forex trading portal

How To Keep Track Of Your Forex Trades

2013-12-15T03:00:00.000-08:00

Successful forex trading requires that you keep a close eye on the various business aspects. It may be overwhelming to keep in mind all these activities and transactions. For this reason, it is essential to have a system of analyzing and evaluating your various actions. The trading log is an important tool in forex trading. It assists you in recording and keeping track of all your important tasks and transactions. It is a very effective and efficient system that will save you the time and energy that goes into all the trading chores when business is booming.

A forex trading log can be a simple tabular grids with entries such as the date, the price, number of lots opened, exit price, initial protective stop level, commodity, quantity and so on. Although most traders have been using personal diaries as the trading log, there are standard logs which have been designed specifically for forex trading. Some logs are in book form while others are digital. Both of them may have the same formats but vary with convenience and flexibility.

With the digitalization of business, book-keeping and accounting practices, more and more business owners are turning to digital trading logs. Spreadsheet programs can make a very good trading log for your business since they come with a host of computing and data management capabilities. Updating figures in the log can be easily automated allowing you a great deal of flexibility. Some of the commonly used spreadsheet programs which can be used to create a simple trading log include the Microsoft Excel and The Lotus 1-2-3.

Forex trading software available in the market may help you to carry out the various forex related tasks one of which is keeping an up-to-date log book. The software that you purchase is likely to have market forecasting and analysis tools and order as well as management capabilities; which makes it a good package to manage your forex transactions.

A good trading log will optimize your trading business by eliminating weaknesses. The entries and exits that are to be recorded on the log book should be determined before hand. Otherwise, it will be hard to know which trades are doing well and which one's aren't doing well. There should be an area where remarks and comments can be made after a fixed trading period. These will help you when making key decisions about what strategies to put in place to ensure that your's profitable trading business remains so.

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Dealing with Distraction in Forex Trading

2012-07-16T12:39:00.000-07:00

When you sit down to place a Forex trade, do you find it difficult to concentrate some days? If so, you probably should do something about it, since trading the currency market when your head isn’t in the game is a pretty good way to lose money. When you’re unfocused, you could make a poor decision which you wouldn’t usually make if you were thinking straight. You might miss key elements of what’s going on if your mind is elsewhere. Here are some tips for dealing with distraction when you’re trading the FX market.

When you’re trading, don’t do anything except trade. That doesn’t mean if you’re in a trade for hours, days, or longer than you should sit in front of your computer all day. It simply means when you’re actually placing an entry or sitting down at your computer to analyze the trade you’re in and make a decision about it, that you shouldn’t also be watching television or browsing videos online. It may help you to actually make a list of Forex-related websites which you can browse while you’re trading so you won’t get distracted surfing the internet trying to answer a question.
Let other people in your home know what you’re doing. Make it clear to others how important your trading is, and explain that if you are distracted while you’re working, you could lose focus and consequently money. Others should understand you need a quiet, focused environment while you’re dealing with the market.
Keep your workplace clean and uncluttered. Try to keep materials around you limited to trading materials while you’re working. Some people also like to put on music while they trade — some music might distract you but other music might keep you focused. Classical music is a popular choice.
Deal with potentially stressful activities after you do your trading, if that is possible. If you think you might find a distracting message from your ex in your email inbox for example, it’s probably best not to bother with your email until after you’ve done your trading. The last thing you want to do is trade while thinking about an unrelated and emotionally unsettling issue. In fact, if there’s nothing you can do about being really stressed out right now, you might consider taking a day off trading altogether so you can get your focus back.

The foreign exchange market is a great way to earn consistent profits, but you can only do that if the most important ingredient in your trading system is working — and that’s you. Being distracted while trading Forex is a recipe for disaster, and if you allow it to happen continuously you’ll be building up bad habits. So address issues of distraction now and start building good habits instead. Those good habits will help you to not only become profitable in the short term but also to create long term success and become a more focused individual altogether. Increased discipline and confidence can be another great outcome of FX trading!

If you have any ideas on dealing with distractions when trading currencies, please feel free to share them using the commentary form below.

When Should You Give Up on Forex Trading?

2012-07-09T01:52:00.000-07:00

It’s not a pleasant subject, but it’s one that comes up often among Forex traders — when is it time to quit? The fact is that this is a field in which many people try, but few actually succeed. The failure rate among Forex traders is estimated to be higher than 95 percent (possibly even higher than that). Considering that, the odds are weighted heavily against you. The foreign exchange market is a tough place to cut it, and not only that, but trading can have an addicting effect on many people. There is a strong element of chance which is always present when you trade currencies, and so for many people who have lost a lot, it becomes a gamble to try and get back on top. Many people trade for years and years without becoming profitable. When do you call it quits and move on with your life?

This is actually a two-dimensional question that doesn’t take into account a lot of factors that play in your favor — the biggest one being the ability to demo test without investing a dime of your own money. When is it time to quit trading live? If you aren’t consistently profitable, and your wins and losses are both the result of chance, or your system isn’t working, it’s definitely time to quit trading with real money, but it’s not necessarily time to quit trading FX altogether. If trading is taking over your whole life, it’s time to take a break from trading live as well-and maybe even a break from demo testing, at least until you get your life in order. This is true even if you are profitable.

It’s important to realize that even people who are good at Forex and successful at it usually take years to get to that point. Those years are generally full of pitfalls and failures on the way to success. So if you’ve been struggling, it could mean Forex isn’t for you, but it could very well mean the opposite. You could just be struggling along the road to success and profitability. You shouldn’t be investing real money if you aren’t doing well, however, not when you can trade with virtual money for as long as you want or need. Take the pressure off your finances, learn responsibility and patience, and demo test until you are profitable if you still think FX is for you. It’ll pay off hugely in the long run. In other words, don’t cut yourself out of the running too soon — try and figure out if trading really isn’t for you or if you’re just going through a rough patch before you give up.

