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Saturday, August 31, 2013

Candlestick charts

Candlestick charts
Candlestick charts show the same information as a bar chart but in a graphical format that is more fun to look at. Candlestick charts indicate the high and low of the given time period just as bar charts do, with a vertical line. The top vertical line is called the upper shadow while the bottom vertical line is called the lower shadow; you might also see the upper and lower shadows referred to as “wicks”. The main difference lies in how candlestick charts display the opening and closing price. The large block in the middle of the candlestick indicates the range between the opening and closing price. Traditionally this block is called the “real body”.
Generally if the real body is filled in, or darker in color the currency closed lower than it opened, and if the real body is left unfilled, or usually a lighter color, the currency closed higher than it opened. For example, if the real body is white or another light color, the top of the real body likely indicates the close price and the bottom of the real body indicates the open price. If the real body is black or another dark color, the top of the real body likely indicates the open price and the bottom indicates the close price (I used the word “likely” since you can make the real body whatever color you want). This will all become clear with an illustration:
Now, here’s the same EURUSD daily chart that I showed you in line and bar form, as a candlestick chart. Note that I have made the candles black and white, you can pick whatever colors you want, just make sure they are friendly to your eye but also that they convey bullish and bearishness to you. Bullish candles are the white ones (close higher than open) and bearish candles are the black ones (close lower than open):
Candlestick charts are the most popular of all three major chart forms, and as such, they are the type you will see most often as you trade, and they are also the type I recommend you use when you learn and trade with price action strategies. I use candlestick charts in my Forex trading course, and I recommended all my members use them when posting up charts in the members’ forum, because their visual pleasantness and simplicity make it easier for everyone to learn from.

Forex Charting

Introduction to Forex Charting
This part of the course is going to give you a brief overview of the three primary types of charts that you will run across in your Forex trading journey. The chart type that I use, and that my members use, is candlestick charts, I feel forex candlestick charts do the best job at showing the price dynamics in a market, since their design helps you to visualize the “force”, or lack thereof, that a particular price movement exhibited. So, let’s go over the three main types of charts that you will likely see as you trade the markets:
• Line charts
Line charts are good at giving you a quick view of overall market trend as well as support and resistance levels. They are not really practical to trade off of because you can’t see the individual price bars, but if you want to see the trend of the market in a clear manner, you should check out the line charts of your favorite markets from time to time.
Line charts are made by connecting a line from the high price of one period to the high price of the next, low to low, open to open, or close to close. By far, line charts that show a connection from one closing price to the next are the most useful and the most widely used; this is because the closing price of a market is deemed the most important, since it determines who won the battle between the bulls and the bears for that time period. Let’s look at an example of a daily line chart of the EURUSD:
• Bar charts
A bar chart shows us a price bar for each period of time. So if you are looking at a daily chart you will see a price bar for each day, a 4 hour chart will show you one price bar for each 4 hour period of time…etc. An individual price bar gives us four pieces of information that we can use to help us make our trading decisions: The open, high, low, and close, you will sometimes see bar charts called OHLC charts (open, high, low, close charts), here’s an example of one price bar:
Here’s an example of the same EURUSD chart we used for the line chart example but as a bar chart:

