Month: September 2010

By Cedric Welsch – Below we provide a composite of forex indicators explained. An indicator, in general, is one that signals a change. In forex world, it means currency fluctuations. Currency fluctuations are affected by several factors. To monitor or predict these changes, two broad categories of indicators are used: technical and economic. A technical approach is one that uses price history changes and chart patterns. Some examples would be stochastic oscillator, moving average convergence divergence or MACD, and RSI or relative strength index. Economic indicators are, just that, based on economic data. The common economic measurements are GDP growth, unemployment, CPI, retail sales, and industrial production.

Let us dive more closer into the world of technical indicators. A measurement of the strength of the underlying currency movement trend can be defined by its RSI or relative strength index. This normalized index is a ratio of the positive moves relative to negative ones to determine which direction is more prevalent. The index is based on a zero to one hundred point value. A number below thirty indicates oversold and over seventy as overbought.

Another indicator, the MACD, can signal a change in direction over a specific window of time measured. This moving average convergence divergence calculates the difference between two exponential moving averages like a two hundred day versus a fifty day. Graphing this difference versus the moving average of the difference will provide cross over points that signal a change in direction.

The stochastic oscillator is a very good gauge for the sustainability of a trend whether it is positive or negative. This methodology calculates percentage values based on closing prices. In the case of an uptrend, the closing prices are focused on the upper end of a trading range, and in a downtrend they are near the bottom end. The concluding result is a band of lines which delineates an uptrend or downtrend. Any variation away from these bands would result in a trend change signal.

For forex indicators explained, one needs to include economic factors. GDP growth is the most prevalent economic indicator. It reflects the change in the gross domestic product, or an economy’s total value of its output which is the goods and services it produces. GDP is measured on an annual, quarterly, and sometimes monthly basis. Although GDP growth shows the change in economic output, it should not be viewed in isolation.

Industrial production helps measure productivity, as well. This calculation measures the manufacturing prowess of a nation. Another offshoot of this measurement is capacity utilization. The greater the amount or increase in unused capacity could well signal a decrease in economic activity and, hence, a lower currency value.

Unemployment is by far among the top most important economic factors. It is a gauge of the population’s production health, meaning the number of people it takes to produce the goods and services. The greater the number of people engaged in a productive endeavor, the stronger the economic engine. As more people are employed, there is more consumption and more growth. This also is reflective in the housing statistics, as homeownership rates increase.

As stated earlier, unemployment affects consumption. However, it is not a direct correlation. A country can have a relatively healthy unemployment rate with lower consumption. The population can opt to save versus spend. Hence, retail sales are a good indicator of economic sentiment. The more optimistic one is about the future the more likely one is to spend.

Lastly, GDP and retail prices are affected by inflation. The value of goods and services can vary depending on input costs. To gauge inflation, the consumer price index or CPI is used. This index measures the change in value of a set group of goods and services. This index, along with the PPI or producer price index, can help determine the profit or surplus of an economy. A composite understanding of these indicators along with the technical signal previously discussed, provides a good forex indicators explained overview.

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By James Woolley – Many forex traders like to use technical indicators to help them trade, and one of the most effective ones is the exponential moving average, or EMA for short. This indicator indicates the trend for a particular period so when you use multiple EMAs with different settings, you get a great idea of where the market is heading.

This is why EMA crossovers are one of the most popular ways to trade the forex markets. Basically when a shorter term EMA crosses through a longer term one on your price chart, this is often a great signal that the trend has changed. Therefore you should think about entering a new position in the same direction as this most recent crossover.

I myself trade these crossovers a lot because they are a vital part of my trading system. The trick is to only trade them on the longer time frames.

If you use them to take intraday positions, you will struggle to make consistent profits because not only do you have the spreads to contend with, but you will also find that you get lots of false crossovers that ultimately come to nothing. Plus you will often find that even the successful crossovers fizzle out fairly quickly on the 1 minute, 5 minute or 10 minute charts, for example.

You’re much better off going up to the 4 hour or daily chart at the very least. That way you will have far fewer EMA crossovers, but the ones that do occur will often result in some big profits. Of course you will still get a few false crossovers, but the successful ones will generally more than make up for these losing ones.

Anyway the point I want to make is that trading EMA crossovers is a very effective way of trading the forex markets. You can increase your chances of success even further by using one or two extra indicators to help find the very best high probability set-ups. For example I like to use the 5 and 20 period exponential moving averages along with the MACD and Smoothed Repulse indicators and this helps me find some excellent set-ups every week on the 4 hour chart.