Anything, even profitable currency trading, can become addictive (most people have met at least one workaholic in their lives). It’s important that whether you have real money on the line or not, and regardless of whether you’re winning or losing, you learn to maintain a proper balance between trading and other activities in your life. Lead a full, rich life, and you’ll be far more likely to cultivate the right attitude for success in the market and in your other pursuits.

How Long to Demo Test Forex

2012-05-22T01:19:00.000-07:00

Before you trade live with Forex, you’re going to need to demo test for a while. This is true whether you’re using fundamental or technical analysis, price action, or some other method of determining your Forex trades. It’s true whether you’ve traded another commodity before or not. It’s also true whether you’ve backtested or not. A lot of beginners ask how long it’s going to be before they can become live traders, and the answer is usually, «Longer than you think.» Beyond that it’s going to vary with every person. About how long should you plan on demo testing before you go live?

If you’re demo testing, you’ve probably already established some kind of trading method which was successful in backtesting, at least to some degree. If you have a solid foundation, you can open an account with a Forex broker and trade virtual money for free, usually indefinitely, before you invest real money in the foreign exchange market. How long you demo test is going to depend in part upon the timeframe you are going to be trading. Position traders who stay in Forex trades for weeks or months obviously will have to demo longer than interday traders who stay in trades for hours or days. Even if you’re doing intraday trading on very short time periods or scalping, however, you should plan to demo test for at least a few months before you go live.

Why demo test that long, even if you’re trading on a fast timeframe? Demo testing is about more than just proving your method works successfully and consistently in real time (though that’s the biggest part of it). It’s also about getting to know yourself as a trader. While demo testing Forex, you’re going to encounter a lot of unexpected situations. You might discover that you can only trade during certain days or hours for example — that’s something you probably overlooked with your backtests. You may find that you are too tired to trade during nighttime hours, even though you backtested that time period. Or you might find out that you have to set up a complex alert system to know when to trade. Maybe you didn’t realize how stressful trading could be in real time. There are a lot of reasons that you may find trading more difficult in demo phase.

It’s important to iron out as many of those issues as you can during the Forex demo phase, while you don’t have real money on the line. Once you deal with those complexities and understand how trading will fit into your real life and you are consistently profitable for several months, you may be ready to trade. Four to six months is a good timeframe to demo before going live (that’s four to six months of consistent profit). At a very minimum, shoot for two to three months. And remember you can always go back to demo testing if things don’t work out when you go live — it’s very common and it happens with a lot of Forex traders. You’ll also probably routinely go back to demo every time you have to make a modification to your trading method.

Factors That Affect Forex Exchange Rates

2012-05-09T01:50:00.000-07:00

Whether you’re going to be using fundamental analysis or not in your trading, you’re probably curious about the factors which affect Forex exchange rates. If you’re relatively new to trading, this is a subject you may not be well versed in. The economic factors surrounding Forex are myriad and complex, so you may never have a thorough understanding of them (plenty of successful traders don’t), but the more thorough your understanding is, the more useful knowledge you have at your disposal.

Some of the main factors which affect Forex exchange rates include interest, inflation, trade balance, speculation, foreign investment, and central bank intervention. Interest rates and inflation are interlinked concepts. When inflation is high, central banks in countries may raise the interest rate for borrowing money, which reduces consumer spending in turn. When inflation is low, central banks may drop interest rates to indirectly encourage consumer spending. Currencies that have higher interest rates offer a more substantial return, so oftentimes Forex investors will buy into them and sell currencies with low interest rates to make a profit. Doing this over an extended time period is known as a carry trade.

Balance of trade (a country’s imports vs. that same country’s exports) may also impact the level of demand for its currency. When a country exports more than it imports, that country has a positive trade balance, and there is more demand for that country’s currency on the Forex market.

Speculation from large and small investors may also impact the values of currencies. Traditionally it has been large investors that really move the market (usually not private traders), though retail spot Forex traders now have more of a measurable impact than they used to. Traders speculate based off of many different things including economic reports and news. Similarly, investors often flock to currencies they perceive as «safe.» For a long time that was the US dollar. When confidence in a currency drops, investors sell that currency off. Both actions can impact the value of the currency.

Finally, raising and lower interest rates aren’t the only way in which central banks can intervene with their respective economies and alter the values of currencies. Central banks may also engage in quantitative easing, which is a last resort to resolving economic difficulties if lowering interest rates fails. This is a way in which central banks can increase the liquidity of a country’s banking system. Too much of this and the country’s currency may lose value, which is why it is risky and a last resort.

As you can see, there are many different factors which drive the fluctuating prices on the foreign exchange market. To actually trade fundamentals involves a tremendous amount of research; even among professional economists there is a great deal of disagreement as to how things really work. Nonetheless, trading fundamentals does work well for some Forex traders. Whatever you choose to do, do thorough backtests and demo tests before you trade with real money. Never speculate wildly-have a method in place for your decisions.

