and early 2020.

Chris Vermeulen
www.TheTechnicalTraders.com

Should You Own Crypto-Currencies or Invest in Them?

The recent spike in cryptocurrencies prices and trading volume suggests an increasing interest from investors who want to take part in this monetary revolution. This revolution started 10 years ago with the launch of the Bitcoin (BTC), the first, biggest and most important cryptocurrency, which has gained more than 114% since the beginning of January at the time of writing.

Source: Coinmarketcap.com

The two most popular ways to take advantage of the crypto-currency market is to

  • Buy coins through an exchange
  • Trade cryptos via a CFD broker. Each way has its own advantages and disadvantages.

To decide which method is the best for you, you should first think about and develop your investment strategy. Owning cryptos (long term horizons) or trading them (short-term horizons) do not offer the same level of protection, fee scheme, payment methods, withdrawal methods, etc.

Let’s discover what differentiate them.

What does owning cryptocurrencies imply?

Owning cryptocurrencies is great if you want to use them to shop or to transfer money anywhere at any time quickly (faster than with normal bank transfers), at a lower cost and with a higher degree of anonymity than with traditional wire transfers.

To own crypto-currencies, you first need to find an exchange you can trust, one that’s available in your country, and that offers a payment method for buying cryptocurrencies with fiat currencies (American/Australian/Canadian Dollars, Euros, Sterling…).

Once you’ve bought your virtual currencies, you have to put them into a “wallet”, a program that can contain them. Most exchanges have their own “wallet” that clients can use, but it is widely recommended that you use a wallet that only you have access to and fully control.

There are different types of wallets, they can be gathered into two main groups: “cold” and “hot” wallets. The main difference is whether or not they are connected to the Internet. While “hot” wallets are connected to the net, “cold” wallets are not.

Cryptocurrency buyers and owners are often seen as soft and easy targets for hackers, as virtual currencies transactions are final, there is no anti-fraud protection, nor is it possible to reverse the charges offered by financial institutions in case of problems, as explained by IBM X-Force senior cyber threat researcher John Kuhn to NBC News. Cold storage is thus usually a more effective solution to protect your funds, as it limits the risk of hacks. The two most popular cold wallets are physical hardware wallets, such as external hard drives, and paper wallets.

Why trading currencies can be a safer and cheaper option to take advantage of the crypto-market volatility

When held on digital services, cryptocurrencies are vulnerable to cyber-thieves. Hackers usually target crypto exchanges to drain their crypto wallets (hence the reason why you shouldn’t keep your cryptos online in an exchange). In addition, as the crypto-sphere is quite new, it isn’t a regulated industry.

For this reason, using derivative financial products like CFDs (Contract For Difference) through a regulated broker can be an interesting option for you to make a profit from the crypto-market.

A CFD is a financial contract you enter into with the broker you’re using. This contract allows you to benefit from a rise (or fall) in the price of an asset, as you will exchange the difference between the opening and the closing price of your trading positions with your broker.

An important aspect of CFDs is that you never actually own the underlying asset. So, you won’t own any coins when trading CFDs on cryptos – you will simply take advantage of their price fluctuations.

Of course, using CFDs is only a good option if you want to take advantage of short-term crypto-currencies price movements, because it is a leveraged financial product that relies on margin trading. It means that as a CFD trader, you only need to put aside a part of the total value of your position to open it – this is called the margin. This technique therefore increases your market exposure.

Conclusion: owning vs. trading crypto-currencies

Are you not sure about whether you should own or trade cryptocurrencies? Think first about your financial needs, goals, and horizons.

In addition to being able to transfer money and use cryptocurrencies to shop whenever you want, owning virtual currencies can also be compared to longer-term investments. Having coins in your wallet means that you can hold your virtual currencies until you want to sell them at a higher price later on in the future. In the meantime, you won’t pay fees for holding them.

Trading crypto-currencies via leveraged products like CFDs means that you do not own any coins, you’re just taking advantage of the crypto market volatility instead. So, trading crypto-currencies is a short-term investment strategy, where you are using price changes to make a quick profit without holding the underlying asset.

So, ask yourself: would you consider yourself as an investor or a speculator?

While both seek maximum profit, an investor doesn’t have the same trading strategy, level of risk aversion and objectives as a speculator. In any case, the key to successful investing of any kind is to use the right platform for your needs.

Exchanges appear to be riskier than CFD brokers, who are regulated and offer protections to retail traders. Brokers can be useful for you to be able to apply your short-term trading strategy and appropriate money management rules in a responsive and regulated trading environment, while strengthening your financial knowledge.

With a regulated, reliable and safe broker, like Skilling, you can make your money grow while taking advantage of protections offered to retail traders. Regulated brokers in Europe, for instance, are part of a fund recovery program that can protect trader funds in case of bankruptcy. The European Securities and Markets Authority (ESMA) also imposes some restrictions on CFDs, such as a limited leverage effect (2:1 for cryptocurrencies), a 50% margin close out rule, and a negative balance protection.

What are the Different Types of CFD brokers?

CFDs are relatively new financial derivatives that have become increasingly appreciated among investors, especially in the Forex market. But as with any other activity, to be successful while trading CFDs, you need to have the right set of tools – the most important one being your broker.

Of all the different CFD brokers available, almost all fall within 2 overall categories – ECNs and Market-Makers. While a novice user may not notice much of a difference between them, the behind-the-scenes mechanics are substantially different. These differences have a significant impact on you, the trader, whether you realize it or not.

What are the differences between an ECN broker and a Market Maker, and which one is best for your trading style? Let’s jump right in.

What is a CFD and how does it work?

CFDs, which stands for Contract For Difference, are financial contracts you have with your broker to exchange the difference between the opening and the closing price of a trading position.

When you trade CFDs, you do not own the underlying asset you’re investing in, as you are only getting (or paying) the difference in price between the value of your contract when you opened it and when you closed it.

CFDs are leveraged financial products, allowing you to use margin trading to profit from increased market exposure. Every time you want to open a trading position, you have to put aside a fraction of the total value of this position as collateral – this is the margin.

As a result, you are able to invest more money than what you possess in your trading account. Consequently, as leverage amplifies price movements in all directions, they can be risky – you might make larger profits, but you could also lose just as much.

In addition to leverage, one of the biggest advantages you have, when you trade CFDs, is that you can benefit from rising as well as falling markets, which means that you can earn money regardless of the market direction.