Ultimately you just have to test out different systems and find one that’s right for you. However I myself can definitely recommend you look into trading EMA crossovers because I’ve been trading very successfully this way for a good few years now.

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Many traders attempt to lock in profits as the market moves in their favor by trailing the market with various trailing techniques. Personally, I use trailing stops every time I trade a trending based system. When these trailing stop strategies are used correctly, they manage the stop loss level such that they convert floating profit into ‘earned’ profit. Trailing stop by its nature have these two features in-built.

1. Pip Protection Mechanism

Shifting of this stop loss level for the purpose of locking in earned pips acts as the pip protection mechanism and secure your profits even before a forex trader closes the trade. In addition, it provide a plan for traders to exit their trade when the trending market become exhausted.

2. Pip Maximization Mechanism

A trailing stop will exit the trade when it detects that market has some form of trend exhaustion while at the same time maximizing the potential of profit from a trend. This is what we called pip maximization mechanism.

However, when trailing stops are not used properly, a trader will end up adding volatility to his results in terms of risk to reward ratio and return of investment. This is because using trailing stop will some time allow the trade to exit prematurely due to noise resulting in a stop out. After a stop out occurred to a trade, price seems to consolidate and continue trending again.

The value of a trailing stop order is obvious. Because it prevents the forex trader from leaving after achieving a small profit, he will have a plan to ride a trend for as long as it is profitable. He will only leave when trend exhaustion is detected as market goes into consolidation phrase and no more opportunity to capture more pips from the trend.

While trailing stop has their limitations, we believe that their advantages outweighs their limitations and it is very important for beginning traders to apply trailing stop strategies to their trading system where they are just starting and have not have a solid plan for risk management. Trailing stop provides the discipline and a plan for traders to exit and cash in their profits rather than risk having to give back to the market.

There are many techniques to manage a trailing stop. Traders often start moving their stop when their positions have earned twice the amount risked. Another popular technique is to trail the market with a stop placed near the high or low price over the last 2 candles. Both of these techniques are effective for short-term trading or otherwise called intraday trade.

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By Warren Seah

“Introducing 11 Exit Strategies, What Every Disciplined Traders Need … Go Without It You Could End Up Being A PIP VICTIM Just Like Thousands Of Traders Out There.”

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By David Adams – I got an interesting e-mail today asking me about a particular futures trading system. The writer wanted to know if the system was fully mechanical and automated. I should point out that there are automated or “black box” trading systems employed by large hedge funds and other large trading groups, but I have never come across a fully automated trading system suitable for individual traders seeking to day trade the futures markets.

Of course, there are a slew of Forex robots on the market today, and the results from these robots have been mixed, at best. In my opinion, this type of question regarding futures day trading is the result of a spillover effect from the Forex trading cabal. But I think that this request reflects an even deeper question being considered by new traders that are entering the futures markets.

What sort of question do you think I am considering?

It’s the old goose that lays the golden egg story. In my opinion, the great attraction of Forex robots is the lack of accountability the trader is forced to shoulder. After all, if you have a machine that simply works day and night to create money, why wouldn’t everyone own one?

The answer to this question is fairly simple, there are no geese that lay golden eggs and there are no Forex robots that consistently churn out fantastic profits. It would be a wonderful thing if there were trading machines that could consistently make profitable trades, just as it would be a great thing to own a goose that lays golden eggs. Unfortunately, day trading doesn’t work that way because the market moves in a variety of methods that makes low-cost trading robots impractical to produce.

Nor are there any strictly mechanical methodologies that will consistently churn out an endless stream of profitable trades. No matter what methodology you employ in your trading, you will always be faced with subjective choices as to the merit of any trade under your consideration. At this point in our technological progress, we simply don’t have a level of artificial intelligence capable of adjusting to the varying conditions that exist in the futures markets.

And I am glad we don’t.

I have always considered trading a combination of interpreting formulaic indicators and personal judgment. Some call this form of trading and art, but I look at it more in terms of a learned skill. I am an avid reader of technology and scientific journals and we are years away from developing the level of artificial intelligence needed to effectively day trade markets. We have one of the most marvelous computing devices ever designed sitting atop our shoulders. Though I wonder if some individuals care to employ this marvelous device we refer to as our brain.

A combination of advanced technical indicators that have been developed in recent years and the power of our own brain is what has, in the past, and will continue to be in the future the most effective trading devices available. Of course, developing this trading machine will take some traders a good deal of training to refine it to the point where it is an effective trading machine. There is nothing wrong with this process, in my opinion.

