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Forex Basics
A Popularity Contest
Rounding Off
Interest Rate
wherein one currency is traded for another. Additionally, Forex is one of the
largest markets in the world. The goal of some participants in the Forex market
is to seek an exchange of a foreign currency for their own. A large part of the
Learning Forex
The investments placed on Forex markets normally deal with the four major
pairs, namely EUR/USD, USD/JPY, GBP/USD, and the USD/CHF. These pairs
such as: the trading volumes, extreme market liquidity, the large amount and
income markets.
in the year 1972 at the Chicago Mercantile Exchange. Future volumes of Forex
have grown rapidly in recent years, and accounts for about seven percent of
Most traders in the United States are involved in stock trading. Within that
environment, a trader who is following a trend for as long as possible would not
have any difficulty in making money. The stock market is also a very forgiving
market, which would bail out even poor traders. The only trick is to understand
the difference between the good and the lucky. There are several talented
traders who can falter when the conditions of trading become less then ideal.
Although both the stock and Forex markets involve risks, the latter is not
One is the greater leverage. Forex trading provides greater leverage compared
individual to trade the same size positions that he or she might take with a
stock broker, while leaving him or her with more available capital to trade
more markets.
markets, the only players are the dealer and the primary market maker, or the
trader and the buyer or seller of the currency pair; no extra parties are
involved. On the other hand, the stock market involves the trader, broker and
There are a number of unpleasant events that a person must learn to deal with
in life. After a while, these problems are no longer considered as a burden but
instead a norm. As for traders, there are also unpleasant occasions that can be
One of these problems is the partial fill. The partial fill is a normal incident in
stock trading. It occurs when a trader puts an order for a definite number of
shares and instead receives only a portion of the order. The market will not be
able to absorb an entire order if there are not enough shares available at a
defined price. This can be frustrating for the trader, especially if he or she
wants to pursue large orders. Still, this kind of event is considered as normal
Slippage is another problem that futures and stock traders encounter every
transaction costs and the amount actually paid. Slippage tends to cut into the
traders profits and is a major headache for futures and stock traders.
Aside from those two, another hurdle that a trader must overcome is the
listed stock. More so, the specialist also controls the spread; he or she can
widen or narrow the spread at his of her discretion. Hence, the specialist can
The uptick rule is another frustrating obstacle that faces the success of an
equity trader. Stock traders can place a trade that will become profitable if the
stock rises whenever they wish. However, if they desire to place a trade that
will become profitable if the stock falls, the traders must go through several
market. The currency market is considered as highly liquid or thick. This is the
reason why the partial fill headache evident in the stock market is extremely
rare for all but the largest traders in the foreign exchange market.
Additionally, the slippage is also rare in the Forex market. Several foreign
exchange market makers have a one slippage policy, thus giving currency
More so, the spread is often fixed in the currency market. This allows the
Lastly, the Forex market has no uptick rule. The trader can buy or sell at his or
her own will. Conversions, bullets or married puts are not required to be
purchased.
Forex Basics
Forex Basics
Whenever people travel outside their home country, there is good chance that
required to exchange their home country’s currency for the currency of the
country they are visiting. Much like the Forex market, there are two currencies
Canadian currency for every U.S. dollar. It is safe to say that the exchange rate
during that year for the U.S. dollar and Canadian dollar was about 1.60
Years that followed resulted in a dramatic change in the exchange rate and by
the year 2006, the rate had fallen to 1.10. This only means that a traveler from
the United States would only receive about C$1.10 in Canadian currency for
every U.S. dollar exchanged. The measurement of very small changes in this
exchange rate can be expressed using 1.1000. If so, the U.S. dollar
significantly depreciated against the Canadian dollar during the early part of
Eventually, the rate of the Canadian dollar approached parity with the U.S.
dollar. U.S. citizens were also less likely to visit Canada, because if they did,
they were more likely to spend more than they would have in the past, when
the exchange rate was more favorable. On the other hand, travelers from
Canada were more likely to visit the United States, since their currency bought
The rise of the Euro also created a similar situation to that of the Canadian
dollar. In 2002, 2003 and 2004, the Euro created dramatic gains against the
U.S. dollar. Additionally during those years, the value of the Euro rose from
citizens from the United States found that vacationing in Europe became very
expensive. This kind of change caused a huge influx of shoppers from Europe
There is no doubt that fortunes were made and lost on huge movements, such
tiniest shift in the exchange rates can also result in substantial gains and
losses.
An easy way to understand the exchange rate is to think of the base currency
as the number one. For instance, assume that the exchange rate for the
EUR/USD pair is 1.2904. Since the base currency is Euro, that is also the first
member of the pair. Thinking of Euro as the number one will only mean that
But how do these movements in the exchange rates translate to the Forex
traders bottom line? With trading a pair, like the EUR/USD, the U.S.-based
trader will note that the pair has a fixed value of $10 per pip. This is also true
for all pairs that have USD as the second currency. Hence, in any currency pair
would cause a loss of $100. In the case of the EUR/USD pair, a gain or loss of
10 pips can happen easily since the pair moves about 100 pips each day on
average.