Questions to Ask Before Opening Forex Account

2012-04-23T02:42:00.000-07:00

Before opening a Forex account, there are some questions you need to ask and some features you need to carefully examine. Everyone has unique needs, and every broker caters to different ones. The longer you are part of the trading world and the more time you spend testing before opening an account, the more familiar you will be with Forex brokers, and the less likely you’ll be to make a mistake when selecting yours. Considering however that you will need to demo test on your new broker’s platform for months before going live, you probably want to figure out what broker you’re going to use early on in the process. Here are some things to look for and consider:

Is the Forex broker registered with the National Futures Association (or other applicable regulatory agencies)? Is the broker accredited by the Better Business Bureau?
How long has the broker been around? What kind of track record do they have? Check out customer reviews — take them worth a grain of salt in some cases. Some reviews are dishonest (traders love to blame brokers for their own failures), but others may give you a good idea of what you’d be dealing with.
How is the broker doing financially? You don’t want to sign up with a broker who is at risk of going under.
How do you add or remove funds from your Forex account? How long can you expect it to take, and are there any minimums you should be aware of? Since this is your money it is very important that it is accessible!
Find out how the broker makes money. Are the spreads fixed or variable? How do they compare with the spreads charged by other Forex brokers? How much can the spreads expand during volatile times? How much slippage can you expect? Do you need to pay commissions, or are the spreads the only fees for trading? Does the company charge «maintenance» or other miscellaneous fees? Is there a minimum required balance or a minimum required number of trades per month?
Does the broker offer the leverage you need? How does the broker handle margin calls? Some brokers give you a warning — others just close your account. There are many ways this issue can be handled and it is extremely important for you to know all the details.
Do you need to trade a certain minimum lot size? Or can you trade as much or little money as you wish? This is especially important for traders who do not have a substantial amount of money to fund their Forex accounts.
Will the platform be sufficient for you? You’ll be demo testing to make sure that you’re satisfied with the platform and that the broker performs at the level you hoped, but a cursory look can tell you whether the platform is likely to cut it or not. Don’t forget that you can use another charting platform to plan your trades, like MetaTrader. You’ll still be executing them with your broker’s platform.
Test out customer service. Ask questions while you’re testing to make sure that the company responds quickly and is friendly and helpful! You may be used to poor service at your bank, but good Forex brokers offer a much higher standard of service, so look for it and demand it.

If you have any comments regarding opening a Forex account, please feel free to post them here.

Benefits of a Forex Community

2012-03-29T01:56:00.000-07:00

When you’re getting into Forex, one thing which you may overlook is the value of having a community. There are many different Forex communities online, and while you may think of investing as a competitive activity by nature, you will be surprised to discover just how cooperative and friendly the Forex online community can be. What are some of the benefits of joining a community and getting to know some of your fellow traders?

Having a community gives you access to a whole plethora of resources which you would not otherwise have. You may be tempted to go it alone, but you will be able to learn far more trading strategies and methods from others than you would on your own, and you’ll also have a chance to hear first-hand how they worked out for others. If you need help on a particular method or system, you’ll be able to speak to other traders at various levels of experiences who are working on using that system or have used it successfully for a long time. This can help you to solve problems with your Forex trading much faster than just reading ebooks! Best of all, most Forex communities are free, so the knowledge which you receive will be free as well. You can get a lot more out of a free community with an open exchange of information than you can paying for a system. If you do decide to pay for a system, you will be able to turn to the community to find out which systems or training programs are worth the money. A Forex community also provides a platform for reviewing brokers.

A community also gives you accountability. Many traders routinely report their progress (or lack thereof) to their fellow traders online. It can be a challenge to maintain discipline and keep working on something when you are likely to make many mistakes and experience many setbacks along the way. Forex traders often place their trades together and alert each other to trading opportunities. Being able to trade alongside someone else can help you to stay focused and not miss Forex opportunities. It will also make you less likely to revert to negative behaviors like gambling and unnecessary risk-taking since your loss could become someone else’s loss as well.

A community of Forex traders can provide you with encouragement along the way and can assist you in developing greater self awareness. One thing which you will notice about Forex traders online is that many of them are generous with their knowledge — while you are certainly involved with Forex in order to further your own gains, you will learn just as much from the examples of generosity you discover in others around you. The gain of one can become the gain of many — and just as other Forex traders help you out while you’re getting started, you will one day be able to lend a hand to someone else who is entering the world of trading.

Managing Risk in Forex

2012-03-01T01:28:00.000-08:00

How much is too much to risk on a Forex trade? A lot of beginners don’t hesitate to risk a huge percentage of their bankroll on a trade — after all, one of the reasons that many new traders turn to the FX market is that they are able to control more money than they actually have using leverage. The reality though is that professional traders usually risk only a tiny percentage of their bankroll. Even 5-10% is too much for most traders. A better percentage to aim for is 1-2.5%. Whatever percentage you do go with, you should stick with it and be consistent. The last thing you want to do is wildly risk more on some trades than others — while you may think you have a «basis» for such a decision, it’s behavior which will quickly degenerate into gambling.

Why shouldn’t you risk a lot on your trades? The bigger your drawdown, the harder it is to recover. Let’s say for example that you open a Forex account with $1,000.00 (this is barely enough to get started; and make no mistake, if you do it right with this amount it will be slow going for a while). Let’s then say that you decide that you’re going to risk 50% on your first trade. If you lose that trade, your drawdown is 50%, and you are down to $500.00. What do you have to do in order to recover? You don’t just have to win 50% of your current bankroll — that would only get you halfway there. You have to win 100% of your bankroll, another $500.00, to get back to your original $1,000.00 — and that’s before you can even start to profit again.

If on the other hand you only decide to risk 10% and you lose, you’ll be down to $900.00. You’ll need to profit by 11.1% to make up for it and get back to $1000.00. Note how much smaller that difference is than the difference between 50% and 100%? That’s not nearly as unmanageable. It’ll also take you a lot more losses to blow your account.