Why are CFDs popular in the Forex market?

The Forex market is the market dedicated to currencies. It is one of the most liquid and active financial markets in the world, and it is open 24-hours a day, 5 days a week. It is also the largest financial market, with US$ 5.1 trillion exchanged every day.

If you decide to trade the Forex market with CFDs, you can do so by borrowing capital from your broker to place a trade. This is called margin trading.

Trading CFDs on Forex currency pairs is very popular, as it is an ideal market for leverage and margin trading due to its high liquidity, as you can enter and exit the market quite easily with small slippage. Of course, leverage can be offered on many different markets, but leverage, as applied to the Forex market, is generally much higher than any other trading instrument.

Because CFDs are very risky leveraged products that are linked to speculation, they are not allowed everywhere. For instance, there are forbidden for US residents, but they generally are permitted in many other countries.

In Europe, the European Securities and Markets Authority is the deciding authority on the rules brokers need to follow when it comes to trading CFDs. Recently, the organization decided “to strengthen restrictions on the marketing, distribution or sale of contracts for differences to retail clients”.

Forex Brokers Regulations also varies in different parts around the world, as it is a fast-growing OTC market.

What are the different types of CFD brokers?

A “No Dealing Desk” Forex broker usually provides direct access to the interbank market and can either be an STP or an ECN broker (or a mix of both).

This type of broker only sends trading orders directly to liquidity providers, which means that it doesn’t bear the risks of its clients internally. They only act as an intermediary between trader orders and the liquidity providers available.

ECN, which stands for “Electronic Communication Network”, describes the broker type that is connected to an electronic trading system in which many buying and selling orders from different large liquidity providers compete. Therefore, an ECN broker only connects different market participants together, so then they can trade with each other.

STP stands for “Straight-Through-Processing” and describes a broker that does not execute trader orders. They only carry out trading operations, without human intervention (No Dealing Desk – NDD) to external liquidity providers connected to the interbank market.

Dealing Desk (DD) – Market Maker

A Dealing Desk Forex broker is a Market Maker, which means that they don’t offer liquidity provider prices, as they are the ones providing liquidity for its traders by offering their own prices. It is for this reason that they are called market makers, as they “create” the market for their clients. This means that they are the ones setting the bid and ask prices of any financial instruments offered.

A Dealing Desk broker is very often the counterparty of their traders’ positions, as they do not directly trade, or hedge their clients’ position, with their liquidity providers. Therefore, a Dealing Desk broker has to pay for profitable client trades with their own money. If a client makes a winning trade, the broker loses money – and vice-versa.

How do CFD brokers make money?

A No Dealing Desk CFD broker earns money on the trading volume of their clients, as it receives a commission on all trades, and/or a markup on the spread (the difference between the buying and the selling price). Most of the time, these spreads are variable spreads, which fluctuate depending on the market conditions.

A Dealing Desk CFD broker usually gets money from spreads, as well as client losses. Spreads offered by market makers are usually fixed spreads.

The most important thing for a No Dealing Desk broker to provide is the best trading conditions for their clients – that way, their clients are more successful, they trade more, and everybody earns more money. It is for this reason that most traders prefer to use an ECN or STP broker, as they find them more reliable and profitable.

As a market maker broker earns money from their traders losing money, it is often seen as less transparent, as they have the ability (and motivation) to manipulate prices. Revenue is usually higher for a Market Maker than for an ECN/STP broker, given the same trading volumes.

Bottom line

CFDs are complex financial products that are not suitable for everyone, as leverage can trigger big losses. But, leverage also means that you can make huge gains on the financial markets by using volatility to your advantage.

CFDs are generally a good fit if you’re a short-term trader (like a scalper or a day trader), and if you have time to spend in front of the markets. Most importantly, to trade CFDs you need to have a high tolerance for risk – especially if you’re trading the Forex market, as it’s a very volatile market.

To better protect your trading capital, always use tight money and risk management rules when trading CFDs on the FX market. Equip yourself with the right suite of trading tools by selecting the right broker for your trading needs.

Regardless of whether you choose a dealing or a non-dealing desk broker, both can be perfectly reliable. Trading with No Dealing Desk broker, like SimpleFX, is likely to be a better choice, both for avoiding the conflict of interest inherent in the Market Maker model, and for partnering with a broker whose interests are aligned with yours.

To find the best broker for your trading needs, be sure to:

  • Establish your preferred trading style and your requirements first
  • Make sure your broker is regulated and licensed (in the more regional markets the better)
  • Be sure that the broker’s client support is knowledgeable and easy to access
  • Open a demo account first to know if the trading platform is going to be a good fit for your trading strategy
  • Check out trading conditions:
  1. Costs
  2. Fees
  3. Spreads
  4. Minimum/maximum deposit
  5. Margin requirements
  6. Financial assets
  7. Trading platforms
  8. Type of trading accounts offered

This is How to Trade the NFP Report



What is the NFP report?

The headline data point is the non-farm payrolls number. It is a measure of how many net new jobs are added to the U.S. economy each month. Along with the NFP figure are data on unemployment, which sectors are hiring or firing employees, the average number of hours worked, the average hourly earnings, and a few other key metrics of employment.

Two of the lesser watched yet still important metrics are the employment-to-population ratio and the labor-force-participation rate. The employment-to-population ratio is a measure of how many people are working relative to the total population, the labor-force-participation rate is a measure of how many people are working relative to those who could be. In recent years, because the Baby Boomers are retiring, the employment-to-population and labor-force participation rates have seen sharp declines.

Why is the NFP report so important?

The NFP report is so important because it is a reading of the core fundamental conditions that drive the U.S. The United States. is a consumer-driven economy, labor market health and wage gains have a direct impact on consumer health. When more people are working, when wages are rising, when employees are confident, and labor markets are tight the consumer if flush with money. When the consumer is flush with money, it is more comfortable spending on things it needs, services it likes, luxuries it can’t resist, and that fuels the broader economy.

The Report has flaws

It may surprise you to know that the NFP, the most closely watched economic indicator in the market, is also one of the most flawed. To begin with, the NFP is the difference between two estimated figures. The government estimates the number of job losses and the number of job gains subtracts one from the other and gives the NFP. It is far from an exact figure and gets revised not once but twice before it is finalized. This means the first figure you hear is often far from accurate.

Additionally, the margin of error is often larger than the actual number. At any given time, on any given release, the Non-Farm Payrolls figure you see in the headline is affected by such a large margin of error it is near meaningless without context.