Terminologies in Trading
A non-trader or a beginner can get easily confused around traders, since they
mostly use their own language. This kind of language is easily synonymous to
a secret handshake, which would let others know that they are a member of
the group.
First trading terminology is going long. Whenever you hear this come out of a
traders mouth, it only means that he or she is placing a trade that will only be
profitable if there is an evident rise in the exchange rate. selling short, on the
other hand, means that the trader will be placing a trade that will only be
profitable if the exchange rate falls. Flat means that the trade is neither long
nor short. More so, the trader saying this has no open positions in the market.
Another trading term is the pip. By definition, the pip is the smallest increment
point. An example for this term would be when supposing the exchange rate
for a pair rises from 1.1000 to 1.1001. It is safe to say that the rate rose by one
pip.
Included within the trading terminologies are the major currencies, such as:
EUR for Euro, GBP for Great Britain pound, JPY for Japanese yen, USD for U.S.
dollar, CAD for Canadian dollar, CHF for Swiss franc, AUD for Australian dollar
Nicknames are also used in trading. These are slang terms that several traders
like to use. Several examples of these nicknames are: cable or sterling for the
British pound, greenback or buck for the U.S. dollar, single currency for the
Euro, Swissy for the Swiss franc, kiwi for the New Zealand dollar, loonie for the
A Popularity Contest
A Popularity Contest
For several years, more investors grew dissatisfied with the performance of
other options for international investments. There are several opportunities for
foreign markets but foreign exchange trading is becoming the most popular.
One of the reasons why investors like Forex trades is quick trading with
minimum hassle.
Normally, access to this kind of market has been only open to hedge funds,
worlds major banks have been involved in foreign exchange markets for years.
Back then, the individual trader had no way to access Forex since there were
in the 1990’s. Makers of online Forex market even opened the gates and made
What this means is that individuals can now make trades alongside the largest
banks in the world. More so, they can even use the same strategies and
techniques that other professional traders use. The landscape of trading has
changed suddenly and traders obtained a new alternative to future and stock
markets.
market, and global market, may seem like the newest player on the trading
world. However, it has been the choice of market for institutional investors and
global hedge funds for several years. The big money has always traded Forex
since the large size of the market permits these kinds of traders to enter and
exit large trades without making price alterations and upsetting the exchange
rates.
During the past few years, the popularity of foreign exchange has taken off.
The daily volume of Forex market is estimated at about $1.9 trillion and still
which can be bigger than 200-to-1. The leverage allows traders to expand their
trading positions and may also serve to amplify gains and losses. Due to the
superior leverage in Forex, the barriers for traders are very low. Traders in
Forex markets can open account with as little as a few hundred dollars.
small chance that the change in the exchange rate can cause a large profit or
loss. Wealth can be made or lost rapidly in the Forex market; even a shift in the
Such analysis is mainly the study of charts and indicators. These kinds of
traders believe that all the pertinent information required to put a trade is
rates. Such traders believe that the currencies will eventually gain or lose
The subject of currency trading in pairs can be confusing for beginners at first.
However, even if there are two currencies involved in trading, there is only one
exchange rate. Thus, every transaction or trade involves two currencies and
another currency can change. For instance, a single dollar you may have today
would still be worth $1 dollar the next day; although, the value of that dollar
constantly fluctuates relative to other currencies. This is the main reason why
there are no rigid schedules. The market allows traders to decide for
themselves when to trade regardless of the time of day. There are even
part-time traders, with full-time jobs, who can trade Forex. More so, wherever
the individual is located or whatever hours he or she keeps, the individual can
Since the market is open 24 hours each day, no one can really tell when the
market opens and closes at a specific time of day. It is important for traders to
10:00 p.m. London time. Since the Forex market trades 24 hours, the trading
During that time of the day, the three largest Forex trading centers, namely
the United States, Great Britain and Japan, are quiet. However, the New
Zealand and Australian dollars may witness some action during those hours.
The trading sessions for Asia starts a few hours later, at around 7:00 p.m.
Eastern U.S. time, London midnight time. For the European session, the
trading begins at around 3:00 a.m. Eastern U.S. time. Lastly, the U.S. session
starts at 8:00 a.m. New York time, which is halfway through the trading
session of London.
Former equity traders and futures traders have chosen to trade in the Forex
markets. They have learned that the technical analysis works exceptionally
well in the foreign exchange markets. But how does this technical analysis
work? Technical analysis is merely the analysis of the movements of the past
price to aid predicting the movements of the future price. In most instances,
the trader, who uses technical analysis, is simply looking for the repetition of
past occurrences.
Long-term movements in the Forex market are usually related with economic
cycles. These cycles tend to repeat themselves and can be predicted with a
Within the environment of the stock market, the fundamentals of one company
can change radically in a short period of time. This fact makes past stock prices
On the other hand, within the Forex market environment, the traders are
adjust relatively slow, thus making the boom-bust nature of the economic
larger samples of information, which can reveal more accurate results. The
larger size and liquidity of the foreign exchange market provides technical
analysis a greater sample of data from which to draw. There are also more
trades and much money changing hands in Forex markets compared to any
futures or stock market. The Forex market contains several data points, thus
Additionally, the vast liquidity located in the foreign exchange market makes it
much less likely that irrelevant players will upset the market and momentarily
skew technical indications, which is common in liquid markets.
