The Best and Worst Forex Trading Strategies
Strategies in Forex market operations are a fundamental part of being able to achieve success, since without one, you will find yourself adrift and simply gambling with your money.
Having a strategy provides security and discipline. Finding the perfect strategy is not easy, it requires tests and time to be invested. Of course, just having a strategy does not mean that you are assured of success; on the contrary, using a not-so-good strategy can make you lose a lot of money. Next, we will explore various strategists who, after being tested and analysed, can be classified as bad or good strategies.
Please note that this is only a very brief overview, to see in-depth analysis and education, you will need to find our writings where we discuss specific trading techniques.
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Normally when discussing the different strategies available in the Forex market, they focus on a specific trading method that unfortunately is nothing more than a facet of a complete trading plan and does not represent the entire negotiation process itself.
This leads us to wonder: How do I know how good a Forex strategy is? Well, the answer lies in the fact that if the strategy is advantageous and consistent then it is good.
However, you must have in mind other aspects of the strategies so that you’ll make sure that you are following the right path.
– Position’s size
– Risk Management
– Ways to exit a trade
A good strategy will depend massively on the type of trader that executes it, since the trader has the responsibility to understand his personality as a trader obtaining from this self-study the right amount of knowledge to find the best Forex strategy that can adapt to its needs.
Therefore, we will focus on simple, basic and generic strategies that adapt to any type of trader. Here at The Doji Trader, we believe that psychology and personality play a huge role in the success of any trader, if you would like to find out more information on this, please click here.
By using this strategy, you gain an advantage in the 60-minute time frame when you enter the market. The currency pairs that are usually traded using this technique are EUR / USD, GBP / USD, USD / JPY and the AUD / USD.
To make good use of this technique, you must make use of an impulse indicator of 100 pips, as well as indicator arrows; tools you can find in MetaTrader 4.
Buying with this Strategy
The pips indicator will give you the signal when it is the right time to use it, it will be when the Momentum 100 pips indicator activates a buy signal and the blue line is ready to cross the red line from below. Once that is ready, the stop loss should be placed just below the red line of the indicator. Once these steps have been followed, the trade can be closed after 30 pips.
Now, if you want to sell, then you will have to enter a short position just at the moment when the 100 pips Momentum indicator activates a sale signal when its blue line crosses the red line from above and the Indicator arrows proceed to give a red arrow sign.
Finally, you must place the stop loss on the red indicator line and once this is finished, you must proceed to close the operation at the moment when the indicator arrows give a green arrow signal.
The purpose of this strategy is to capitalize on some unique opportunities to be obtained through the additional volatility obtained when London opens. Despite being a very specific technique, it is also very good. It can be used at any time, especially when the price drops sharply in one direction, it also allows you to return from a very strong support / resistance area.
Although most currency traders prefer to do their intraday trades, since market volatility generally offers more positive opportunities in narrower terms, usually the weekly currency trading strategies can provide more flexibility and stability.
For example, a weekly candlestick can provide you with a lot of market information. This contains five daily candles and changes that give visibility to trader on the real market trends. Then, all weekly strategies are generally based on lower position sizes thus avoiding excessive risks.
In order to use this strategy, the use of the exponential moving average indicator is used. Then, the last daily candle of the previous week must be closed at an objectively higher level than the exponential moving average value. Once this happens, you should look for the moment at which the maximum level of the previous week is broken, then proceed to place a purchase order in the closed H4 candlestick, considering that it must be at the level price level broken.
These types of strategies are useful as most of the breakdowns do not usually become long-term trends. Therefore, a trader who uses this type of strategy has the objective of obtaining an advantage of the tendency of prices to recover both in the maximums and in the minimums that were previously established.
These are considered the best Forex trading strategies, because they generate a lot of confidence among traders because of their high success rate.
In all types of markets, we will many techniques that are not as feasible or advantageous as others. It is important to keep in mind that if we find offers from people online, or many trading ‘miracles’ that sound too good to be true, there is a high probability that it is actually too good to be true…
Below you can find some strategies that we do not recommend when trading.
This strategy is very popular among beginner traders. It is a scam and only used by inexperienced traders and charlatans, it is unfortunate that so many will blow their whole trading accounts by following this. The plot of this technique is based on chasing your losses by subsequently adding larger operations to your already losing position in an excessive way.
It is well known that the sensation when using scalping is very good, you are the boss and trade expert. 2 pips here, 3 pips over there and you feel so excited that adrenaline can be savoured. But as on many trading accounts, you will find yourself at a disadvantage due to the spread. To be more specific, let’s see it this way: when a winner of 4 pips is hit, the market is in the duty to immediately move 5 pips and thus cover the cost of its margin / commission. This means that the spread is consuming 20% of its profits and is also amplifying its loss just before the price has moved.
For this same reason, it would need to beat the market by a very wide margin in order to counteract the spread that corresponds to each operation. Although it doesn’t seem like a significant loss, it will cause this minimal statistical disadvantage to deactivate your account.
However, it must be noted that we believe scalping to be one of the most effective and useful trading strategies, and it is so popular among both professional and retail traders. It is not an easy task, but if you feel up to the challenge, you can begin your path to being a great scalper right here. If you wish to scalp for profits regularly, but feel that the high spread of your account just renders your time unworthy, then why not look on our broker reviews to find out which broker is the most cost-effective?
Knowing that not all currency pairs behave in the same way is to be a mature and responsible trader, however, not everyone manages to be that way. Each currency has its own peculiarities, so each one will move differently, and the inhabitants of each nation will sell and buy their coins depending on their territorially political and economic situation. Therefore, decisions are made every day that will affect the movement of a particular currency in one way or another. So, this leads us to the conclusion that these types of practices (or strategies) should be used less times than recommended, there are many operators in the market who are dedicated to apply this strategy over and over again even if they don’t get results, either from boredom or despair and desire for quick success. It is critical and basic thinking, knowing that the idea of exchanging several pairs at once is a mistake and that it is best to concentrate on one and take care to study it properly.