Bottom line, the NFP is affected by so many variables, the figures are subject to so many revisions, with such a large margin of error it is unusable on its own.

This is how you read the NFP figures

The best way to read the report is over time. For one, this allows the first estimates to be finalized and revisions to be made. It is far better to track the trend of the Non-Farms Payroll numbers than the numbers themselves. Even more importantly, it is necessary to track the trend of the twelve-month average of job gains. The twelve-month average is the best gauge of labor market trends and can be used to judge the importance of all other data within the report.

Likewise with the unemployment and average hourly wage figures, the next two most important data points within the non-farm payrolls report. The headline figures are subject to revision so tracking them over time is the best approach. If unemployment is tracking lower, or wages are tracking higher, it is a good sign of overall economic health. The problem is that on any given month either of these figures could give a false signal, a market moving signal, and you can’t confirm it until the next report comes out.

What the NFP means for The FOMC, the Economy, and Inflation

FOMC has two mandates that it must work to fulfill; full employment and inflation. With this in mind, it makes sense that the FOMC would pay close attention to the NFP numbers and how they are tracking over time. In this respect, the average hourly wages are as important as the payrolls data. Ironically, the FOMC’s two mandates are often at odds with each other because their relationship is circular, one leads to the other.

Full employment leads to inflation leads to higher interest rates leads to less activity leads to less employment leads to lower inflation leads to lower interest rates leads to more economic activity leads to rising employment leads to full employment and on and on.

he FOMC’s true mission is to balance their mandate, keep economic activity as high as possible without inducing too much inflation. In terms of the NFP, the FOMC will be watching the trajectory of job gains, the number of employed persons relative to the workforce and population, and average hourly earnings. They want to see employment on the rise,  unemployment on the decline, and wages rising but not rising too fast.

The two biggest problems faced by the FOMC, relative to the NFP, is if wages are rising too fast and if wages are shrinking. When wages are rising too fast, the economy is in danger from unsustainable over acceleration which brings the need for higher interest rates into focus. Higher interest rates have a negative effect on the economy by making it more expensive to do business. When it is more expensive to do business there is less expansion, less expansion means less demand for employees and less inflationary pressure in wages.

Falling wages are a sign of an economic recession. Wages fall because there is an overabundance of employees for business to choose from. They are able to pay less for the same job because someone will always be there to take it, no matter how low the pay is. In this environment, the FOMC is faced with the dual problem of slowing activity and slack labor markets, problems that can be fixed with lower interest rates. Lower interest rates make it cheaper to do business and are a motivating factor for economic expansion.

How to trade the NFP report

There are two ways to trade the non-farm payrolls report, these are the long-term trend and the near-term news. By far the most effective way of using the NFP for trading is from the long-term perspective. Basically what you are doing is using the NFP to determine or confirm the trend, changes in trend, and major turning points in the market. If the NFP is trending positively and showing signs of strength ie trending above the 12-month average then the fundamental trend of the market is bullish.

In this case, it is advisable to follow only bullish signals when they are presented on a price chart. Price corrections and pull-backs to support levels are often opportune entry points for longer-term style trades. By longer-term style trades I mean trades you will want to keep open for multiple days, possibly even weeks or months.

The other method of trading the NFP is the short-term news; is the NFP better or worse than expected, or does it confirm or refute market expectations. The problem with this method is that the NFP doesn’t always get the market wound up enough to produce a move and, because of its flaws, rarely produces a figure that is truly market moving.

In practice, the two techniques bare some similarities. In order to capitalize on near-term expectations, you need to have a good understanding of the long-term trends and why today’s NFP is more or less important than any other NFP report. Changes in trend and confirmations of expectation are by far the best signals.

These are the assets that are most affected by the NFP

The non-farm payrolls report is important as an economic indicator and as an inflation gauge so it makes sense that it can affect multiple assets and assets classes. It is important to note that two important data points are the actual NFP figure including revisions and trend, and the hourly wage gains.

The Dollar

The dollar is the most obvious market affected by the NFP. The NFP is a gauge of economic health, it is a gauge of inflation, it is an FOMC influencing figure, it has bearing on interest rates, and it can move the dollar. When the NFP is positive and trending positive, especially the hourly wages, you can expect to see the dollar exhibit bullish behavior. Better than expected data is a possible catalyst depending on the inflation situation.

If underlying core inflation, as read by the PCE price index, is running tame it may not matter if hourly wages are running hot. Ironically, hot wage gains are good for the consumer which is also good for the overall economy. Tradable assets that may see a price move when the NFP is released include the Dollar Index (DXY), USD/EUR, GBP/USD, USD/JPY, USD/CHF, any other USD denominated pair including BTC/USD and other cryptocurrencies.

S&P 500/Indices

the NFP can have an impact on individual stocks and that effect is best seen in the indices. The indices movements are the net gain/loss of the stock market as a whole. If the NFP has buyers buying or sellers selling you will see it in the index charts. A strong NFP number can help confirm trends and pinpoint key turning points in bear markets. Likewise, weak or weakening NFP, especially with slowing wages or wage declines, would help confirm bear markets and changes in bull market conditions.

Gold

The NFP has an impact on gold if only because of its effect on the dollar. In reality, the NFP’s economic impact goes much further. A strong NFP may, in fact, support gold prices if there is a sign of industrial and/or physical demand within the economy. If not, you can expect to see gold move contrary to the dollar in relation to the labor data most times.

Oil/WTI/Brent

The NFP is an economic indicator that can affect oil/energy/gas demand outlook as well. If the NFP is trending strongly it is a sign of underlying economic strength and consumer health. These kinds of conditions typically lead to higher energy use for industry, housing/homes, travel, and work. By itself, the NFP is not a good indicator of oil price direction but it can affect the importance of other data. If global oil supplies are tight, tightening, or demand is high or rising, a strong NFP could help spark a rally or fuel one that is already in place.

Some other labor market indicators you should know

There are a few other important labor market indicators you can watch to help predict labor market trends and the NFP.

  • The ADP Report is a private-sector gauge of labor market trends akin to the NFP. The ADP and NFP are frequently out of alignment on their gauge of monthly job gains but tend to track alongside each other over time.
  • The Challenger, Gray & Christmas report on planned layoffs gives a read on job cuts and planned hirings over the course of the month.
  • The JOLTs report is a read on the number of job openings; when there are more job openings than available workers you can expect to see labor markets tighten.
  • The Kansas City Federal Reserve’s Labor Market Conditions Index is a broad gauge of labor market health and useful for pinpointing major changes in labor market trends.