The main reason why traders, who like to follow trends, are drawn to the
currency market is due to the trends. Since currency pairs have a tendency to
create strong and persistent trends, the Forex market is relatively famous for
these trends. For instance, the Euro trended constantly superior against the
U.S. dollar over a three-year period. This uptrend also occurred during a time
Knowing the popular trends can help overcome the fear of the unknown. It is
normal for an individual to have a fear of the unknown; this is also a typical
human behavior. Entering the Forex market, at first, can make someone think
of several concerns that might be weighing on his or her mind. These concerns
are common to traders who desire to experience the advantages of Forex, but
still reluctant to leave their comfort zone. If you are concerned about the
charts, it is important to realize that the charts used for Forex exchange rates
are not very different from the charts of other vehicles for trading, like
commodities or stocks.
The Trading Patterns and the Technical Indicators
The good news for experienced futures and equity traders is that nearly
everything that they already know about technical analysis can be applied to
the foreign exchange market. Charts used in Forex contain familiar patterns,
including the head and shoulders, double tops and bottoms and the
Traders in Forex use Bollinger bands, moving averages and MACD or moving
and equity traders use. There are also similar breakouts and pullbacks, ranges
Forex traders also use resistance and support levels in order to determine the
best location for entry and stop orders, similar to traders involved in stock and
futures markets. Also, the strategies involving trend lines and channels are
profiles ever since small investors were given the chance to join in the realm of
rigors of a day job, several traders still aspire to enter and profit from foreign
exchange markets.
However, before starting any kind of trading, including those involved in Forex
markets, you should know what you are getting into: gains and losses. In
every venture, it is important to know the risks involved and the techniques in
Any trader who masters trading strategies and technical analysis can pinpoint
profitable entry and exit points. Mastering the fundamental analysis can help
one anticipate turning points in the markets when economies shift. More so,
the trader who understands the solid risk management can defend and protect
the account against loss in any trading arena. Any trader who masters all of
those three, namely the technical analysis, fundamental analysis and risk
Anyone can be the tripe threat trader. Firstly, it is important to learn genuine
intimidating. What separates a good trader from the great one is the solid
Risk management is one element that all traders, who are successful, share
together. Having good risk management knowledge can help evade troubles
and allow survival from the tough times and even gain valuable experience.
Acquiring Experience
Having a good trading education can help anyone in anticipating several things
several Forex market makers who offer such accounts and they often include
real-time charts, news feeds and price quotes. This is one advantage a
beginner can get nowadays. In the past, traders had to learn and make errors
demo account for at least several months before even making a shot at live
trading.
Aside from demo trading, mini accounts are also available, which helps
neophytes place live trades with minimal risks. These kinds of accounts can be
opened with as little as a few hundred dollars. Thus, they create one of the
months before advancing on the mini account. Luck is never the same as a
successful trading; even if you turn profit on the demo account, but still
acquire too much risk during the process, that profit would not suffice for live
trading.
If you are starting to trade Forex, it is necessary to begin with just one
currency pair. Moreover, an excellent way to start is with a pair that has a
narrow spread, like the EUR/USD pair. The spread of this pair is the difference
pairs that have wide spreads, which are suitable only for long-term trading.
Overcoming the spread can help you reach the point of the trade, called the
break-even. Thus, using a pair with a narrow spread can help achieve this
level.
Through the use of a demo account, begin with the EUR/USD pair and by the
time you feel comfortable with the way the pair moves, you can then branch
out and try the GBP/USD pair. The GBP/USD pair is similar to the EUR/USD pair
Always remember that no two traders are exactly alike. The decision on
choosing the pair only relies on your personal style. However, any moment
when you test a new trading technique or currency pair, always remember to
do so with a demo account. Choosing the currency pair best suited for your
After knowing which pairs to trade, you can see if the USD/CAN is a pair that
you can enjoy trading. The relationship between this pair and the price of the
oil is strong, since the Canadian dollar often gains ground as the prices of
energy rise and falls when the energy prices weaken. Commodity currencies
are the currencies that share a strong relationship with the price of a
CAD/JYP, which has an even stronger relationship with the price of oil. Another
pair is the AUD/USD. The AUD or Australian dollar usually rises and falls along
with the price of gold. Such correlation is extremely useful to currency traders,
who frequently witness occurrences where the price of gold appears to lead the
Australian dollar.
Like some activities in our daily lives, we use techniques to cope with different
situations. Trading is very much the same. In trading the Forex market, there
are several techniques available and no one of these techniques will work all
the time. Techniques are designed to help a trader survive a specific condition
within the currency market. Thus, it is an important ability of the trader to cope
and adapt with any condition and be able to vary his or her own trading style
In trading, there are three basic types of conditions, such as: Range-bound,
wherein the currency pairs bounce between support and resistance; Trending,
wherein the pairs have a definite direction; and Consolidating, wherein the
currency pairs are cornered in a narrow and tightening area.