Wednesday, August 28, 2013

price action trading signal

What is a price action trading signal?
Next, let’s discuss how we can use price action analysis to find entries into the Forex market from a raw price chart. As a result of years of trading the markets I have boiled down all I have learned into my own unique method of trading with price action. This method consists of a handful of very specific price action entry triggers that can provide you with a high-probability entry into the market. Essentially, what we are looking for is reoccurring price patterns that tell us something about what the market might do in the near-future.
For purposes of brevity and out of respect for my paid members, I won’t give away all of my trading strategies and entry triggers here, but you can learn more about the trading strategies that I teach in my trading course. In the chart below, we are going to look at a particularly good price action signal for trading with trends; the inside bar strategy.
In the example chart below, we can see one price action trading signal that I like to use in trending markets; the inside bar setup:
paanalysisibs How to use price action analysis to determine a market’s trend
You will probably come across many different indicators designed to tell you what the trend of a market is. However, the most time-tested and trusted way for determining a market’s trend is simply to look at the daily charts and analyze the market’s price action. To identify a downtrend, we look for patterns of lower highs and lower lows, sometimes annotated by “LH and LL”. To identify an uptrend, we look for patterns of higher highs and higher lows, sometimes annotated by “HH and HL”.
In the example chart below, we can see examples of a downtrend, an uptrend and an uptrend changing to a downtrend:
paanalysistnd
Where and when should you trade a price action signal?
In my trading course I focus heavily on teaching my members how to trade with “confluence”. When I say “trading with confluence” I am basically referring to looking for areas or levels in the market that are clearly significant. Confluence means when things come together or intersect. Thus, when we are looking to “trade with confluence” we are trying to put together an obvious price action signal with a significant level in the market. There are different factors of confluence that we can watch for, but in the chart below I am showing you price action setups that formed at key support and resistance levels in the market; support and resistance are each a factor of confluence. Note, I have shown you two more price action setups in the chart below; the pin bar strategy and the fakey trading signal.
In the example chart below, we are looking how to trade price action setups from confluent levels in the market:
paanalysiscon In closing…
This lesson gave you a basic overview of what price action analysis is and how to use it in the markets. From here, you should proceed to the next part of this beginner’s course and continue learning about Forex and price action trading.

Saturday, August 24, 2013

Price Action Trading Analysis

 What is Price Action Analysis?

My definition of Price Action Analysis: Price action analysis is the analysis of the price movement of a market over time. By learning to read the price action of a market, we can determine a market’s directional bias as well as trade from reoccurring price action patterns or price action setups that reflect changes or continuations in market sentiment.

In simpler terms: Price action analysis is the use of the natural or “raw” price movement of a market to analyze and trade it. This means, you are making all of your trading decisions based purely on the price bars on a “naked” or indicator-free price chart.
All economic variables create price movement which can be easily seen on a market’s price chart. Whether an economic variable is filtered down through a human trader or a computer trader, the movement that it creates in the market will be easily visible on a price chart. Therefore, instead of trying to analyze a million economic variables each day (this is impossible obviously), you can simply learn to trade from price action analysis because this style of trading allows you to easily analyze and make use of all market variables by simply reading and trading off of the price action created by said market variables.

• How do you apply price action analysis to the Forex market?
First, I want to say that price action analysis can be used to trade any financial market, since it simply makes use of the “core” price data of the market. However, my personal favorite market to trade is the Forex market, mainly due to its deep liquidity which makes it easy to enter and exit the market, and also because the Forex market tends to have better trending conditions as well as more volatility which makes for better directional trading and allows price action trading to really shine.
My own personal approach to trading and teaching price action trading is that you can trade effectively from a few time-tested price action setups. There really is no need to try and trade from 25 different price patterns, the Forex market moves in a relatively predictable fashion most of the time, so all we need is a handful of effective price action entry setups to give us a good chance at finding and entering high-probability trades.
The first thing you need to do to apply price action to the Forex market, is to strip your charts of all indicators and get a “clean” price chart with only the price bars in a color you like. I choose simple black and white or blue and red for my colors, but you can pick whichever colors you like (Part 7 will cover an introduction to charting). Here’s an example of my daily chart setup on the EURUSD:
paanalysiscl Now, let’s look at an example of a clean and simple price chart next to a price chart covered with some of the most popular indicators that many traders use. I want you to look at these two charts and think about which one seems easier and more logical to trade off of:
paanalysismes paanalysiscl1 From looking at the two charts above, you will probably agree that it seems a little silly to hide the natural price action of a market with messy and confusing indicators. All indicators are derived from price movement anyways, so if we have a solid method to trade based only on price movement (price action analysis), it only makes sense that we would use that instead of trying to analyze messy secondary data.