The Non-Farm Payrolls Report; The Final Analysis

The Non-Farm Payroll’s report is without a doubt an important monthly data point. It is also, without doubt, one of the hardest to handicap and trade from. While it does have a near-term effect on the market and price movement its value is in the long-term analysis. The trend of job growth, the trend of wage inflation, and the trend of unemployment is far more important than any single data point on any given month.

You can trade the NFP report across any or all asset classes with Tickmill, a regulated forex and CFD broker with operations in all major jurisdictions.

Why Using Leverage is Popular in Forex Trading

While the word leverage is commonly used, few investors know the definition of leverage and how it is incorporated into their profits and losses.

Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also accelerate your losses. If you plan on using leverage while you are trading the forex markets you need to have a complete understanding of the benefits of investing with borrowed capital.

What is Leverage?

You probably have used leverage before in your life without realizing it. If you have purchased a house or car or even used a credit card you are using leverage. When you purchase a house, you generally take out a mortgage which is a loan that is collateralized using the house. The term collateral refers to the asset that the lender will take if you are unable to pay off the loan. In many cases, you will only put up 20% of the purchase price while a bank will lend you 80% of the value of your new house. By using borrowed capital you are able to purchase a home for a cost that is likely more than you could afford if you did not borrow from the bank.

When you trade in the forex market, you can borrow capital to place a trade. Your broker will lend you capital and your collateral is the value of the currency pair. For example, your broker might require that you post 5% on a EUR/USD trade that has a total notional value of $10,000.

In this case, you would need to have a minimum of $500 in your account to initiate this transaction. With leverage, instead of placing a trade that has a total value of $500, you can borrow $9,500 from your broker and make a $10,000 trade. In essence, leverage is the ability to control elevated levels of capital by borrowing money from a forex broker.

What is a Margin Account, and How Do You Use It?

Before your broker will hand over borrowed capital to allow you to trade the forex markets, you will need to open a margin account. Margin is a term that describes a good faith deposit, which is used by your broker as a portion of the collateral on your trades. Remember, your forex broker is in business to make money by facilitating trades. They will not take losses on your behalf. They will not put themselves in a position where your losses will exceed the amount of money you have in your account.

When you open a margin account at a forex broker it is in some ways similar to applying for a credit card. Your broker will question about your trading background including your experience. They want to know how long you have been trading, as well as your investing goals. Your broker might also ask about the potential account size, as well as other accounts that you currently have open. All of these questions are used to determine if they should provide you with a margin account and the type of leverage they should offer you.

Your broker will charge interest on the money that is used in your margin account. So, if you make a EUR/USD trade that has a notional value of $10,000, and borrow $9,500, your broker will charge you a margin interest rate on that balance for as long as you have a trade open. Once you close the trade, the interest charge ceases. The interest rates that are charged on margin are generally market rates.

Prior to trading using margin you should find out the rate that your broker charges. If it is out of line with other market rates you might consider using a different broker. A 5% difference on $9,500 for an entire year would come out to be $475. Remember, you are only charged for margin when your trades are active. For example, if you borrow $9,500 for 1-week, at a rate of 5%, you will be charged $9 =(5% * $9,500)/52.

What is a Margin Call?

When you open a margin account and use leverage, your broker will require that you maintain your account. The margin that you use to open trade can change as the profits and losses accrue for each transaction. If you place a trade, and the exchange rate moves against you, your broker will require that you have enough capital in your account to meet the new margin requirements.

If your trade is underwater, your broker will begin to charge you for the borrowed losses you have accrued, on top of the money that you used to initially place a trade. This is referred to as the maintenance margin.

For example, if you borrow, $9,500 to buy $10,000 of EUR/USD and the value of the trade declines to $9,500, you will have to pay interest on the initially $9,500 as well as interest on the additional $500. So there is a charged on the initial margin and a charge on the maintenance margin.

If the equity in your account drops below the maintenance margin level, your broker will generate a margin call. This is an alert to you that you have a certain number of days, to deposit additional capital in your account. If you do not meet the margin requirements following a margin call, your broker will have the right to liquidate your position. Prior to making your first leveraged transaction, you should find out exactly what the margin requirements are as it pertains to a margin call.

Because you have the potential to lose more money in your account that is initially deposited, the requirements to open an account are generally rigorous. Your broker wants to make sure you understand how the process works before you begin to risk capital on forex investments. They also want to understand the broker’s rights and what will happen if you don’t comply with a margin call. If a broker liquidates your position to meet a margin call, they will not try to get out at the best exchange rate. They will sell your position at the market and you will incur any slippage from the liquidation of the trade.

You broker will post the amount of margin that is currently being used on trades, as well as the total available. You might see a designation called “used margin” as well as “available margin”, in your account balance.

Margin Requirements and Leverage

The amount of margin that is required determines the maximum leverage on your account. For example, if you are required to post a 5% margin, the leverage you can generate is 20:1. As the margin requirement falls, the leverage increases.

For example:

Margin Requirement Leverage
5% 20:1
2% 50:1
1% 100:1
0.5% 200:1
0.25% 400:1
0.20% 500:1

High levels of margin are generally granted by reputable brokers such as Multibank. By using well-known platforms such as MT4 and Mt5, Multibank can offer leverage up to 500:1 on liquid currency pairs:

Your margin-based leverage is the total transaction value divided by the margin that is required. For example, if you place a EUR/USD trade that has a notional value of $10,000, and the margin that is required is $500, then your margin-based leverage is 20:1.

There is a theory that some refute that margin increases the amount of capital that you are willing to rise. Just because you can control more capital, does not mean that you are willing to lose more money.

Even if you only have to post 2% of the value of a trade, it does not preclude you from adding more money to your account if one of your trades moves against you. This means that your risk is more of a function of real leverage than margin leverage. Your real leverage is the amount you are able to leverage based on your discretionary capital. You would calculate real leverage by dividing the average margin requirement by your discretionary capital. For example, if you are willing to risk $10,000 on forex trading then your real leverage using 5% margin is $200,000 ($10,000 / 5%).

How Does Leverage Effect Your Trading

It’s important to understand the pros and cons of using leverage. Here is an example.