The idea of artificial intelligence machines picking every trade perfectly is something from Aldous Huxley’s “Brave New World”, and not something I would relish. Imperfection and improper trading technique are part and parcel of the trading process, especially for traders in the early part of their career. It is the way we learn to trade. If we developed the technology capable of picking all trades as winners, the markets as we know them would cease to function. In every trade, there has to be a winner and loser. It is the very nature of trading. If every trade were a winner, there would be no need to trade.

It’s not a trading world in which I would choose to live.

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By Warren Seah – A professional forex trader is not someone who makes money with each and every trade. The fact is a professional trader will make losing trades. What separate a professional trader from a retail trader will be shown in how he reacts to a lost trade. When professional traders lose in a trade, he tries to find the reason and not to repeat the same mistake again in the future.

The shift from retail trader to a professional trader is not easy. Although developing strategies and techniques to make the transition can be difficult, it is not impossible to develop the proper makeup to emulate. Retail traders can leverage on technologies to put them on the same level playing field with the professional forex traders. Professional traders break up their approach to the markets in three components:” discipline, accountability, and planning.

1. Discipline

Professional forex trader means someone who has built his confidence through enough practicing and repeating his success. Repetition and sticking to the plan is the rule for all professional forex traders. Professional traders are required by law to be disciplined at all time during their trading. Transitioning from a retail trader to a professional forex trader will mean that the trader take responsibility of sticking to their trading rules and money management strategies, just like the professional traders do every day.

2. Accountability

Professional forex traders are forced to keep their trading records transparent to the respective regulatory bodies, immediate superiors and his clients. It is their responsibility to safeguard their clients’ money and company funds while trading to achieve a better return.

As a retail trader, you have all the reasons to trade for yourself and you would not have any responsibilities to other parties beside your spouse. Your successes, losses and strategies need not be revealed or monitored by anyone. It stands to reason that it is no surprise that retail traders fail in their fiduciary duty to yourself.

3. Planning

The success of professional traders is not by accident – it is by design of trading plan. They have the rules and all the reasons prior from entering into a trade. Entry and exit strategies are constantly developed and improved to minimise losses and increase profits. They looked back into histories to understand more about their trading system performance. They understand their trading system like that of a surgeon to a human body.

Retail traders have to keep on trading with a demo account at least for a few months. Trading with the demo account without an especial and well-described system is a waste of time. Retail traders should first write out a trading plan, understand the trading plan and start first by working the plan from history. Record results of your trading performance and improve on your plan by trading the demo account.

The great news is that the techniques that professional forex traders used are easily found and, in fact if you ask them nicely, they will give you documents necessary to see behind the scenes in their programs. This will mean that a retail trader will get access to information on how they use entry and exit strategies to minimise losses and increase trading results. Then it is a matter of incorporating what they do right into your retail activity to help you get to the next level.

As a retail trader, the secret to transitioning to a professional forex trader is not about how much money you bring to the table but a combination of your discipline, responsibilities to your trading capital and committing yourself to the planning prior to trading.

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Warren Seah

“Introducing 11 Exit Strategies, What Every Disciplined Traders Need … Go Without It You Could End Up Being A PIP VICTIM Just Like Thousands Of Traders Out There.”

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When Will You Exit a Trade?

Identifying exits falls under the trading system category in that the exits should be placed at meaningful places in the market that are determined by support and resistance. With that said, it is important to always determine the initial exit prior to entering the trade. And then it is required to exit the trade when the stop tells you to.

1. An initial stop loss order

The purpose of the initial stop is to get you out of the trade if the trade goes in the wrong direction near the beginning of the trade. In general, many systems have both an initial and trailing stops, but the trailing stop may not be known until certain conditions are met. An ideal initial stop should allow “room to breathe” as well, but not so large as to cause the trader to take on excessive risk.

Use a stop loss exit strategy that is based on market price activity, key support resistance levels or some fibonacci levels.

2. Break-even stops are another commonly used forex exit strategy.

Stop loss may be moved to entry price when market moves in your favour is one way to secure a winning trade before employing any trailing stop strategies. This method is commonly used and is popular because it reduces anxiety during trading.

3. Use trailing stops to lock in profit when the market moves in the traders’ favor

There are many trailing stop strategies to choose from. A very basic forex exit strategy is two bar trailing stop. The high or low of the last two bar are levels a trader should shift their stop loss level to in order to lock in profits. This strategy is great for intraday trading or when a trader is anticipating that the market is moving into a consolidation phrase.

