Online trading has opened up a wide array of possibilities for traders, however, it has also opened up a new and never-before-seen level of risk. The speed at which transactions take place today, the emotional rollercoaster triggered by the possibility of instant gratification and the opportunity to make money in seconds, often causes traders to treat trading as gambling, and not as a professional business requiring educated and savvy speculative habits. When trading is not given the seriousness it deserves, risk management takes a back seat. Add to this the high levels of leverage offered by most forex brokerages, and you end up with a magnified risky venture.
This is why you’ll come across article upon article written on the subject of risk management. One way in which traders can help minimize the level of risk they take on in their trading is by hedging. Having a tool like hedging in your tool chest can be outstandingly useful in a venture that is as risky as foreign exchange trading.
What does hedging mean? Forex hedging is basically a transaction that is put in place by a trader in order to protect a position from unwanted or unexpected moves in currency exchange rates.
In order to implement an FX hedging strategy effectively, you must first analyze your risk exposure. Identify the amount of risk you’re currently are exposed to (or will be exposed to upon opening a proposed position) and what the implications would be if you did not hedge against this risk. Provided that the market remained at the current level, what would your risk be?
Once you determine the level of risk you are exposed to, determine whether this is an acceptable risk. How much of your current exposure are you willing to risk? How much are you willing to pay to avoid that risk? That relationship between risk and amount to be paid to remove it will determine the amount you need to hedge.
Now choose the type of hedging strategy you want to implement. Choosing the most cost-effective hedging strategy is part of your risk management success, as over-hedging or overpaying to hedge, can prove to be bad trading practice. Two of the most common hedging strategies are multiple currency pair hedging and forex options hedging. Although only recommended when building a complicated hedging plan that takes into consideration several currency pairs, hedging using multiple works essentially by using two different currency pairs to hedge against a particular currency.
Let’s say for example that you want to hedge your USD exposure on a long EUR/USD, then you would short on USD/CHF. The downside of this is that if the euro becomes stronger against all other currencies, the fluctuation in the EUR/USD would not be countered in the USD/CHF.
The second hedging strategy I want to discuss is Forex options. A Forex option is basically an agreement to exchange at a predetermined price, at some point in the future. For example, if you place a long EUR/USD at 1.45, you would place a forex strike option at 1.44 in order to protect that position, so that in the event the EUR/USD falls to 1.44, within the timeframe specified in your option, you get paid on that option. If the currency pair doesn’t reach the specified price in the option, all you risked was the option purchase price. The farther your option at the moment you purchased is from the market price, the larger the payout if the price is hit within the time you specified.
About the Author:
Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.
Trend lines offer a wide range of analytical trading advantages – as shown in part 1 and part 2 of our special series.
But trend lines are valuable in other ways too.
Most notably:
…they help identify the start of analytical waves within the Elliott Wave (EW) theory…
…and they recognize where the waves are expected to finish.
By the end of this article, you will know how to correctly combine trend lines and waves.
So let’s get started.
The first step is to show you how to build a trend channel based on EW, then:
explain the value of such a channel
clarify how the same technique can be used in different conditions.
Sound difficult?
Don’t worry – our explanation is beginner friendly.
You can read more about it offline too, with our free ebook.
Connecting waves 1 and 3
First of all, let’s start with two key rules for trend lines and waves.
Namely:
lines always require two points on the chart, before you can draw a trend line with EW
waves 1 and 3 are parts (or swings) of the chart, that show strong bearish or bullish momentum.
Keep this in my mind when you scan the charts.
Once you find a stronger third swing than the previous one:
move in the same direction
connect waves 1 and 3 with a trend line, which provides the angle of the trend
draw a new EW trend line, which is exactly parallel to the first line (in step 1)
hook the second trend line to the bottom of wave 2, which is the point connecting waves 1 and 3 (in case of an uptrend i.e. to the top in a downtrend).