Once you find a currency pair that really works for you and to which you can extract good profits, you can consider expanding your sales and purchases. Trading is often about finding where you have an edge on the market and zoning in on that specific area.
Summary
It is always good advice to take to know that the fact that a strategy works for another person does not mean that it is equally successful for you. However, there are strategies that are usually much more general and that usually work for a good percentage of the population, which means that trying them is not a bad idea. On the other hand, if we are in front of a strategy that seems to be a fraud and that has several negative aspects, it would be best to stay away from such strategies, to avoid unpleasant moments and significant losses.
But the most important thing is that any strategy that you have not used before, you should try it for a while, without risking much of your capital, in order to draw your own conclusions and even customize it.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.
How to Eliminate Risk in Trading
How to Eliminate Risk in Trading
Eliminating risk in trading is a large challenge for traders of all skill as well as a major reason for the majority of failures when trading. Risk could even be blamed for the reason of the most recent global financial crisis, as many bankers were trading with such large leverage. To eliminate risk could prevent future disasters both economically, and for you personally with your account.
Many have the opinion that it is not possible to eliminate risk in trading, and this is true to some extent. What you do is to manage risk. At the basic level, trading can be summed up in two words — risk and reward. If there is no risk, there will never be a reward. So, take your mind away from the idea of trading without risk.
While it’s not possible to eliminate risk from trading, your primary job as a trader is that of a risk manager. Some traders don’t take risk management seriously, but to succeed in the game of trading, you must learn how to practice low-risk trading at all times. Risk management helps you to cut short your losses to protect your trading account from catastrophe.
There are many ways to manage and minimize risk in trading, and below we show how to eliminate risk in trading:
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The importance of using an honest broker cannot be overemphasized to eliminate risk in trading. No matter how good your trading strategy is and how robust your risk management techniques are, if your broker is dishonest, you will never make one cent from your trading, and the money in your trading account is as good as lost.
As a matter of fact, check the broker’s trust rating. Is the firm authorized and regulated by any of the tier-1 financial regulators, such as the CFTC, FCA, ASIC, and IIROC? How does it handle clients’ funds and are there measures to protect against negative account balance?
The worst thing that can happen to you as a trader is to have a dealing desk broker who takes the other side of your trades — there will definitely be a conflict of interest. Be sure that the broker offers ECN accounts and that your account is ECN. If you would like to find the right broker for you, why not check out our broker reviews, where we fairly weigh up the pros and cons of over 30 brokers.
Trading is a very tough and emotionally draining task, and there are no guaranteed returns for all the hard work. Returns are highly unpredictable — you will never make profits from month to month. It is better you know all these now and be realistic with your expectations.
The right way to go is to understand the nature of trading and set the right goals. In the words of Mark Douglas: anything can happen, every moment in the market is unique, and there is a random distribution between wins and losses
So, your goals should not be outcome-oriented. Instead, set execution-oriented goals. That is, to properly execute your trade anytime your trade setup appears in the market, without fear, hesitation, or pressure. To ensure low-risk trading, you must have a trading plan and follow it to the letter.
You must predefine the risk of every trade. What this means is that you have to know what you are willing to risk before placing a trade in the market. And make sure you don’t go beyond your risk tolerance. This will make it easier for you to accept a loss if it occurs.
There are different ways to define your risk exposure. One way is to know the number of pips your trade setup requires. But the ultimate thing is your account risk. How much of your account capital do you risk in a trade? It is advisable not to risk more than 1% of trading capital in each trade. You can figure out your lot size once your account risk and the number of pips to risk.
By adhering to this, it becomes easier to take a loss without losing your emotional capital, and your account will be safe from blowing up.
After defining your risk, the easiest way to make sure that you maintain that predefined risk when you place a trade is by using a hard stop loss, instead of a mental stop loss, in every trade. It saves you the emotional battle of thinking that price may reverse after you close the trade.
A hard stop loss is automatically executed once the price reaches the level where it is. It doesn’t require you to do anything else once it has been placed, unlike the mental stop loss which requires you to manually exit the trade.
Using a hard profit target is good too. Even though it doesn’t directly help you to manage risk, it helps you to maintain a reasonable risk/reward ratio and protects you from greed and hope — two dangerous emotions for traders. We believe that emotions and psychology play a vital role in trading, to learn more, click here.
It is very important that you do not use excessive leverage so that you don’t blow your trading account. Trading is a game of odds, and there’s no guarantee that the next trade or even the next three trades will be a winner.
So, why use excessive leverage that will burn your account fast if you have a streak of losses? The first rule in this game is to preserve your capital and the second rule is not to forget the first rule. If you have your trading capital, you will get the opportunity to win in the future
Controlling your leverage comes down to the size of your positions. How many lots do you trade at a time? How does it affect your account risk? Using bigger leverage and maintaining a 1% account risk means using a tighter stop loss, which would increase your chances of losing.
It is very important to guard against overtrading because you may get overconfident and make a costly mistake that can lead to a catastrophic loss.
When you have a series of wins, take a break from trading and go do something else to clear your head. This will help you avoid getting overconfident and taking trades that don’t meet your criteria. If you trade out of excitement or boredom, you are very likely to give back all your profit plus more to the market.
Controlling your emotions is one of the toughest tasks in trading, but you have to do it if you desire to get the most out of your trading — remember, you don’t trade for the fun of it but to make money.
While volatility is good and helps you profit from huge price movements, it can also decimate your trading account if things go wrong. If you are new to trading, it is best to avoid extremely volatile conditions such as during high impact news.