Friday, August 23, 2013

Technical Analysis VS. Fundamental Analysis



 

• Fundamental Analysis
Fundamental analysis is the study of how global economic news and other news events affect financial markets. Fundamental analysis encompasses any news event, social force, economic announcement, Federal policy change, company earnings and news, and perhaps the most important piece of Fundamental data applicable to the Forex market, which is a country’s interest rates and interest rate policy.
The idea behind fundamental analysis is that if a country’s current or future economic picture is strong, their currency should strengthen. A strong economy attracts foreign investment and businesses, and this means foreigners must purchase a country’s currency to invest or start a business there. So, essentially, it all boils down to supply and demand; a country with a strong and growing economy will experience stronger demand for their currency, which will work to lessen supply and drive up the value of the currency.
For example, if the Australian economy is gaining strength, the Australian dollar will increase in value relative to other currencies. One main reason a country’s currency becomes more valuable as its economy grows and strengthens is because a country will typically raise interest rates to control growth and inflation. Higher interest rates are attractive to foreign investors and as a result they will need to buy Aussie dollars in order to invest in Australia, this of course will drive up the demand and price of the currency and lessen the supply of it.
• Technical Analysis VS. Fundamental Analysis
Technical analysis and Fundamental analysis are the two main schools of thought in trading and investing in financial markets. Technical analysts look at the price movement of a market and use this information to make predictions about its future price direction. Fundamental analysts look at economic news, also known as fundamentals. Now, since nearly any global news event can have an impact on world financial markets, technically any news event can be economic news. This is an important point that I want to make which many fundamental analysts seem to ignore…
One of the main reasons why I and all of my members prefer to trade primarily with technical analysis is because there are literally millions of different variables in the world that can affect financial markets at any one time. Now, Forex is more affected by macro events like a country’s interest rate policy or GDP numbers, but other major news events like wars or natural disasters can also cause the Forex market to move. Thus, since I and many others believe that all of these world events are factored into price and readily visible by analyzing it, there is simply no reason to try and follow all the economic news events that occur each day, in order to trade the markets.
One of the main arguments that I have read that fundamental analysts have against technical analysts is that past price data cannot predict or help predict future price movement, and instead you must use future or impending news (fundamentals) to predict the price movement of a market. So, I thought it would be a good idea to give my response to these two arguments against technical analysis:
1) If fundamental analysts want to try and tell me that past price data is not important, then I would like them to explain to me why horizontal levels of support and resistance are clearly significant. I would also like to ask them how myself and many other price action traders can successfully trade the markets by learning to trade off of a handful of simple yet powerfully predictive price action signals:
Looking at the daily spot Gold chart above, we can clearly see that support and resistance levels are important to watch. Any Fundamental analyst, who wants to say that charts don’t matter, is simply wrong, and you will come to this conclusion on your own when you spend more time studying some price charts.
2) The next argument that Fundamental analysts use is that you can more accurately predict a market’s price movement by analyze impending forex news events. Well, anyone who has traded for any length of time knows that markets often and usually react opposite to what an impending news event implies. Are there times when the market moves in the direction implied by a news event? Yes, absolutely, but is it something you can build a trading strategy and trading plan around? No.
The reason is that markets operate on expectations of the future. This is actually an accepted fact of trading and investing, so it’s a little strange to me that some people still ignore technical analysis or don’t primarily focus on it when analyzing and trading the markets. Let me explain: if Non-farm payrolls is coming out (the most important economic report each month, released in the U.S.) and the market is expecting 100,000 more jobs added last month, the market will likely already have moved in anticipation of this number. So, if the actual number is 100,000 even, the market will probably move lower, instead of higher…since there were not MORE added jobs than expected. So, while 100,000 new jobs might be a good number, the fact that the actual report did not exceed expectations is bad for traders and investors (can you see how this junk gets confusing now? I almost confused myself writing this…).

AND NOW FOR MY FINAL POINT: 
                                                                    Since all of the preceding expectations of a news release have already been carried out and are visible on the price chart, why not just analyze and learn to trade off the price action on the price chart?? What a novel idea! You see, even after the news is released we can still use technical analysis to trade the price movement, so really technical analysis is the clearest, most practical, and most useful way to analyze and trade the markets. Am I saying there is no room for Fundamental analysis in a Forex trader’s tool box? Absolutely not. But, what I am saying is that it should be viewed and used as a compliment to technical analysis and it should be used sparingly, when in doubt consult the charts and read the price action, only use Fundamentals to support your Technical view or out of pure curiosity, never rely solely on Fundamentals to predict or trade the markets.