The single most important thing you can do to make money in Forex is not to lose it in the first place. Money lost is harder to make up than it was to lose — just look at the percentages. It’s a mathematical fact. If you take care of your account and protect the profits you have, then your profits will take care of themselves. You should always keep your focus on losing as few trades as possible, and making those losses as small as possible. Money management is one of the key ways you can accomplish this. This is why a conservative approach to Forex is far more likely to win than one which is aggressive and involves risking huge amounts of money. Forex takes time and patience, especially if you’re starting out with very little money, but that patience will pay off in the end if you stick with it.

3 Forex Traits for Success

2012-02-13T04:02:00.000-08:00

What does it take to become a successful Forex trader? As a beginning Forex trader, you might think that the answer involves some combination of intellect and a great system — and maybe even luck. While all of these things play a role in Forex success, what you really want to do is rely on luck as little as possible. You can do that by cultivating personality traits which breed success — traits like consistency, patience, and self-discipline. There are some things which are more important than making money in Forex — and those are a few of them. You don’t just want to profit — you want to profit consistently.

Consistency. Which is better — a trade which wins and pays you nicely, but which violates all of your trade rules, or a trade which loses but conforms to your (tested and proven) trade rules? Any trade where you violate your trading method and your discipline is a trade you’ve lost — even if it makes you money, it costs you something else. Money won through luck can be lost through luck just as quickly, and if you trade arbitrarily you will blow your account in no time. There’s no such thing as a perfect system, but if yours brings in good, consistent profits, a lost trade isn’t the end of the world. Do whatever you can to never lose a Forex trade, and always be alert to whether changes in the market call for adjustments in your tactics, but never trade randomly, and don’t expect perfection — it’s unrealistic.
Self-discipline. This is what it takes to maintain your consistency as a Forex trader. If you can’t develop self-discipline, even the best system in the world won’t make you a profitable trader. No matter how smart you are, no matter how much you know about finance, you won’t be able to trade for a living or achieve any other trading goal. Without self-discipline and consistency, you’re only a gambler, and not a real FX trader.
Patience. You aren’t going to become a great Forex trader overnight. You’re not going to win all your trades that way either (unless of course you trade very short time frames!). You’re going to have to learn to be patient while your trades are in progress — trading in real time is much different than backtesting, especially psychologically. You’ll also need to get used to the idea that it’s going to take some time to get to where you can trade consistently and profitably. Many Forex traders take years to get to that place — so don’t let yourself get discouraged if you’ve had some starts and stops along the way.

Making money is obviously one of your main goals trading Forex, but it shouldn’t be your only one, since you’re not going to achieve it unless you can also achieve some other goals, like cultivating self-discipline, patience, and consistent returns. All of these are prerequisites to making money in the currency market or any other market.

Over and Under-Trading in Forex

2012-01-31T02:01:00.000-08:00

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

2012-01-08T02:42:00.000-08:00

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?

2011-12-27T01:37:00.000-08:00

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?

2011-12-12T06:57:00.000-08:00

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.

What Is Confluence in Forex?

2011-11-06T02:26:00.000-08:00

In Forex, especially while studying technical analysis, you may hear the term "confluence" used in conjunction with trade setups. What is confluence and why should you care about it as a Forex trader?

Confluence refers to any circumstance where you see multiple trade signals lining up on your charts and telling you to take a trade. Usually these are technical indicators, though sometimes they may be price patterns. It all depends on what you use to plan your trades. A lot of traders fill their charts with dozens of indicators for this reason. They want to find confluence—but oftentimes the result is conflicting signals. This can cause a lapse of confidence and a great deal of confusion. Some traders add more and more signals the less confident they get, and continue to make the problem worse for themselves.

Most Forex traders who succeed do so with a minimal number of indicators on their charts. Two or three is a good number of indicators to aim for. Some traders use just one, and some use none at all—though it’s harder to find a good trade context if you don’t have any at all.

Here is a good example of using confluence to place a great Forex trade. Say you trade using price patterns formed by the candlesticks on your chart, and you see a pattern which signals a "buy" trade. While the price pattern itself might be all you need to be right 80% of the time, perhaps you’ve discovered that confirming the pattern with some confluence can help you to be right 90% of the time. Maybe you’ve tested and discovered that Fibonacci retracement levels can help you find a good context. If your price pattern which signals "buy" lines up with a Fibonacci retracement level which is acting as support, then that is a great example of an "A" trade confirmed by confluence (the price action and the Fibonacci level). Note how this is not a cluttered Forex system. Aside from the Fibonacci levels, there are no indicators drawn on the charts at all. All you’re looking at here are price patterns. You only overlay the indicator when you want to check the context surrounding a price pattern. If you notice that the retracement level matches up with a pivot point you’ve been keeping an eye on, that’s another form of confluence.

This is only one example of using confluence in Forex. There are many different ways to use confluence. Systems are as varied as personalities. Test different combinations of signals to determine the best Forex indicators for you to use. Experiment and see what gives you the best statistical results over a large number of trades using historical data. Maybe you’ll find that using confluence of moving average crossovers combined with Fibonacci levels gives you great results. Maybe you’ll discover that Bollinger bands used in conjunction with support and resistance tests well. One thing which is important to note is that when you experiment with confluence, you need to choose indicators which are independent of each other—not calculated using each other. Otherwise you will stack up time lag, which will decrease accuracy.

Confluence is beneficial because it does more than show you a good setup in isolation—it shows you a good setup in context of the market. This is essential in Forex to avoid fake outs, unexpected reversals and trading against the trend. In a way, most Forex systems are built on the idea of confluence. If you haven’t found a system you like, this is how you can start building one from scratch. A good system will show you what’s going on right now, and how it fits into the bigger picture—and how you can profit from that knowledge.

