It is important to be clear and fully understand the concept of support and resistance (S&R) if you want to interpret the movement of a Forex chart correctly. So, what exactly is support and resistance? Why do support & resistance happen? It is basically an economic question that will be beyond the scope of my post today, and also it is not necessary for us to underatnd it.
What we need to do is to understand what exactly is support & resistance.
Resistance are levels that exists above the current price. It act as a barrier to the price preventing it from increasing above that level.
Support are levels that exists below the current price. It act as a barrier to the price and preventing it from falling below that level.
Try to imagine having a bouncing with unlimited energy in a room. When the ball bounce up and hits the celing, it will rebounce and head towards the floor. When it hits the floor, it will rebounce and head towards the celing. You can simply take the ball as the price, the celing as the resistance and lastly the floor as the support. It takes great effort to break strong S&R like the celing and the floor.
So to trade in Forex, it is very important to know where all the S&R lines are for the currency pair that you are looking. Why? The reason is simple. The lines are the place where price can either breakout or price will rebounce S&R. It might present you a new trade opportunity. So by knowing where the S&R lines are in advance, we can try to take profits at these lines.
Friday, September 25, 2009
Tuesday, September 22, 2009
Video - Support and Resistance Line Trading
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Monday, September 21, 2009
What is Market Activities and How do we measure them?
I have discussed in my previous posts, the Asian, European and North American sessions, their operating hours, and how they affect price action for the different currency pairs. A currency such as the Japanese Yen would be the most active during its own market. It will see higher volatility on average during the Asian session.
This is simply due to the fact that most of the banks, big businesses and major traders from Japan will use their own domestic currency for foreign exchange transactions and as such the currency Japanese Yen will be more active and volatile during the Asian session. The other reason it is also more difficult for banks, traders to buy or sell a currency from a region where their market is still closed. That is why, you should not really expect the USDCHF pair to be active and volatile during the Asian market.
To explain this further, if a Euro bank would like to make a multi-billion dollar currency exchange for Japanese Yen, it would most likely do so when Asian (Japanese) banks are online and there is a greater pool of liquidity. Otherwise, large orders like this in a thin market (if this is done during the European session) would definitely result in prices moving away from the ideal entry point when the order is processed.
Since a currency is the most active and volatile during its own market, it can therefore lead to another conclusion. The price action is usually greatest when the sessions overlap. When traders, banks and business from two different sessions are online, there are more participants in the market and, therefore, a greater level of liquidity is available. The first sharp rise in price action will generally occurs around the closing hours of the Asian session and opening of the European session at around 0700 GMT.
The second and larger jump in activity could be seen when the North American and European sessions converge between 0000 and 1600 GMT. This four-hour overlap is the greatest union in two different sessions. The volatility can be clearly seen from the large amount of liquidity.
However, beside overlapping session, there is another factor at work that will drive price action further up or down. This driving force normally appears at around 0800 GMT. This is due to the release of economical news from the U.K. There is also another moment which economical news release will affect the price action and that is the release of the U.s. news at between 1230 to 1400 GMT, which will coincides with a sharp peak in the activity for GBPUSD, EURUSD.
There is another area that we have to consider. Each currency pair consists of 2 currencies. If the components of the currency pair are made up of currencies from the same session, they are more likely to have a greater level of activity and volatility. One such pair is the USDCAD. For the GBPJPY pair, they will see more activity and volatility during the overlapping of the Asian and European session.
This is simply due to the fact that most of the banks, big businesses and major traders from Japan will use their own domestic currency for foreign exchange transactions and as such the currency Japanese Yen will be more active and volatile during the Asian session. The other reason it is also more difficult for banks, traders to buy or sell a currency from a region where their market is still closed. That is why, you should not really expect the USDCHF pair to be active and volatile during the Asian market.
To explain this further, if a Euro bank would like to make a multi-billion dollar currency exchange for Japanese Yen, it would most likely do so when Asian (Japanese) banks are online and there is a greater pool of liquidity. Otherwise, large orders like this in a thin market (if this is done during the European session) would definitely result in prices moving away from the ideal entry point when the order is processed.
Since a currency is the most active and volatile during its own market, it can therefore lead to another conclusion. The price action is usually greatest when the sessions overlap. When traders, banks and business from two different sessions are online, there are more participants in the market and, therefore, a greater level of liquidity is available. The first sharp rise in price action will generally occurs around the closing hours of the Asian session and opening of the European session at around 0700 GMT.
The second and larger jump in activity could be seen when the North American and European sessions converge between 0000 and 1600 GMT. This four-hour overlap is the greatest union in two different sessions. The volatility can be clearly seen from the large amount of liquidity.
However, beside overlapping session, there is another factor at work that will drive price action further up or down. This driving force normally appears at around 0800 GMT. This is due to the release of economical news from the U.K. There is also another moment which economical news release will affect the price action and that is the release of the U.s. news at between 1230 to 1400 GMT, which will coincides with a sharp peak in the activity for GBPUSD, EURUSD.
There is another area that we have to consider. Each currency pair consists of 2 currencies. If the components of the currency pair are made up of currencies from the same session, they are more likely to have a greater level of activity and volatility. One such pair is the USDCAD. For the GBPJPY pair, they will see more activity and volatility during the overlapping of the Asian and European session.
Thursday, September 17, 2009
More in Depth on The Three Major Session of the Forex Market
The 24 hour Forex market offers great advantage to alot of us traders as it guarantees liquidity and the opportunity to trade at any conceivable time, BUT it also has its own drawbacks. It is a fact that currency can be traded over 24 hours a day but we traders are basically human and there is no way that we can monitor the Forex market every single minute.
The inability to track the market every minute would result in missed opportunities, or even worse, when a sudden increase in volatility that will result in a move against our already open position.
As there are 3 major sessions in the Forex market, traders will have to understand the effect of the various session on the different pairs of currency so as to minimize his risk, and also the best time in which he can trade with his trading strategy/plan.
It is a fact that the Forex Market is separated into 3 sessions, namely the Asian Session (Tokyo), European Session (London) and the North America Session (New York). These 3 cities represent the 3 major financial cities for the 3 sessionsand as such their names can be used to name the 3 sessions. The Forex markets are the most active and volatile during the operation of the 3 sessions. Banks, large corporations, investment firms and individual investors look to trade mostly during these sessions.
Forex markets starts off with the Asian Session (Tokyo). When liquidity is restored to the Forex market after the weekend, Asian markets are the first to see actions. It is unofficially but a fact that activity from this part of the world is generally represented by the Tokyo capital markets, which are alive from 0000 to 0600 GMT.
It is also an important thing to keep in mind that many other countries such as Australia, New Zealand and China have strong influence on the Forex Market as well.
Due to the nature of the scattered markets, the opening and closing of the Asian session are stretched beyond the standard Tokyo hours in order to allow the different markets' activities. Therefore Asian session operating hours are often considered to be between 2300 and 0800 GMT.
The next market to open will be the European Session (London) at 0700 GMT, just before the close of the Asian market. The overlapping trading hours kept the Forex market alive. This Forex time zone is very dense and includes a lot of other major financial markets such as Germany, France, that could replace London. The official business hours for London starts at 0730 GMT and ends in 1530GMT. As explained before, due to the presence of the other markets, the London session actually run from 0700GMT to 1600GMT
Next and last to open will be the North American Session (New York). By the time it opened at 1200GMT, the Asian markets have been closed for almost 5 hours while it is only half way through for the London session. This session is the most important session of the three sessions. It is dominated with activity of the U.S. and with contributions from Canada, Mexico and of course a number of other countries in South America. This is the session with highest concentration of activites and volatilities. This is due to the early activity in financial, futures, commodity trading and the concentration of economical news releases during the North America session.