Hopefully you now have a trend channel visible on your chart and have successfully used trend lines with EW pattern.
If you don’t – follow the steps again.
Keep in mind that the steps might seem complicated at first:
The channel offers a concrete method for finding support or resistance.
Specifically, it shows traders how to find wave 4.
In wave 4:
a bullish channel indicates that price is expected to receive support at the bottom of the channel, which is the parallel trend line connected to the support point of wave 2
a bearish channel indicates that price is expected to receive resistance at the top of the channel, which is the parallel trend line connected to the resistance point of wave 2
the turning spot at the channel, is literally called wave 4.
As you can see below:
waves 2 and 4 are corrective movements (slow)
waves 1 and 3 are impulsive pieces of price action (quick).
This technique often works well, but it occasionally has a weakness too.
When?
Most notably:
…if wave 4 turns out to be lengthy consolidation zones.
To counter that problem, you:
add a Fibonacci retracement tool from the end point of wave 2, to the end point of wave 3)
keep an eye on the 23.6%, 38.2% or 50% Fibonacci retracement levels – which are where price should stop if it’s in a wave 4
note that if price does break the 50% Fibonacci level, then it is most likely not a wave 4.
Next forecasts with wave channels
So now we’ve covered waves 1 to 4, let’s look at wave 5.
Wave 5 marks the end of the trend and the channel.
The good news is:
…you can use more or less the same channel that helped connect waves 1 to 4.
Here’s how.
Firstly, connect waves 2 and 4 then:
hook the second trend line, to the top of wave 3 in an uptrend and the bottom in a downtrend
expect wave 5 to finish at the top of the channel in an uptrend and the bottom in a downtrend.
Wave 5 does have one specific danger though:
…it tends to lose momentum because the trend is almost completed.
But thankfully there is an effective countermeasure.
To avoid this danger, simply:
draw a third EW trend line that is parallel to the first two trend lines, and
place it in the middle of the channel (the pink line in the image below).
The third middle trend line offers a safer target spot for the completion of wave 5, than the official target at the top (bull) or bottom (bear) of the channel.
Corrective trend line predictions
Price eventually makes a correction, even within trends.
The neat thing is that traders can also use trend lines, for estimating price corrections.
Remember, trend lines are especially formidable tools for establishing the start and finish of corrections.
Now, to understand trend line predictions – you need to know that corrections take place as:
fast paced price movements called zigzags corrections, or
slower price movements called sideways corrections.
During a zigzag correction, traders can exercise the same steps as mentioned for determining other waves – but alter by connecting different highs and lows.
For example:
connect the trend line between a:
top and lower high, during bearish reversal of the uptrend
bottom and higher lower for bullish reversal of the downtrend
draw a second trend line, which is exactly parallel to the first line
hook the second trend line to the:
bottom in bearish reversal
top in bullish reversal
note the main target (see green checks in below image), is the
support trend line in bearish reversal
resistance trend line in bullish reversal ( see the green check in image).
During a sideways correction, traders can connect various tops and bottoms – to determine a wide range of EW chart patterns.
Please view our dedicated webinar, for a full overview of all the available patterns.
If you have already used trend lines and waves – I would love to hear about your experience in the comments below.
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.
See More Elliott Wave:
The Elliott Wave Principle – The first step in Elliott wave analysis is to identify patterns in market prices.
Elliott Waves Point to Market Probabilities – Each wave in price reflects the dominant investor mood. For example, strong price advances on high volume typically happen during wave 3, the healthiest leg of a bull market. The reverse happens during third waves in bear markets — conspicuous fear drives prices lower.
The great thirteenth century mathematician Fibonacci was important to history for devising a number of different equations and getting a closer review of how numbers work. Today his work continues to be reflective in forex trading through the use of Fibonacci levels.
Fibonacci levels are used to identify the support and resistance sports on a trend. These can particularly identify when values and trends can be impacted over time. This can help you get an easier time with understanding how different values are going around on the market and can certainly be important for when you’re trying to figure out how the values of something might change.