The key factor, which can help a trader know which technique can be used for
range, sooner or later. Traders must be nimble and have the capacity to adapt
to this kind of changing environment by using the right strategy at the right
time.
When a trader first starts using new techniques for trading, he might be lucky
unfortunate side to this kind on initial success. The trader has the tendency to
continue using that same trading technique, even though the market has
clearly altered and the technique is no longer applicable. Falling in love with a
that while short-term success in not common, it is surely not the ultimate goal.
Luck can be brought to anyone but it does not last for long. It is important to
know that the markets are not static and it is up to the trader to distinguish and
observing a market for a long period of time, there are noticeable tendencies,
like when the currency market tends to shape long and strong trends. Another
tendency, which can happen at any trading market. There is also another
situation where the market has the tendency for a strong breakout to occur
instantly following a tight consolidation. The trader can use these tendencies
and make them the foundation from which to create a strategy.
number support and resistance occur when people often locate their entries,
The truth of the matter is, not all traders consult a chart before putting a trade,
and there are some who have very general thoughts as to where they wish to
place their orders. These kinds of traders often place entry, stop and exit
orders at round numbers and the orders assemble at these levels. When this
happens, the round numbers frequently correspond with the key levels of
support and resistance in the futures and equity markets, as well as in the
Applying Trends
Traders can utilize trends to their own benefit. For example, when the market
is trending, it has preferred a clear direction. Traders can assume that this
trend continues, since history dictates that in the currency market, trends can
last for several years. If the trader is able to get on the right side of the trend,
It is easier and profitable for traders to allow their winning trades to run in a
trending market, since the exchange rate has a clear direction. For as long as
the currency pair moves in the direction, the traders defensive stop is less
likely to be prompted.
Conversely, with the case of the sideways or range-bound currency pair, the
price has the tendency to return to the entry point, for such a reason that this
kind of pair has no real direction. This kind of situation makes it hard for
traders to hold on to their positions and even forces them to be quick regarding
exits.
One method is to use moving averages, also known as proper order of moving
averages.
Another method is by using the ADX or Average Directional Index indicator.
This indicator states the strength of the trend without regard to the trends
A trend line is also used to determine if a trend is in effect. Simply, the trend
The reason why trends form is because of the economic cycles. In Forex
economy of a country is either strong or weak, it remains that way for years.
More so, the strength and weakness of an economy runs in a cycle that is
measured in years. There are four stages that traditional business cycles
respectively.
Moreover, the economic strength and weakness usually reflect in the currency.
Since currency markets involve matching two currencies against one another,
situations can arise wherein one currency is stronger than the other in the pair,
tempting to apply and deduce the point at which the trend will undo though
countertrend move, a trader who always trades in this manner is stacking the
One of the most dependable features of the currency market is its tendency to
form trends in an assortment of time frames. Trends with the Forex market can
linger for weeks, month or even years and traders who support themselves
only after the price has pulled back to a favorable entry point. In short, the
strategy does not allow the traders to enter long at the highs or short at the
lows.
The technique can also be utilized for shorter time frames. Like for example,
when the active day trader can use the four-hour chart for long-term reference
By performing a role of a trend trader, your main objective is to use the trend
to your own advantage. If the currency pair is in a downtrend, you should look
only for short entries and ignore any opportunity to go long. More so in the
same instance, if the pair is rallying, you must find your entry point and locate
enter at the absolute peak. There are several traders who seem to be
excessively concerned with achieving the ultimate entry point; they desire to
sell short at the peak and proceed long at the absolute bottom.
one can really foretell the peaks and valleys in stocks, options, futures, as well
as Forex. Any trader who tries to achieve this is simply attempting to get lucky.
If the trader waits for the momentum to turn, he or she has no chance of
entering at the very top or bottom which is fine. Always remember that an
exchange rate slides and the RSI descends from overbought levels. The trader
can enter short within the vicinity or point at which the Relative Strength Index
is no longer providing an overbought reading; this should also be the point
RSI or Relative Strength Index is used to measure the activity of the market as
Placing the stop is also important and must be immediately applied in order to
gain protection from any adverse movement. The trader must know how to
stop at a certain point, again by referencing the RSI. It is important for the
trader to consider the possibility, that after his or her entry, the exchange rate
could rally further. If the pair trades above the stop point, it is advised not to
hold on to it, as it could only be breaking out to the upside. And so, the stop
should be placed in a location where the trader will be taken out of the trade if
If the currency pair is rising up from support, the trader should not enter a long
trade and try to gain from a possible bounce. In a multiple time frame strategy,
the main focus is to trade only in the direction of the trend and to disallow
It does not mean that the trades going against the trend are never profitable
because anything can occur in an individual trade. A trader who fights against
the trend on a steady basis will only have difficulty in finding success, as
When a trader properly uses the multiple time frame strategy, he or she has
the capacity to see the exchange rate rising. This kind of trader would not also
be tempted to go long and battle against the odds. The correct attitude for
trading should be to allow the exchange rate to rise and hope that it creates
In the foreign exchange market, it is no doubt that fortunes can be made from
trends. However, it is not always the case when the market cooperates. The
trader must be able to develop solid techniques for times when the market is
not trending. Doing so can be done around specific tendencies that are most
In Forex trading, there are several indicators that people use, including the RSI
or relative strength index, the exponential moving averages of EMAs, and the
Bollinger bands. However, there is another indicator that stands above the
rest, which is the price. It has always been the ultimate indicator, compared to
other mentioned indicators who are merely equations of formulas that are
price of the trading vehicle over a selected period of time. The RSI or stochastic
oscillators are used to measure the difference between the current price and
Technically, the Forex market does not have a price per se and instead, there
is an exchange rate. The rate allows the traders to compare two currencies in
one equation. Thus, the price is only another term for exchange rate in
currency trading.