There is a big gap between the close of the U.S. market and the next opening of the Asian market at 2300 GMT. A lull in liquidity set in at the close of New York exchange at 2100 GMT (winter time) upto the time the North American session closes at 2200 GMT.
The inability to track the market every minute would result in missed opportunities, or even worse, when a sudden increase in volatility that will result in a move against our already open position.
As there are 3 major sessions in the Forex market, traders will have to understand the effect of the various session on the different pairs of currency so as to minimize his risk, and also the best time in which he can trade with his trading strategy/plan.
It is a fact that the Forex Market is separated into 3 sessions, namely the Asian Session (Tokyo), European Session (London) and the North America Session (New York). These 3 cities represent the 3 major financial cities for the 3 sessionsand as such their names can be used to name the 3 sessions. The Forex markets are the most active and volatile during the operation of the 3 sessions. Banks, large corporations, investment firms and individual investors look to trade mostly during these sessions.
Forex markets starts off with the Asian Session (Tokyo). When liquidity is restored to the Forex market after the weekend, Asian markets are the first to see actions. It is unofficially but a fact that activity from this part of the world is generally represented by the Tokyo capital markets, which are alive from 0000 to 0600 GMT.
It is also an important thing to keep in mind that many other countries such as Australia, New Zealand and China have strong influence on the Forex Market as well.
Due to the nature of the scattered markets, the opening and closing of the Asian session are stretched beyond the standard Tokyo hours in order to allow the different markets' activities. Therefore Asian session operating hours are often considered to be between 2300 and 0800 GMT.
The next market to open will be the European Session (London) at 0700 GMT, just before the close of the Asian market. The overlapping trading hours kept the Forex market alive. This Forex time zone is very dense and includes a lot of other major financial markets such as Germany, France, that could replace London. The official business hours for London starts at 0730 GMT and ends in 1530GMT. As explained before, due to the presence of the other markets, the London session actually run from 0700GMT to 1600GMT
Next and last to open will be the North American Session (New York). By the time it opened at 1200GMT, the Asian markets have been closed for almost 5 hours while it is only half way through for the London session. This session is the most important session of the three sessions. It is dominated with activity of the U.S. and with contributions from Canada, Mexico and of course a number of other countries in South America. This is the session with highest concentration of activites and volatilities. This is due to the early activity in financial, futures, commodity trading and the concentration of economical news releases during the North America session.
There is a big gap between the close of the U.S. market and the next opening of the Asian market at 2300 GMT. A lull in liquidity set in at the close of New York exchange at 2100 GMT (winter time) upto the time the North American session closes at 2200 GMT.
Thursday, September 10, 2009
The Three Major Session in Forex Market
It has already been discussed before the 24 hours trading nature of the Forex market. The continuous round the clock trading allows investors from all around the world to trade during their normal business hours, after work or even in the middle of the night.
But there is an interesting to note, not all trading times will result in great price action for the world's most volatile market. There will be times when the market is muted and price just consolidate around the region.
It is also interesting to note the price action behaviour of different pairs of currency and its volatility during certain trading hours. This is mostly due to the general demographic of those market participants that are online at the time.
In my subsequent posting, I will try to discuss the effects of the world's three major trading sessions, and try to explore and analysis what kind of market activity can be expected during the three major trading sessions.
But there is an interesting to note, not all trading times will result in great price action for the world's most volatile market. There will be times when the market is muted and price just consolidate around the region.
It is also interesting to note the price action behaviour of different pairs of currency and its volatility during certain trading hours. This is mostly due to the general demographic of those market participants that are online at the time.
In my subsequent posting, I will try to discuss the effects of the world's three major trading sessions, and try to explore and analysis what kind of market activity can be expected during the three major trading sessions.
Sunday, September 6, 2009
The Mechanics of Currency Markets - Margin Call
Margin Call is an important call that you as a Forex Trader will have to be familiar with. It is basically a broker's demand on you whom is using margin to trade to top up your account with additional money so that your margin account can be brought up to the minimum safety level. Margin Call will occur when your account reduces to a value lower than that the value calculated by your broker.
For example,if your broker thinks that your position is in danger, maybe with your open position of $100,000 and with a margin of one percent ($1,000). With your losses are approaching your margin of $1,000, your broker is most likely to initiate a Margin Call for you to increase the fund in your account or for you to close your position in order to limit both of your risk.
If you think that you are going to trade using a margin account it is off great importance that you confirm or talk to your broker about their policy on margin account. It is important to know how your broker will handle Margin Call. Would they request you to top up that margin or would they close off your position automatically?
Let's say you have decided to trade with $5,000 in your account with your broker. You then open 3 position (standard lot) of EURUSD, which is $300,000. You would required $3,000 (assumed 1%) as margin for the trades. Your trade goes bad and your record a loss of $2001. From this moment on, your account has a equity balance of $2,999 which is less than your required margin. Your broker in this case may request that you top up your account or even close off your positions by a Margin Call. The reason that your broker may do a Margin Call even though you still have $2,999 in your account is because the broker needs that as a form of security and if they allow you to use it, it could finally endanger both of you.
To look at it in another manner, If you have a $3,000 account, with 1 standard lot open, the margin required will be $1,000. In other words, this $1,000 will not be available for you to use as your trading capital. The $1,000 is still yours, but it is being held in trust for you by your broker as a form of security.
Many discussions have been help on the topic of margin and many argue that too much margin is dangerous. This is a point for YOU to note. It is important to remember as with all trading is concerned, you should thoroughly understand your broker's policies on the subject and you are comfortable with and understand your risk.
Please always remember that you should trade only with money that you can afford to lose and YOU SHOULD NOT trade more than what you can afford to lose. You would like to live to trade another day.
See my post on Money Management.
For example,if your broker thinks that your position is in danger, maybe with your open position of $100,000 and with a margin of one percent ($1,000). With your losses are approaching your margin of $1,000, your broker is most likely to initiate a Margin Call for you to increase the fund in your account or for you to close your position in order to limit both of your risk.
If you think that you are going to trade using a margin account it is off great importance that you confirm or talk to your broker about their policy on margin account. It is important to know how your broker will handle Margin Call. Would they request you to top up that margin or would they close off your position automatically?
Let's say you have decided to trade with $5,000 in your account with your broker. You then open 3 position (standard lot) of EURUSD, which is $300,000. You would required $3,000 (assumed 1%) as margin for the trades. Your trade goes bad and your record a loss of $2001. From this moment on, your account has a equity balance of $2,999 which is less than your required margin. Your broker in this case may request that you top up your account or even close off your positions by a Margin Call. The reason that your broker may do a Margin Call even though you still have $2,999 in your account is because the broker needs that as a form of security and if they allow you to use it, it could finally endanger both of you.
To look at it in another manner, If you have a $3,000 account, with 1 standard lot open, the margin required will be $1,000. In other words, this $1,000 will not be available for you to use as your trading capital. The $1,000 is still yours, but it is being held in trust for you by your broker as a form of security.
Many discussions have been help on the topic of margin and many argue that too much margin is dangerous. This is a point for YOU to note. It is important to remember as with all trading is concerned, you should thoroughly understand your broker's policies on the subject and you are comfortable with and understand your risk.
Please always remember that you should trade only with money that you can afford to lose and YOU SHOULD NOT trade more than what you can afford to lose. You would like to live to trade another day.
See my post on Money Management.
Thursday, September 3, 2009
The Mechanics of Currency Markets - Leverage
Leverage basically means the borrowing of a certain amount of the money that is needed for investment. In our case, the Forex. The money is is usually borrowed from your broker. In Forex trading the possibility of using high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money.
