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Forex Chart Study : More on Indicators

Forex chartists use price charts to identify apparent market trends. But mere identification is not enough. They need to know how strong and lasting the trends are. This is done with the help of indicators.

Moving Averages

Being one of the most widely used indicators, these lines laid out on charts average out short term fluctuations enabling one to observe long term trends.

Simple moving averages average all price points over the whole period, like a normal average. Weighted moving averages also smoothen out the price curve, but emphasise on recent price changes more than past ones. The third type are exponential moving averages and are different from the other two in that they multiply a certain percentage of the latest price with previous averages to obtain the average curve.

It can take some time to find what combination of moving average and period length works best for the currency pair you’re targeting. Once you find the right combo, you will be able to trace patterns easier, and hence keep track of your trades accordingly.

Stochastics

These are studies that indicate trend sustainability and price reversals. %K and % D are the two types used in stochastics, measured on scale of 0 to 100; %D is a slow, long term indicator while %K is the faster more responsive indicator. These studies serve no useful purpose in a choppy sideways market.

Relative Strength Index (RSI)

The RSI also measures price movements on a 0 to 100 scale. It is advisable to confirm RSI signals with other indicators. RSI will vary according to the time frame used. Short term RSI fluctuates more and is suitable for day traders while long-term position traders will benefit more using a longer time frame.

Moving Average Convergence Divergence (MACD)

Mac-dee charts the differences between exponential moving averages (26 day and 12 day). A 9 day moving average is used as the trigger line, which when crossed by MACD gives a bullish or bearish signal (going higher than or lower than the trigger line respectively).

There are other indicators like Bollinger bands and Fibonacci retracements which are also used, but the above mentioned indicators are the most commonly used ones.

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Analysing Indicators and Spotting Trends

We are now aware of the various technical indicators that are used in technical analysis in the forex market. In this article we will see how indicators and trends are related. One of the best things to do during technical analysis is to use more than one indicator to get a fairly good idea of the how strong a potential trend is and how long it is likely to last.

A trend, from a trader’s viewpoint is basically a predictable movement of prices at support and resistance levels. If prices break either of these levels, it is a strong indicator of the trend’s staying power. Identifying trends on historical charts is not a difficult job; it can be done with near perfection. But accurately predicting and identifying price moves while the trend is still developing is a harder task. Draw trendlines over longer time frames, and gradually move down to shorter intervals (of the order of hours). This way you will not miss the long-term trend in trying to identify the short-term ones.

The Directional Movement Indicator (DMI) is a valuable tool that reduces guesswork and enables us to confirm our trendline analysis. It has two parts:

- Average Directional Movement Index (ADX): A higher ADX indicates a stronger trend. A reading of over 20 usually indicates a lasting trend. A sudden drop in ADX signals exit time, until a fresh signal is obtained from DI lines.

- DI Lines (DI+ and DI-): When the + reaches and crosses – levels, it is a buy sign, and vice versa.

A number of traders also refer to what is called the parabolic indicator to confirm ADX signals.

These methods can be used for the short term, even in a sideways seemingly trendless market. But as an obvious precaution, keep in mind the larger trends. Playing on a short term trend totally against the larger one is stupidity.

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The Forex Trend-Line Analysis - Understanding the forex trends

It is basically the overall direction prices that might be moving Up, Down or Flat.

A trend may comprise of many other smaller trends that sum up to make the entire trend. The direction in which the trend is pointing is very important when it comes to trading and surveying the market. Trends in Forex can be understood as the response, which you can predict on the basis of analysis, to the price at its very own level of opposition or support over a span of time. To illustrate a little, prices are recovered when they are in the proximity of the apex in an upward trend. However the case is just the opposite with the downward trend – prices increase when they come nearer to the opposition levels. A trend is identified in such a manner. This is called, what is referred to as the ‘Trade-line examination’.

Trend-line examination is often underrated. In the view of some analysts, there is a lot of subjectivity used in it that it is a little retrospective. Though such analysts cannot be held completely wrong but they also overlook that trend-lines help concentration when it comes to essential price designs thus pulling out the redundant factors which are there in the market. So it can be said that the Trend-line analysis should be your very first process in determining the existence of a trend. If you continue to follow the same and it does not show any existence of a trend, then you can be sure that there isn’t any.

The Trend-line analysis is made the best use of when you are using it for a longer period of time for eg. Daily to weekly. With the passage of time we can move to hourly timeframes as well where levels of opposition and support may be found out. This methodology has proved quite beneficial because it lets you give more importance to those aspects in trends which are more significant than the others rather than to the less important ones. Also by making use of this method, traders reduce the risk of following a not so permanent leg up that might have come in the trend. It also ensures that you don’t miss an important long-term upward trend.

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Doing the Technical Analysis in Forex

All markets require careful and detailed analysis to result in profitable trades. Technical analysis is one of the ways of analyzing the forex market. It basically involves studying past market trends.