Avoiding Slippage in Forex

2011-10-14T01:27:00.000-07:00

«My Forex broker cheated me. I put in an order at one price and it got filled at another, and now I’m in a losing trade. That’s why I’m losing.»

How often have you heard that story, or been tempted to tell it yourself? One of the many risks of trading Forex is something called slippage. No, it’s not your broker cheating you (well, that’s up for debate, but seriously, don’t make excuses for your lost trades). It’s something you need to be aware of and compensate for during your trades.

What is slippage in Forex? Slippage is when you place an order at a quoted price, and your order gets filled at a different (worse) price than the one you were quoted. Slippage can be minor enough not to impact your trade outcome at all, or it can be major enough to stop you out the moment you’ve entered the trade! You can lose a lot of money through slippage, so it’s something to be wary of and to avoid if at all possible.

Why is there slippage in Forex? Slippage tends to result during times of great volatility, and also in response to fundamental events like reports being filed, etc. Slippage almost always happens when the market opens each weekend on Sunday nights! If you stay in a trade over a weekend, be very wary. Sunday nights are unpredictable—in general this is not a good day to trade.

If you do place a Forex trade which you’re going to hold over the weekend, or set up for a trade on the weekend which might get triggered when the market opens again, compensate for that potential slippage. Place entries a little farther out than you usually would (testing will help you choose a good amount of buffer to leave). You may also want to move your stops out a little farther than usual too if you are already in a trade.

Do some Forex brokers deliberately make money through slippage? Probably, but slippage is a fact of life, even with good Forex brokers. It’s best to learn to deal with it than to complain and blame someone else for your failure. There are bad brokers out there though, so if you’re concerned you might have one, look up their ratings and find out about other traders’ experiences.

On a related note, you can set up most broker platforms to show you the spread. This should help you to understand spread and slippage better and thus make better trading decisions. Spread widens and shrinks in different market conditions—during volatile ones it tends to widen (which is how slippage usually occurs). By setting your charts to show this spread, you’ll be able to visually see the days of the week and the times at which the spreads widen the most. Then you can compensate in the future by following the previous suggestions to avoid slippage in Forex outright or work around it.

What to Include in a Forex Backtest Spreadsheet

2011-09-29T01:56:00.000-07:00

One critical step on your Forex journey is going to be backtesting. Once you find a system or method which you like, you are going to need to run through historical data and see how your method would have performed on real trades over the past few weeks, months or years (depending on the timeframe you’re planning to trade). It is recommended you do at least a couple hundred of backtest trades for any given system to establish a really good idea of how the Forex system will perform in those market conditions. Market conditions do change, so a backtest still doesn’t give you all the information you need, but it can sure give you a good lead in to your demo testing. If you record a lot of important information you can also learn specific things that work and don’t work and how you can refine your system to statistically improve your profits.

On a Forex backtest spreadsheet you will want about six columns. The first will state whether each trade was a buy or a sell. The second column should list the date, and the third column the reason for the trade. The fourth and fifth columns should be the entry and exit prices respectively. The last column will be the sum of pips you gained or lost from each trade. The column where you list the reason you entered the trade can be a good place to take specific notes along with the triggers which caused you to enter. Those notes will come in handy later, so be detailed, especially on trades you lose. Later you can look back and find patterns which will help you to refine and eliminate losses.

Write your Forex trading rules at the top of your spreadsheet. They will help you focus and also remind you of what your rules were on this backtest when you look back on it later. If you make changes as you go to your system, note those changes and the historical dates on which you implemented them.

Some statistics to calculate from your data, which will be useful to you, include net pips from your entire Forex backtest, along with the values of your average win and average loss. You’ll want to tally how many wins and losses you have, and what your win percentage and win to loss ratio is. Remember that the spread will cost you some profit on every trade, and breakeven trades are technically at a very small loss as a result. You can calculate an adjusted net which takes these losses into account. Take note of your biggest losing streak, and how many losses in a row you endured. Also find out your average net winning trades per month, week, day, or whatever is an appropriate unit of time for you to overview your trading. Another good quotient to add up is your net profit divided by your maximum loss. This will tell you how many of your largest losses you could endure before blowing all your profits.

Forex backtesting can be pretty overwhelming at first, but eventually you’ll get used to it and get into a rhythm. And it can be incredibly rewarding—it can make the difference between whether you blow your account in real life or become a profitable trader.

Tips for Trading Forex at Night

2011-09-22T02:08:00.000-07:00

For a lot of us (especially in the US), the best times to trade Forex fall at the worst times of day—either during work hours or while we’re asleep at night. Fortunately for those who trade the dailies in the US, the start of the new candle tends to happen in the afternoon, but that often means that trades will span overnight on this and other timeframes. What do you do if your trading schedule is this inconvenient? Suggestions online usually range from “quit your job” to “move to Europe.” This is hardly feasible for most of us. Most of us are going to be faced with examining an option which is more viable but still challenging: trading Forex at night.

For many people, trading overnight is just a given since position traders who trade longer term charts like weeklies are going to be in trades for many days on end. These timeframes move slowly though and are easier to keep an eye on during the daytime than other trades on faster timeframes. What if you trade the dailies or hourly charts? You could be stuck making critical trading decisions in the dead of night.

Unfortunately many FX traders arrive at the solution, “I’ll just not sleep.” This is the road to disaster though. You cannot function without sleep. You need sleep to be healthy and also to keep your mind sharp and fresh. Trading on a sleep deficit is like trading inebriated. It’s just a really bad idea; it’ll destroy your health and your finances. So you have to sleep. How do you balance sleep with currency trading at night?

