Forex Trading Made Easy

Over and Under-Trading in Forex

2012-01-31T12:01:00.001+02:00

Following a system is a key component of succeeding at Forex, but there is really more to it than that. Your Forex system has to not only work, but be balanced-it has to be something which you can integrate into your real life, and which won’t cause you to trade in imbalanced ways. Two common problems which Forex traders face are under-trading and over-trading. While some Forex traders under- or over-trade because of trepidation, impatience or other psychological factors, many do it because their systems tell them to. How do you fix under- or over-trading when it’s built into your trading system?

Oftentimes, over-trading and under-trading are built into a system because of the context of that system. It isn’t necessarily your entry or exit rules which are causing you to take too few trades or too many — it may be that you’re looking at too many currency pairs or not enough currency pairs. Or perhaps you’re trading on a Forex timeframe which is too slow or too fast. It’s very common for new Forex traders to trade faster timeframes than they need to or should starting out, for example. If you trade a fast timeframe when you’re starting out, not only will you be inundated with more trading opportunities than you necessarily can handle, but you’ll have less time to make decisions in and, more relevantly, less time to patch up mistakes. Does this mean you have to trade a slower timeframe? Not necessarily; not every personality is suited to having all that time to think (and double guess). And again, not everyone over-trades. Many people under-trade Forex as well.

If you’re taking on more Forex trades than you can handle, consider dropping to a slower timeframe (test this first) or dropping a few currency pairs. If you don’t feel overwhelmed with information, just with trading, consider imposing some rules on yourself so that you only take a certain number of trades in a given timeframe. Then pick only the very best setups (which is what you should be doing anyway).

If you aren’t trading enough to turn a good profit and your system isn’t signaling you to take any more trades than you are now, think about moving to a faster timeframe (only if you feel comfortable doing so — and don’t forget to demo it first), or looking at more currency pairs. If you’re only taking A+ Forex setups, you’re on the right track, but you may be able to find more trades of the same high caliber simply by looking at more currency pairs or a faster timeframe where more setups form.

These are just a couple of ideas to consider which may help you to improve your Forex trading. A lot of people don’t think of simply changing the context of how they trade, and wonder if they need to revamp their whole system. It’s often not the system that’s not working, however. You may just need to change the way you apply it.

How Forex Trading Checklist Can Help You

2012-01-08T12:42:00.000+02:00

You’ve probably read about how a trading system and trading plan are indispensable components of your trading. Indeed, if you don’t have some kind of system or method which tells you when to enter and exit trades — get one. A checklist for trades can be a part of your trading plan. Your trading plan will help you organize when you watch the charts, when you trade, what timeframes you look at, how you manage your money, how you work with alerts and more. While your system probably has your entry and exit rules and target profit and stop-loss rules, it probably doesn’t have a full list of things to keep in mind as you trade. Nonetheless, this needs to be part of your trading plan.

Why make a trading checklist to help you keep track of what you’re doing? Trading real money (or even demo testing for some people) can be very stressful. When you’re dealing with your emotions and working on making trading decisions, the last thing you want to do is forget something simple just because it isn’t written down. A trading checklist helps you to make sure you consider all contingencies.

For example, you might have a checklist for entering a trade. This is a checklist you look at after you find a setup identified by your entry criteria and before you actually hit «buy» or «sell.» You might ask yourself whether the context around the trade looks good (unless this is already part of your entry criteria). You could also make sure you’re investing the correct percentage of your account (obvious, yes, but remember, if you’re frantically trying to place a trade to catch a move, you may not look carefully at what you’re doing — especially if your trading platform is confusing, and many are).

Some questions to ask yourself while in a Forex trade might include:

Did I set my alerts?
Have I identified important pivot areas where price could hesitate?
Is a new price formation occurring? Does it conflict with the old one? Are my signals telling me to do the opposite of what I’m doing now? Do the original reasons for the trade still exist, or not?
Am I in a retracement or an actual loss?
What is price doing at a higher or lower timeframe? Is the context for the trade still good?
Am I in a weekend trade? Do I need to move my stops to avoid being stopped out by the weekly gap when the market re-opens?

This is just an example — what you put in your checklist could vary quite a bit. Your checklist could include not only considerations about the trade itself but considerations about yourself. If you have a tendency to hang onto losing trades when you should let them go, you could even ask yourself in your checklist if you are doing so, and include a reminder about the ways in which your emotions tend to impact your trading. Your checklist not only checks your trading, but also checks you. It’s a form of accountability, and it makes trading much easier to manage when emotions run high.

What Statistics Are Important in Forex?

2011-12-27T11:37:00.001+02:00

When you are testing a Forex system or method, you are testing it to see if it can provide consistent, repeatable profits. The only way for you to see this objectively is through statistical evidence. There is a tendency for new traders to assume that there is one all important statistic which they should work on, but this isn’t a realistic way of going about developing a system that works. Many people think that if they create a Forex system with a high win percentage, for example, they will be profitable. But what if your losses are all huge and your wins are tiny? You might still have a losing system.