Wednesday, August 21, 2013

Major economic events in Forex



Now, let’s quickly go over some of the most important economic events that drive Forex price movement. This is just to familiarize you with some more of the jargon that you will likely come across on your Forex journey, you don’t need to worry too much about these economic events besides being aware of the times they are released each month, which can be found each day in my Forex trade setups commentary.
Gross Domestic Product (GDP)

The GDP report is one of the most important of all economic indicators. It is the biggest measure of the overall state of the economy. The GDP number is released at 8:30 am EST on the last day of each quarter and it reflects the previous quarter’s activity. The GDP is the aggregate (total) monetary value of all the goods and services produced by the entire economy during the quarter being measured; this does not include international activity however. The growth rate of GDP is the important number to look for.

Trade Balance
Trade balance is a measure of the difference between imports and exports of tangible goods and services. The level of a country’s trade balance and changes in exports vs. imports is widely followed and an important indicator of a country’s overall economic strength. It’s better to have more exports than imports, as exports help grow a country’s economy and reflect the overall health of its manufacturing sector.
Consumer Price Index (CPI)

The CPI report is the most widely used measure of inflation. This report is released at 8:30 am EST around the 15th of each month and it reflects the previous month’s data. CPI measures the change in the cost of a bundle of consumer goods and services from month to month.
The Producer Price Index (PPI)

Along with the CPI, the PPI is one of the two most important measures of inflation. This report is released at 8:30 am EST during the second full week of each month and it reflects the previous month’s data. The producer price index measures the price of goods at the wholesale level. So to contrast with CPI, the PPI measures how much producers are receiving for the goods while CPI measures the cost paid by consumers for goods.

Employment Indicators

The most important employment announcement occurs on the first Friday of every month at 8:30 am EST. This announcement includes the unemployment rate; which is the percentage of the work force that is unemployed, the number of new jobs created, the average hours worked per week, and average hourly earnings. This report often results in significant market movement. You will often hear traders and analysts talking about “NFP”, this means Non-Farm Employment report, and it is perhaps the one report each month that has the greatest power to move the markets.

Durable Goods Orders
The durable goods orders report gives a measurement of how much people are spending on longer-term purchases, these are defined as products that are expected to last more than three years. The report is released at 8:30 am EST around the 26th of each month and is believed to provide some insight into the future of the manufacturing industry.
Retail Sales Index

The Retail Sales Index measures goods sold within the retail industry, from large chains to smaller local stores, it takes a sampling of a set of retail stores across the country. The Retail Sales Index is released at 8:30 am EST around the 12th of the month; it reflects data from the previous month. This report is often revised fairly significantly after the final numbers come out.


Housing Data
Housing data includes the number of new homes that a country began building that month as well as existing home sales. Residential construction activity is a major cause of economic stimulus for a country and so it’s widely followed by Forex participants. Existing home sales are a good measure of economic strength of a country as well; low existing home sales and low new home starts are typically a sign of a sluggish or weak economy.
Interest Rates

Interest rates are the main driver in Forex markets; all of the above mentioned economic indicators are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy. So while interest rates are the main driver of Forex price action, all of the above economic indicators are also very important.

Tuesday, August 20, 2013

trading strategies and systems

There are many different trading strategies and systems that pro traders use to trade the markets with, but generally speaking, professional traders do not use overly-complicated trading methods and rely mainly on the raw price data of the market to make their analysis and predictions. To be comprehensive, I wanted to give you guys a brief overview of all the primary different styles and ways people trade the Forex market:

Automated / Robot Trading:
                                                      Software-based trading systems, also known as forex trading robots, are created by converting a set of trading rules into code that a computer can make use of. The computer will then run this code via trading software that scans the markets for trades that meet the requirements of the trading rules contained in the code. The trades are then executed automatically via the trader’s broker.
 


Discretionary Trading:
                                        Discretionary Forex trading depends on a trader’s ‘gut’ trading feel or discretionary trading skill to analyze and trade the markets. Discretionary trading allows for a more flexible approach than automated trading but it does take a certain amount of time to develop your discretionary trading skill. Most professional Forex traders are discretionary traders because they understand the market is a dynamic and constantly flowing entity that is best traded by the human mind.