You place a $10,000 EUR/USD trade using 5% margin which is leverage of 20:1. This means that you would post $500 and borrow $9,500. Assume that the margin interest rate is 5%. In this hypothetical trade, you achieve gains of 2%, on the entire notional value of the trade which is $200 ($10,000 * 2%). Your trade only lasted 1-week.

This would allow you to achieve gains on the capital you risk of nearly 40%. Your gain of $200 is reduced by $9.13 as an interest charge for 1-week of margin on $9,500 ($9,500 * 5%) / 52-weeks in a year. Your net gain is $200 – $9.13 = $190.87. Since you only posted $500, your net return is 38%.  Your annualized gain is 1,985% = (38% * 52).

What is important to understand is that while the gains are robust, leverage is a double-edged sword. A loss of 5% on $10,000 ($500) would wipe out the entire amount of equity you have in this trade. In addition to a margin call, you would be subject to an interest charge on the initial $9,500 as well as the $500 of borrowed capital to handle your unrealized loss as maintenance margin.

Risks of Trading with Leverage

The risks stem from the amounts you can lose from small changes in the value of a currency pair:

  • You are exposed to market risks, especially if you are unaware that your position has moved during hours when you are not watching the market.
  • You also are subject to political risks, that can affect the value of your position, and make it impossible for you to exit your position. This is more likely to happen with an emerging currency pair as opposed to a major currency pair.
  • You are exposed to interest rate risks. If interest rates rise, the cost of borrowing capital will also increase.

Why Is Leverage Offered in Forex Trading

There are several reasons why brokers offer leverage. Leverage is offered in many instances of capital markets trading, but forex leverage is generally much higher than any other trading vehicle. The leverage that is offered for US equities is approximately 1.5 times the value of the stock. So your margin is at most 50% the notional value of the trade.

Forex leverage can reach levels up to 500:1. Brokers are comfortable offering this type of leverage for several reasons.

  • Forex markets are very liquid – You can enter and exit with very little slippage. If a broker has to liquidate your position, they can easily exit.
  • Forex markets are less volatile – The average volatility on major currency pairs is close to 10%. This compares to 40% volatility in many equity shares
  • Forex markets are open around the clock – you can trade in and out 24-hours a day, 6-days a week. Many other markets are only open during exchange hours.

Conclusion

Trading the forex markets is popular as it can enhance your gains and allow you to generate robust returns with only a portion of your portfolio. Many investors are attracted to forex trading as the margin requirements are low relative to the value of the capital you can control.

Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also generate large losses. There are several risks involved in trading forex with leverage, but the most obvious risk is market risk. When you trade with borrowed capital, your broker will charge a margin interest fee. Make sure you are aware of all the fees related to leverage before you place your first trade. Lastly, spend time going through examples of how leverage will affect your projected gains and losses and make sure you have allocated enough capital to an account before you begin to trade with a margin account.

Learn the Basics of Trading Currencies

What is Currency Trading?

Currency trading is when a person buys and sells different types of currencies, money, that are used worldwide. Foreign Exchange, or Forex, is the more commonly used name.  Anyone can trade currencies, market access is easy, however, you’re encouraged to learn everything you can before starting to help avoid unnecessary losses. You can start the learning process from sites like Forexhandel and nextmarkets and try trading demo accounts to get a feel for how it forex trading works.

What is Foreign Exchange?

The currency market or Foreign Exchange is the most liquid market in the world. It contains all the worlds money and continues to grow annually. The U.S. Dollar is the primary currency traded and it is traded against virtually every other currency on the market. Its safety and liquidity make it invaluable to traders, allowing them to enter and exit the market at will.

The OTC (over-the-counter) foreign exchange market, what you are accessing with a forex or CFD broker, has no physical location or central exchange and is usually open 24-hours per day, Sunday evening through Friday evening. Forex trading with CFD’s is a speculation on the direction an underlying currency pair like the EUR/USD (US Dollar versus the EU Euro) is going to move.

You make money by buying or selling the pair before the move begins and profit on the amount of movement that happens. For example, if you buy the EUR/USD at 1.1200 and it moves up to 1.1400 you make 0.0200. That may not sound like a lot but when you factor in the leverage provided by CFD trading it can amount to hundreds of dollars in profit.

Trading currencies can be very difficult, especially for those with no clue how to make a good trade.  There are three primary sessions successful traders focus on. These include the European, Asian, and United States trading session. These sessions may overlap but the main trading is associated with the hours these markets are open (when the traders are awake, business hours).

This means that certain pairs will have more active during certain times of the day. Those who stay with pairs based on the dollar will find the most volume in the U.S. trading session and when the opposing pair’s market is open.

The Basics of Trading

A lot is the standard number of units in trading currencies. When you buy a position it will be in lots, one lot two lots, three lots or more depending on how large a trade you want to make. Each lot represents a regulated quantity of a financial instrument as set out by the exchange you are using or the regulator in charge of your jurisdiction.

Some exchanges and brokers allow micro-lots for smaller trading accounts and those with lower risk tolerance. The micro-lot is equivalent to 1,000 units of one currency. If you have an account that is financed with the use of U.S. dollars, a micro-lot signifies 1000 USD of the base currency. A mini lot is 10,000 units of your base currency and a standard lot is 100,000 units.

What are Pairs and Pips?

A currency pair is an expression of exchange between two currencies. For example the EUR/USD. There are literally hundreds of pairings, any currency can be traded against another one, you just have to find the right market or exchange.

A Pip is the smallest amount of movement among major currency pairs. It is usually tracked as the fourth significant digit after the decimal place but this is not true in some cases. The USD/JPY (Japanese Yen) only goes to two significant digits at most exchanges.

How Forex Trading Works

Currencies are traded against each other because the exchange rates are always fluctuating. If you buy one currency when it is cheap and then sell it when it is expensive you can make money. Traders watch the market using financial charts of price movement to pinpoint when they want to buy or sell. Because most forex trading is done with pairs and speculative CFDs you never really have to own the currencies you are trading.

For example, if you think the EUR/USD is going to go higher you would buy 1 lot of EUR/USD. If it moves up you can profit, each PIP will be equal to $0.10 or more depending on your leverage. If you think the EUR/USD will move lower you would sell 1 lot. If it does move lower you will profit for each pip that it falls.

So, what makes Currency Trading trendy nowadays?