In order to calculate your margin-based leverage, you will need to divide your total transaction value (US$) by the amount of margin (US$) you are required to put up.
Margin-Based Leverage = Total Value of Transaction / Margin Required
Look at this example. If you are needed to deposit 1% of the total transaction value as your margin and you intend to trade one standard lot of USDJPY which is equivalent to US$100,000. The margin that you required would be US$1,000. Thus, your margin-based leverage will be calculated as: -
Levererage = 100,000 / 1,000 = 100:1.
For a margin requirement of 0.5%, your margin-based leverage will be 200:1 using the same equation.
I have discussed about margin-based leverage. However, margin-based leverage will not necessarily affect one's risks. It does not matter whethere you are required to put up 1%, 2% or even 3% of the transaction value as margin. This will not influence your profits or losses. This is because you can always attribute more than the required margin for any position. What it means in this case is that you need to look at your real leverage, and not margin-based leverage.
How do you do that? Simply, to calculate the real leverage you are currently using, you can apply the following equation: -
Real Leverage = Total Value of Transactions (Open Positions)/ Total Trading Capital
As an example, if you deposit $5,000 into your trading account, and you have decided to open a standard lot (which is equivalent to $100,000), you will be trading with a 20 times leverage on your account (100,000/5,000). If you trade two standard lots, which is worth $200,000 in face value with $5,000 in your account, then your leverage on the account is 40 times (200,000/5,000).
The only time that margin-based leverage and real leverage will be equal is when you are trading to your maximum. And since you do not normally use your entire account as margin for each of your trades, your real leverage tends to vary from your margin-based leverage.
In the next post, I will discussed about Margin Call by your broker.
In order to calculate your margin-based leverage, you will need to divide your total transaction value (US$) by the amount of margin (US$) you are required to put up.
Margin-Based Leverage = Total Value of Transaction / Margin Required
Look at this example. If you are needed to deposit 1% of the total transaction value as your margin and you intend to trade one standard lot of USDJPY which is equivalent to US$100,000. The margin that you required would be US$1,000. Thus, your margin-based leverage will be calculated as: -
Levererage = 100,000 / 1,000 = 100:1.
For a margin requirement of 0.5%, your margin-based leverage will be 200:1 using the same equation.
I have discussed about margin-based leverage. However, margin-based leverage will not necessarily affect one's risks. It does not matter whethere you are required to put up 1%, 2% or even 3% of the transaction value as margin. This will not influence your profits or losses. This is because you can always attribute more than the required margin for any position. What it means in this case is that you need to look at your real leverage, and not margin-based leverage.
How do you do that? Simply, to calculate the real leverage you are currently using, you can apply the following equation: -
Real Leverage = Total Value of Transactions (Open Positions)/ Total Trading Capital
As an example, if you deposit $5,000 into your trading account, and you have decided to open a standard lot (which is equivalent to $100,000), you will be trading with a 20 times leverage on your account (100,000/5,000). If you trade two standard lots, which is worth $200,000 in face value with $5,000 in your account, then your leverage on the account is 40 times (200,000/5,000).
The only time that margin-based leverage and real leverage will be equal is when you are trading to your maximum. And since you do not normally use your entire account as margin for each of your trades, your real leverage tends to vary from your margin-based leverage.
In the next post, I will discussed about Margin Call by your broker.
Tuesday, September 1, 2009
The Mechanics of Currency Markets - Contract Size
Spot Forex is traditionally traded in lots and also most of the time referred to as contracts. The standard size/contract for a lot is $100,000. As the forex market opens up in the last few years, mini lot size has been introduced at $10,000 and this again may change in the years to come.
As I have covered on PIPS in my last post, PIPS is the smallest increment/decrement unit of a currency. To take advantage of these tiny increments in PIPS value, it is necessary to trade large amounts of a particular currency in order for us to see any significant profit or loss.
I shall cover the leverage portion of Forex trading in a later post. But for the discussion, I will assume that you have the ability to purchase a standard/contract at $100,000.00. I will show you now how to recalculate some examples in The Mechanics of Currency Markets - PIPS to see the actual value of each pair of currency.
Take for example, USDCAD at 1.0915, the value of 1 pip would be 0.0001/1.0915 = 0.0000916. The actual value of 1 pip in dollars and cents will be 0.0000916 * $100,000.00 = $9.16.
USDJPY at 93.95, the value of 1 pip would be 0.01/93.95 = 0.0001061. The actual value of 1 pip in dollars and cents will be 0.0001061 * $100,000.00 = $10.61.
EURUSD at 1.4301, the value of 1 pip would be 0.0001/1.4301 * 1.4301 (exchange rate) = 0.0000699 * 1.4301 = 0.0001 (round up). The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00.
GBPUSD at 1.6267, the value of 1 pip would be 0.0001/1.6267 * 1.6267 (exchange rate) = 0.0000614 * 1.6267 = 0.0001 (round up). The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00.
Different brokers might have a different way of calculating the PIPS value relative to the lot/contract size, but they will be able to tell you the PIP value for the currency that you are trading at that moment of time. But, that is not important, you need to remember, as the market moves, the value of PIPS will also change.
I have already shown you how to calculate the PIP value. Now, I shall show you how it is related to the lot/contract size.
EUR/USD is quoted at 1.4334/1.4336. You would like to buy 1 Lot of EUR and sell US Dollars. The rate that you have to look out for will be 1.4336, the rate that other traders are prepared to sell. You proceed to buy 1 Lot of EUR at 1.4336. The price increase and you have a re-quote of the EURUSD pair at 1.4396/1.4398. To close your trade, you need to look at 1.4396, the price that traders are willing to buy from you. The gain in pips is 60 pips.
EURUSD at 1.4396, the value of 1 pip would be 0.0001/1.4396 * 1.4396 (exchange rate) = 0.00006946 * 1.4396 = 0.0001 (round up).The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00. The gain in 60 pips will be 60 * $10.00 = $600.00.
Next, if you are looking to trade in USDJPY. The quotes given at that time is 93.13/93.15. You are to sell US Dollar and buy Japanese Yen. The quote that you should look out for is 93.13, the price that other traders are willing to buy from you. The price drops to 92.81/92.83 in a few hours time. You now look to close your trade at 92.83, the price other traders are willing to buy from you. The gain in pips is 30 pips.
USDJPY at 92.83, the value of 1 pip would be 0.01/92.83 = 0.00010772. The actual value of 1 pip in dollars and cents will be 0.00010772 * $100,000.00 = $10.77. The gain in 30 pips will be 30 * $10.77 = $323.10.
The reverse calculation is true for losses.
Just a simple recap, when you buy a currency you will use the Ask price and when you sell a currency, you will use the Bid price. As can be seen from this, you will only pay spread when you buy currencies. But to note, spread are being paid per trade as each trade involves buy and sell each time.
As I have covered on PIPS in my last post, PIPS is the smallest increment/decrement unit of a currency. To take advantage of these tiny increments in PIPS value, it is necessary to trade large amounts of a particular currency in order for us to see any significant profit or loss.
I shall cover the leverage portion of Forex trading in a later post. But for the discussion, I will assume that you have the ability to purchase a standard/contract at $100,000.00. I will show you now how to recalculate some examples in The Mechanics of Currency Markets - PIPS to see the actual value of each pair of currency.
Take for example, USDCAD at 1.0915, the value of 1 pip would be 0.0001/1.0915 = 0.0000916. The actual value of 1 pip in dollars and cents will be 0.0000916 * $100,000.00 = $9.16.
USDJPY at 93.95, the value of 1 pip would be 0.01/93.95 = 0.0001061. The actual value of 1 pip in dollars and cents will be 0.0001061 * $100,000.00 = $10.61.
