Market Mechanics — Understanding Market Movements in the Foreign Exchange Market

Market  Mechanics — Understanding Market Movements in the Foreign Exchange Market

Have you ever wondered what causes price movements in your forex charts? Or why the market usually retraces at some point even in clearly established trends? Or better still, why some retracements finally become strong enough to form a whole new trend? This article is aimed at answering the questions above. Notice that a good understanding of market mechanics will definitely help you as a trader by fine- tuning your entry, exit, and stop loss levels, thus yielding better trading results.

Before we delve into the topic, I will like to explain four major reactions that lead to price movements, and in what direction each of them effects their movement in the market.

• Buyers entering the market: definitely, buyers entering the market will create a bullish reaction, thus causing upward price movement.
• Sellers entering the market: in a similar manner, there would be a downward price movement when sellers enter the market thereby creating a bearish reaction.
• Buyers leaving the market: when buyers are leaving the market, it gives a similar reaction as sellers entering the market. Therefore, this will cause a downward price movement.
• Sellers leaving the market: sellers leaving the market will create a bullish reaction, thus causing upward price movements.

At every point in time while the market is open, a combination of some or all of the above is occurring. This means that the final price movement you actually see on your chart is the resultant of the market vectors listed above. For example, if we are in an uptrend, and are spotting bullish market reaction, it means that we have more net buyers than sellers which are causing the resultant upward movement. Now, as the swing tops out, those buyers who have been scoring profits all along will begin to bank their profits, thus buyers leaving the market. When this is happening, it causes a downward price movement as indicated above which we term retracement. Also, some sellers who were able to predict the end of the bullish swing will also jump in thereby augmenting the downward retracement. As price retraces to a bullish confluence below, those sellers, who entered at the top of the bullish swing, will begin to take their profits( sellers leaving the market), and more buyers will enter the market hoping to continue with the trend to the upside- the general result being a net bullish market reaction. The opposite is the case for a bearish trend.

So, what happens during a trend change? Most trend changes are signaled by fundamental analysis or by bigger investors massively closing out portions of their position which are usually huge enough to break levels of confluence in the previous direction of the trend. When this happens, emotion sets in, and other traders around the world will be keen in taking positions against the previous trend. This action increases the net volume in the new direction, thus creating a whole new trend.

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8 Tips to Improve Your Forex Trading

8 Tips to Improve Your Forex Trading

It is a well known fact that the vast majority of Forex traders do not make money. However, on the other hand, I believe many people can massively increase their chances of being successful by following the simple tips below.

Start with a demo account

If you are new to trading, don't risk your money right away. You'll probably lose it. Practice on a demo account for a few months, or if you are extremely eager to get started, at least a few weeks. The longer the better really. I know what it's like at first, you just want to be trading!

Take time to choose your broker

Choosing a Forex broker is not a task to be rushed. There are so many to choose from, all have their own strengths and weaknesses. You can afford to be picky.

Bid/Ask spreads and execution are often the most important factors for short term traders. Longer term traders may want to pay closer attention to the "swap" rates paid by brokers. Especially if you are looking to make money on the interest rate differentials between currencies, such as a long AUD/JPY position.

Make sure you full know your platform inside out

It sounds simple, doesn't it? But from reading the various Forex forums, it's amazing how many people talk about making basic errors, such as incorrect position sizing, stop losses, limit orders etc.

Your trading platform is what you are going to be using to place your trading and orders, so it's vital you know exactly how it works. Play with the demo account until you know the platform like the back of your hand.

Have a strategy and stick to it

Making impulsive trades that are not part of a trading strategy usually ends in tears. Having a solid strategy that has been thoroughly tested is imperative. Never deviate from your strategy, no matter how tempting it might be.

Forward test and back test your strategies first

Many Forex traders like to back test their strategies. This is where you see how your strategy would have performed in the past. There is nothing wrong with this, it can be helpful, but just because a strategy you have created has performed well in the past, there is no guarantee the strategy will work when future testing. This is because when you back test strategies, you are usually "curve fitting" to some extent.