These are typically calculated within a to help you learn how different trends are moving around. If you don’t have time to learn that, you might have better luck joining one of the social trading networks. Don’t know where to start? Check out this Tradeo review. Otherwise – keep on reading and find out what Fibonacci levels are all about.
How Are They Created?
Fibonacci levels are generated within typical trading platforms and will help you identify trends between two extremes or a high and low on a chart.
The top and bottom parts of a chart’s readout will be measured.
Individual trend lines are arranged on the chart. These are horizontal lines organized at specific percentage points.
Trend lines are arranged at the 23.6%, 38.2%, 50% and 61.8% rates. These are Fibonacci ratios that are often used to divide general movement rates.
This in turn helps you to create good ideas for where target prices or stop losses may be placed at.
This is a good example of how these work. Notice how the levels are organized from top to bottom in a clear pattern. It helps to review how well the values in a currency pair are changing and how different trends in the buy and sell patterns might come about. The specific picture here shows that one of the lines actually held and that the trend within a currency pair is actually active and consistent.
You can use these lines to particularly determine when you should be buying or selling a pair as you can get a clear idea of what might come about over time in that particular pair.
Finding Levels
You have to use a few pointers when finding levels that you can easily use:
You must look at the most recent highs and lows of a swing.
Check on the data that goes in between each of the highs and lows that you come across. This is regardless of whether this goes from up or down or the other way around.
Check on the retracement or extension levels within the trend. A trading program can help you figure this out.
Look at how well the Fibonacci levels you run into hold. This can be a sign of a trend being steady even if there is a slight reversal.
The important point is that the Fibonacci levels cannot just be broken into rather quickly. You have to take a careful look at these bars to see if a reversal is going to correct itself over time. The use of Fibonacci levels can really make a difference when figuring out what you can earn.
About Nick James
Nick has been trading currencies and CFDs since 2009. Currently he focuses on fundamental analysis and positional trading. In free from trading time Nick works on various FX sites to help the trades open better positions and get a detailed overview of the FX market.
GBP USD, Time Frame H4. Tenkan-Sen and Kijun-Sen are very close to each other inside Kumo Cloud (1). Chinkou Lagging Span is above the chart, Ichimoku Cloud is closed (2). Short-term forecast: we can expect resistance from Senkou Span B, support from Senkou Span A – Tenkan-Sen – Kijun-Sen, and attempts of the price to stay above the cloud.
GBP USD, Time Frame H1. Tenkan-Sen and Kijun-Sen are influenced by “Golden Cross” (1). Chinkou Lagging Span is above the chart, Ichimoku Cloud is heading up, and the price is on Tenkan-Sen. Short-term forecast: we can expect support from Kijun-Sen – Senkou Span A, and growth of the price.
XAU USD, “Gold vs US Dollar”
XAU USD, Time Frame H4. Tenkan-Sen and Kijun-Sen are influenced by “Golden Cross” (1). Chinkou Lagging Span is above the chart, Ichimoku Cloud is moving upwards (2), and the price is on Tenkan-Sen. Short‑term forecast: we can expect support from Senkou Span B, and growth of the price.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
USD/JPY opened in Asia at 104.10. After ticking down to 104.08, it proceeded to edge higher on fresh carry trades favoring AUD, NZD and CAD. USD/JPY traded up to as high as 104.21 before option-related selling capped it. The combination of broad USD strength and a healthy risk appetites should keep carry trade demand strong and USD/JPY well underpinned. Option expiries at 104.20 today look to help contain the price action with more option-related offers ahead of presumed barriers at 104.50. Japanese exporters look less keen to sell on 104 now, perhaps awaiting moves towards 105 and above. Japanese importers look to be staked out now below 104.00. Although most see no change in BoJ policy Thursday, some do hold out hope for further ease. The majority see change only possible after more weak economic data.