The trick is to set up alerts in such a manner that you can maximize your rest, minimize the complexity of your decision-making process, and maximize your returns. You want to only have your alerts wake you up at critical junctures, and you want those junctures to be clear cut. Making difficult, complex decisions in the dead of night will rob you of sleep and also harm your judgment, resulting in losses. The alerts should wake you up in order to make simple, straightforward decisions.

One technique you can use to trade during the night is to set alerts at pivot zones. Different techniques will be appropriate for different Forex systems, but if for example you exit trades partially based on support and resistance, then you will want to identify important pivot areas and set alerts in those areas. Choose a sound to signal when a trade is moving toward profit and another sound to signal when it is moving away. That way if you hear the “good” sound in your sleep you can roll over and go back to sleep (or get up and trail your stop). If you hear the “bad” sound you can get up and choose whether to exit. By letting the sound itself give you information, you can optimize your sleep. Also make sure to have the alert beep at you more than once so you don’t miss it in your sleep the first time.

Trading the foreign exchange market at night is one of the most challenging real life integrations you can do, but with some tweaking you should be able to make it work for you. You don’t have to move to another country or quit your job to trade during the day if you can learn how to trade at night and get adequate sleep!

Trading in Real Life: Why You Need to Demo Test

2011-09-13T02:15:00.000-07:00

Have you backtested a fantastic system over hundreds or even thousands of trades, and achieved a high win percentage and otherwise excellent statistics? If so, you may be tempted to go live. Some traders struggle to bring themselves to actually take their Forex systems live, but for others it is impatience and not trepidation which is the enemy. If you are thinking of taking this great system which you’ve backtested live without demo testing, think again. Backtesting and trading in real life are completely different, and you may have quite a bit of work ahead of you to achieve the same kind of results in real time as you did backtesting.

The first thing a lot of us discover while demo testing is that we completely forgot that in real life we do stuff like work, eat, and sleep. Something which worked fine in backtesting may be impossible to fit into our real life schedules, or take some very serious workarounds. You may need to learn to trade using a cell phone if you are at work during trading hours for example. Or what if your Forex trades tend to fall in the dead of night? You’ll need to trade in your sleep, and that means setting a lot of price alerts. Those alerts will have to wake you up at useful times though, and even figuring that out can be like designing an entirely new system. The wrong system of alerts can cause you to lose the same trades you’d have won while demo testing!

Another difference you’ll discover quickly is the role which time plays in your trading psychology. When you move the Forex charts forward a candle at a time and make trading decisions in a few seconds or minutes while backtesting, you don’t have a lot of time to second guess yourself. The same trades though, spread out over a time period of hours, days, or even weeks, can cause a lot of traders to experience a wide range of conflicting emotions. Many times we ask ourselves “What decision would I have made backtesting?” only to discover that we don’t know anymore! It takes a lot of practice to find out how timing is impacting your trading. You may find you need to trade on a different timeframe, or just get a grip on your emotions.

While all this may again sound simple in theory, most traders discover Forex demo testing presents a lot of unexpected situations which need resolution before they can go live. We highly recommend that you demo test until you are profitable for at least 2-4 consecutive months before you go live with your system. There is no reason for you to lose a dime in this business unnecessarily since you can demo test for as long as it takes for you to master your trading, completely free! Your drawdown live should reflect your backtesting figures, but it won’t unless you invest some time and effort demo testing and finding out how to integrate trading into your real life first.

Good Forex Trades Need Great Context

2011-08-29T01:13:00.000-07:00

On your path to becoming a profitable trader, you will test many different methods for entering and exiting trades. At some point you may find a method which works pretty well for you and which you feel comfortable using. You may take a lot of great trades using this method, only to find that one day your method just stops working. What happened? Did your system break? Will you have to start all over?

Sometimes the answer to questions like this is simpler than you might expect. A lot of traders pay attention to entry triggers like moving average crossovers, price action patterns, and other indicators lining up on their charts, but don’t pay as much attention to what the market is doing on a given day. The market does slowly transform, and like any other living system it will evolve with time. Some things about Forex will never likely change, but others are sure to do so. The “mood” of the market can change considerably as the years go by, and a system which worked great in one context may fail in another—or simply need an adjustment to keep working.

If you are in a situation like this and your system has abruptly “failed,” you may want to ask yourself if this is what has happened to you. Has the economic climate changed substantially since you were last profitable? If so, then perhaps the context around your trades has stopped being quite as optimal as it once was. You may have been placing trades in an excellent context before without even knowing it or attempting it by complete coincidence. And now that the context isn’t as great, your trades aren’t working out.

Here are some questions to consider. Ask yourself, “Am I trading against the trend?” This can often work against you. “Am I trading in a choppy market?” Choppiness kills a lot of traders. If there are a lot of fake outs, sometimes you need to take a break and wait for the market to even out a bit before you come back in. “But I’ll have to wait forever,” you might say. If this is the case, then look at more currency pairs. If you only trade a couple of pairs, and great setups are coming half as often in the current market climate, then think about looking at twice as many pairs each day. This phase of the market, like all others, will pass. It doesn’t mean your system is broken, it just means that right now it’s a little harder to make it work than usual. All traders face this sometimes. Once in a while you may indeed find you need to go back to the drawing board, but more often than not it’s a waste of time to start all over. If what you have makes sense and it works often enough, than you probably should just adapt to the market conditions and stick with what you’ve got.