Prices can spike wildly during these conditions that using a hard stop loss may not be helpful in some cases because of huge slippages and the possibility of price gaps, which can render the hard stop loss useless.
It is best to take a short break when some of the high impact news are being released. The U.S. Nonfarm Payroll report and central bank interest rate reports are some of the high-impact events you should avoid.
We have created a very helpful article in trading one of the most volatile market times; the FOMC Meetings. If you would like to learn how to trade at the time of these meetings, please click here.
It is not enough to set a limit on the amount to risk on each trade if you trade different currency pairs at the same time. If you use the 1% rule for each trade but have three trades at the same time, your risk exposure is at that point is 3%.
While trading different currency pairs at the same time is not bad, make sure the pairs are not correlated. Some currency pairs (EUR/USD and GBP/USD, for example) can correlate by as much as 80%, so trading them at the same time will only multiply your risk.
Trading currency pairs that are not correlated may be a form of diversification and can help you to lower risk. Some traders even use negatively nerve-wracking pairs to hedge their position.
Trading is a tough job — emotions can run high when things are moving our way, let alone when things are not moving as we want. A series of losses can make you abandon your trading plan and start trading haphazardly, which will even lead to more losses.
So, to maintain low-risk trading, you must have a maximum number and dollar amount of daily (if you are a day trader or scalper), weekly, and monthly losses beyond which you suspend trading for that day, week, or month.
After a series of losses or a huge single loss, it is advisable to avoid trading and do something that will help you clear your mind and regain your emotional capital. When you are coming back to the market, start with demo-trading to build your confidence.
Many of the best traders will walk away from the screen once they have lost or achieved a certain amount of points in one trading day. This is a very disciplined practice and can keep your account at a very safe, stable growth-rate.
Following on from the final point above, trading is a serious business that requires personal discipline. You need to create a trading plan and stick to it. Define what gives you an edge in the market and make a checklist for the criteria a trade setup must meet before you place a trade. Do the same for your exit strategy.
Don’t ever think of changing your trading plan until you have reached a sample size of at least 20 trades. Then, review the plan to see if it’s doing fine or needs some adjustments.
Being a disciplined trader helps you avoid bad trading habits, such as over-trading, revenge trading, and emotional trading.
Final Words
It is not possible to completely eliminate risk from trading since there can be no reward without risk, but applying the tips discussed here will help you maintain low-risk trading. Without proper risk management, it’s impossible to succeed as a trader.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results
Trading the FOMC Meeting
Trading the FOMC Meetings
There are several fundamental
news and economic events that can have a huge impact on the forex market, and
the FOMC meeting is one of them. The anticipation and speculations in the days
leading up to the meeting and the fallout thereafter cause so much volatility
in the market, as traders and analysts react to decisions made in the meeting.
It is such an important event
that even pure technical traders look forward to it and adjust their trading
plan accordingly — temporarily stay off the market during the press conference where
the key decisions in the meeting are announced or formulate strategies to
benefit from the increased volatility during the period.
Before looking at how to trade
the FOMC meeting, let’s find out what the meeting is all about.
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FOMC is the acronym for the Federal Open Market Committee, which is the branch of the U.S. Federal Reserve Bank that supervises the direction of the monetary policy of the United States. Members of the FOMC include seven governors of the board and five presidents of the Federal Reserve Bank.
Eight meetings are scheduled for the FOMC each year. The purpose of each meeting is of twofold:
1) Previewing existing economic data
2) Deciding the necessary intervention based on the economic data.
What Happens During the Meetings?
During the meeting, the committee deliberates on several issues about the U.S. economy and the global economy. The committee considers a lot of economic data, including the growth of household spending, job gains, unemployment rate, wage increase, inflation, and business fixed investments.
After carefully considering all these data, the committee decides on the Federal Fund Rate and money supply. Fund Rate is the short-term overnight interest rate that banks charge each other for loans and deposits with the Fed, and this rate dictates the medium-term and long-term interest rates. The Fed’s decision on money supply affects the sale of U.S. Treasury Bills and bonds.
Meetings are closed to outsiders, and only the seven governors of the board and the five Federal Reserve Bank Presidents are in attendance. Shortly after the meeting is concluded, a press conference is held, and the general outcome and the key decisions are announced. However, the minutes of the meeting are not published until three weeks after the conclusion of the meeting.
How do the Markets React?
Market reaction to the decisions reached during the FOMC meeting can vary dramatically, but it is generally based on the prospects of changes in the interest rates. The FOMC’s position on whether or not to intervene in the U.S. economy has far-reaching effects even outside of the US. Being the largest economy in the world, whatever affects the U.S. market also affects the rest of the world. Moreover, other central banks take a cue from their U.S. counterparts.
The Fed usually targets an annual inflation rate of 2%. So, depending on whether it wants to slow inflation or drive it up to balance out the money supply and ensure price stability, the FOMC may introduce policies to raise interest rates or lower them. In essence, the outcome of the FOMC meeting gives traders an idea of the official view of the U.S. economy.
Probably the most important indicator of the U.S. economic health, alongside the Nonfarm Payroll report, the FOMC meeting is keenly followed by traders all over the world. Many traders, especially the fundamental traders, make use of the FOMC decision to design a framework for their trading strategies.
Technical traders also pay great attention to the decisions of the committee because of the volatility it generates in the markets. Some technical traders tend to stay away from the market during the post-meeting press conference and when the minutes are published. However, others love the increased volatility and formulate strategies to trade the event.