There are two elements correlated with the price: the support and the
particular price. On the other hand, when the seller repeatedly steps in at a
specific price, this is known as the resistance. The support and resistance can
price can bounce from the support, it can also fall from the resistance.
When the trader is participating in any kind of trading, like the intraday
advantage possible. Traders normally search for situations wherein the odds
are in their favor, and then take the necessary course of action.
price appears to break below support or above resistance, only to rise back
There are negative effects of false breakouts and in order to reduce them, and
The Triangles
directional partiality for the currency pair. Firstly, the ascending triangle is
the other hand, the descending triangle is formed through the combination of
Traders can increase their edge and take it to the next level. More so, traders
can also gain a further edge by checking the direction of the currency pair
descending triangles. This is for the reason that it is not abnormal for a
currency pair to trend in one direction, then consolidates and then resume
trending in the same direction. The pair trending in the same direction prior to
the formation of the triangle pattern can only cause the trade to become all the
more compelling.
In trading, when you notice that the pair has been trending steadily heavier, it
is important to use the power of this trend to your own advantage. You must do
this in order to reduce false breakouts from happening and enhance your
chances of success. Through filtering the breakout trades, you are again
Remember that the general rule for the trade is always to trade with the trend
and never fight it. Traders who fight against the trends often get disappointed
Within a high-volume environment, the move is deemed real since the players
are placing significant amounts of capital work. On the other hand, order that
normally would not have a significant impact on the exchange rates but have
If the trader applies buying or selling pressure at the right moment, the
While traders do not have the capacity to easily access precise volume figures,
the trading is not equally liquid at all time of the day. Additionally, there are
In Forex markets, there is a situation when the traders often witness the price
fall rapidly, then consolidate, and then continue its fall. In between these two
consolidates its gains or losses before moving on. A rest period indicating that
the exchange rate will continue to move in its previous direction is referred to
The Flags
formation of the flags, the exchange rate has the tendency to resume its
In the case of the flags, the preliminary move is a sharp, sudden directional
thrust. Even if the move is an advance or decline, it does not matter. What
matters is the velocity of the move. The sharp burst generates a long candle or
even a series of long candles on a short-term chart; this is also known as the
flagpole.
Flag formations are also in continuation patterns, which mean that the most
the flagpole. Generally, flags contain two parallel lines sloping away from the
There are impatient traders who opt to enter when the price clears the upper
line of the flag, instead of waiting for the price to reach the right entry point.
This is absolutely a mistake. Normally, if the exchange rate escapes from the
formation of the flag but fails to clear the top of the flagpole, there is no reason
to assume that the trade should be triumphant. However, by waiting for the
exchange rate to clear the top of the pattern by an amount equal to 10 percent
of the flag, traders can filter out a poorer entry that would have been
disastrous.
The Volatility Cycle
It is not unusual for volatility to run in cycles. Usually, periods of high volatility
are followed by periods of low volatility. An explanation for this event is best
trends and the participants have a definite opinion regarding the direction of
the trade.
The cycle can be observed in any trading market though it is most closely
distinguished with options trading. Traders in this kind of market write put and
call contracts during times of high volatility in order collect the cost of the
contract, or the premium. Premiums that are attached to the contracts have
The option writer then assumes that the volatility will go back to normal levels
in the future. This would allow him to buy back the contracts at a reduced
premium. This concept is also known as selling volatility. This kind of cycle in
Traders show a strong preference for one currency over another, when a
currency pair begins to trend. When strong trends happen, the market is
volatile due to the price movement. The perception of value has altered and
When the time comes that the trend has continued for a while, the pair will
achieve a certain point where the participants feel that the exchange rate is
valued fairly. More so, there will come a point when the bears and the bulls
This period of rest or consolidation will eventually come to an end. The bulls
and the bears may have attained a temporary agreement, but eventually new
information will be introduced into the market. Hence, the perception of the
Normally, the catalysts for this alteration of opinion are the economic
events.
Rounding Off
are drawn to round numbers or those that end in zero. In trading, round
The Dow Jones Industrial Average approached the 10,000 mark for the first
time in March of the year 1999. The event included index testing investors for
approximately two weeks before finally closing above 10,000. This event was
11,000. The investors who frenzied during the peak of the Dow 10,000,
Back then, the success of Dow was highly publicized and filled the front pages
television specials advertising the event. At the time, the whole market was
There are some scientists who believe that human beings generated a numeric
system called “base-10” because we are born with 10 toes and 10 fingers.