The best approach is to cultivate a number of Forex statistics which provide you with important information about your trading. Well-gathered statistical evidence will not only demonstrate to you whether a system is profitable, but give you information which you can use to improve that system. Here are some important statistics to focus on during your Forex backtests and demo tests.

Win/loss ratio (or win percentage). Obviously you want to get a high percentage of wins and a low percentage of losses. This is one of the most important things you can aim for, but as mentioned already, it isn’t everything.
Size of wins and losses. You want larger wins and smaller losses if possible.
Net pips. How many pips have you made, total, over the course of the Forex test?
Number of breakeven Forex trades. How many trades did you break even on? The reason this is important to calculate is because you will usually lose a little money on breakeven trades since you must still pay the spread for the trade. You will need to add up the costs of your breakeven trades and subtract that cost from your net profit. It can be significant if you have a lot of breakeven trades.
Worst losing streak. How many losses in a row did you incur during your worst losing streak?
Average number of winning trades per day/week/month/year. If you’re eventually going to trade for a living you need to get some feel for how much money your system might actually make you in a given real life time period.
Number of winning/losing trades for various types of Forex trades. If your method involves multiple entry methods, tally up data on every single one of them. You may also want to take notes on context. You may discover a price pattern or indicator which works great in one context works poorly in another. You can then make the adjustment to your next test.
SOL Quotient. This term comes from well known Forex trader Rob Booker. Your SOL Quotient = your net profit/maximum loss. The resulting number is how many of your worst losing trades you’d be able to withstand in a row before blowing your net profit. Naturally you want this to be a large number.

You can profit with any one of these statistics being poor — if the others make up for it. There is no one golden statistic which determines statistics — but taken together these statistics can help you to succeed at Forex. If you are using MetaTrader platform to backtest or demo test your trading strategy, you can then use a report analysis tool to get all these important statistics.

If you want to share your opinion on the importance of various FX trading statistics, please use the commentary form below to post it.

What Is Moving Average?

2011-12-12T16:57:00.009+02:00

One type of indicator which you'll see time and again as you are learning about Forex is the moving average (MA). Moving averages are lagging indicators—this means they don't predict price direction, but rather are calculated from past prices. There are four popularly used types of moving averages: Simple, Exponential, Weighted, and Smoothed. You will rarely see Weighted moving averages used in Forex, but we'll go over them anyway. Most traders prefer to stick with Simple and Exponential moving averages. The default is to calculate moving averages using closing prices, but you can also choose to calculate using High, Low, Open, Median, Typical, and Weighted prices. You'll be able to choose how to calculate your moving averages in your charting platform, unless you wish to calculate them manually.

Let's start with simple moving averages (SMA). A simple moving average is calculated by adding up the most recent N number of prices and then dividing that sum by N. What is "N"? It's called a period of moving average and you can set it in your charting software. It can take any positive integer value from 1 to infinity. It indicates how many days (or hours, or weeks, or any other chosen periods of time) you’ll be adding up. The general formula for calculating the simple moving average for a given moment of time is:

For example, you chose 5 as the number of days (period), and the Close prices for those are (from oldest to most recent): 1.3345, 1.3348, 1.3350, 1.3374 and 1.3325. Then the simple moving average can be calculated as:

SMA = (1.3325 + 1.3374 + 1.3350 + 1.3348 + 1.3345) / 5 = 1.33484

With an exponential moving average (EMA), the calculation is more or less the same, but the difference is that exponentially less weight is given to the older data. This is done to reduce lag. Here's a general formula to calculate the EMA:

Which means that the EMA for today is calculated based on the EMA value yesterday, today's price and the special multiplier α, which can be anything from 0 to 1 (the higher it is, the sharper is the exponential decline of the weight of the older data). In Forex, α for exponential moving averages is usually calculated as 2 / (N + 1), where N is the period of the MA.

For example, we have the same data and period as in the above example for SMA. Let's calculate α:

α = 2 / (5 + 1) = ~0.33

The EMA of the first day is considered equal to the price of that day:

EMA₁ = 1.3345

EMA₂ = 1.3345 + 0.33 × (1.3348 - 1.3345) = 1.3346

EMA₃ = 1.3346 + 0.33 × (1.3350 - 1.3346) = 1.33473

EMA₄ = 1.33473 + 0.33 × (1.3374 - 1.33473) = 1.33561

EMA₅ = 1.33561 + 0.33 × (1.3325 - 1.33561) = 1.33458

As you see, it's quite different from the result obtained using the simple moving average calculation.