Technical analysts follow certain assumptions for their analysis:

• Price data reflects all market fundamentals, and nothing else needs to be studied.
• The market does follow trends. The key is to figure out the trend. Once a trend is established, it will in all likeliness continue for some time.
• Previous market trends repeat. One just needs to look for the signals, and identify the trend and the repetition.

Technical analysis sticks to stats and stats only. No emotion, no rumours, no news. It deals objectively, and helps you go through with your planned entry and exit without getting distracted. Technical analysis uses various indicators to study the market. They include:

• Moving Averages which are further divided into:
  
  
  • Simple Moving Average
  • Weighted Moving Average
  • Exponential Moving Average

• Stochastics
• Relative Strength Index (RSI)
• Bollinger Bands
• Moving Average Convergence Divergence (MACD – one of the most widely used)
• Fibonacci Retracements

Price charts are also of different types including the common bar charts, candlestick charts and point & figure charts.

Forex trading is a game of odds. If you can trade the odds, you stand a higher chance of winning. Do not bother with what is making the trends. Bother with the trend itself. The price is changing, and that’s it. Why that is happening doesn’t matter as long as you study the price change accurately. Be objective, be disciplined, and follow the rules. If you can’t follow the rules of your system, you cannot be a forex trader. You won’t fail because your methods were wrong, you would fail because your discipline was poor.

You can compare technical analysts with ship captains who study charts to get from their source to their destination through an ocean that can support them, or drown them. Technical analysis if used correctly can provide you unbelievable income in no time. But you need time to satisfy the pre-requisite of using it correctly.

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How to keep your risks to a minimum in forex trade ?

Risk Management is basically an approach to manage uncertainty which might be linked to a threat through a series of human activities like risk strategies, management, its management and even migration of risk.

The strategies basically consist of transference of risk to a different party, avoiding it, bringing down the ill effects of risks, and receiving the consequences and results of a given risk. Some of the traditional risk managements are highlighted on the risks arising from legal or physical causes (eg: accidents, lawsuits, natural disasters, fires etc.). On the other hand Financial Risk Management focuses upon the risks that can easily be managed with the help of traded financial instruments.

The basic objective of Risk Management is the lower the no. of various risks linked to a domain selected beforehand and bring them to such a level that may be accepted by the society. It may also refer to the various threats caused by technology, humans, environment, politics and organizations. On the obverse side it includes all the basic means available to humans or rather for a entity of risk management (organization, staff, person).

The video below gives an excellent step by step risk management execution for a forex newbie using real time screenshots:

In case of ideal Risk Management, a process based on prioritization is followed in which the risks with maximum probability are dealt first then the ones with the second highest probability and the process continues in the same manner. The process is very difficult in actuality. Sometimes its difficult to handle and strike the right balance between a risk with high probability but low loss and another with low probability and high loss.

In Intangible Risk Management there might be a risk with almost 100% probability but even then it is not accepted by the company because there is lack in the ability of identification. Eg: when insufficient information is used for a particular solution, the ‘knowledge’ risk materializes. Risks related to Relationship also start appearing when the collaboration does not prove to be effective. The issues relating to process-engagement risk may also arise when the applied operational procedures are ineffective. Such risks are instrumental in reducing the productivity of workers, profitability, reputation, quality, service and brand value. Intangible Risk Management permits risk management to make instant value from the reduction and identification of risks that directly reduce productivity.

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High Probability Forex Trading

High probability trading in Forex is basically about getting into position when your probability of making a profit is high. So no matter whether you are a long term or a short term trader, you would always like to be in such a position where you end up getting a profit.

Though it may sound very obvious but it happens that traders do not consider the probability factor while trading, though doing which is very easy and could result in them becoming much more selective regarding their trading, hence more profitable.

What you should do is rate every potential trade on a scale of 1 to 10 according to your intuition that a particular trade will win. For example: you are thinking of going into a short position while you have the technical indicator backing you up strongly, then you have good chances of winning and you might rate it 9 or sometimes even 10 on 10.

Therefore it’s a good idea to get into such a trade because the chances of your winning are quite high. However if the technical indicators have some sort of conflicts among themselves, then the trade should only be rated a maximum 6 out of 10 i.e. it would be better not to trade.

So it’s better to make use of this system and trade positions that you have assigned more than or equal to 8. This makes sure that there are more chances of your winning than losing. It would also be better to adapt a 4 or 5 hour trading strategy because it highlights those EMA crossovers that are mostly 8 or even more out of 10, which are based on the past results. So again the success rate is quite high. For the same reason you should not trade off of these 5 minutes charts because you will hardly find trades with which you can be confident. Almost every trade is a borderline case therefore you get a maximum 6 out of 10.

So whenever you trade with Forex, make sure that you rate every trade that you try on a scale of 1 to 10 regarding its probability of winning, and trade only those coming in at 8 or more. This will increase your win ratio and also your profits by a considerable value.