So once you have backtested your strategy thoroughly, be sure to test it on a demo account for a good few months before trading it live.

Use proper risk management

Always be sure that you have a solid risk management strategy and never deviate from it. For example you may want to risk 2% of your entire account on one trade. Perhaps you want to move your stop to break even when your trade is up 1%. Whatever you decide, stick to it.

Never chase the market

I know it's tempting to make a trade just so you can be "in the market", but always be patient and get the best possible entry. This can massively lower your risk and improve the chance of your trade ending positive.

Don't get cocky or arrogant

It's so easy to get cocky when you have had a long line of winning trades, you can begin to feel invincible. This can lead to rash and impulsive decisions. Remember, when you trade Forex, you are a very tiny fish in a very big pond. You must always respect that to be successful.

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Forex Knowledge — 5 Things to Consider Before Trading

Forex Knowledge — 5 Things to Consider Before Trading

In certain aspects Forex has been around us, since there was no electricity in caves. Long ago people always traded currency they had: whether it was food, animals or some shiny minerals. With the creation of modern money (coins and then paper) different nations traded one currency for another. In modern times currencies are widely traded by the world’s major financial organizations. The birth of a retail market in mid 1970s allowed non-commercial players to trade Forex. However, the most crucial change to the industry came in 1996 when Forex trading was put online.

Nowadays, the Forex child grew up and became the real giant. Over $4.5 trillion is traded daily in the Forex market where almost $1 trillion belong to the activity of such traders like me and you. These numbers strengthen Forex reputation and tell us about the broad opportunities for making profit with it. However, where the benefits, there come the dangers. Not every Forex-teaching company tells you about them — these guys need you to be thoughtlessly attracted to trading.

In this article, I want to give you the basics — five steps to put your thinking along the way of desirable profits in this biggest market space in the world.

1. The Hype Makes It Wipe

One trade makes me a millionaire. Hail Mr. Soros! This is what brokers want you to think when you are about to start with Forex. Relax and refer such words to what they call “True lies.” Not a Schwarzenegger movie, but a twisted reality. You can strike rich in Forex — it’s “true.” However, “lie” is that it comes an easy way. If you don’t be disciplined, prepared and patient, your winning chances are close to lottery. Approach market responsibly with a balanced frame, set your goals and stick to them. Like in fishing, success comes to those who wait and then strike.

2. Don’t Stay Hungry

I basically don’t mean that you have to trade Forex after having a nice breakfast. No. Before putting any cent into this venture, think if you are ready to lose it. Don’t leave your family without any food or clothes after betting all on “black” and losing with “zero.” Trade a capital that you can afford to lose without affecting your common life strongly. As a trader, I have to admit — more than 80% of new traders lead to losses. So think twice. If you are ready to say “good bye” to your investments and still carry on, you have a chance get into those 20%.

3. Read, Listen, and Learn

Like you wouldn’t borrow your hard-earned to some guy Phillip you had met only once. You would not jump into such a risky and volatile market like Forex without knowing “who,” “what” and “why.” Your complete research on the subject should include all the market aspects: how it has developed, where it is going, etc. Study the FX history more carefully than I put in first paragraph. Then you could speak to other traders and hear what they say (e.g. go to forums) about the worthy trading practices, best FX tools and services, the surest tips on predicting the market movements, etc. Also learn to read charts, understand and distinguish the Forex news, and (most important) learn your strengths and weaknesses to work on them henceforth.

4. Use Many Baskets for Your Eggs

The way to success in Forex (if I may call it like this) is thorny so treat your capital with care. Do not put all of your hopes on one trade — use the certain percentage of your equity. Although these numbers are up for debate, but take a loss into account, try to predict where your account will be after you lose a trade. My receipt here: use Stop Losses and Take Profits, trade smaller trades, “kill” your greediness, and DON’T even think to overcompensate for losses. Loss means loss. Extending your Stop Losses in hope the market will reverse itself is worthless. Usually, it does not do that. Your “best friend”, a trend, could become your worst enemy. I would also recommend you to trade several currencies to branch out the risks in terms of trades and currencies.