4. Do not move stops for emotional reasons.

This is a rule and I like to add a side note to this topic of forex exit strategies is because it is the number 1 rule that should be adhered to. Trading with a plan and sticking to the plan eliminate emotions. This rule is what makes exit strategies serve their purpose and forex traders can reap their benefits.

5. Employing a time stop

Most trading systems would exit a trade before a major economic event like Non Farm Payroll. A time stop is used to exit a trade before these news event to avoid market volatility. Risk of market volatility is reduced by using a time stop.

Whenever you enter into a Forex trade of any kind, the first thing you have to make sure is that you have your exit strategy planned out regardless of whether the trade ends up a winner or a loser. Knowing how to manage your trade and the right exit strategy are the most important aspects of trading the Forex market.

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By Warren Seah

“Introducing 11 Exit Strategies, What Every Disciplined Traders Need … Go Without It You Could End Up Being A PIP VICTIM Just Like Thousands Of Traders Out There.”

Download Your Exit Strategy EA Now

By David Adams – As a trend trader, one of the real challenges is to identify and stay in a trend. Trend retracements are frequent annoyances in trend trading that can lead to substantial losses. In short, identifying trends is extremely important. Of course, in a high volume markets like the ES e-mini identifying trends and retracements can be dicey business and no simple matter. To be sure, when the market is in a high volatility state, trend trading can be very difficult and challenging.

Enter the Heiken Ashi candlestick trading system. The Heiken Ashi system is a variant of the traditional candlestick formation system with some important improvements. In the Heiken Ashi system the candlesticks are calculated in a manner that improves trend identification and greatly improves the trader’s ability to identify trending markets.

So why doesn’t everybody use the Heiken Ashi system?

That is not a question that is easy to answer, but my general impression is that most traders are either unaware of the system or don’t care to add a new variable to their existing system. In any event, the Heiken Ashi system it is a great improvement for trend traders and has great potential to improve your trading results. The mathematical basis for the Heiken Ashi system can be found on a number of Internet pages, so I will not devote a great deal of time to detailing the mathematical underpinnings of the system. But there are several important rules to observe when using the Heiken Ashi candlestick system.

1. A candle with a small body and long upper and lower shadows indicates a change in the trend. If you are brave soul, you may want to add or sell shares at this point. Personally, I’m inclined to wait for a confirmation bar in this situation.

2. Hollow candles lacking lower shadows (hollow candles indicate an uptrend, and solid candles indicate a downtrend) indicate a strong uptrend. Obviously, and a strong uptrend you’ll want to maintain your position.

3. The exact opposite of point number 2, filled candles with no higher shadows indicate a strong downward move and most traders will stay in their trade. One quick point though, I am hesitant to enter into an already well-established trend. This is referred to as piling onto a trade and you risk piling on late in that trend movement and sustaining a loss.

4. Filled candles indicate a downtrend.

5. Hollow candles indicate an uptrend.

The rules in trading the Heiken Ashi system are fairly straightforward and easy to understand. More importantly, they readily identify trends in the market with better than average accuracy. If you are a trend trader using candlestick charts, the Heiken Ashi system will be a substantial upgrade to your current methodology and I highly recommend implementing the system. The candlesticks are relatively easy to adjust to, and with some practice you can easily adapt your current candlestick charts to the Heiken Ashi system.

In summary, I switched to using Heiken Ashi candlestick several months ago and have seen a noticeable improvement in my trend trading. We have noted there are several simple rules to follow when using the Heiken Ashi system. It is important to assimilate and implement these rules into your trading to get the full value of the system.

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By Danielle Franklin – In the past, compared to other investment options like stocks and options, forex trading had been rather unregulated. Recently, there have been lots of talks, rumors and opinions about the proposed changes to forex trading in US by Commodities Futures Trading Commissions (in other words CFTC). What does it all mean? How can this affect you? Is it a good time to change your broker?

Let us first look at what exactly is included in those panic-creating adjustments:

1. Forex Brokers would be required to register with CFTC as “retail foreign exchange dealers”.

2. Brokers would have to possess a certain capital to minimize the chance of broker bankruptcy.

3. Introducing brokers would be required to agree to exclusive contracts with the dealers.

4. Last, but not least, the worst case scenario – the minimization of the leverage option to 10:1.

Despite the fact that the potential regulation is likely to benefit the traders, since CFTC’s watchful eye over brokers will surely minimize fraud, based on the reaction from industry insiders and traders themselves, the majority are opposed to the new proposal. Most traders are planning to, if not already done so, switch to overseas brokers.