Develop a technique to find the best setups in the best locations. Great Forex traders point out that finding excellent setups is like using a rifle, not a shotgun. They’re right—good trades don’t take good setups, they take great setups.

Forex PDF

2010-10-16T07:30:00.000-07:00

PDF is the popular file format for the electronic books (or e-books) and Forex traders always search for Forex PDF to read about the currency trading from their own PC without having to buy a physical book or installing some additional software for e-book reading. Of course, there are many strictly proprietary e-books that aren’t available in PDF format, but there are also free e-books that allow reading about Forex in PDF format.

There are several sources of the Forex PDF books on-line. Some of them are great and feature tens of interesting and useful e-books; others aren’t that cool but still allow downloading one or two free Forex PDF books:

Forex E-Books from EarnForex.com list more than 70 free PDF e-books that can be freely downloaded. All the books are divided into 6 thematic categories.

Trading Naked Library — the site isn’t too visitor-friendly but it has ton of Forex PDF and other financial trading e-books.

Phildun’s Forex Trading Library is a great source of free Forex PDF books but it lists them without descriptions and the download process isn’t very easy from this website.

The Forex Village has four categories of free Forex PDF books with a lot of rather rare strategy descriptions.

FX1618 lists a lot of interesting e-books but, unfortunately, only few of them are about the actual Forex trading.

Forex-Book.org — the majority of the listed books are paid but there are also several free ones there (not too great).

Forex Newbies Library - 9 carefully picked newbie-friendly Forex PDF books. Nice choice if you don't want to spend a lot of time to go through the dozens of them to find what you really need.

When you set yourself into a Forex trading, it’s very important to have a good level of knowledge in the markets. Downloading and reading at least some of these e-books can be a good start before your open your real money account and buy some real books on trading.

If you know some other good on-line sources of free Forex PDF e-books, please, feel free to mention them in the comments.

Update: One more source added.

5 Reasons to Use Forex VPS

2010-05-14T04:24:00.000-07:00

Installing your trading system on a dedicated server with a full-time connection to the trading server and no need to reboot, restart or be turned off is a great advantage that can seriously enhance your profit results. If you trade with MetaTrader expert advisors there is a great selection of VPS services available for you — starting from as little as $9/month they can guarantee you a 99.9% uptime of your trading robot. This is a list of 5 main reasons to use Forex VPS:

Uninterrupted 24/7 run-time of your expert advisor ensures that it uses all the trading signals. You won’t miss any opportunities. Your EA will be also able to close other positions on time and won’t need to store its internal variables in a file to load them after restart — there’s simply no need for it to restart during trading sessions.
No need to run the expert advisor from your home or office PC. Now that your expert advisor is trading on a real account from a VPS, you can stop running your MetaTrader platform all the time. You can also safely reboot your PC and turn it off when you don’t use it. And there is no more stress when suddenly you get some critical software error.
Because VPS is a dedicated server that runs only your trading platform and EA, it can have a much better performance, processing the incoming data and sending orders much faster than your own PC could do. That can really help to get better quotes, deal with the requotes and use scalping systems.
You can choose a VPS, which is located physically close to your Forex broker’s trading server, ensuring even faster connection and order execution. For example, if you trade from New Zealand and your broker is located in United States you’ll always have some network latency due to the distance. But installing your EA on a VPS, which is hosted in U.S., will remove this latency.
Usually, VPS can be accessed anywhere from any computer. So, if you travel a lot you won’t need to move your expert advisor from your PC to your notebook or some mobile device. Your EA will always remain on VPS and you will be able to control and monitor it by logging into your VPS control panel from any place with a connection to internet.

Of course, your EA should be a profitable one and your monthly profit should be high enough to cover the cost of the VPS or otherwise there is no point in using it. You can also use VPS hosting for demo testing your EAs but that’s quite an expensive endeavor. If you have any questions or opinions please, use the commentary form below.

3 Most Important Forex Fundamental Indicators

2010-03-14T03:22:00.000-07:00

There are many fundamental indicators available to the Forex traders today. If you count all of them only for the major currency pairs you’ll get more than a hundred distinct indicators — macroeconomic, monetary, economical, financial, weather-based, etc. For many traders it’s difficult to follow all of them, as it requires time and efforts in addition to the necessity to learn about the effect of all these fundamental indicators on various currency pairs. This article lists 3 most important (in my humble opinion) fundamental indicators that have the highest impact on the currency rates and are quite easy to follow as they are reported not so often.

GDP or Gross Domestic Product is the main indicator of the macroeconomic strength of the country. The growth of GDP signals a stronger economy and a more competitive currency because the global investors will have to buy this currency in order to invest in this country, and they will want to invest in it because its economy is growing. GDP reports are usually published quarterly but they have three states of revision (advance, preliminary and final) published with the monthly intervals. GDP strongly affects currency pairs both in short-term and long-term. You’ll have a trading opportunity during the time of the release, as the volatility spikes up, and you’ll be able to adapt your long-term positions to the new data after the release.

Interest Rates are set by the world’s central banks and are the main tools of the monetary regulation. Higher interest rates provide more value to the affected currency, while the lower interest rates decrease the value of the currency. Interest rates are usually revised every month or two during the special monetary policy meetings of the central banks. Interest rate decisions greatly depend on the growth of GDP and other macroeconomic indicators. Currency pairs react with the high volatility to the unexpected interest rate changes. It’s important to monitor the trends in the interest rates to forecast the long-term trends of the traded currencies.

Unemployment Rates are influential indicators both for currency traders and for the monetary authorities when they set the interest rates. Non-farm payrolls are considered to be the most important of the unemployment indicators in USA and they are released monthly. Major currencies usually react with the short-term tendencies to such releases. Weekly reports on jobless claims can also be considered but they aren’t as influential.