Decisions from the FOMC can have a direct impact on several aspects of the U.S. economy and the markets that rely on the economy. So, the effects can be felt in different markets or asset classes, including:
1) Forex markets
2) Bond markets
3) Equity markets
4) Commodity markets
Forex Markets
Decisions of the FOMC have a serious impact on the forex market because most of the major currency pairs have the USD as either the base or the quote currency. When the FOMC increases interest rates, the value of the USD increases because more foreign investors will be attracted to the U.S. economy. Conversely, when the interest rates are lowered, the value of the USD is likely to decrease.
Bond Markets
Bond markets are highly dependent on the prevailing federal rates. Bond prices and yields have some inverse relationship with each other and the interest rates. When the interest rates increase, bond prices fall, and yields increase. On the other hand, when interest rates fall, bond prices rise, and yields decrease.
Equity Markets
Interest rates affect the way businesses and consumers can borrow money. When interest rates are increased, people tend to have less disposable incomes to buy shares, leading to declines in prices. This is due to less demand for certain shares. When the interest rates are low, people can easily borrow money to invest in stocks, so stock prices often rise.
Commodity Markets
Commodities (such as gold, silver, and other precious metals), tend to have an inverse relationship with the USD. So, when the interest rates are low and USD is weak, those commodities tend to rise in value. Conversely, when interest rates are high and the USD is rising in value, the value of those commodities often decreases. Also, investors see those precious metals as safe-haven assets to buy when the economic outlook is looking gloomy.
Increases in volatility occurs during the FOMC meeting press conference, and when the minutes are released, may present some trading opportunities. Scalpers and day traders may formulate some strategies to benefit from the increased volatility that occurs around the time of this economic event.
However, trading during a period of increased volatility can also be very risky. If the price goes against your position, you can lose a lot of money. Even if you’re using a stop loss or a trailing stop, the price movement can be very dramatic that the slippage may be more than you can handle.
Speculation Prior to Meetings
In the weeks leading up to an FOMC meeting, speculation as to what the Fed’s decision will be is common, so more often than not, the market may have already priced in the interest rate adjustments expected from the meeting, by the time the outcome of the meeting is announced.
Unexpected Decisions - Implications
Implications of an unexpected FOMC decision is that the market reaction can be very swift and severe as volatility may increase significantly. It is often difficult to take advantage of the confusion, but if you have a good understanding of the dominating market sentiment and you are quick enough, you may be able to capture the quick price spikes that come with such surprises from the Fed.
While long-term traders may not be concerned with the price spikes that occur during this kind of economic events, they should also be aware of the fact that the FOMC decision can affect the long-term direction of the market. However, the actual effect of any adjustments in the interest rates may take time to manifest in both the economy and the financial markets. This is sometimes more than 12 months.
So, it is very necessary to take the time lag into consideration when analyzing any potential trading opportunity or making any investment decisions. Another thing to consider is the possibility of formulating a specific trading strategy for each FOMC meeting which can benefit from the price movements, irrespective of the outcome from the meeting.
You can combine the outcome of the FOMC meeting and a simple technical strategy to scalp the market in the minutes following the announcement of the FOMC decisions.
Use the 5-minute and 1-minute timeframes for this strategy and only for currency pairs with USD as the base currency. Here is what you do:
1) Put a 21-period EMA and a 100-period EMA on your chart and watch the direction of the indicators before the news release.
2) If interest rates are raised and the 21-EMA is above the 100-EMA, enter in favor of the USD and put a stop loss below the nearest support level. Then trail your profit very fast.
3) If interest rates are lowered and the 21-EMA is below the 100-EMA, enter against the USD and put a stop loss above the nearest resistance level. Then trail your profit very fast.
For currency pairs with USD as the quote currency, the opposite may work.
Final Words
FOMC meetings are among some of the most important events on any traders’ economic calendar. It is scheduled eight times in a year, and it’s where interest rate decisions are made. Its reports have some significant effects on the forex market, and the increased volatility that occurs during the event may present some trading opportunities.
Want to find the best broker to trade with? Take a look at our top 3 brokers for traders in the United Kingdom here.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.
How to Trade Fibonacci Sequence
How to Trade The Fibonacci Sequence
The Fibonacci sequence, which is the basis for the Fibonacci levels in Forex, was discovered by Leonardo de Pisa, an Italian mathematician. Nicknamed Fibonacci, Leonardo de Pisa was born in the year 1170 in the Italian city of Pisa. He traveled a lot with his father and lived with him in Bejaia, a Mediterranean port in northern Algeria, where he studied mathematics.
During his extensive travels, the young Leonardo learned the benefits of the Hindu-Arabic numeral system, and on returning to Italy in 1202, he documented his discovery in his famous work — ‘Liber Abaci’, which popularized the Hindu-Arabic numeral system in Europe.
In the book, he described a sequence of numerical numbers now known as the Fibonacci sequence of numbers.
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The Fibonacci sequence of numbers is a numerical series documented in Leonardo’s ‘Liber Abaci’. In the sequence, after 0 and 1, every number is the sum of the two numbers before it. Thus, the Fibonacci sequence looks something like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on.
As you can see, the sequence can extend to infinity. Looking at the numbers, you will observe that every next number is approximately 1.618 times larger than the preceding number — or the other way round, each number is 0.618 of the number following it. For example, if you divide 55 by 34, you will get 1.618, and if you divide 34 by 55, you will get 0.618.
With the exception of the first few numbers, dividing a number in a number in the sequence with the preceding number gives a fairly consistent ratio. From the example above, the ratio is 1.618, and its inverse is 0.618. This value, 1.618, is known as Phi or the golden ratio — it occurs in several aspects of life.
Apart from the golden ratio and its inverse, other ratios can be derived from the Fibonacci number sequence. For instance, 0.382 can be gotten from dividing a number by the number two places to the right — say, 89 divided by 233. Another important ratio is 0.236, which is derived from dividing a number by the number three places from the right — say, 34 divided by 144.