EURUSD at 1.4301, the value of 1 pip would be 0.0001/1.4301 * 1.4301 (exchange rate) = 0.0000699 * 1.4301 = 0.0001 (round up). The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00.
GBPUSD at 1.6267, the value of 1 pip would be 0.0001/1.6267 * 1.6267 (exchange rate) = 0.0000614 * 1.6267 = 0.0001 (round up). The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00.
Different brokers might have a different way of calculating the PIPS value relative to the lot/contract size, but they will be able to tell you the PIP value for the currency that you are trading at that moment of time. But, that is not important, you need to remember, as the market moves, the value of PIPS will also change.
I have already shown you how to calculate the PIP value. Now, I shall show you how it is related to the lot/contract size.
EUR/USD is quoted at 1.4334/1.4336. You would like to buy 1 Lot of EUR and sell US Dollars. The rate that you have to look out for will be 1.4336, the rate that other traders are prepared to sell. You proceed to buy 1 Lot of EUR at 1.4336. The price increase and you have a re-quote of the EURUSD pair at 1.4396/1.4398. To close your trade, you need to look at 1.4396, the price that traders are willing to buy from you. The gain in pips is 60 pips.
EURUSD at 1.4396, the value of 1 pip would be 0.0001/1.4396 * 1.4396 (exchange rate) = 0.00006946 * 1.4396 = 0.0001 (round up).The actual value of 1 pip in dollars and cents will be 0.0001 * $100,000.00 = $10.00. The gain in 60 pips will be 60 * $10.00 = $600.00.
Next, if you are looking to trade in USDJPY. The quotes given at that time is 93.13/93.15. You are to sell US Dollar and buy Japanese Yen. The quote that you should look out for is 93.13, the price that other traders are willing to buy from you. The price drops to 92.81/92.83 in a few hours time. You now look to close your trade at 92.83, the price other traders are willing to buy from you. The gain in pips is 30 pips.
USDJPY at 92.83, the value of 1 pip would be 0.01/92.83 = 0.00010772. The actual value of 1 pip in dollars and cents will be 0.00010772 * $100,000.00 = $10.77. The gain in 30 pips will be 30 * $10.77 = $323.10.
The reverse calculation is true for losses.
Just a simple recap, when you buy a currency you will use the Ask price and when you sell a currency, you will use the Bid price. As can be seen from this, you will only pay spread when you buy currencies. But to note, spread are being paid per trade as each trade involves buy and sell each time.
Monday, August 31, 2009
The effect of the Victory by Japan's Opposition Party in a Historic National Election
The morning after a historic victory by Japan's opposition party in the national election and yes pressure is already mounting on a Monday morning for quick, definitive action to resolve a host of problems faced by the country, with, of course, reviving the country's economy at the top of the list.
Japan is in its worst economic slump ever since World War II. It is caught in deflation and with the unemployment rate at its record high. The dissatisfaction of country wide voters caused an expected turnaround which led to a landslide victory for the opposition.
With the victory by the Japan's Opposition party, Japan’s Nikkei 225 stock average initially rose as much as 1.5 per cent to 10,767, its highest level in over 10 months. A strong surge in the value of YEN could be seen across majors YEN crosses such as USDJPY, EURJPY, GBPJPY, AUDJPY and CHFJPY. The strong surges occurs at the opening of the Tokyo Market around 0000GMT 31 August 2009. Surge of upto 100 pips could be seen.
Japan's Nikkei 225 stock average gave up the early gains and slipped 0.4 per cent to 10,497.19 by midday. The strengthening of the YEN lasted only around 3 hours and starts to lose its strength after midday too.
So, how will Japan's fare with its government? Will its economy be revived? How will the new Japan's government affect the world's eceonomy? Let's take a back seat now and observed how the trend goes..
Japan is in its worst economic slump ever since World War II. It is caught in deflation and with the unemployment rate at its record high. The dissatisfaction of country wide voters caused an expected turnaround which led to a landslide victory for the opposition.
With the victory by the Japan's Opposition party, Japan’s Nikkei 225 stock average initially rose as much as 1.5 per cent to 10,767, its highest level in over 10 months. A strong surge in the value of YEN could be seen across majors YEN crosses such as USDJPY, EURJPY, GBPJPY, AUDJPY and CHFJPY. The strong surges occurs at the opening of the Tokyo Market around 0000GMT 31 August 2009. Surge of upto 100 pips could be seen.
Japan's Nikkei 225 stock average gave up the early gains and slipped 0.4 per cent to 10,497.19 by midday. The strengthening of the YEN lasted only around 3 hours and starts to lose its strength after midday too.
So, how will Japan's fare with its government? Will its economy be revived? How will the new Japan's government affect the world's eceonomy? Let's take a back seat now and observed how the trend goes..
Sunday, August 30, 2009
Video - How to read Currency Quotes
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Saturday, August 29, 2009
The Mechanics of Currency Markets - PIPS
In currency trading, the smallest and most common increment is the PIP. IF GBPUSD move from 1.6251 to 1.6252, that increment is known as 1 PIP. PIP actually means Percentage increase in Points. The PIP is generally referered to as the last decimal place of a currency quote. Therefore if the currency quotes is in 4 decimal places, the one increment/decrement of 4th decimal place is known as 1 PIP. For currency quote for AUDJPY at 78.68, which has 2 decimal place, one increment/decrement of 4th decimal place is known as 1 PIP.
The PIP in currency trading is often seen as the measurement of profit/loss from the trade.
So what is the worth of a PIP exactly, since it measures profit or loss?
Each currency that is traded, it is therefore important to know the value of a PIP for that currency. We also require a constant value that we can use if there is a need to convert all our trade profit/loss to US Dollar.
In currency where US Dollar is quoted first, the calculation will be as follow: -
USDCAD at 1.0915, the value of 1 pip would be 0.0001/1.0915 = 0.0000916.
USDCHF at 1.0595, the value of 1 pip would be 0.0001/1.0595 = 0.0001808.
USDJPY at 93.95, the value of 1 pip would be 0.01/93.95 = 0.0001061.
The above value for 1 pip might look like some large numbers, but it might not be after we discuss the lot (contract) size later.
If the US Dollar is not quoted first and in order for us to get to the value of US Dollar we have to include one more step, which is to include in the exchange rate.
EURUSD at 1.4301, the value of 1 pip would be 0.0001/1.4301 * 1.4301 (exchange rate) = 0.0000699 * 1.4301 = 0.0001 (round up)
GBPUSD at 1.6267, the value of 1 pip would be 0.0001/1.6267 * 1.6267 (exchange rate) = 0.0000614 * 1.6267 = 0.0001 (round up)
You might be thinking by now, there is so much mathematics involved in Forex Trading! How does it work out? Do I have to do all these calculations myself evertime I trade? Do not worry, all brokers that you choose to trade with will do all the calculations for you automatically.
In the next post, we will touch more on the mechanics of ciurrency markets.
The PIP in currency trading is often seen as the measurement of profit/loss from the trade.
So what is the worth of a PIP exactly, since it measures profit or loss?
Each currency that is traded, it is therefore important to know the value of a PIP for that currency. We also require a constant value that we can use if there is a need to convert all our trade profit/loss to US Dollar.
In currency where US Dollar is quoted first, the calculation will be as follow: -
USDCAD at 1.0915, the value of 1 pip would be 0.0001/1.0915 = 0.0000916.
USDCHF at 1.0595, the value of 1 pip would be 0.0001/1.0595 = 0.0001808.
USDJPY at 93.95, the value of 1 pip would be 0.01/93.95 = 0.0001061.
The above value for 1 pip might look like some large numbers, but it might not be after we discuss the lot (contract) size later.