EUR/USD opened in Asia at 1.3133 and, after ticking up to 1.3135, fell back with fresh sales absorbing option-related bids at 1.3120-30 and pushing the pair down to 1.3119. Carry trade demand helped with EUR/AUD, EUR/NZD and EUR/CAD all sold. Sentiment remains extremely bearish with the market continuing to add to already large EUR short positions. Uncertainty surrounding the Ukraine-Russia crisis looks to be adding to bearish sentiment as further EU sanctions against Russia will negatively impact the already fragile Eurozone economy. Eurozone PMI data due later today may add to the bearish EUR case.
GBP/USD opened on Monday at 1.6595 and traded a tiny 1.6587-99 range in Asia; last at 1.6598.
USD/CHF opened on Monday at 0.9183 and traded a tiny 0.9183-95 range in Asia; last at 0.9193.
AUD/USD opened in Asia at 0.9326 and traded a modest 0.9318-42 range. The low was seen early before decent bids returned, presumably on fresh carry trades. The two, rather nondescript China PMI releases had little impact as any shorts were pared. Mixed Aussie data also failed to impact. The RBA meeting tomorrow is expected to be a non-event unless Gov Stevens ratchets up verbal intervention. Wednesday’s Q2 GDP release and Thursday’s retail sales and trade data will be eyed with care.
Today, I am very pleased to bring you our latest forex interview with Sergey Kamenshikov from IFC Markets. Sergey is currently the Chief Financial Analyst of IFC Markets, a forex brokerage licensed by the British Virgin Islands Financial Services Commission (BVI FSC). The company provides trading services in foreign currency pairs, CFDs (Contracts for Difference) as well as customizable trading instruments called personal composite instruments. In this interview, Sergey shares information on his company’s features and strengths as well as his views on the future of the forex industry.
Q: Can you give our readers a brief history of IFC Markets and who are the ideal candidates to use IFC Markets?
IFC Markets is a part of IFCM Group, which is involved in development and implementation of new effective projects in the field of financial technologies.
IFC Markets is a leading broker in the international financial markets which provides online Forex trading services, as well as future, index, stock and commodity CFDs. The company has steadily been working since 2006 serving its customers in 13 languages of 60 countries over the world, in full accordance with international standards of brokerage services.
The company is licensed by the British Virgin Islands Financial Services Commission (BVI FSC), Certificate No. SIBA/L/14/1073 and provides its customers with services in the sphere of trading financial instruments both at organized market places and beyond, using trading-analytical platforms NetTradeX and MetaTrader 4.
IFC Markets is a good choice for those clients, who are looking for a reliable partner in financial markets that provides wide range of trading instruments, fixed and low spread, instant order execution, beneficial swap conditions, innovative solutions for trading and analysis and highly qualified technical support.
Q: What can a trader expect when using IFC Markets?
One of our top priorities is to provide qualified services to our customers so as to satisfy even the most capricious expectations and needs. Working with our company, one can expect stable business relationship, based on mutual trust, professional and individual approach and constant development of existing services, taking into consideration fast growing demands.
Q: What do you feel makes IFC Markets stands out from your competitors? What do you feel are the best features or greatest strengths of IFC Markets?
Well, when speaking of outstanding features and strengths, first I want to emphasize our individual approach to each client. Being in the market for more than 8 years, we are constantly doing our best to satisfy each trader’s expectations. Our business model (DMA/STP) is eliminating conflicts of interests and is built on transparent and trustworthy relations with the client.
Another very important feature that makes IFC Markets different among the competitors is NetTradeX Trading Analytical Platform of new generation. The platform is designed and developed by IFCM group especially for our clients and is not available in any other company, besides those that are included in our group.