Traders and investors have a strong tendency to put orders that coincide with
round numbers. For example, an analyst may have said that he would buy a
specific stock if it falls to a specific amount, for instance $40. If several traders
placed buy orders for that stock at $40 per share, since they believe that the
stock is a bargain at that price, the stock will encounter a large pool of buy
orders. When these orders are activated, they can unleash an incredible
Basically, the buyers have generated a support level at $40, since several
orders have accumulated at that level. Traders call this as the psychological
especially in the Forex market. The reason why commodities, currencies and
the human nature to be attracted to round numbers. Therefore, the event can
instance, back in the early part of 2005, the USD/CAD currency pair found
support repeatedly at 1.2000. Another is in early 2006, when the EUR/USD
buyers stepped in repeatedly within the vicinity of 1.2700. Traders who use
A pool of large orders can generate an attractive target since banks can earn
commissions when their customers orders are implemented. More so, since
the orders tend to congregate at round numbers, the trader can take this
For a day trading strategy, time frames will be strangely short. This is because
the first bounce off of round number support or resistance is normally the best
bounce, and so traders desire to be certain that they are seeing the first
bounce. On the other hand, longer time frames cannot also be used for this
kind of strategy since they can hide multiple bounces within a single candle.
Every moment the exchange rate achieves the round number, orders are
normally executed, and the pool of orders that produces the level of support
and resistance is diminished. Once the total of orders remaining is no longer
enough to repel the exchange rate, it is not odd for the level of support and
This is why it is very essential for the traders to trade the first bounce off of the
round number, since it is at this point that the pool of orders is most valuable.
The traders can also trade subsequent bounces as well, though the first bounce
Interest Rate
Interest Rate
Getting something extra without the added cost can be a nice change
sometimes. The ultimate traders dream is to enter a trade and turn a profit
even though the currency pair does not budge. There are others who desire to
make money off their trades, even though the market is seemingly
uncooperative. This would surely make trading a lot easier. Although it may
seem farfetched to those who are unfamiliar with the methods of Forex
market, that is exactly how the hedge funds, banks and other institutional
The heart of this technique lies on the interest rate arbitrage and in the reality
that every currency has a matching rate of interest. The rate is determined by
the nations central bank or the nations that use the currency. For instance, the
Federal Reserve sets the U.S. interest rates, while the interest rate for France,
Germany and other nations of the European Monetary Union are determined
In the Forex market, currencies trade in pairs and each currency has an
equivalent interest rate. For these reasons, there are two different rates on
interest for every pair involved. Generally, a disparity exists between the
rates, and so in most cases, one currency yields higher than the other.
Large institutional traders seek to exploit this kind of edge. Additionally, the
trader can be long one currency and short one currency in every foreign
exchange market. The trader who is long, the higher yielding of the pair
to pay the interest. The amount of the interest that the trader either pays or
collects is based on the interest rate differential. This factor is described as the
Suppose that a certain trade is placed in the imaginary currency pair, say
ABC/XYZ. The rate of interest for the ABC currency is 4.0 percent, while 1.0
Hence, the ABC yields higher than the other. Traders who are long ABC and
short XYZ will collect 3.0 percent in interest, which is the differential between
ABC and XYZ. Note that the trader must be long the higher-yielding currency in
However, traders who are long XYZ and short ABC must therefore pay the
same 3.0 percent in interest rate differential. Arbitrage traders who are long
the higher-yielding currency seek to collect interest every day, given that they
hold the currency pair.
For starters, this might seem at bit simple. However, there is more to this
currency that is yielding low. Traders utilize this strategy when they are able to
identify a situation where the interest rate differential is likely to expand over
time.
Such event would result in an even greater payoff for the trader who is long the
becomes evident that the interest rate differential will stop growing or become
By using the previous example provided, assume that the traders are trading
currency pair ABC/XYZ, and they are collecting interest since they are long
likely to raise the interest rates to control inflation and contain growth. When
the bank takes a course of action, the interest rate of ABC rises from 4.0
percent to 4.25 percent, thus causing the differential from 3.0 percent to 3.25
percent.
bank is likely to lower the interest rates in order to encourage demand and
promote growth. The interest rate for the currency will be lowered from 1.0
percent to 0.75 percent, thus the differential would have grown to 3.5 percent.
The traders, who are encouraged by the growing interest rate differential, go
long ABC and sell short XYZ to collect the extra interest. If there are enough
traders tempted to go long ABC and sell short XYZ, this event will create a
positive pressure on ABC and negative on XYZ. Thus, the currency pair will
begin to rise.
spite of whether the trade moves in the preferred direction. For instance, if the
trade maintains its flatness for several months, the trader can still come out
ahead given that he or she collects interest. Moreover, this will provide the
When comparing this kind of situation to the trader who is on the other side of
the trade, he or she must pay the interest day by day, even if the trade moves
in the preferred direction or not. The trader who is short the higher-yielding
The Forex market also has the tendency to be very quiet at certain times of the
trading day. There is an evident stretch of a number of hours, starting after the
United States Forex session ends and prior to the beginning of the Asian
session, which also tends to be very low in volume. Although the New Zealand
and Australian Forex markets are full of life during this time of day, the entire
namely Great Britain, United States and Japan, during this time of day. Under
these situations, the currency pairs have the tendency to drift, and any
During these hours, breakouts that happen are infamously unreliable since
they almost always occur on very low volume. More so, a trending technique is
also inappropriate due to the lack of direction from the market. Since any
movements that occur at this time of day are undependable and likely to
retrace, the traders can create a strategy that is designed to capitalize on false
This specific time of day is also considered as the beginning of the Forex
trading day. Due to this fact, it is also the same time that a number of market
enter order just after 17:00 Eastern time. This would normally link to 22:00
GMT during standard hours or 21:00 GMT during Daylight Saving Time. Either
way, the time of day for this kind of trade will constantly be just after 17:00
This kind of strategy is exclusively designed for the EUR/USD currency pair.