5. Don’t Let It Go to Your Head

It’s like a deep-town rock band, nominated for a musical award: they haven’t finally won but already turned into mannered and arrogant creatures. As for traders, there is no good for them to get too excited and anxious with trades. Any given second they can reverse. If you let your Forex successes go to your head, it will change your trading philosophy so you might take risks where you never did.

Be consistent and get it one by one. Like deserts are thankful for the rain, be grateful for what you win. And carry on with the current scheme if you are profiting. Stick to your plan and be deaf to your hunch calling to move Take Profit or extend Stop Loss.

As an “after word” I would like to say that Forex market is immensely huge. You can profit quickly and get large returns. However, if you are betting on “black” because it’s your favorite color, you can win in casino, but with Forex in the end. Address it like a business (with same responsibility) and it will get back to you with the benefits.

The Power of Confluence in the Forex Market

The Power of Confluence in the Forex Market

What is confluence and why is it so important when trading the Forex market? In this article I’m going to discuss what confluence is, why it’s so important and how you can integrate it into your current trading strategy to help put the odds in your favor.

What is Confluence?

Before we get into the details of how confluence can improve your trading, we first need to understand what it is. The dictionary has the following definition.

Confluence : a situation in which two things come together or happen at the same time.

So essentially confluence represents two or more “things” coming together at the same time. In terms of trading Forex, we can say that confluence is when two or more factors come together at the same place on a chart.

Some examples of these “things” might be a key support or resistance level, moving average, price action buy or sell signal or even something as simple as a strong trend. All of these things form what we’ll call Confluence Factors. In other words a strong trend might be one factor, a price action buy signal might be a second factor and so on.

Now that we've defined what confluence is and how we can apply it to trading, let’s discuss why it’s so important.

Putting the Odds in Your Favor

I think I can be so bold as to say that consistent profits is the goal of every serious Forex trader. So why then do only a small portion of traders make it to this level? It all comes down to the use of confluence. Those traders who can be called consistently profitable have found a way to identify and harness the power of confluence in a way that puts the odds in their favor.

The ability to put the odds in your favor is what trading is all about. Figure out a way to do this over and over again and you’ll be well on your way to becoming profitable. This is where the combination of various Confluence Factors comes into play.

For all intents and purposes we can view confluence as putting the odds in your favor. In other words the more Confluence Factors present on any given setup, the greater the odds are that the setup will move in the intended direction.

Putting the Power of Confluence to Work

This is my favorite part because it’s where we get to highlight the power of confluence as it relates to a particular trade setup.

To start, let’s say we have a strong uptrend in a given market. We all know that trading with the trend, or path of least resistance, is always a good idea. At the risk of sounding cliché, the old saying, “the trend is your friend” is absolutely true in my experience.

So Confluence Factor #1 becomes a strong uptrend.

The second thing we notice is a key support level that has just come into play. The market has retraced from a recent high and now appears to be finding support at this level.

Confluence Factor #2 = Key support level.

With respect to the key support level, price action has now formed a bullish pin bar from this level. Pin bars can be a great indicator that the market has reached a swing high or low and is about to reverse.

Confluence Factor #3 = Bullish pin bar.

Last but not least we notice that the tail of this bullish pin bar intersects with our 10 and 20 exponential moving averages that we use as part of our trading strategy. So it appears our moving averages are also providing dynamic support in combination with the key support level.

Confluence Factor #4 = Dynamic support from moving averages.

You get the idea. The list could go on and on and the factors you identify will vary depending on your style of trading. However the point to take away from all of this is that the more Confluence Factors we have on any given setup, the better the odds are that the setup will move in the intended direction.

This works both ways, however. Just as a trade setup with more factors can be thought of as higher quality, a setup with fewer factors is of lesser quality. This is when patience is so important – to have the ability to wait for the trade setup which has four or five factors instead of taking the setup that has just two or three factors.