Currency trading is popular for three reasons; the market is easy to access, it is challenging, and you can make a lot of money. The problem is that too many would-be traders get into trading forex without the full knowledge of the risks. Just like with any investment, it is possible to lose a lot of money. If you make a trade and the market does not move in the direction you want but in the opposite direction, you will lose money with each PIP the pair falls.

Final thought

Learning the basics in currency trading is not complicated. Building your own strategy to make and making it work is a different story. You will need a lot of patience and practice to reach your goals. There are many helpful articles and applications online that can help you develop your skills in getting ahead of the game in trading currencies.

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Trading Bullish and Bearish Divergences

Trading bullish and bearish divergences is a popular strategy to take advantage of the price movements in the forex market. While there are numerous strategies to use technical analysis as a useful tool to make profits, trading bullish and bearish divergences is said to be one of the most powerful approaches of them all. How it works and what you need to know about it isis explained in detailly in the following text.

First of all, we have to specify where we want to apply this strategy. In the most common way, bullish and bearish divergences are observed in the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD) and the Money Flow Index (MFI).

RSI

The Relative Strength Index (RSI) is shown as the purple wave above the price chart in the example below. As you can see, there are two dotted lines, one at the top and one at the bottom. If the RSI reaches above the line, the RSI signals us that the price is in overbought regions, indicating that there will be a sell-off soon enough.

The opposite case holds true if the RSI falls below the line at the bottom. If the RSI reaches oversold regions, it indicates that the recent drop will soon come to an end and there will be a wave towards the upside in the not-too-distant future.

As seen above, the RSI touching or overreaching the dotted lines often resulted in tremendous price movements in the opposite direction. Thus, the RSI is a very powerful tool to find entry levels for long and short positions.

In the chart above, the RSI shows a bearish divergence. If the price climbs higher while the RSI performs lower highs, it indicates that there will be a (massive) sell-off in the near future. The bigger the timeframe, the bigger the price movement. In this example, EUR/USD lost 15 percent after the divergence formed over two years in the monthly chart.

In the bull case seen below, the RSI must form higher lows while the price is performing lower lows. In this case, the price climbed nearly 5 percent after the bullish divergence formed in the daily chart.

MACD

The same strategy can be applied to the Moving Average Convergence Divergence (MACD) indicator.

In the example below, the MACD shows a bearish divergence in the monthly chart. If we want to spot a bullish or bearish divergence in the MACD, we look at the green histogram and not at the blue and red lines. Thus, it can be observed that the histogram forms a lower high while the price was continuously climbing higher to form new highs. As indicated by the bearish divergence in the MACD, a massive price drop of more than 20 percent occurred after that.

The same principle is applied when spotting a bullish divergence in the MACD, but of course, in the opposite way. The MACD forms a higher low while the price chart is showing lower lows. This divergence indicates that a trend switch in the opposite direction is about to take place very soon. The price chart acted accordingly, surging by nearly 100 percent after the bullish divergence formed.

MFI

The money flow index works similar to the RSI, showing overbought and oversold regions to indicate trend switches. Unlike the Relative Strength Index (RSI), the Money Flow Index combines both price and volume data, as opposed to just price. Because of that, some analysts refer to the MFI as the volume-weighted RSI.

Looking at the weekly chart of EUR/JPY, the MFI shows a series of lower highs while the price chart is forming higher highs. The principle is exactly the same as in the RSI and shortly after the bearish divergence formed, a heavy price decline of nearly 27 percent took place.

What we can see below is the EUR/JPY daily chart. The money flow index shows a bullish divergence forming higher lows while the price continues to decline to form new lows. Thus, if we would trade according to the divergences strategy, we would have considered placing a long position after the bullish divergence has formed, which would have resulted in a 4 percent profit.

It is advised to take the bodies and not the wicks of the price movements to spot bullish and bearish divergences. This way we ensure that the divergence is correct and not a false signal.

How to get Started with cTrader: cTrader Overview

When forex trading became widely accessible, there wasn’t a big choice of trading platforms, if any at all. But today, you, as a modern trader, have a much bigger variety and can choose to trade with the platform that best suits your needs.

One of such trading platforms is cTrader. It is a powerful platform with a vast number of advanced features and tools, especially the charting and technical analysis capabilities, that you may not find elsewhere. It comes on desktop, web and mobile applications for both, Android and iOS devices. It is also probably the only platform that offers Manual, Copy and Algorithmic trading, as well as provides you with your trading performance analytics all in one platform.

In recent years, it has become quite a popular choice among traders, not only because of its great features but also because it is very transparent and is built that way that it protects traders from brokers’ manipulations. It also has a large community of traders, so you can easily connect and share with others in its forum.

Getting Started

cTrader offers Public Beta versions for desktop, web, and mobile. What it means is that you can easily download the platform on any device and try its latest features commitment- and risk-free, as it’s purely a demo, not linked to any broker. Each broker has their own branded cTrader platforms, on which you can open a Demo or Live account. The features may differ depending on the version the broker is using. From Public Beta, you can also open a Live account with any of the featured cTrader brokers.

To login to cTrader, use your Facebook or email address. These credentials will be treated as your cTrader ID. cTrader ID allows you to login to any future accounts of any broker on any device (unlike login in with account number). The other benefit of cTrader ID is that you can login with it to cTrader ID Site where you can manage all your accounts, sessions and more, as well as to cTrader Community website. This is achieved thanks to a cloud infrastructure which distinguishes cTrader from other trading platforms.

Once you are in, you will see the side menu with Watchlists, Apps, and Settings on your left side, charts, Tradewatch in the center and Active Symbol Panel (ASP) on the right side. The menu can be easily collapsed horizontally and vertically and resized to show longer symbols. There are different chart modes, including a full-screen mode and the possibility to detach charts on separate screens if you are working with several monitors. Tradewatch and ASP panels can be shown or hidden by choosing the preferred option in Layouts. The interface offers personalization choices including the selection of 22 languages and either a black or a white theme. There are also links to useful resources such as Marketwatch for example, as well as Help section.

cTrader Web 3.1 Main Screen

All your preferred options, such as chart configurations, settings, layouts and alike can be saved as Workspaces, another cloud-enabled feature of cTrader. You can load your saved Workspaces from the multiple accounts across different brokers. The cloud infrastructure also allows you to switch between all your accounts in one click and manage sessions on devices you are using.