The agenda is to enter or sell order above the market to fade a move higher
and enter a buy order underneath the market to trade against a move lower, at
the same time. In both of these cases, the traders assume that any movement
Such a directional move can be caused by a large order, which would not have
the ability to move the market under normal situations. More so, since the
volume is extremely low during this time of day, the orders have the ability to
The buy order will be situated 15 pips below the opening price, while the sell
order at 15 pips above. The traders stop will also be located 15 pips away, thus
Fixed-pip parameters can be set, since this kind of trade is only for the
EUR/USD currency pair. However, if the trader attempts to use this technique
account for the difference in volatility. Additionally, the trader is also required
to consider the kind of spread for most currencies, which is wider than the
EUR/USD pair.
This kind of strategy is designed for quick profits, hence perfect for the
EUR/USD pair. This currency pair tends to consist of a narrow spread, making
The traders must place order 15 pips above the opening price at about 1.2598.
Additionally, he must place a buy order 15 pips below the open at about
1.2568.
If the trader does not execute the trade within two hours, he or she must
cancel both the orders. During that point, there is no valid reason for placing
the trade since the Asian markets are starting to wake up and the volume and
volatility are about to increase. Moves are more likely to be authentic, when
real volume enters the market. In this instance, the strategy that fades
A trading neophyte does not have the experience which allows him or her to
anticipate and avoid trouble. This kind of trader is more likely the prime
candidate to do damage to his or her own account. It is very important for the
goals to be in tune with where the trader stands as a trader. The first-time
trader must not have an aspiration of doubling his or her account overnight.
Although big gains are possible, it is important not to expect everything to fall
into place overnight. Always start with an easily achievable goal and once the
first obstacle has been conquered, move on to the next one, and then the next.
It is not unusual for traders to get excited when they first get involved with
trading. Since the rewards of trading are fantastic, it is easy to get excited and
clouds the better judgment and most often leads to unrealistic expectations. In
There are traders who are exceedingly trying to change their lives overnight
and often do what is not advised. Traders enter the market with high
expectations and are quickly annihilated. Always note that more traders fail
than succeed, and the rate of failure is high among new traders. Thus when
though you have read these expectations in books, watched them on the
television or heard them from a friend, it does not necessarily mean that you
can do it too. In time, the trader will realize that a good trader rarely talks
An excellent way to attain great results is to take an ambitious goal and break
When traders are asked if an annual gain of 100 percent is an aggressive goal,
they would surely say yes. However, when asked if a consistent 6 percent
not know is that if the trader has the capacity to increase the value of the
then multiplying it by 1.06, which is the 6 percent gain. This would end in the
first months result of 106. Next multiply the result by 1.06 and keep doing so
until the calculation is enough for the entire years worth of results or for twelve
months.
Consistency
Consistency is the key. It is not hard to attain a six percent return in any given
return every month. It is advised to begin with a relatively easy target, and
Instead of starting out with a goal of 6 percent per month, try starting with a
the trader, which is essentially good, since trading is stressful enough without
By achieving a goal of just 1 percent each month, you would be well ahead of
most traders. Although a monthly goal of 2 percent may not be inspiring, if
done consistently, can help you achieve an annual gain, which is just shy of 27
percent. Additionally, achieving that goal will only prove that you have
In case you have achieved your modest goal for three months in a row, you can
then raise the goal to the next level: from 1 percent to 2 percent, or from 2
percent to 3 percent and so on. Also, do not rush things and remember that
you can gain experience and confidence from this goal, which can even make
Once the trader has achieved his or her goal, it does not necessarily mean that
it is the end of all trading; instead he or she must take precautions in order to
However, in case you ask yourself why you encounter problems or do not meet
your objectives, it may be for the fact that the goals are too aggressive. Take
a shot at an easier target and if things get really hard, stop live trading and
switch to a demo account, until the time comes when you can regain your
footing.
It is not a lie to say that trading can be difficult. However, in an effort to make
it easier, other traders often resort to taking quick exits sometimes by trying to
make 10 pips on each trade instead of earning 100 pips on one. This kind of
playing it safe, which would look like a commendable trait in world of trading.
However, instead of making things easier, the trader is in fact making his life
more difficult.
The world of Forex trading is much like the European roulette. The zero
pockets represent the spread and the odds are forever going to be at least
success, every additional pip in the spread can also lessen the chances of
The house always determines the spread and the traders have no control over
it; it is only determined by the market maker alone. However, in the world of
foreign exchange trading, the traders can increase the size of the playing field,
using exits and stops, longer time frames, and trying for larger gains.