While you may find other ratios from the Fibonacci number sequence, when it comes to forex trading, the most important Fibonacci ratios are these four: 0.236, 0.382, 0.618, and 1.618.
Apart from its significance in Forex technical analysis and the rest of the financial world, the golden ratio (1.618), or its inverse (0.618), has been shown to appear frequently in every aspect of life, from biology and the natural world to fine arts and architecture, to all parts of the universe (even patterns of solar systems).
For instance, the ratio has been observed in the Parthenon, tree branches, sunflowers, rose petals, mollusk shells, Leonardo da Vinci’s Mona Lisa, human faces, spiral galaxies of outer space, and the ancient Greek vases.
One of the most famous examples of the golden ratio can be seen in the nautilus shell. The nautilus shell expands in a logarithmic spiral, which follows the Fibonacci ratio. Connecting the arcs with squares, or Fibonacci tiling, it becomes obvious that the sizes of the squares follow the golden ratio.
Obviously, one of the areas where the Fibonacci ratios are often applied is in Forex technical analysis, where they are used to mark price retracement and extension or expansion levels — the Fibonacci levels. Converting the ratios to percent gives the Fibonacci levels.
So, the 0.236 ratio becomes the 23.6 % Fibonacci level; the 0.382 ratio becomes the 38.2% Fibonacci level; the 0.618 ratio becomes the 61.8% Fibonacci level; and the 1.618 ratio becomes the 161.8% Fibonacci level.
Apart from the four levels — 23.6 %, 38.2%, 61.8%, and 161.8% — other levels are derived from different combinations of the four basic ratios. For example, 100% level is gotten from adding 38.2% and 61.8%; 123.6% is gotten from 100 and 23.6; 138.2% is gotten from 100 and 38.2; while 261.8% is gotten by adding 100 and 161.8.
Although 0.5 is not usually seen as a Fibonacci ratio — not technically true since 1 and 2 are in the Fibonacci sequence and 1 divided by 2 is 0.5 — the 50% level is added in the Fibonacci tools because it is a significant level in the Dow Theory.
Almost all trading and charting platforms, if not all, have some or all the Fibonacci measurement tools, which traders use to mark important price levels or timelines. There are several Fibonacci tools you can encounter on these platforms, such as:
· Fibonacci retracement/extension
· Fibonacci expansion
· Fibonacci fans
· Fibonacci arcs
· Fibonacci channels
· Fibonacci time zones
But Fibonacci retracement/extension and Fibonacci expansion are the most widely used Fibonacci tools.
Depending on the levels added, this tool can have two parts: the retracement part and the extension part. The retracement part consists of horizontal lines that indicate the 23.6%, 38.2%, 50%, and 61.8% retracement levels from the preceding price swing high or swing low, while the extension part consists of the -23.6%, -38.2%, -61.8%, -100%, -161.8% extension levels from the preceding swing high or low.
Obviously, the retracement levels show the percentage of the previous swing the price can pull back before it starts moving again in the trend direction. The extension levels, on the other hand, show the percentage by which the price is extending beyond the preceding swing’s high or low.
You apply this too in a trending market when a pullback starts. To pick this tool from the MT4 platform, click on Insert and click on Fibonacci from the dropbox. Then, click on Retracement. On the chart, place the first point on the price swing high/low, from where you want to start your measurement, and drag it to the most recent swing low/high before the current pullback.
So, in an uptrend, you start from a swing low and drag to the most recent swing high, while in a downtrend — as you can see in the EUR/USD chart below — you start from a swing high and drag to the most recent low. In the chart below, the pullback has reached the 50% retracement level.
The expansion tool functions just like the extension levels, in the retracement tool in that it projects where the price can get to after a pullback. However, unlike the extensions levels that project how far the price can extend from the preceding swing low/high, the expansion tool measures the price expansion from the pullback’s high/low.
Just like the retracement tool, it is used in a trending market. You apply the expansion tool when the pullback has completed and the price has resumed in the trend direction. The tool has three points that must be fixed at the starting swing high/low, the recent swing low/high, and the current pullback’s high/low, as the case may be. To get the tool in an MT4 platform, go to Insert > Fibonacci > Expansion.
Take a look at the EUR/USD chart below. The price is in a downtrend, so the three points of the expansion tool are attached at the starting swing high, a swing low, and the highest point of the pullback. We didn’t use the most recent swings and the current pullback, because we aren’t sure the pullback is over and also to show the reactions at the expansion levels. Note the reactions at 50%, 78%, and almost 100% expansion levels.
There are other Fibonacci tools, such as the Fibonacci fan, arcs, spirals, channels, and time zones. All the tools are based on the Fibonacci ratios. The Fibonacci fan, spirals, and arcs are used to project spatial price points and levels, while the Fibonacci channels project price direction. With the Fibonacci time zones, you may be able to time the market cycles.
The Retracement Levels
You can use the retracement levels to anticipate where a pullback may end since you can see the levels before the price gets there. Depending on the direction of the trend, the 38.2%, 50%, and 61.8% retracement levels can act like a support or resistance level where the price gets to and reverses.
In an uptrend, the retracement levels can serve as support levels where a pullback may reverse, while in a downtrend, they can serve as resistance levels. Thus, they can be used to estimate where to place stop loss orders. Some traders also use them in breakout trading.
From the picture, you can see the price is at the 50% level and may reverse from there to continue the downtrend.
The Extension and Expansion Levels
These levels also serve as potential support or resistance levels, depending on the direction of the trend. In an uptrend, they serve as potential resistance levels, and in a downtrend, they may become support levels. So, you can use the extension or expansion levels for your profit targets when trading.
Final Words
The Fibonacci sequence is the basis for the Fibonacci levels in Forex trading. It was described by an Italian mathematician Leonardo de Pisa, and its derivative, the golden ratio, seems to occur in several aspects of life apart from Forex. In Forex, the levels derived from the Fibonacci ratios help to identify potential support and resistance levels before the price gets there.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.