Symbol Information

The ASP panel provides you with a full market overview on a particular symbol at a glance to help you make informed trading decisions. It contains Market Sentiment, Market Details, Trade Statistics, Market Hours, related Links, Inverted Rate, Leverage, as well as Depth of Market (Standard DoM, Price DoM, and VWAP DoM). You can open new charts, create new orders and change symbols from the ASP panel. It can also be linked to switch symbol from it in Watchlists, Tradewatch, and Charts.

Active Symbol Panel

The Watchlist provides you info on the bid and ask price, the change in price and how many opened positions you have per symbol. You can group, save, add or remove your favorite symbols as desired into multiple Watchlists. There is also a section with Popular Markets and a convenient Symbol Finder. All of these are integrated inside the menu under the Trade application.

Watchlist

Charting & Technical Analysis

cTrader is popular for its charting capabilities and technical analysis tools. To start with, you can choose from 3 chart modes, 6 chart types, 28 timeframes, and more than 60 technical indicators. You can customize the color of charts and chart elements, and draw different lines and shapes on charts.

The chart displays a vast amount of information, such as your Positions, Orders, Stop Loss and Take Profit levels to name some. You can create a new order directly from the chart, open it in full screen or detach on another monitor.

Charts

Another cool feature is Linked Charts. It allows you to link a symbol to several charts so you can switch between symbols while retaining specific chart settings like timeframe, chart type, indicators, drawings, and others. So, you don’t have to configure it all over again for every newly selected symbol. You can create multiple groups of charts as well.

Trading Tools

Unlike many other trading platforms, in cTrader there are several options for order placing. Firstly, you can open, close and modify orders with QuickTrade mode just in a single click from every section of the platform. It’s very useful when trading in fast-moving markets. Apart from that, there are advanced order types such as Market Order, Limit Order, Stop Order, and Stop Limit Order which you can also protect with Take Profit / Stop Loss settings and use Market Range feature (with your Market Order) to avoid slippage.

New Order

When selecting the volume of the order, cTrader keeps you informed on pip value, trade value, commission cost, and margin required. For every deal, you will be able to see detailed information on such parameters as execution time, market snapshot and matching time. Your orders will be filed against the full order book using Volume Weighted Average Price (VWAP), and you can also see the full range of executable prices coming directly from the liquidity providers in the depth of market section of ASP panel.

Deal Info

 

VWAP DoM in Active Symbol Panel

In the Tradewatch panel below the charts, you can view all your positions, orders, history, transactions as well as set price alerts (which you can also configure to be shown on charts).

In general, you can set up different push and email notifications using cTrader ID website. This can be an alert for Margin Call, Stop Loss / Take Profit, Stop Out and others. Being a cloud-enabled feature, you will be able to receive push notifications in-platform across all devices you are using.

Tradewatch

To sum up, cTrader is a very transparent trading platform that provides you with important information throughout every step of your trading experience. It equips you with a wide selection of important tools that help you achieve your goals and enables you to stay in control of your trading.

If you want to try cTrader, download its Public Beta version on any device following this link or open Demo or Live account with one of the cTrader featured Brokers at https://spotware.com/featured-ctrader-brokers/.

About Spotware

Spotware is an award-winning financial technology provider specializing in complete business solutions and complex custom development projects that add value to their clients. It is best known for its flagship product, cTrader, a premium FX and CFDs trading platform offered by leading brokers and trusted by millions of traders worldwide. It has also developed cXchange, an out-of-the-box digital asset exchange solution that allows any business to launch a cryptocurrency exchange. Spotware has been raising the standards of the online trading industry since 2010 providing constant innovation ever since. Founded on the values of transparency and Traders First™ approach, the company develops products that are responsive to the changing demands of business and regulatory landscape, and serve the long-term interests of all market participants.

What is ECN Trading and What are its Advantages?

Forex trading doesn’t take place on a regulated exchange (like shares or other assets do), as it occurs between buyers and sellers from anywhere in the world, through an over-the-counter (OTC) market. To be able to access this market, you need to use a broker.

As this market is not centralized, you’ll quickly realize that you can access different exchange rates and trading conditions, depending on the broker you use.

For this reason, choosing the right broker for your trading style is essential in becoming a successful Forex trader.

It’s important to note that even if there are many brokers out there offering similar products and services, there are a few things you should check before deciding which one to use, to be sure you’ll be giving yourself the best chance to succeed.

Of course, the first thing you need to be sure of is that you’re trading with a regulated broker.

For instance, the broker MultiBank Group is registered with 7 different regulators, including Spain, Germany (BaFin), Austria, Australia (ASIC) and the UAE. In addition to being heavily regulated, MultiBank follows strict rules and obligations regarding client funds and security. For instance, MultiBank uses fully segregated client accounts and offers negative balance protection to its clients.

Besides checking out the regulatory status of your broker, you also need to be sure it offers the right kinds of trading platforms and trading accounts for your trading style – not to mention other details such as trading conditions, spreads, minimum deposit, payment methods, main currency of the account, and the availability of the technical support.

Another very important thing to consider when choosing a broker is what type of broker that they are, as they are different kinds – predominately, Market Makers and ECNs.

Market Maker vs. ECN broker

Understanding the definition of a Market Maker is pretty straightforward – it’s a broker that “makes the markets” by setting the bid and the ask prices via its own systems. Then, they display these prices via their platforms, so that investors can open and close trading positions.

Usually, a Market Maker broker will not hedge its client positions with other liquidity providers like an ECN broker would do. Instead, what Market Markets do is they pay winning client positions out of their own accounts. It also means that when a client has a winning trading position, a Market Maker broker loses.

An ECN broker stands for Electronic Communication Network (ECN). This type of broker provides its traders with direct access to other market participants via interbank trading prices. This network allows buyers and sellers in the exchange to find a counterparty of their trading positions.

By using different liquidity providers, an ECN broker is able to allow prices from these providers to compete in the same auction, which usually means that traders get better prices and cheaper trading conditions. Moreover, by using an ECN broker, traders usually trade in a more efficient and transparent environment.

Usually, the way an ECN broker makes money is with the trading volume of its clients, charging a commission on each position.

Why you should trade with an ECN broker?

An ECN broker doesn’t trade against its clients

An ECN broker is only the intermediary between your buying and selling orders, matching you up with different market participants.

Hence, an ECN broker doesn’t bet against you, which means that it never takes the other side of your trading positions.

This trading model ensures you that there is no conflict of interest, as an ECN broker gets a commission whether you make or lose money.