If the US Dollar is not quoted first and in order for us to get to the value of US Dollar we have to include one more step, which is to include in the exchange rate.
EURUSD at 1.4301, the value of 1 pip would be 0.0001/1.4301 * 1.4301 (exchange rate) = 0.0000699 * 1.4301 = 0.0001 (round up)
GBPUSD at 1.6267, the value of 1 pip would be 0.0001/1.6267 * 1.6267 (exchange rate) = 0.0000614 * 1.6267 = 0.0001 (round up)
You might be thinking by now, there is so much mathematics involved in Forex Trading! How does it work out? Do I have to do all these calculations myself evertime I trade? Do not worry, all brokers that you choose to trade with will do all the calculations for you automatically.
In the next post, we will touch more on the mechanics of ciurrency markets.
Thursday, August 27, 2009
The Mechanics of the FOREX Markets - Currency Quotes
It is clear now that the Forex Market is the largest market in the world. The broker or institution that you trade with collects information on currency quotes from a centralized feed or individual quotes comprising of INTERBANK rates.
So, what are quotes? Well I have discussed previously, "What currencies are traded, and What are the most common pairs?".
You will normally see the USD being quoted in front with a few exceptions such as the Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.
Look at Forex quotes, you will normally see two numbers. For example, EURUSD, you might see 1.4231/1.4233. The first number is referred to as the Bid or the Buy Price while the second number is referred to as the Ask or the Sell price. So, when you want to buy the Euros against the US Dollars, you are prepared to buy (or go Long) at 1.4231. The reverse is the same. When you want to sell the Euros against the US Dollars, you are prepared to sell(or go Short) at 1.4233. The currency quotes are the price that you as a trader are willing to pay for your trades. One of the other typical way of displaying quotes is 1.4231/33. Each broker has its own convention and some will quote the full number and others will show only the last two.
You should have by now notice that there is a difference between the Bid and the Ask Price. This difference is callled the spread. For the major currencies the spread is normally between 2 to 4 pips difference. So, what is pips again. We will discussed about in a later post.
Let's come back to the quotes again. Using the value of the bid, you can buy 1 EUR for a price of 1.4231 US Dollars.
In the next post, we shall discuss more about the term PIPS and how it is calculated.
So, what are quotes? Well I have discussed previously, "What currencies are traded, and What are the most common pairs?".
You will normally see the USD being quoted in front with a few exceptions such as the Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.
Look at Forex quotes, you will normally see two numbers. For example, EURUSD, you might see 1.4231/1.4233. The first number is referred to as the Bid or the Buy Price while the second number is referred to as the Ask or the Sell price. So, when you want to buy the Euros against the US Dollars, you are prepared to buy (or go Long) at 1.4231. The reverse is the same. When you want to sell the Euros against the US Dollars, you are prepared to sell(or go Short) at 1.4233. The currency quotes are the price that you as a trader are willing to pay for your trades. One of the other typical way of displaying quotes is 1.4231/33. Each broker has its own convention and some will quote the full number and others will show only the last two.
You should have by now notice that there is a difference between the Bid and the Ask Price. This difference is callled the spread. For the major currencies the spread is normally between 2 to 4 pips difference. So, what is pips again. We will discussed about in a later post.
Let's come back to the quotes again. Using the value of the bid, you can buy 1 EUR for a price of 1.4231 US Dollars.
In the next post, we shall discuss more about the term PIPS and how it is calculated.
Monday, August 24, 2009
What is "INTERBANK"? Why is it discussed in FOREX?
When you are involved in Forex Trading,INTERBANK will normally be mentioned and discussed. So What exactly is INTERBANK? The name simply says the exchange of currency rates or informations between large banks and institutions, which will act as platform for their own clients or even themselves to trade (Buy/Sell) in the currency.
The word INTER basically means between two and BANK refers to an institution that takes in deposits from people. The forex market has advanced so much that the term INTERBANK now refers to anyone that is trading the currency market.
The quotes that you obtain for Bid (buy) and Ask (sell) are all from reliable sources. These quotes are normally made up from the top 300 or so large institutions. This ensures that if your broker place an order on your behalf, the institutions that they have placed the order with is capable of fulfilling that order.
Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.
Over 90% of all currencies are traded against the US Dollar. The next four most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).
As currencies are normally traded in pairs or exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the forex market and are called major currencies or the majors.
The word INTER basically means between two and BANK refers to an institution that takes in deposits from people. The forex market has advanced so much that the term INTERBANK now refers to anyone that is trading the currency market.
The quotes that you obtain for Bid (buy) and Ask (sell) are all from reliable sources. These quotes are normally made up from the top 300 or so large institutions. This ensures that if your broker place an order on your behalf, the institutions that they have placed the order with is capable of fulfilling that order.
Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.
Over 90% of all currencies are traded against the US Dollar. The next four most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).
As currencies are normally traded in pairs or exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the forex market and are called major currencies or the majors.
Thursday, August 20, 2009
What is Risk to Reward Ratio?
What Does Risk to Reward Ratio Mean (R/R)?
A R/R ratio normally used by traders/investors to compare the expected returns of an investment to the amount of risk undertaken by them to get these returns.
This ratio is mathematically calculated by simply dividing the amount of profit the trader/investor expects to made when the position is closed (i.e. the reward) by the amount he stands to lose if price moves in the unexpected direction (i.e. the risk). The risk portion is normally pre-determine by using the stop-loss order while the profit is pre-determine by using the take-profit order.
Let's take a look at this example. A trader Buy 0.1 Lot of AUDJPY at 77.00. He place a stop-loss order at 76.50 and a take profit order at 78.00. By doing so, he has limited his loss to 50 pips while he expect to make a profit of 100 pips. Therefore the risk-reward ratio is caculated to be 1:2. The optimal risk to reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.
In real time trading, it might be good to have stop-loss, take-profit and even R/R, but certain decision making should still falls on the trader himself. Should he still trade during news release? Should he still enter the trade if the price is near a very strong support/resistance line? Should he....
There are too many questions. There is also the fundamental and technical aspect of currency trading to consider too. I shall in my later posts go through some of the experience I experienced.
A R/R ratio normally used by traders/investors to compare the expected returns of an investment to the amount of risk undertaken by them to get these returns.
This ratio is mathematically calculated by simply dividing the amount of profit the trader/investor expects to made when the position is closed (i.e. the reward) by the amount he stands to lose if price moves in the unexpected direction (i.e. the risk). The risk portion is normally pre-determine by using the stop-loss order while the profit is pre-determine by using the take-profit order.
Let's take a look at this example. A trader Buy 0.1 Lot of AUDJPY at 77.00. He place a stop-loss order at 76.50 and a take profit order at 78.00. By doing so, he has limited his loss to 50 pips while he expect to make a profit of 100 pips. Therefore the risk-reward ratio is caculated to be 1:2. The optimal risk to reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.
In real time trading, it might be good to have stop-loss, take-profit and even R/R, but certain decision making should still falls on the trader himself. Should he still trade during news release? Should he still enter the trade if the price is near a very strong support/resistance line? Should he....
There are too many questions. There is also the fundamental and technical aspect of currency trading to consider too. I shall in my later posts go through some of the experience I experienced.
Wednesday, August 19, 2009
I Closed my AUDJPY Trade at Take-Profit
I closed my AUDJPY at Take-Profit (78.45) for a profit of USD 21.09 at 2252 GMT plus rollover interest of USD 1.06.
What kind of trading strategy I am using? I will discuss about it as the time comes.
Please continue to follow and support me..
Bye for now.
What kind of trading strategy I am using? I will discuss about it as the time comes.
Please continue to follow and support me..
Bye for now.
Tuesday, August 18, 2009
What is a Take-Profit Order?
What Does Take-Profit Order Mean?