Why do US traders turn to off-shore brokers?

Let’s recall The NFA regulatory hammer in 2008, which lead to a serious drop in the number of forex brokers operating in US. The lack of choice and forceful unnecessary leverage minimization will force all US traders to move the account offshore. To make things worse, just like with online casinos, the government will most likely to figure out the way to stop US-based traders from trading offshore either.

What does the limit of margin actually mean?

The current leverage standard is 1:100, meaning that a trader borrows 100 times as much money as he/she actually invests in trading. Those who aren’t closely familiar with forex trading, link it directly gambling, however, US retail forex is not what it used to be few years ago.

If forex is a casino, what is next? Maybe we should add commodities and stock exchanges to gambling category as well! Forex is not gambling – it is trading one currency for another. There are economic, political and governmental factors that influence the market movements. Currencies are the basis that holds together the whole trading system – this is much more sophisticated than putting down chips on the random number and waiting for the roulette wheel to give you a random answer.

What can you possibly do with 10:1 leverage? Nothing! Seems like the attempt to drastically raise margin is a transparent effort to wipe off retail forex. After all, this is the only way an regular trader like you and I can stay in the game.

We all need 100:1 leverage accounts. This is the only way not only to trade and earn, but also to risk less, since the beginners can learn and practice with smaller accounts.

If government is so desperately hunting down gambling, how come they do not regulate Las Vegas instead? I mean, people lose much larger sums of money in one game of blackjack, for example.

As you can see, it has nothing to do with the gambling. It is all about who is getting the money. In case of Las Vegas, the money stays in States. In case of forex brokers (similar to online casinos), the money is floating out, which is, of course, uncomfortable for the country leaders.

The point is that irresponsible, impulsive traders will blow up their account no matter what margin they choose – 400:1, 100:1, 10:1 or even less. Leverage doesn’t matter when a trader doesn’t know how to minimize the risks and manage the money. The only way to become a professional trader is to learn the market, follow the plan, stay disciplined or otherwise invest in something else!

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By James Woolley – Forex trading is a very emotional business. You can be up one minute and down the next. However I want to talk about three emotions in particular because each one of them can have a devastating impact on your overall profits if you’re not careful.

The first is basically boredom. The truth is that there are certain times when the major currency pairs are stuck in narrow trading ranges and are not really going anywhere. Therefore it is all too easy to become bored just staring at the markets, unable to trade.

Some traders have the discipline to stay out of the markets during these times, but others will be so desperate to be involved, that they will look for any half-decent trading opportunities. Unfortunately this is where the problems start because as soon as you start deviating from your trading method and start placing random trades based on gut instinct, you start making bad trading decisions, and will therefore inevitably lose money.

Another potentially damaging emotion arises after you have had several consecutive losing trades. During these times you feel really low because you’ve lost a large amount of money, and so it’s natural to want to make it back as quickly as possible.

The correct approach is to stick to your trading system (if it has proven itself over many months or years), but many people start using a new system or placing impulse trades using much higher stakes in order to try and recoup their losses. As you can imagine, this nearly always leads to disaster as well.

Finally you also need to be aware of your emotions when you have several winning trades back to back. This can often make you feel arrogant and cocky because you seem to have mastered the markets. As a result you may well start ramping up your stakes in order to make more and more money.

The problem is that everyone has losing trades at some point. Even the best trading system will have a few losing trades every so often. So by dramatically increasing your stakes, you are opening yourself up to the possibility that you will give most of these profits back as soon as you have a losing trade, or worse still a losing run of trades.

So the point I want to get across is that if you want to become a profitable forex trader in the long run, you have to recognize the different emotions that you may experience at various times, and make sure they don’t affect your trading in any way.

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The U.S. dollar fell against most of the major currencies during today’s morning session. The dollar erased most of yesterday’s profits vs. the euro, and the EUR/USD pair is now trading around the 1.2730 level. The dollar dropped about 100 pips against the British pound as well.

The dollar slipped today as recent economic data releases have managed to, at least temporarily ease concerns from a slowing global growth. In addition, analysts have recently released their forecast regarding the German investor confidence, claiming that it rose to its highest since January 2008 in August.

The positive data and expectations are boosting demand for riskier assets, such as the euro and the pound. The rise in stocks and equity markets also contributes to the dollar’s weakness, and it seems that as long as global economic data will indicate a global recovery, the dollar might drop further.

Forex Market Analysis provided by ForexYard.

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Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.