A weighted moving average (WMA) is similar, except that in the case of an EMA, the weight given to each older point of data decreases exponentially. In the case of a weighted moving average, the weight decreases incrementally. In general case the WMA is calculated as follows:

If, for example, we choose the same data and period as in the examples above, we'll get the following result for the weighted moving average:

WMA = (5 × 1.3325 + 4 × 1.3374 + 3 × 1.3350 + 2 × 1.3348 + 1 × 1.3345) / (5 + 4 + 3 + 2 + 1) = 1.33475

Once again, the result is somewhat different from both SMA and EMA.

A smoothed moving average (SMMA) is like a mix of a simple moving average and an exponential moving average. In general, it's calculated the same way as the EMA except that the multiplier α = 1 / N:

Consider the same example with the same 5 pieces of data. Let's calculate the multiplier:

α = 1 / 5 = 0.2

The SMMA of the first day is taken as the price of that day:

SMMA₁ = 1.3345

SMMA₂ = 1.3345 + 0.2 × (1.3348 - 1.3345) = 1.33456

SMMA₃ = 1.33456 + 0.2 × (1.3350 - 1.33456) = 1.33465

SMMA₄ = 1.33465 + 0.2 × (1.3374 - 1.33465) = 1.3352

SMMA₅ = 1.3352 + 0.2 × (1.3325 - 1.3352) = 1.33466

Although it's different from all of three previous variants of the MA, as you see, it's closer to the result obtained with the EMA calculation.

The nice thing about charting software is that you don't have to learn all these formulas; your charting platform will do your calculations for you. All you have to do is choose the periods you want to calculate the moving averages across and let the software display them for you. Here is a MetaTrader chart of the daily GBP/USD showing all four types of moving averages applied to the close for a period of 14:

Simple Moving Average: Red
Exponential Moving Average: Blue
Weighted Moving Average: Green
Smoothed Moving Average: Orange

As you can see in the chart, exponential and weighted moving averages are faster than simple moving averages, and smoothed moving averages are the slowest of all. The longer the period of any moving average, the greater the lag will be.

What can you do with moving averages? Most people who trade moving averages use them either to provide context for other systems or on their own in crossover systems. Moving averages tend to act as support and resistance levels; a lot of people like to place a slower moving average and a faster moving average on their chart, and then wait for the faster moving average to cross under or over the slower one. This can indicate an opportunity to sell or buy respectively. But one should also remember that moving average is not some magic trading tool and it will often fail.

If you have any questions or want to share some useful info regarding various types of moving averages, please feel free to reply using the commentary link below.

How ECN Brokers Work?

2011-11-19T13:07:00.003+02:00

When you’re going to choose a Forex broker, you’ll hear a lot of people talk about the benefits and drawbacks of going with an ECN broker. What’s an ECN broker and what is the difference between an ECN broker and a retail Forex company (market maker)?

ECN stands for «Electronic Communication Network.» ECN brokers are in direct communication with various market participants within a comprehensive interbank network. This allows ECNs to offer the best prices to their clients on trades. ECNs aren’t necessarily «better» than retail Forex companies. What’s best for you depends on your circumstances.

A lot of people argue about whether in Forex you trade against your broker or another trader. This comes from an essential misunderstanding about how Forex brokers work. Not all brokers work the same way. When you trade with a retail Forex company, the retail Forex company takes the other side of your trades. When you trade with an ECN, you are paired up with an actual trader who trades against you.

Many people believe (correctly or incorrectly to varying degrees) that retail Forex companies manipulate prices, widen spreads, and otherwise attempt to make money off of you when you trade. Since they are trading against you, it is indeed to their advantage. The majority of retail Forex brokers don’t really have to do this though since the majority of Forex traders lose the majority of the time. Will you get less slippage and tighter spreads with an ECN? Yes, but you’ll also have to pay commissions. Nonetheless, a lot of traders consider ECNs more reliable and a better deal.

You can get higher leverage with retail Forex brokers and start out with smaller accounts (whether you choose to take advantage of the higher leverage or not). With ECNs you’ll need a good amount of money to open an account. A lot of Forex daytraders favor ECNs though since the price which is quoted is often more reliable with an ECN. Wealthier traders often switch their retail accounts over to ECNs after they have enough funds since they enjoy the increased feeling of security they get trading with ECNs. Forex ECNs often don’t borrow your money for use in their own transactions and sometimes even let you keep your money in your own standard bank account if you can get your bank to issue a guarantee on your trades.

If you’re starting out and you don’t have a lot of money you’ll probably need to trade with a retail Forex broker. Their platforms are often more sophisticated and easier to use, and the smaller account sizes will be more palatable to most new traders. You can demo forever on a retail trading account without investing a dime, which makes it a great way to learn how to trade. You won’t have to pay commissions, and often times you can learn to predict when spreads will widen (such as after weekends) by demo testing. Once you have more money in your trading bankroll you may want to switch to an ECN at your own discretion.