Let me note another important feature that distinguishes our company from others- PCI technology, based on GeWorko Method. This is an innovative approach to trading and analysis, as it allows clients to create their own instruments, make analysis and trade. This is a unique tool in the market, through which one can obtain any instrument, composed from 2 to dozens of instruments both in the base and quoted parts of the instrument.
Q: One of the most interesting features of IFC Markets, in my opinion, is the Personal composite instruments (PCI). Can you briefly explain what these are and what the benefits of using these may be?
Each user of trading-analytical terminal NetTradeX PC gets access to a unique technology, providing an opportunity to create unique Personal Composite Instruments (PCIs), the variations of which are restricted by user’s imagination only. The technology of creating Personal Composite Instruments (PCI) is developed for technical realization of GeWorko Method (patent pending) on NetTradeX trading platform.
One can create new cross rates, correlations between various assets, currency indexes, stock portfolios, portfolios for pair trading and many more.
The key benefit of the new technology is that it breaks the limits in the number of available assets and grants an opportunity for clients to create instruments based on their imagination and preferences.
As technology is new and very unique, you cannot find any other company offering such technology; I can offer your respected readers to visit our website for more detailed information.
Q: If a trader is interested in finding out more about IFC Markets, testing and maybe trading on the platform, what would be your advice?
Usually for newcomers we always offer to read some literacy before taking some practice. As you probably know our company offers wide choice of educational materials, where newcomers as well as already experienced traders can find much interesting information. Getting familiar to this literacy is first step, after which we suggest opening a demo account for getting practice on the platform, which is absolutely free and does not require any kind of investment.
Q: What do you see in the future for IFC Markets? Do you have any thoughts on the future of the Forex industry?
• Expanding the number of trading instruments, offering CFDs from various stock exchanges, thereby developing the function of the central broker (a broker, providing a possibility to trade from one account in many stock exchanges);
• With the development of the industry to improve trading conditions for the client, based on our model of providing low fixed spreads not only for currency pairs, but also for CFDs on stock market instruments. It must be taken into consideration that the provision of such services requires high technical and dealer professionalism from the company, while reducing the company’s own margin from clients’ trades. However, we believe that the growing number of clients and the volume will compensate this.
• Now the company, unlike the most competitors, has developed and offers unique opportunities not only for speculative trading but also for serious long-term investment (GeWorko Method). We plan to promote our capabilities in different regions, to popularize our services.
Due to the global economic crisis, there was a fall in investment in securities, which resulted in a decrease in demand of brokerage services and asset management. At the same time Forex companies, offering simple speculative margin trading with high leverage with a relatively small number of trading instruments did not lose their attractiveness (here it is seen a certain analogy with the increasing number of visitors to the casino at the beginning of economic crisis). This led to the opening of new Forex companies and expansion of Forex trading services in the oldest brokerage companies. The competition increased, while the revenues fell. Companies are trying to stay afloat by providing more and more trading opportunities to clients. Thus, Forex companies began to expand the list of instruments through Commodity CFDs. In addition, models of asset management (PAMM accounts) are offered, investment in different mutual funds, etc.
As a result, interesting patterns occurred:
– Forex companies are more democratic for clients, than stockbrokers, it is easier to open an account, the leverage is higher, deposit requirements are lower, etc;
– Providing a huge amount of trading instruments from different stock exchanges through CFDs, Forex companies easily provide functions of a central broker;
– Can offer trading without exchange scalping through fixed spreads on stock market instruments;
– It may be stated that for the majority of clients trading will be easier and more profitable in the Forex companies. Moreover, for risky clients there is a chance to increase their capital in a short time;
Regulation of Forex companies is much softer than that of the stockbrokers, which allows providing and constantly expanding the huge list of trading services. So, I think that the brokerage activity is undergoing serious changes and Forex companies play the major role here.
Thank you Sergey for taking the time to share your thoughts and information on your company for our latest forex interview.
To find out more about IFC Markets and to learn about their services, please visit IFC Markets at www.ifcmarkets.com.