This is usually an order that is used by investors or currency traders whereby they specify the exact rate or number of pips from the current entry price where they would like to close out their current position for a profit. Please note the difference between stop-loss and take-profit. For take-profit, the trade closes with a profit.
The currency rate at which is deemed to be the level where the investor/trader wants to take a profit is sometimes referred to as the "take-profit point".
Look at the name, take-profit are normally used to lock in an investor/trader's profit in the event of favourable move. If the investor/trader is in a short position, you believe that the price will fall to a certain level, but you are unsure how the currency will behave beyond that level. By placing a take-profit order at that point will automatically close out your position allowing you to lock in all your profit.
Short 0.1 Lot of AUDJPY at 78.45. Place a take-profit at 78.00. When the price falls to 78.00, the trade will close automatically and will generate a profit of USD45.00.
Risk to Reward ratio coming up next.......
Anyway I am currently Long AUDJPY @ 78.35 and I am currently at -68 pips.... Oh!.... anyway out............... Hey ! Don't worry, I follow the money management policy.
Look out for my next post.
This is usually an order that is used by investors or currency traders whereby they specify the exact rate or number of pips from the current entry price where they would like to close out their current position for a profit. Please note the difference between stop-loss and take-profit. For take-profit, the trade closes with a profit.
The currency rate at which is deemed to be the level where the investor/trader wants to take a profit is sometimes referred to as the "take-profit point".
Look at the name, take-profit are normally used to lock in an investor/trader's profit in the event of favourable move. If the investor/trader is in a short position, you believe that the price will fall to a certain level, but you are unsure how the currency will behave beyond that level. By placing a take-profit order at that point will automatically close out your position allowing you to lock in all your profit.
Short 0.1 Lot of AUDJPY at 78.45. Place a take-profit at 78.00. When the price falls to 78.00, the trade will close automatically and will generate a profit of USD45.00.
Risk to Reward ratio coming up next.......
Anyway I am currently Long AUDJPY @ 78.35 and I am currently at -68 pips.... Oh!.... anyway out............... Hey ! Don't worry, I follow the money management policy.
Look out for my next post.
Monday, August 17, 2009
What is Stop-Loss Order?
What Does a Stop-Loss Order Mean?
It is basically an order placed with your broker to sell your currency pair that you are currently holding when it reaches a certain price. This certain price typically means a loss, as the name stop-loss implies. Therefore, a stop-loss is placed to limit your loss on your position.
Alternatively, it is slso known as a "stop order" or "stop-market order".
To set a stop-loss order for 20% below the price you paid for the currency (assuming that you are Long in the position), this will limit your loss if any to only 20%. This stop-loss strategy allows you to determine your loss limit in advance, and thus preventing emotional decision-making. What should be the limit of your loss? This is discussed in the post on Money Management. The recommended risk that you should take per trade is 2 -4% of your investment.
If your initial investment is $5000, the recommended risk should be between $100 to $200. Depending your lot size, assuming a 0.1 lot purchase, your stop-loss can be placed at a distance of 100 pips to 200 pips from the purchase price.
It's also definitely a great idea to make use a stop-loss order before you leave for holidays or you happen to enter a situation in which you will be unable to watch over the development of your currency pair for an extended period of time.
In the next post, we shall cover the take-profit and risk to reward aspect of Forex trading.
It is basically an order placed with your broker to sell your currency pair that you are currently holding when it reaches a certain price. This certain price typically means a loss, as the name stop-loss implies. Therefore, a stop-loss is placed to limit your loss on your position.
Alternatively, it is slso known as a "stop order" or "stop-market order".
To set a stop-loss order for 20% below the price you paid for the currency (assuming that you are Long in the position), this will limit your loss if any to only 20%. This stop-loss strategy allows you to determine your loss limit in advance, and thus preventing emotional decision-making. What should be the limit of your loss? This is discussed in the post on Money Management. The recommended risk that you should take per trade is 2 -4% of your investment.
If your initial investment is $5000, the recommended risk should be between $100 to $200. Depending your lot size, assuming a 0.1 lot purchase, your stop-loss can be placed at a distance of 100 pips to 200 pips from the purchase price.
It's also definitely a great idea to make use a stop-loss order before you leave for holidays or you happen to enter a situation in which you will be unable to watch over the development of your currency pair for an extended period of time.
In the next post, we shall cover the take-profit and risk to reward aspect of Forex trading.
Sunday, August 16, 2009
The Effect of Compound Interest
In my last post, I mentioned the effect of compound interest. With the bank interest rate at a pathetic low of 0.2% P.A., some even at 0%, the amount of interest earned with deposits in the bank is so low that it can be considered as wasted deposit.
Why put your money in the bank? You should look at some other forms of investment that might reap higher returns for you. With conservative investment in mind, forex trading might just be the thing for you. Look at the table below. With just 2% interest per week, look at the returns after 52 weeks - Almost 180% return!
However, risk comes with every investment. It is just how we manage the risk. Read my last posting about Risk Management. I will cover in my next post about how we can cut loss if the trade goes against us and also how to take profit. How do we overcome the greed in us?
Why put your money in the bank? You should look at some other forms of investment that might reap higher returns for you. With conservative investment in mind, forex trading might just be the thing for you. Look at the table below. With just 2% interest per week, look at the returns after 52 weeks - Almost 180% return!
However, risk comes with every investment. It is just how we manage the risk. Read my last posting about Risk Management. I will cover in my next post about how we can cut loss if the trade goes against us and also how to take profit. How do we overcome the greed in us?
Thursday, August 13, 2009
Money Management
Money Management is an important aspect if you want to live to trade another day. As the saying goes, win or lose, we want to trade again the next day. Normally, when I say to people, my “average risk per trade is about 200 pips and some times even more”, they go blank and stare into empty space. The most important to note is that, the number of pips is not the crucial point. It is the risk (money sense) that you are willing or you can afford to take.
In an example, no matter how you place your stop-loss, be it 75, 100, or even 150 pips, the risk/amount of money that you are willing to lose should not CHANGED.
As a conservative recommendation, you should not risk more than 5 – 7% of your account on one trade alone. But, for those who have just start to learn to trade, I would recommend that maybe you could even start with 2 – 4%.
There are a lot of people talking about money management, and yet there are hardly a hand full of them that actually practice to protect their account. We trade forex to make money, NOT to lose it. Most of the new traders, they could only afford to start with a small capital, but they hope to make it big by playing it big, which is not in path with the real world.
You cannot expect, be realistic, to start with an account of $2000 and you expect to make a living out of it. No way man! You need to grow your account slowly and eventually, you could withdraw yourself a paycheck where you could still leave some of the profits to grow your account slowly. This is time period where traders start to lose heart and start to over leverage and thus burst their account.
You might not have notice that with a steady 2% growth on your account per week, how fast you are compounding your account.
I will show you an example of how alarming the compounding looks...
See you then..
In an example, no matter how you place your stop-loss, be it 75, 100, or even 150 pips, the risk/amount of money that you are willing to lose should not CHANGED.
As a conservative recommendation, you should not risk more than 5 – 7% of your account on one trade alone. But, for those who have just start to learn to trade, I would recommend that maybe you could even start with 2 – 4%.
There are a lot of people talking about money management, and yet there are hardly a hand full of them that actually practice to protect their account. We trade forex to make money, NOT to lose it. Most of the new traders, they could only afford to start with a small capital, but they hope to make it big by playing it big, which is not in path with the real world.
You cannot expect, be realistic, to start with an account of $2000 and you expect to make a living out of it. No way man! You need to grow your account slowly and eventually, you could withdraw yourself a paycheck where you could still leave some of the profits to grow your account slowly. This is time period where traders start to lose heart and start to over leverage and thus burst their account.