Using an ECN broker limits price manipulation, increases transparency and provides better trading conditions

As an ECN broker doesn’t “make the market” by creating its own quotes, it is harder for it to manipulate prices, simply because it uses prices from different liquidity providers.

With an ECN broker, you have access to real-live, current information, as well as more accurate prices history, hence why it is more difficult for this type of broker to manipulate prices.

Displaying prices from official sources transparently in the ECN broker’s trading platforms makes it easier for you to trade instantly, with tighter spreads than other types of brokers. Moreover, you usually get lower fees and commissions, as well as immediate confirmations.

Another benefit of accessing real quotes is that you avoid “re-quotes”, which can have a negative impact on your overall trading performance. This usually happens when your trading order is rejected because of the change in the price of the asset you want to invest in. Then, the broker offers you a “re-quote” of the given asset (which rarely works out in your favor).

Bottom-Line

As you can see, using an ECN broker allows you to trade more efficiently and profitably, thanks to better trading conditions and better trading execution. With increased transparency and no conflict of interest, ECN brokers like MultiBank are the most reliable and safe way to trade.

How to Trade Market Sentiment

The behavior of the masses works differently from the mechanism that determines individual actions. The discovery is quite old and well described in a book by a French anthropologist Gustave Le Bon in 1895 “The Crowd: A Study of the Popular Mind.” The author states some of the characteristics of the psychology of the crowds: “impulsiveness, irritability, incapacity to reason, the absence of judgment of the critical spirit, the exaggeration of sentiments, and others…”

Trying to take advantage form market sentiment is a common mistake by individual traders

Every trader knows the importance of emotions. You can see it in market volatility; you can see that some stock is overvalued in comparison to the company’s fundamentals, and others are undervalued.

Just like people on a rock concert, football game, or political demonstration transcend from individuals to a crowd, traders around the world create an entity that has its emotions and moods. The state of mind of the crowd of traders is called market sentiment.

The market sentiment is one of the three possible pillars for any trading strategy:

  1. Technical Analysis
  2. Fundamental Analysis / Trading the News
  3. Reading Market Sentiment

For Forex and especially cryptocurrency traders fundamental analysis is much more difficult to apply than on the stock market. That is why these markets traders focus on technical analysis.

Bulls, bears and “dumb money”

Understanding the sentiment will let you know whether the crowd is optimistic (bull market), cautious or pessimistic (bear market) about a currency, stock or crypto. Identifying the current trend can help you predict the future overall market sentiment and will open sentiment-based trading opportunities.

Market sentiment works for all kind of markets, but it is very difficult to read. There are big players, such as institutional banks that can play against the prevailing sentiment, and seek for so-called “dumb money.” Wait until the crowd gets all in on a particular position – be it long or short – and use the trading power to incite a reversal.

Follow or go against the market sentiment

There are two possible strategies for using the market sentiment. You can go with the current and try to join the crowd or trade against the sentiment. The first strategy would include tactics involving the Fibonacci retracement tool, that can help traders profit from local price corrections.

The second strategy is all about hunting for reversals identifying support and resistance levels and taking into consideration the overall market sentiment to decide whether a breakout may happen.

Safe-havens play an important role when the market sentiment goes to extremes, or there’s an overwhelming uncertainty. Assets like gold, USD, CHF or JPY are considered an excellent shelter in case of too much risk. When more volatile assets are entering a bear market, traders (including the most prominent players) tend to seek these safe-havens, which automatically creates a bull market on ultrasafe assets.

The two most dominant emotions

Fear and greed are the most dominant emotions among traders. They are either afraid of losing money, or they want to earn more. Greed is overwhelming at market peaks when the bubble is created.

A classic example of greed taking over in the peak of 2017 Bitcoin bubble

More and more people open the same long position on a hot asset be it a tech company, a currency of a fast-growing economy or a popular cryptocurrency. Just take a look at the most significant burst in crypto.

On the other hand, fear takes over when the market hits bottom. Traders are panicking underestimating the real value of an asset. A savvy investor can see an opportunity for opening a long position in these situations. However, trading against the trend always involves high risk.

How to identify fear or greed? When you see a trend accelerating breaking new resistance levels without any fundamental explanation – no critical information that would justify it – you may expect the greed is in action. The same mechanism works the other way around with fear. If during a downtrends support levels are broken without an apparent reason, the fear may have taken over.

How to spot “dumb money”

“Dumb money” is where traders are taking the most popular and the most obvious moves. Everyone takes the hottest position, more and more people join and put themselves in a very vulnerable position.

Let’s take a look at Forex, a market where individual traders compete with the largest banks to make successful trades. Forex is as susceptible to market sentiment. Both the biggest institutional traders and the smartest individual traders see where the “dumb money” goes. Then when there’s the right time, the most prominent players open an opposite position and take the profit.

You can find indicators that show the number of traders having a short or a long position on an instrument. It turns out that the market almost always suddenly goes the other way rapidly cleaning the trading accounts of those who “hang out with the popular kids,” that follows the crowd.

Hindsight bias

The market sentiment is very easy to read if you take a look back. Everything seems to be visible. Even if you are new to trading, you can easily spot greed taking over just when the bubble is about to burst. However, at the time of the bubble, hardly anyone notices it, even the wisest and most experienced traders.

It’s difficult to profit directly from fear or greed taking over. Even if you can read the past and present sentiment correctly, you need to know what the collective traders’ mood will be like tomorrow. Without any insider knowledge or ability to influence the prices with your trading volume it’s impossible to do it repetitively.

What is the best market sentiment strategy?

Keep away from it. If you don’t use the most popular technical analysis tools and don’t trade reversals, you can avoid the riskiest moves. If you don’t want to play the “dumb money” but avoid it, you can focus on developing an effective trading strategy. You don’t have to know where the “dumb money” will go. All you need to know is where the “dumb money” is usually and at present.

There’s no good way to chase sentiment. It doesn’t matter if you want to trade along with it or against it. Guessing the future sentiment is a risky move, that’s why avoiding market sentiment at all may prove to work best for you. Doing so you could develop a sustainable trading strategy with the right mixture of technical and fundamental analysis.

Don’t chase the sentiment. Invest not in the most popular assets, such as EURUSD, but the ones that are more off the radar. It’s best to find your own niche. Don’t be a herd trader. Choose one of the hundreds of instruments available at SimpleFX WebTrader, and use the best technical analysis UX and tools to learn how to trade effectively and don’t get disturbed.