It’s important to keep in mind that although confluence helps to put the odds in your favor, it doesn't mean a setup with four or five factors can’t fail. Instead you want to focus on the bigger picture. You know that if you patiently wait for those “A+” setups that your account will begin to grow over the following weeks, months and years. Becoming a profitable Forex trader is a marathon, not a sprint.

Just as a casino doesn't expect to win every hand, you shouldn't expect to win every trade no matter how many Confluence Factors are present. Having said that, the casino knows that by the end of the year it will have made a sizable profit because the odds are stacked in their favor. So start thinking like the casino and begin using confluence to stack the odds in your favor.

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3 Reasons Why You Should NOT Use Expert Advisors

3 Reasons Why You Should NOT Use Expert Advisors

As traders, we live in a world dominated by automated trading. Some two decades ago, robots were following humans when it came to trading, but now the reality is that the trend has reversed, with robots leading the way. However, I can give you at least three reasons why you should NOT use expert advisors when it comes to trading your own account.

VPS costs

An expert advisor is basically a robot instructed to buy or sell when specific conditions are met. Programming them is relatively easy and anyone with an IT background should be able to adapt to the MetaEditor or any other programming tools available for free.

Before developing an expert advisor, one needs a strategy that will pass the test of time. This can be done in two ways: either back-testing the strategy in the history center to see what results were in the past years/months, or just paper-trade the strategy for some time to see if it works.

Providing both steps are completed and the expert advisor is ready, one needs to know that applying it to a broker/chart is not enough, because by the time the platform/computer is closed, the expert advisor will simply stop trading. To overcome this, a VPS (Virtual Private Server) is needed.

A VPS is a real computer in a separate location that is guaranteed not to close the trading platform during the trading week. More than that, the VPS is actually never supposed to close unless some unavoidable, technical issue appears.

To have access to such a VPS, one should open an account with various VPS providers, pay a monthly subscription fee based on the server needs, and follow the instructions of how to best use the chosen VPS.

Using a VPS is a good way to overcome issues related to the trading platform, but there are monthly costs one needs to consider that should be deducted from the profit the expert advisor will produce, if any!

Execution and spreads

Trading with an expert advisor still requires a broker and brokers differ quite a lot. Common variable are the spreads offered and the speed of execution.

Spreads differ in volatile markets or when an important economic event, such as the NFP (Non-Farm Payrolls) in the United States, is released. If your expert advisor is programmed to open or close a trade during the NFP release or just after, then the entry or exit level will be different and results will not match the ones in testing.

Execution is important as well. Let’s say the robot has a stop loss for a long position at ten pips below the current market price and an important news item is released. Because of the ECN (Electronic Communication Network) that brokers use, it is virtually impossible for a broker to fill the order exactly at a desired level. Therefore, the actual close will be far away. So again, testing results will not match the reality.

Lack of market conditions

However, none of the above is as big of a challenge for an expert advisor to manage as a lack of market. What does this mean?

A Forex broker is obligated to fill an order if there is a market, meaning that if you sell, there should be a counterpart to buy, or if you buy someone should sell. This is a market. What if there is nobody to buy your selling order or to sell when you want to buy?

You might say that is not possible in Forex trading but recent history tells us things are not always the way they are supposed to be.

Last January 2015, the Swiss National Bank (SNB) dropped the peg on the EUR/CHF 1.20 floor creating unprecedented chaos in the Forex industry. Brokers went bust, trades were stopped, and the entire industry was shaken to the core.

If you happened to have your expert advisor buying EUR/CHF before the 1.20 floor was broken and had the stops shy below 1.20, then no broker in the world would have helped you, as there simply was no market after the floor was dropped.

Actually, for a few minutes (5-10 minutes) nobody knew the real value of the EUR/CHF pair as, again, there was no market. There were no buyers for sell orders in order to close the longs. So the expert advisor would be forced to carry the longs until a market was formed.

The problem is that the market formed at around the 0.8700 level, which would have been the level the expert advisor would have closed the longs at. That would mean the expert advisor is giving up ALL of the possible previous years’ gains and still would not make up for the loss, thus demonstrating why Forex online trading bears risks when trading with expert advisors.

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