Technical Trading:
                                  Technical trading, or technical analysis, involved analysis of a market’s price chart for making one’s trading decisions. Technical analysis traders use price patterns or ‘technical signals’ to trade the market with an edge. The common belief amongst technical analysis traders is that all economic variables are represented by and factored into the price movement on a price chart.

Fundamental Trading:
                                          Fundamental trading, or news trading, is a trading technique wherein traders rely heavily on market news to make their trading analysis and predictions. Fundamental news does ‘drive’ price movement, but often times the market will react differently than what a particular news release would imply due to the fact that market participants often buy on expectations of future events and sell once the reality of said future event occurs. This is another main reason many pro traders rely more heavily on technical analysis than fundamental analysis, although many do use a combination of the two.

Day Trading:
                          Traders who day-trade the Forex market are in and out of the market within one day. This means they typically buy and sell currencies over a very short period of time and they may enter and exit numerous trades in one day.

Scalping:
                  Scalping is similar to day-trading but it relies on more frequent and shorter-term trades than even day-trading does. It is a trading style that refers to jumping in and out of the market many times a day to ‘scalp’ a few pips here and a few pips there, generally with little regard for placing logical stop-losses. Scalping is generally not recommended by experienced / pro traders because it is essentially just gambling.

Swing Trading / Position Trading:
                                                                This style of trading involves taking a short to mid-term view on the market and traders who swing trade will be in a trade anywhere from a few hours to several days or weeks. Swing or position traders are generally looking to trade with the near-term daily chart momentum and typically enter anywhere from 2 to 10 trades per month, on average.

Range Trading:
                                  Range trading involves trading a market that is consolidating between obvious support and resistance levels. By watching for trading signals near the support and resistance boundaries of the trading range, traders have a high-probability entry scenario with obvious risk and reward placement.



 

Trend Trading:
                                  Trend traders are traders who wait for the market to trend and then take advantage of this high-probability movement by looking for entries within the trend. An uptrend is considered to be in place when a market is making higher highs and higher lows, and a downtrend is in place when a market is making lower highs and lower lows. By looking for entries within a trending market, traders have the best chance at making a large profit on their risk. Traders who continually try to trade against the trend by trying to pick the top and bottom of the market, generally lose money quite quickly. Professional Fx traders are largely trend-traders.

Counter-trend Trading:
                                          Trends do indeed end, and if you are a savvy and skilled trader you can successful trade a counter-trend move, but this should not be tried until trend-trading has been mastered as counter-trend trading is inherently more risky than trend-trading and there can be many false tops or bottoms in a trend before the real one emerges.

Carry Trading:
                               Carry trading, or simply ‘the carry trade’ as it is called, is the strategy of simply buying a high interest-rate currency against a low interest-rate currency and holding the position for what is usually a long period of time. Forex brokers will pay traders the interest rate difference, or ‘swap’, between the two currencies for each day the position is held. The trick here is that higher-yielding currencies are susceptible to large sell-offs if the market loses risk appetite since these currencies are generally considered riskier than safe-haven currencies like the U.S. dollar or Japanese yen, so it’s a good idea to trail your stop loss up to lock in profit as the carry trade moves in your favor.

Caution: Forex trading is not a ‘get-rich-quick’ scheme

A professional Forex trader is someone who uses price movement in the Foreign exchange currency market to make profit. The aim of any Forex trader is to win as many trades as possible and also to maximize those winning trades. A professional Forex chart technician uses price charts to analyze and trade the market. By trading with an EDGE in the market, professional traders can put the odds in their favor to successfully trade price movement from point A to point B.
Technical-Forex-Trading

Caution: Forex trading is not a ‘get-rich-quick’ scheme and it is more difficult to make money in Forex than what most popular Forex system-selling websites would have you believe. To trade profitably we must not only have winning trades, but we must also cut our losing trades short so that our winners out-pace our losers. You see, losing is an enviable part of trading the Forex markets, and you must learn to lose properly by taking small losses relative to your winners. This means you must A L W A Y S trade with a stop loss on E V E R Y trade you take and make sure the dollar amount you have at risk is an amount you are 100% comfortable with losing.
Professional Forex price-chart traders have a winning edge which is developed via Technical Analysis (more on this in Part 4). There are also Fundamental Analysis traders and traders who use a combination of both analysis techniques; we will discuss all of these later.
A professional Forex trader understands that reading a price chart is both art and skill, and as such, they do not try to mechanize or automate the process of trading as each moment in the market is unique, so it takes a flexible and dynamic trading strategy to trade the markets with a high-probability edge.