What Are Indices and Where Can I Trade Them?
What are Indices and Where can I trade them?
There are many financial derivatives out there, and indices are one of those derivatives that traders and analysts follow on a daily basis. They have become a very important part of every financial market because of what they represent in the market.
While you cannot directly invest in market indices, there are ways to gain exposure to them or speculate on their price movements. But before we get into that, let’s find out what an index is and how it is derived.
Content List
1) What is an Index?
An index is a measurement of the price performance of a group of securities in an asset class or a market. It consists of a portfolio of securities that represent a particular market or a section of it, and its value is calculated as a weighted average of the prices or market capitalization (in the case of stocks) of its constituent securities.
The market, here, can be the stock market, bond market, forex market, or commodity market. So, we have stock market indices, like the S&P 500 Index and the FTSE 100; the bond market indices, such as the U.S. Aggregate Bond Index; the currency market indices, such as the USD Index and the Euro Index; and the commodity market indices, like the S&P Commodity Index and the Rogers International Commodities Index.
However, stock market indices are, by far, the most common indices in the financial market. They are the indices that financial analysts talk about most of the time, and most online brokers offer their CFDs for retail trading. So, for the rest of this article, we will focus on the stock market indices.
A stock index is a statistical measure of the performance of a group of stocks listed on a particular stock exchange. Depending on the constituent stocks, an equity index may represent a section of the stock market or the whole of it.
For instance, in the U.S. stock market, the Nasdaq Index, which is dominated by tech stocks, is often used as the benchmark for the technology sector of the market, while the S&P 500 Index, which consists of the 500 most capitalized stocks listed on the NYSE, is used gauge the U.S. stock market.
Apart from the S&P 500 Index and the Nasdaq Index, other popular equity indices of the U.S. market include the Dow Jones Industrial Average (DJIA), which represents 30 large stocks on the NYSE, and the Russell 2000 Index, which measures the performance of 2000 smallest cap stocks in the Russell 3000 Index — a basket of 3000 biggest U.S. stocks.
Almost every major stock exchange in the world has an index that tracks the performance of the market. For example, the FTSE 100 Index represents the 100 largest stocks trading on the London Stock Exchange. Others are DAX 30, which represents the 30 largest stocks on the Frankfurt Stock Exchange; Nikkei 225, which measures the performance of 225 large companies on the Tokyo Stock exchange; and CAC 40, which is an index of 40 most capitalized stocks listed on the Euronext Paris.
Many of the major stock indices are re-balanced on a quarterly basis, so any constituent stock that no longer meets the minimum criteria required to be on the index is removed and replaced by another stock that does.
The value of any stock index is derived either from the prices or the market capitalization of the individual stocks that make up the index. But whatever the underlying parameter used in calculating an index, it is weighted according to the values of the individual stocks.
For the majority of stock market indices in the world, the value of the index is capitalization-weighted. What this means is that a company whose market capitalization (the product of the share price and the total number of shares outstanding) is higher contributes more to the index’s price. An example of a capitalization-weighted index is the S&P 500 Index
On the other hand, some major indices are price-weighted. In other words, a company with a higher share price has a greater impact on the price of the index. For example, a company with a share price of $100 will have ten times the impact of a company with a share price of $10. Examples of price-weighted indices include the DJIA and Nikkei 225.
Since an equity index is based upon individual stocks trading on an exchange, its value fluctuates with changes in the prices of the underlying stocks. So, if those underlying stocks increase in price, the value of the market index will go up, and if those stocks decrease in price, the value of the market index will go down.
Unlike other financial instruments, stock indices cannot be bought or sold directly. They are just indicators to track overall market sentiment, and they also serve as a benchmark to measure the performance of individual stock portfolios.
Although you can’t buy or sell an index directly, there are trade-able financial products through which you can speculate on the price movement of an index, and they include the following:
An index fund is a mutual fund whose portfolio mirrors a stock market index. The fund manager selects and invests in stocks in accordance with the composition and weighting of the stock index the fund is meant to tract.
Being a managed fund, you will have to pay a management fee if you want to invest in an index fund. But because the fund manager doesn’t spend money on researching the stocks to pick, the management fees are lower than that of traditional mutual funds.
An ETF is a fund that trades on the stock exchange and can be bought or sold through a stockbroker during the trading hours, just like a normal stock. It automatically tracks a basket of stocks that make up the fund, and it is not managed by a fund manager. When an ETF is tracking a stock market index, it is known as an index ETF.
An example of an index ETF is the SPDR S&P 500 (SPY), which tracks the S&P 500 Index. So, if you want to gain exposure to the S&P 500 Index, you can do that through the ETF. You will be charged a management fee though. But it’s usually lower than that of an index fund.
Another way to speculate on a stock index is by trading the futures contracts of that index. The futures market is a huge market for speculative traders, and since index futures are cash-settled, it is very good for speculation. Additionally, futures contracts can be traded with leverage.
One factor that can make futures trading less appealing, especially when compared with CFDs and spread betting, is the need to roll over expiring contracts and the inherent contango and backwardation effects. Moreover, the margin requirement is generally higher than those of CFDs.
The options market offers another way to trade stock market indices. Just like index futures contracts, index options contracts are always cash-settled, so no actual stocks are bought or sold. Both traders and investors use index call and put options to speculate on the price movement of a stock index.
A contract for difference (CFD) is a derivative product that represents a contract between a broker and a trader to exchange the difference in the value of a security, from the time a contract is opened to the time it is closed. So, the trader doesn’t at any moment own the underlying instrument but can still benefit from favorable movement in the price of the instrument. CFD trading is purely for speculation, and with its little margin requirement, it is the easiest way to trade a stock index.