Do the Math
Assume that a trader is trading a currency pair that has a 3-pip spread, which
is also a very common size of the spread in the Forex market. If the trader just
wants to gain 10 pips, it is understood that he or she can lose the spread upon
entering the trade. And so, in order to turn a profit of 10 pips, the trader
actually requires the exchange rate to move 13 pips in his or her favor, thus 10
would have to happen to create an equivalent loss. This is also the method on
To create a loss of 10 pips, the trader would only require an adverse move of
7 pips. This is for the reason that a loss of 3 pips is acquired automatically upon
It was also determined that the trader needs a positive move of 13 pips in
order to gain 10 pips, but a move of just 7 pips can result in an equivalent of 10
pips. The so-called raw odds of the 10-pip win versus the 10-pip loss for such
As such, the odds of the success in this example are 1.857:1. This only shows
that trying to make money trading for small gains is difficult, not to mention
that the playing field is too small. However, traders can improve the odds of
currency trading, by making the playing field larger. If the traders are aiming
for larger gains, the spread becomes less essential part of the trade.
Once again, suppose a spread of 3 pips, only this time the trader will be hoping
to gain 100 pips as a replacement for just 10 pips. To turn a profit of 100 pips,
the trader actually needs the exchange rate to move 103 pips in his or her
More so, to generate a loss of 100 pips, the trader would need an adverse
move of only 97 pips since a loss of 3 pips is incurred instantly upon trade
entry. The raw odds for this situation, which is a 100-pip win against a 100-pip
Noticeably, the odds are better because they are close to 50-50. However, if
the trader is using good trading techniques and risk management, he or she
is larger, the odds of success also improve significantly. More so, traders who
are trying to achieve greater gains have the tendency to hold their trades
Though the prospect of trading for larger gains is favorable, not everybody
does it. There are a couple of possible answers: first, these traders do not
understand that they are stacking the odds against themselves; and second,
they have damaging predetermined notions about the nature of trading itself.
The problem that most traders encounter is that trading is not always what
they believe it to be. Each trader has his or her own concept of trading, or even
what he or she likes trading to be. Although it is ideal for trading to provide
people with riches through minimal effort, trading strategies are not suited for
Summing it Up
Summing it Up
Being fixed on the percentage of winning trades versus losing ones is similar to
a disease and it cannot be easily cured. In trading, not all battles are won and
instead you should be willing to lose a few battles along the way. More
accurately, as a trader, you should be willing to deal with small losses in order
to avoid the creation of a large loss. A number of trading fiascos begin in the
investment company will first agree on whether your results are due to your
outstanding decision making or from excessive risks. Take this for example;
there are two traders both with starting equity of $50,000. The first trader was
able to double the initial investment, thus resulting in a 100 percent gain,
hand, the second trader rose only to $60,000, which is only a gain about 20
percent, but his worst drawdown was only at 2 percent of the accounts value.
Although the first trader had the larger return, he is an accident waiting to
happen. Any trader who is willing to lose 50 percent is also an excellent
candidate to lose the account. Probably, the first trader was trying to hold on to
his losing trades, or even adds to them, which is normally a signal of failure in
The trader who can be considered superior is the second trader, since he was
institution would want to know just how much money can the second trader
In trading, it is important to always remember that the ends do not justify the
means. This only means that the outcome of the trade does not automatically
justify the method used to achieve that outcome. There are traders who take
the attitude that for as long as the trade wins, there is a good reason no matter
The truth is, winning trades are not always good trades and vice versa. It is still
possible to perform everything incorrect and still achieve a triumphant result
on a specific trade, just as it is possible to do everything right and still lose the
trade.
instead of a lucky one, since anyone can be lucky. More so, do not judge the
trading on any particular result, but rather on whether the process followed
proper protocols. If done correctly but still not trading successfully, at least
you will be able to resolve that the problem lies not with the execution but with
the plan.
Take note that any good plan is useless without being executed properly.
Unfortunately, this is one area where most traders go wrong. Since they desire
to succeed, they make a plan and then randomly change it probably due to lack
of discipline. When failure occurs, the blame goes on the plan. In fact, the error
have no way of knowing if their plan actually works. When you successfully
Also, never congratulate yourself for a successful trade outcome that came
from an ignored plan or unplanned at all. Instead, consider yourself lucky and
realize that it might be impossible for you to succeed in this manner again, in
Several traders like to place blame. They would have people think that their
unfortunate trading records are due to exploitation on the part of the market
Although dodging blame may be effective in dealing with other aspects of life,
like work, it is not conducive in performing good trading. Deflecting blame only
causes traders to remain the same and leave no space for change.
Additionally, by accepting that the fault lies with someone else, there is no
Always remember to accept responsibility for every trade that you place. If you
are very open in taking credit for the winning trades, then you should also be
able to accept blame for any losing trades as well. Those individuals who
always fail to take responsibility for their own actions, or trades, have the
tendency not to succeed in the Forex market, or any trading environment for
that matter.
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