Monday, August 19, 2013

How to calculate profit and loss

Lot size / Contract size
In Forex, positions are quoted in terms of ‘lots’. The common nomenclature is ‘standard lot’, ‘mini log’, ‘micro lot’, and ‘nano lot’; we can see examples of each of these in the chart below and the number of units they each represent:
 

• How to calculate pip value
You probably already know that currencies are measured in pips, and one pip is the smallest increment of price movement that a currency can move. To make money from these small increments of price movement, you need to trade larger amounts of a particular currency in order to see any significant gain (or loss). This is where leverage comes into play; if you don’t understand leverage totally please go read Part 1 of the course where we discuss it.
So we need to know now how lot size affects the value of one pip. Let’s work through a couple examples:
We will assume we are using standard lots, which control 100,000 units per lot. Let’s see how this affects pip value.
1) EUR/JPY at an exchange rate of 100.50 (.01 / 100.50) x 100,000 = $9.95 per pip
2) USD/CHF at an exchange rate of 0.9190 (.0001 / .9190) x 100,000 = $10.88 per pip
In currency pairs where the U.S. dollar is the quote currency, one standard lot will always equal $10 per pip, one mini-lot will equal $1 per pip, one micro-lost will equal .10 cents per pip, and a nano-lot is one penny per pip.

• How to calculate profit and loss
Now, let’s move on to calculating profit and loss:
Let’s use a pair without the U.S. dollar as the quote currency since these are the trickier ones:
1) The rate for the USD/CHF is currently quoted at 0.9191 / 0.9195. Let’s say we are looking to sell the USD/CHF, this means we will be working with the ‘bid’ price of 0.9191, or the rate at which the market is prepared to buy from you.
2) You then sell 1 standard lot (100,000 units) at 0.9191
3) A couple of days later the price moves to 0.9091 / 0.9095 and you decide to take your profit of 96 pips, but what dollar amount is that??
4) The new quote price for the USD/CHF is 0.9091 / 0.9095. Since you are now closing the trade you are working with the ‘ask’ price since you are going to buy the currency pair to offset the sell order you previously initiated. So, since the ‘ask’ price is now 0.9095, this is the price the market is willing to sell the currency pair to you, or the price that you can buy it back at (since you initially sold it).
5) The difference between the price you sold at (0.9191) and the price you want to buy back at (0.9095) is 0.0096, or 96 pips.
6) Using the formula from above, we now have (.0001 / 0.9095) x 100,000 = $10.99 per pip x 96 pips = $1055.04
For currency pairs where the U.S. dollar is the quote currency, calculating profit or loss is pretty simple really. You simply take the number of pips you gained or lost and multiple that by the dollar per pip you are trading, here’s an example:
Let’s say you trade the EURUSD and you buy it at 1.3200 but the price moves down and hits your stop at 1.3100….you just lost 100 pips.
If you are trading 1 standard lot you would have lost $1,000 because 1 standard lot of pairs with the U.S. dollars as the quote currency = $10 per pip, and $10 per pip x 100 pips = $1,000
If you had traded 1 mini-lot you would have lost $100 since 1 mini-lot of USD quote pairs is equal to $1 per pip and $1 x 100 pips = $100
Always remember: when you enter or exit a trade you have to deal with the spread of the bid/ask price. Thus, when you buy a currency you will use the ask price and when you sell a currency you use the bid price.

Saturday, August 17, 2013

Order types

Now it’s time to cover order types. When you execute a trade in the Forex market it is called an ‘order’, there are different order types and they can vary between brokers. All brokers provide some basic order types, there are other ‘special’ order types that are not offered by all brokers though, and we will cover them all below:

Market order – 
                                 A market order is an order that is placed ‘at the market’ and it’s executed instantly at the best available price.