This is similar to CFDs, except that the profits made from spread betting are not taxable. Unfortunately, spread betting is only available to the U.K. and Irish residents.
While you can trade individual stocks directly on the stock exchange or through CFDs and other derivatives, trading a financial product that tracks the performance of a stock index may be a better option. Here are why it may be preferable to trade a stock index over an individual stock:
· A stock index offers you exposure to the entire market or at least, an entire industry.
· There’s no need to start researching individual stocks; you are only guided by the overall market sentiment to buy or sell an index product.
· Since a stock index consists of many stocks, no one stock can cause an extreme price movement in the index, so the price movement tends to be a lot smoother.
· Most major stock indices are derived from the biggest stocks on an exchange, so there is enough activity in the underlying stocks to provide adequate volatility in an index, offering speculators numerous trading opportunities.
· For an investor, a stock index (through an index ETF) is an easy way to gain access to a diversified stock portfolio because it is made up of several stocks.
Summary
Indices are indicators that track the performance of a financial market or a sector of the market by measuring a basket of securities in that market. Stock indices are more popular than others. Whilst you cannot buy or sell indices, there are several ways to trade them.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.
An Overview of Trading Psychology
An Overview of Trading Psychology
In the world of trading and within each known market, such as Forex or the stock market, you will find that there are several things that each trader must consider and must study in order to become an expert.
This type of knowledge needed ranges from the definition of the market to work itself, operation of the different platforms used competition, economy, and adequate amount of capital to invest and, above all, what type of market will you choose to start.
But there it is a very important aspect that most traders often ignore because they take it for granted; the trading psychology.
It is necessary to understand that the success of any type of business or investment will always depend on us and of course on the way in which we handle a situation or execute each of our thoughts, therefore, psychology is fundamental in the commercial world, in all markets.
The trading psychology is undoubtedly the most important discipline that must be handled and studied by any aspirant to trader in any market, such as Forex trading. In the world of Forex psychology is necessary; this type of investment is attractive for many people around the world due to its ease and comfortable platforms to use. However, the use of psychology becomes a main step to manage if you want to be a very successful trader.
Now, a good advice to start the issue is that: self-confidence and emotional control are the fundamental pillars that are responsible for operating the psychology of trading and of course, manage your emotions, leading to success.
Table of Contents
To begin shaping the aspects that make up the trading psychology, let’s talk about certain elements that we will call enemies of the mind. The enemies of the mind are nothing more than different emotions that give a negative result or effect on the trader’s mind. These are enemies that you must know well for you to have the tools to face and defeat them.
Fear
The first enemy is fear. We define this as an unpleasant sensation accompanied and loaded with anxiety or apprehension that is weighed in the person due to the presence or anticipation of the danger. When there is a trader operating, this feeling comes often; it is one of the most common enemies of the mind that the trader will face. This always happens when you are an inexperienced trader and you are starting. Despite being a normal feeling, many times it can get out of control and nobly affect any strategy the trader has.
Fear can also appear in experienced traders, especially when they get a couple of losing operations, which lead them to feel overwhelmed by fear. The important question is how to deal with it? This can be accurately answered; basically, the best way to deal with fear is to move away from situations where you risk more money than you have available, since with caution, fear disappears.
Euphoria
Although normally this feeling is characteristic for being a good thing, since it gives the trader a lot of confidence and security in themselves and their strategy, it can also be very dangerous, simply because it can get out of hand and in that case we would find a trader who is overconfident and can make decisions that will bring them regrets in the immediate future. This enemy usually makes presence after the trader gains a great amount of profits or nails their entry. Statistically, the greatest commercial losses occur after a couple of quite lucrative victories, so a great trader must not only hit these abnormal profits from time-to-time, they must control their mentality so that they can safely exit with these profits and not damage their account in the long-run.
Now, to be able to solve this, a good measure is to concentrate on what you are doing, always remembering that everything in the market will always be about probabilities and of course the sensible decisions made by you. Like the previous advice, the best thing you can do is not to risk more money than you have to spend. There have been circumstances where after traders largest winning streaks, they have been given larger budgets, and blown everything. New biological discoveries into the “risky highs” of trading from John Coates, a trader turned neuroscientist, argue that due to the euphoria and the chase of new highs and abnormal profits, traders are at higher risk of losing their profits due to the increase in testosterone, and so giving larger budgets is counter-intuitive in reality. Instead, firms should give their traders a cooldown period of three weeks so that their body can normalise until their “biology resets”.
Source, Reuters. Scientist, John Coates.
Panic
Of all the feelings, panic is one of the most curious enemies, is defined as a sudden feeling that comes loaded with fear in excessive amounts, is usually sudden and overwhelming, in addition to uncontrollable thoughts or action. Due to its characterization it can feel a bit like fear, however it is much worse, since it is paralyzing and much more irrational.
The trader must always be alert and active, not only to monitor their business, but to prevent violation of him/herself from going against their rules, or trading without caution. This is considered an enemy that approaches silently in different situations, in novice traders and professionals alike, amid situations where there is a lot of pressure, or when they witness stories of how other people are having or had significant losses in the market. Another event in which it can occur is in periods of market volatility.
Of all the hindering feelings, this is the worst, because a panicked trader will make many mistakes and it will find themselves unable to perform a logical analysis of the situation in which he finds himself. There really is no specific way or infallible advice to avoid the appearance of this feeling, usually the possibility that this type of situation occurs decreases as the trader gets experience. But something important is not to believe everything that is heard or read about other people’s experiences and remember that everything is about probabilities. Many traders now believe that the main cause of profit and loss is your mentality and psychology as a trader, not just the analysis.