You might not have notice that with a steady 2% growth on your account per week, how fast you are compounding your account.
I will show you an example of how alarming the compounding looks...
See you then..
Tuesday, August 11, 2009
Monday, August 10, 2009
Trading Strategy Using Moving Averages and RSI
In today's post, we shall discuss one trading strategy which make use of the Moving Averages and the RSI. Before we move on further, I would like anyone who is following the blog now and who have not read the Risk Disclosure Statement to read it now.
Currency Pair: Any
Time Frame: H1, H4, D1, (D1 preferred, you only need to check the chart once daily)
Indicator Used: 7 EMA (Red), 14 EMA (Yellow), 21 EMA (Blue), RSI(14) (Lime)
The steps involved in preparing the chart for trade is as follow: -
1. Plot the 3 moving averages on the currency chart.
2. Plot the RSI(14) on the chart's indicator window with levels 45 and 55 mark out.
The following Entry Rules are to be observed when taking trade using this strategy: -
LONG ENTRY CONDITION
1. When the 7 EMA cross up the 14 EMA and continue to cross up the 21 EMA
2. RSI(14) > 55
3. The last bar has to be bullish
4. Go Long at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met
SHORT ENTRY CONDITION
1. When the 7 EMA cross down the 14 EMA and continue to cross down the 21 EMA
2. RSI(14) < 45
3. The last bar has to be bearish
4. Go Short at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met
The following Exit Rules are to be observed when taking trade using this strategy: -
1. To exit the trade when then 7 EMA cross up (for Short Trade) or cross down (for Long Trade) the 14 EMA
The above was a EURGBP trade which started on 17/May/2009 and ends on 02/July/2009. The trade net a total of +300 pips.
The advantages to this trading strategy are: -
1. It is to use and implement.
2. You only need about 15 minutes a day to check the chart.
3. It gives good trade in a trending market, big price move or breakout.
The disadvantages to the strategy are: -
1. Moving averages and RSI are lagging indicators, and so they might not indicate real future market movement. They only indicate past trend.
2. This strategy does not work well with consolation market conditions, which might give a lot of false trigger.
So Why am I discussing this strategy as it seems from the disadvantages, this strategy is not one of foolproof. The reason why I am discussing this strategy is that it is a easy to use and implement strategy, and due to the nature of the disadvantages stated, there is a need to put in a stop-loss.
Starting from the next post, I will start to discuss on the concept money mangement, risk to reward ratio which will lead to the use of stop-loss and take-profit.
So, Stay with me...
Saturday, August 8, 2009
Video - Using Bollinger Bands
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Bollinger Bands
What is the Bollinger Bands?
Bollinger Bands are a set technical indicator and trading tool created by John Bollinger in the early 1980s. The Bollinger Bands are therefore being used to measure the volatility of the market. When the market is quiet, the bands contract; but when the market is LOUD, the bands expand. when the price was quiet, the bands close up together, but when the price moved up, the bands spread apart.
The other purpose of the Bollinger Bands is to provide an indication of the high and low of the price. It is clear that prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
The Bollinger Bands consist of a set of three curves drawn in relation to prices of the currency. The middle band is a shows the intermediate-term trend, usually it is a simple moving average, which serves as the basis for the upper and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically a standard deviation of the same data that were used for the average. The default parameters used for the Bollinger Bands are, 20 period simple moving average and standard deviations of 2, and this parameters may be adjusted accordingly to your trading needs.
There are many ways to use Bollinger Bands, the following are a few rules that serve as a good guide to the use of the Bollinger Bands.
1. Bollinger Bands provide a relative definition of high and low.
2. That relative definition can be used to compare price action and indicator
to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open
interest, inter-market data, etc.
4. Volatility and trend have already been deployed in the construction of Bollinger
Bands, so their use for confirmation of price action is not recommended.
5. The indicators used for confirmation should not be directly related to one another.
Two indicators from the same category do not increase confirmation. Avoid colinearity.
6. Bollinger Bands can also be used to clarify pure price patterns such as M-type;
tops and W-type bottoms, momentum shifts, etc.
7. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger
Band.
8. Closes outside the Bollinger Bands can be continuation signals, not reversal
signals--as is demonstrated by the use of Bollinger Bands in some very successful
volatility-breakout systems.
9. The default parameters of 20 periods for the moving average and standard
deviation calculations, and two standard deviations for the bandwidth are just
that, defaults. The actual parameters needed for any given market/task may be
different.
10. The average deployed should not be the best one for crossovers. Rather, it
should be descriptive of the intermediate-term trend.
11. If the average is lengthened the number of standard deviations needs to be
increased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise,
if the average is shortened the number of standard deviations should be reduced;
from 2 at 20 periods, to 1.9 at 10 periods.
12. Bollinger Bands are based upon a simple moving average. This is because a
simple moving average is used in the standard deviation calculation and we wish
to be logically consistent.
13. Be careful about making statistical assumptions based on the use of the standard
deviation calculation in the construction of the bands. The sample size in most
deployments of Bollinger Bands is too small for statistical significance and the
distributions involved are rarely normal.
14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.
15. Finally, tags of the bands are just that, tags not signals. A tag of the upper
Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger
Band is NOT in-and-of-itself a buy signal.
These 15 rules on the use of Bollinger Bands are given with compliments from John Bollinger, CFA, CMT. You may also like to visit him at http://www.bollingerbands.com/ to learn more about the Bollinger Bands.
Bollinger Bands are a set technical indicator and trading tool created by John Bollinger in the early 1980s. The Bollinger Bands are therefore being used to measure the volatility of the market. When the market is quiet, the bands contract; but when the market is LOUD, the bands expand. when the price was quiet, the bands close up together, but when the price moved up, the bands spread apart.
The other purpose of the Bollinger Bands is to provide an indication of the high and low of the price. It is clear that prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
The Bollinger Bands consist of a set of three curves drawn in relation to prices of the currency. The middle band is a shows the intermediate-term trend, usually it is a simple moving average, which serves as the basis for the upper and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically a standard deviation of the same data that were used for the average. The default parameters used for the Bollinger Bands are, 20 period simple moving average and standard deviations of 2, and this parameters may be adjusted accordingly to your trading needs.
There are many ways to use Bollinger Bands, the following are a few rules that serve as a good guide to the use of the Bollinger Bands.
1. Bollinger Bands provide a relative definition of high and low.
2. That relative definition can be used to compare price action and indicator
to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open
interest, inter-market data, etc.
4. Volatility and trend have already been deployed in the construction of Bollinger
Bands, so their use for confirmation of price action is not recommended.
5. The indicators used for confirmation should not be directly related to one another.
Two indicators from the same category do not increase confirmation. Avoid colinearity.
6. Bollinger Bands can also be used to clarify pure price patterns such as M-type;
tops and W-type bottoms, momentum shifts, etc.
7. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger
Band.
8. Closes outside the Bollinger Bands can be continuation signals, not reversal
signals--as is demonstrated by the use of Bollinger Bands in some very successful
volatility-breakout systems.
9. The default parameters of 20 periods for the moving average and standard
deviation calculations, and two standard deviations for the bandwidth are just
that, defaults. The actual parameters needed for any given market/task may be
different.
10. The average deployed should not be the best one for crossovers. Rather, it
should be descriptive of the intermediate-term trend.
11. If the average is lengthened the number of standard deviations needs to be
increased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise,
if the average is shortened the number of standard deviations should be reduced;
from 2 at 20 periods, to 1.9 at 10 periods.
12. Bollinger Bands are based upon a simple moving average. This is because a
simple moving average is used in the standard deviation calculation and we wish
to be logically consistent.