Limit Entry order –
                                        A limit entry order is placed to either buy below the current market price or sell above the current market price. This is a bit tricky to understand at first so let me explain:
If the EURUSD is currently trading at 1.3200 and you want to go sell the market if it reaches 1.3250, you can place a limit sell order and then when / if the market touches 1.3250 it will fill you short. Thus, the limit sell order is placed ABOVE current market price. If you want to buy the EURUSD at 1.3050 and the market is trading at 1.3100, you would place your limit buy order at 1.3050 and then if the market hits that level it will fill you long. Thus the limit buy order is placed BELOW current market price.

Stop Entry order – 
                                       A stop-entry order is placed to buy above the current market price or sell below it. For example, if you want to trade long but you want to enter on a breakout of a resistance area, you would place your buy stop just above the resistance and you would get filled as price moves up into your stop entry order. The opposite holds true for a sell-stop entry if you want to sell the market.

Stop Loss order – 
                                   A stop-loss order is an order that is connected to a trade for the purpose of preventing further losses if the price moves beyond a level that you specify. The stop-loss is perhaps the most important order in Forex trading since it gives you the ability to control your risk and limit losses. This order remains in effect until the position is liquidated or you modify or cancel the stop-loss order.

Trailing Stop – 
                               The trailing stop-loss order is an order that is connected to a trade like the standard stop-loss, but a trailing stop-loss moves or ‘trails’ the current market price as your trade moves in your favor. You can typically set your trailing stop-loss to trail at a certain distance from current market price, it will not start moving until or unless the price moves greater than the distance you specify. For example, if you set a 50 pip trailing stop on the EURUSD, the stop will not move up until your position is in your favor by 51 pips, and then the stop will only move again if the market moves 51 pips above where your trailing stop is, so this way you can lock in profit as the market moves in your favor while still giving the trade room to grow and breath. Trailing stops are best used in strong trending markets.

Good till Cancelled order (GTC) –
                                                                   A good till cancelled order is exactly what it says…good until you cancel it. If you place a GTC order it will not expire until you manually cancel it. Be careful with these because you don’t want to set a GTC and then forget about it only to have the market fill you a month later in a potentially unfavorable position.

Good for the Day order (GFD) – 
                                                               A good for day order remains active in the market until the end of the trading day, in Forex the trading day ends at 5:00pm EST or New York time. The exact time a GFD expires might vary from broker to broker, so always check with your broker. 

One Cancels the Other order (OCO) – 
                                                                          A one cancels the other order is essentially two sets of orders; it can consist of two entry orders, two stop loss orders, or two entry and two stop-loss orders. Essentially, when one order is executed the other is cancelled. So, if you want to buy OR sell the EURUSD because you are anticipating a breakout from consolidation but you don’t know which way the market will break, you can place a buy entry and stop-loss above the consolidation and a sell entry with stop-loss below the consolidation. If the buy entry gets filled for example, the sell entry and its connected stop loss will both be cancelled instantly. A very handy order to use when you are not sure which direction the market will move but are anticipating a large move.

One Triggers the Other order (OTO) – 
                                                                          This order is the opposite of an OCO order, because instead of cancelling an order upon filling one, it will trigger another order upon filling one.

Saturday, August 10, 2013

Going long, Going short

The basic idea of trading the markets is to buy low and sell high or sell high and buy low. I know that probably sounds a little weird to you because you are probably thinking “how can I sell something that I don’t own?” Well, in the Forex market when you sell a currency pair you are actually buying the quote currency (the second currency in the pair) and selling the base currency (the first currency in the pair).
In the case of a non-Forex example though, selling short seems a little confusing, like if you were to sell a stock or commodity. The basic idea here is that your broker lends you the stock or commodity to sell and then you must buy it back later to close the transaction. Essentially, since there is no physical delivery it is possible to sell a security with your broker since you will ‘give’ it back to them at a later date, hopefully at a lower price.
• Long vs. Short
Another great thing about the Forex market is that you have more of a potential to profit in both rising and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone who has traded for a while knows that the fastest money is made in falling markets, so if you learn to trade both bull and bear markets you will have plenty of opportunities to profit.
LONG – When we go long it means we are buying the market and so we want the market to rise so that we can then sell back our position at a higher price than we bought for. This means we are buying the first currency in the pair and selling the second. So, if we buy the EURUSD and the euro strengthens relative to the U.S. dollar, we will be in a profitable trade.
SHORT – When we go short it means we are selling the market and so we want the market to fall so that we can then buy back our position at a lower price than we sold it for. This means we are selling the first currency in the pair and buying the second. So, if we sell the GBPUSD and the British pound weakens relative to the U.S. dollar, we will be in a profitable trade.
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Friday, August 9, 2013