Here are some quick tips from us to stay on top of the negatives caused from psychology:
· Try hard to find the right trading strategy for you and stick to it. You will be able to accomplish this by studying other trading strategies before and after you choose it
· Manage your risk, always remember that.
· Know yourself, through the study of your emotions and being aware of your reaction to different situations.
· Stay organized. Taking care of this point can be a bit difficult, but it is essential. A good idea can be to have an operations diary where you can track your progress and thus study the correct and incorrect movements made by you, this being a measure preventive So you can have a kind of guide on what to do and what not to do in the near future.
· It is never too early or late to walk away. Many traders leave the screen once they earn or lose a certain amount of points a day, why not give this a try? Consistency has been linked to a more healthy mind.
Summary
The best way to deal with any situation that triggers emotional problems and unwanted feelings is having a logical method at hand to trade with a minimum margin of error. The best way to harvest it is by studying the market in which you have decided to operate more thoroughly.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.
Scalping for Beginners
Scalping for Beginners
One of the challenges new Forex traders face is deciding which of the various trading styles — scalping, day trading, swing trading, or position trading — to follow. While each of these styles can be profitable when followed properly, as a beginner trader, you need to be sure that scalping is the right trading style for you.
In this article, we will discuss the basic things a beginner should know about Forex scalping, including what scalping is, the personality for it, the charting time-frames, and the various scalping strategies for a beginner.
Table of Contents
Forex scalping is a style of trading style that tries to profit from minor price movements mostly on the lower time-framed charts. It is a fast-paced style of trading and the quickest way to earn some profits from a trade, no matter how small. With this style, a trader opens and closes his trade once it has earned a little profit or loss (5 to 10 pips) and move on in search of other trade setups, with the hope that the little profits will accumulate over time.
A trader who uses this style of trading is called a scalper. Depending on the time-frame a scalper uses, a trade may last from a few seconds to some minutes. Most times, scalpers don’t hold their positions beyond a few minutes — whether profitable or not — as they are always analyzing the market for any sign of weakness.
One thing which traders try to avoid in Forex scalping is taking a large loss from a trade. Some scalpers use profit targets and stop losses to ensure fast exit from the market. Others employ strict manual exit strategies. The manual exit strategies help traders execute entries and closes more swiftly, but it can add risk. If you are leaving open stop losses, and a trade goes quickly the wrong direction, you could take a much bigger loss than intended.
Scalping is a very tedious and mind-wrenching task — watching the market all the time, analyzing every bit of price data whilst entering and exiting trades swiftly. That is why many legendary scalpers are looking into algorithmic trading. They try to automate their Forex scalping system by creating trading robots. Over half of the trading on the stock market is now reported as automated, and only 10% are from retail clients!
Forex scalping is not for everyone — not all traders can bare the risks involved or have the temperament to effectively implement the strict rules needed in scalping. So, if you must scalp the market, be sure that you have the personality for it.
A scalper must have the ability to concentrate on the market for a long time, so should be someone who enjoys sitting in front of the screen analyzing the minute-by-minute market data. The slightest bit of distraction can cause a huge loss.
The ability to monitor markets for prolonged periods of time is not the only scalping requirement. To effectively scalp the Forex market, the trader must be able to react quickly to changing conditions in the market. He must be able to pull the trigger without hesitation when he needs to do so.
In other words, a delay is very dangerous when scalping. For instance, if you fail to quickly take your profit, the market may turn against you and wipe out the profit in a split second. You may even end up taking a loss. Similarly, hesitating to close a losing trade may lead to a larger loss which could eliminate the many small gains you have had. We have noted the necessary traits of a good trader. Please click here to read more on the psychology of trading.
When scalping, you are trying to capture the slightest price swings in the currency pair. So, it makes sense to analyze the market on the lowest possible time-frame.
Many Forex scalpers trade on the 1-minute chart or the tick chart, but some may trade on the traditional 5-minute chart. However, it may be best to employ the multi-time-frame approach — using multiple time-frames and the tick chart.
With this approach, you may analyze the market on the 15-minute and 5-minute charts and step down to the 1-minute chart or the tick chart for a better entry level. After entering a trade, you monitor it on the 1-minute or tick chart.
There are many ways to scalp the market. For most traders, scalping involves using technical analysis signals derived from price actions and indicators. However, some scalpers like to trade the high-velocity moves that happen when important economic data is released.
These are the common Forex scalping strategies for beginners:
This strategy is based on the fact that price moves in waves and tends to revert to its mean value after moving significantly away from it. Scalpers who use the mean-reversion strategy don’t care about the direction of the trend. One popular indicator for this strategy is the Bollinger band — either used alone or in combination with an oscillator like the stochastic.
You can trade this strategy using a moving average indicator or a simple trendline to indicate the trend. Then, use a momentum indicator, such as stochastic, RSI, OsMA, Williams R%, CCI, or MACD, to estimate when a pullback is over.
Another simple scalping strategy is to trade price bounces at a strong support or resistance level. What you need is to identify the resistance or support level and wait for the price to get there. If the price gets there and reverses, you may place a trade in the direction of the reversal.
Before using this strategy, make sure that the market volatility is low to reduce the risk of sharp breakouts. Also, you need to learn reversal candlestick patterns and look out for them when a bounce happens.
Some scalpers love the high volatility that comes with the release of economic data. Examples of this include the non-farm payroll (NFP) and the CPI, or a speech from a central bank governor. Certain political news can cause huge price movement too.
It is important to know that scalping a highly volatile market is a double-edged sword; can make huge profits if you’re right, but you can lose more than planned if you’re wrong.
Conclusion
Forex scalping is a fast-paced trading style in which a trader aims to take numerous small profits. It may be a fast way to make money in the Forex market for a beginner, but it can also be the fastest way to ruin a trading account. Be sure you are up to the task before choosing this style.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.