13. Be careful about making statistical assumptions based on the use of the standard
deviation calculation in the construction of the bands. The sample size in most
deployments of Bollinger Bands is too small for statistical significance and the
distributions involved are rarely normal.
14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.
15. Finally, tags of the bands are just that, tags not signals. A tag of the upper
Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger
Band is NOT in-and-of-itself a buy signal.
These 15 rules on the use of Bollinger Bands are given with compliments from John Bollinger, CFA, CMT. You may also like to visit him at http://www.bollingerbands.com/ to learn more about the Bollinger Bands.
Friday, August 7, 2009
Parabolic SAR
What is the Parabolic SAR?
The Parabolic SAR is a technical indicator that is used to determine the direction of a currency/share's momentum. It can also measure the point in time in which the momentum has a higher-than-normal probability of changing directions. The Parabolic SAR is also known as the "Stop and Reversal System".
The Parabolic SAR was developed by the famous technician Welles Wilder, creator of the Relative Strength Index (I think I forgot to mentioned that in RSI post). It involves the placing of a series of dots either above or below the price in the chart. The AUDUSD daily chart belows shows how the Parabolic SAR is plotted on the chart.
The position of the "dots" generated by the PSAR can be use as BUY/SELL signals. A dot that is placed below the price is giving a bullish signal, which will generate a BUY signal and traders will expect the momentum to remain in the upward direction. The reverse is true for a bearish signal.
The first PSAR dot on the bullish trend will be plotted when the price of the most recent high price has been breached, it is then at this time that the PSAR dot is plotted at the price of the most recent low. As the price increase, the PSAR dots will also rise slowly, picking up speed and increase with the trend. As the trend develops, the PSAR dots will soon catch up with the price action. The PSAR works extremely well in trending market, and it will lead to false signal when the market is consolidating or a choppy market.
Another exciting feature of the PSAR is that it can help to set the position of the stop-loss for the trade. It can help traders in locking in profits of the trade in a trending condition. PSAR is a wonderful indicator for use in a trending market. It tells the trader exactly when to enter and exit the market, thus eliminating human emotion in trading. The only disadvantage is when the trade is experiencing whipsaw (consolidation) whereby false signals might be given.
The Parabolic SAR is a technical indicator that is used to determine the direction of a currency/share's momentum. It can also measure the point in time in which the momentum has a higher-than-normal probability of changing directions. The Parabolic SAR is also known as the "Stop and Reversal System".
The Parabolic SAR was developed by the famous technician Welles Wilder, creator of the Relative Strength Index (I think I forgot to mentioned that in RSI post). It involves the placing of a series of dots either above or below the price in the chart. The AUDUSD daily chart belows shows how the Parabolic SAR is plotted on the chart.
The position of the "dots" generated by the PSAR can be use as BUY/SELL signals. A dot that is placed below the price is giving a bullish signal, which will generate a BUY signal and traders will expect the momentum to remain in the upward direction. The reverse is true for a bearish signal.
The first PSAR dot on the bullish trend will be plotted when the price of the most recent high price has been breached, it is then at this time that the PSAR dot is plotted at the price of the most recent low. As the price increase, the PSAR dots will also rise slowly, picking up speed and increase with the trend. As the trend develops, the PSAR dots will soon catch up with the price action. The PSAR works extremely well in trending market, and it will lead to false signal when the market is consolidating or a choppy market.
Another exciting feature of the PSAR is that it can help to set the position of the stop-loss for the trade. It can help traders in locking in profits of the trade in a trending condition. PSAR is a wonderful indicator for use in a trending market. It tells the trader exactly when to enter and exit the market, thus eliminating human emotion in trading. The only disadvantage is when the trade is experiencing whipsaw (consolidation) whereby false signals might be given.
Thursday, August 6, 2009
Bonus Video - Top 10 Biggest Mistakes Forex Traders Make
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Video - Using the RSI or Relative Strength Index
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Wednesday, August 5, 2009
Relative Strength Index (RSI)
What Does Relative Strength Index - RSI Mean?
It is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine the overbought and oversold conditions of a currency/share. It is calculated using the following formula:
RS = Average of X days' up closes / Average of X days' down closes
Refering to the chart below, we can see that the RSI ranges from 0 to 100. The currency/share is deemed to be overbought once the RSI approaches the 80 level, meaning that it may be getting overvalued and there is a good chance that the price might fall. It works the reverse if the RSI approaches 20, it is an indication that the currency/share may be getting oversold and undervalued and there exist a possibility that the price might increase.
RSI is a famous tool because it can be used to indicate trend formations. When you find a trend forming, you can take a look at the RSI. If the RSI is up above 50, a up trend is in the making, else a down trend is in the making. If you are looking at a possible uptrend, you should be sure to make the RSI is above 50, and when you are looking at a possible downtrend, you have to make sure the RSI is under 50.
So in summary, RSI
1. Simply measures the overbought/oversold readings
2. Identify potential reversal points
3. Occassional Divergence Strength
It is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine the overbought and oversold conditions of a currency/share. It is calculated using the following formula:
RS = Average of X days' up closes / Average of X days' down closes
Refering to the chart below, we can see that the RSI ranges from 0 to 100. The currency/share is deemed to be overbought once the RSI approaches the 80 level, meaning that it may be getting overvalued and there is a good chance that the price might fall. It works the reverse if the RSI approaches 20, it is an indication that the currency/share may be getting oversold and undervalued and there exist a possibility that the price might increase.
RSI is a famous tool because it can be used to indicate trend formations. When you find a trend forming, you can take a look at the RSI. If the RSI is up above 50, a up trend is in the making, else a down trend is in the making. If you are looking at a possible uptrend, you should be sure to make the RSI is above 50, and when you are looking at a possible downtrend, you have to make sure the RSI is under 50.
So in summary, RSI
1. Simply measures the overbought/oversold readings
2. Identify potential reversal points
3. Occassional Divergence Strength
Video - Timing Trades with Stochastic Indicator
The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.
Tuesday, August 4, 2009
Stochastic Oscillator
George Lane was the originator of the stochastic oscillator in the 1970's. He has observed that as prices increase in an up trend, the closing prices tend to be closer to the upper end of bars and in a down trend the closing prices tend to be nearer the lower end of bars. He therefore developed the stochastics to distinguish the relationship between the closing price and the high and low of a bar.
A stochastic is basically an oscillator that will help us measure the overbought and oversold condition of a currency/shares in the market. The Stochastic is another oscillator that indicate to us the end of a trend. These two lines are similar to the MACD, oen line is faster than the other line. The stochastic consists of two lines, namely the %K and %D. These two line will move between a vertical range of 0 to 100. Readings of the stochastic above 80 indicates overbought while readings below 20 indicates oversold.
The stochastic can also be used as a BUY/SELL indicator. When the faster %K line crosses above the slower %D line and the lines are below 20, a "BUY" signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a "SELL" signal is generated.
There are alot of different ways to use stochastics, but the main use of the stochastic is to deterermine if the market is overbought or oversold.
A stochastic is basically an oscillator that will help us measure the overbought and oversold condition of a currency/shares in the market. The Stochastic is another oscillator that indicate to us the end of a trend. These two lines are similar to the MACD, oen line is faster than the other line. The stochastic consists of two lines, namely the %K and %D. These two line will move between a vertical range of 0 to 100. Readings of the stochastic above 80 indicates overbought while readings below 20 indicates oversold.
The stochastic can also be used as a BUY/SELL indicator. When the faster %K line crosses above the slower %D line and the lines are below 20, a "BUY" signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a "SELL" signal is generated.
There are alot of different ways to use stochastics, but the main use of the stochastic is to deterermine if the market is overbought or oversold.
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