Understanding Forex currency pair quotes


You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this:
The exchange rate of two currencies is quoted in a pair, such as the EURUSD or the USDJPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar:





 

The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency.

You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this:
The exchange rate of two currencies is quoted in a pair, such as the EURUSD or the USDJPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar:
If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.32105 U.S. dollars to buy 1 euro.
If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, in the example above, you will receive 1.32105 U.S. dollars if you sell 1 euro.
An easy way to think about it is like this: the BASE currency is the BASIS for the trade. So, if you buy the EURUSD you are buying euro’s (base currency) and selling dollars (quote currency), if you sell the EURUSD you are selling euro’s (base currency) and buying dollars (quote currency). So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair; the base currency.
The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate (increase in value) relative to the quote currency. If you think the base currency will depreciate (lose value) relative to the quote currency you would sell the pair.
• Bid and Ask price
 

Bid Price – The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.

Ask Price – The ask price is the price at which the market (or your broker) will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker.

Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between the bid and ask the price.

Wednesday, August 7, 2013

Forex terminology

The Forex market comes with its very own set of terms and jargon. So, before you go any deeper into learning how to trade the Fx market, it’s important you understand some of the basic Forex terminology that you will encounter on your trading journey…

• Basic Forex terms:

Cross rate - 
                      The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.
For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U.S. However, if the exchange rate between the pound and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency. 

Exchange Rate - 
                                The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.

Pip – 
        The smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.

Leverage - 
                       Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).

Margin - 
                  The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1.
If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

Spread - 
                  The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.

Monday, August 5, 2013

Advantages of Trading the Forex Market:

• Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means dense liquidity which makes it easy to get in and out of positions.
• Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday around 5pm EST to Friday around 4pm EST.
• Ease of access: You can fund your trading account with as little as $250 at many retail brokers and begin trading the same day in some cases. Straight through order execution allows you to trade at the click of a mouse.
• Fewer currency pairs to focus on, instead of getting lost trying to analyze thousands of stocks
• Freedom to trade anywhere in the world with the only requirements being a laptop and internet connection.
• Commission-free trading with many retail market-makers and overall lower transaction costs than stocks and commodities.
• Volatility allows traders to profit in any market condition and provides for high-probability weekly trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so traders have equal opportunity to profit in rising or falling markets.
While the forex market is clearly a great market to trade, I would note to all beginners that trading carries both the potential for reward and risk. Many people come into the markets thinking only about the reward and ignoring the risks involved, this is the fastest way to lose all of your trading account money. If you want to get started trading the Fx market on the right track, it’s critical that you are aware of and accept the fact that you could lose on any given trade you take.

Sunday, August 4, 2013

Advantages of being a Forex trader

Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list of skills you will need to reach your goals in the Forex market:

Ability - to take a loss without becoming emotional

Confidence - to believe in yourself and your trading strategy, and to have no fear

Dedication – to becoming the best Forex trader you can be

Discipline - to remain calm and unemotional in a realm of constant temptation (the market)

Flexibility - to trade changing market conditions successfully

Focus – to stay concentrated on your trading plan and to not stray off course

Logic – to look at the market from an objective and straight forward perspective

Organization – to forge and reinforce positive trading habits

Patience – to wait for only the highest-probability trading strategies according to your plan

Realism – to not think you are going to get rich quick and understand the reality of the market and trading

Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times

Self-control – to not over-trade and over-leverage your trading account

As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be a loser. More on money management later in the course.