I recommend GTI for their awesome support and high spread. If you are starting for forex or even a pro, GTI has to be your best choice.

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Forex Leverage and Margins

First things first. What is leverage? Leverage refers to “the use of a small initial investment in order to control a much larger one, additionally gaining a high profit compared to the investment, and reducing one’s liability for loss, if any”.

Leverage plays a very important role in the forex market. If you’re still not aware, you need to know that while trading in forex, you make transactions worth multiples of $100,000. An investment that huge is extremely difficult to arrange and handle. This is where leverage comes in. You can (now easily) obtain what is known as a margined account from your brokerage. Through a margined account, you can control investments up to 100 times the deposit.

The minimum deposits vary from broker to broker, and so does the rate per lot (a lot is essentially a ‘packet-size’ of $100,000). As an example we can say that your broker is offering you a margined account with a margin (deposit) of $2000, and a lot rate of say 1% (meaning your deposit needs to be at least 1% of the amount you wish to trade), which means that you can control $200,000 with an initial investment of a mere two thousand dollars.

Two more concepts come in at this point. The first is Margin Call. If at any time during the trade, you run into a loss that is approaching the value of your deposit, your broker may do a margin call i.e. he may call and ask you to either deposit more money, or close the position/trade to limit both his risk as well as yours. The second concept is that of Variation Margin. This is based on the study of your current profits and losses on any open trades. This is better explained using an example: Say you’re playing a trade of $500,000 and your account deposit is $10,000. To play that trade you use $5000. Unfortunately you run up a loss of $5001. Under such conditions, the broker may do a margin call. Even though you still have $4999 in your account, the broker uses it as security. Also, letting you use it in a situation such as above will be very risky.

Margin rates are very variable. They vary from broker to broker of course, but may even very from weekdays to weekends with the same broker.

For finding an interesting opportunity of a forex managed account preposition deal, I would recommend you to visit ForSeriousProfits.com. It comes directly from a friend of mine who has been actively trading in forex since last 5 years. You can get this one time opportunity to tie up with him where he manages your account and promises you a 3% daily return on investment. Minimum investment eligibility is $2000. More details can be found here.

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Technical aspects of Forex made easy

When you read this I will assume you can make out what the following means:

USD/JPY @ 114.55/114.60

I will still summarise in one line: The above says that US Dollars are being traded against Japanese Yen at a rate of 114.55 Yen/Dollar if you’re selling and 114.60 if you’re buying. The difference between the two rates is called the spread and usually values at 5 a pip.

A PIP is the last decimal place in a rate, or in other words the minimum value of increment/decrement in currency rates. Most currencies have a PIP of 0.0001, the Yen being an exception. It trades on a PIP of .01. We will now move on to PIP Values.

Don’t be confused, read on.

Assuming the USD as a constant for reference, consider the above example:

USD/JPY: 0.1 (the pip) divided by the exchange rate gives us the pip value i.e. 0.01/114.55 = 0.0000872

It might look like a complicated and apparently meaningless figure, but we’ll understand it better when you know about lots.

LOTS are simply, lots. When you purchase currency, you don’t purchase say one dollar or 5 dollars. That just sounds stupid. Instead, you purchase in lots of $100,000, as a standard. Nowadays, the smaller investor can purchase in mini-lots of 10,000 as well, something that wasn’t there earlier.

Now comes the interesting part: Calculating your profit or loss. Suppose you buy USD for Japanese Yen and are given the quote as above (refer beginning example). The rate you pay will be 114.60 and NOT 114.55, since you are a buyer. If you had been selling, the rate would’ve been 114.55. As a rule of thumb, remember that you pay more while buying, but get less when selling. So the rate for buying will be the greater value i.e. 114.60. Say you purchase a lot of $100,000 to enter trade. After sometime, you ask for a fresh quote and you’re given a quote of say 114.80/114.85. You’re in luck! The rates are high so if you sell now, you make a profit. You decide to sell and close the trade. The selling rate, or the bid, going by the thumb rule, is now 114.80. The difference between what you paid and what you will get is .20 or 20 Pips.

The profit is calculated as follows:

0.1/114.55 = 0.0000872 (Pip value) X 100,000 (lot) = 8.72 (per pip) X 20 (value changed by 20 pips) = 174.4.

Congratulations! You just made a profit of approximately $175!

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Forex Market Mechanics ESSENTIALS

Forex as you probably know refers to foreign exchange i.e. foreign currency trade. It is a market which has no official exchange, and is 24 hours. Trading takes place through large financial institutions like banks, as well as small dealers and private individuals. Most of the trade is speculative, with only a small fraction of the purchases actually going through at the end of the day. We’ll be dealing with the basics of how this particular market functions. Most of what you’ll read here is for your knowledge and understanding. In actuality, all of this will be handled by your broker, the guy who handles the actual transactions for you.

The primary factor is obviously the rate at which you buy/sell currency. More »

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