In many cases it’s enough to be up to date with these fundamental indicators to understand the possible market trends in Forex. But, of course, if you wish to get a more detailed picture you shouldn’t limit yourself only with these indicators, especially if you pose yourself as a pure fundamental currency trader.

Price Action Forex Trading

2009-11-09T04:38:00.000-08:00

Price action is a type of technical Forex trading that is based on the bare prices and charts instead of the usual indicators. Traders that employ various price action trading techniques believe that bare prices and charts can tell us everything we need and that indicators, while being helpful for calculating some statistical dependencies, create a time lag that can be critical in Forex. In fact, all indicators and any other methods are based on the data that is a part of a price action. So, price action is just a broad definition for the rather raw technical market data. The four techniques that are presented here aren’t the full set of price action trading instruments; they are just the most popular and interesting ones.

Tape Reading. The term refers to the times when the stock quotes came to the trading houses (more like the modern betting firms) in a form of a tape telegram. Traders analyzed the changes in the quotes, their speed and volume and, basing on this analysis, issued their trade orders. Modern tape reading in Forex is somewhat different — you just analyze the quote as it’s displayed in your broker’s terminal and then trade using your analysis of the data. It’s the most basic way of trading and some new traders start from it without knowing how is it called. Tape reading is mostly suitable for scalping and can’t be used for the long-term entries.

Japanese Candlestick Patterns. Many different patterns, formed by the Japanese candles, are recognized by the Forex traders. Such patterns are usually quite small (they consist of 1 to 4 candles) and can be spotted on all timeframes. Japanese candlestick patterns aren’t too reliable but the abundance of symbols compensates the low winning rate. This type of trading is a part of price action but it requires some basic chart analysis.

Chart Patterns. Patterns formed by the price fluctuations of the chart are numerous — triangles, wedges, double-tops, double-bottoms, head-and-shoulders and many others are all part of this trading technique. Opposite to the Japanese candlestick patterns these patterns are usually formed by many chart bars and often serve only for the long-term market evaluation. Chart patterns sometimes have a strong fundamental basement and are thus valued by the professional traders and the Forex market tends to «follow» them simply due to their popularity.

Point-and-Figure Charts. This type is a bit more difficult than everything else in the price action domain. It’s also arguable that point-and-figure can be considered a price action technique at all. P&F charts are built based on the price changes, independently on time. The columns of X’s are formed when the price is rising, while the columns of O’s are formed during falling trends. The columns of X’s and O’s follow each after another. A price should pass a certain amount to form an O or X or reverse in an opposite direction for a significantly higher amount to start forming a new column. Trends can be easily read in such charts and many Forex traders use the strategy to buy and sell exactly at the new column’s start to catch the new trend.

Not all traders can use price action techniques successfully, the same as not everyone can trade with the indicators profitably. Price action can be used alone but it also can be interesting for other methods’ confirmation. With price action techniques you can always scale in and out and flexibly change your strategies as well.

Point-and-Figure Charting Explained

2009-09-25T08:52:00.000-07:00

Point-and-figure charts (P&F) is another way to represent the price charts that can be used in Forex trading. Conventional charts display the price as the linear function of time, which results in a demonstrative picture of how the market behaved during certain periods of time. But the problem is that the trader often doesn’t need to know how price depended on time, all he needs is to know what the prevailing force on the market is at the moment — bulls or bears, demand or supply. That’s where P&F charts come handy. They show the price changes graphically, independently on the time during which the changes have occurred.

For example, the simple point-and-figure chart could look like this:

The green X’s are the price increases (by some certain value) and the red O’s are the price decreases. A column of X’s represent an uptrend, while the column of O’s represents a downtrend. In each given column there can be only X’s or O’s. When one trend ends a new column starts. As you see, there is no time scale in this chart. Each column can last an indefinite period of time.

So, how are these point-and-figure charts drawn? To start drawing a point-and-figure chart you should first set two important parameter values of the chart — the box size and the reversal distance.

The box size is the height of each of the O’s and X’s in pips. For example, if you set a box size to 10 pips, each X will mean an upward movement by 10 pips, so a column of 6 X’s is an upward movement by 60 pips. The same would be correct for the O’s.

The reversal distance is the amount of boxes that should be passed by a price in a reverse direction for a trend to reverse (to start a new column). The most common reversal distance is 3. That means that on a rising trend (a column of X’s) a price has to go down by the amount of pips in three boxes for a new column (this time — of O’s) to start. For example, if you use a box size of 10 and a reversal distance of 3: the price goes up by 60 pips, you draw 6 X’s, then the prices goes down by 30 pips (that’s more than 3 × 10), you draw 3 O’s down starting a new column from the level below the last X. If the price would go down by less than 30 pips you wouldn’t have to draw anything new. Basically, after drawing an X or O you just wait for the price to continue going in the direction for a box size of pips or in a reverse direction for a reversal distance * box size of pips.

If we consider 10 pips box size and reversal distance of 3 for the image above then we can say that first the price goes up by 50 pips during the first uptrend, then it goes down by about 50 pips, then goes an uptrend for 70 pips, then go two equal bearish and bullish trends for 30 pips (exactly the reversal distance). Then a price declines by 50 pips, then goes up by 30 pips and finally falls by 40 pips. It ends at +10 pips (if you sum up all the values) and, as you see on the picture, the ceiling of the final O is 10 pips above the bottom of the first X. That’s exactly +10 pips. The «effective price» is located at the bottoms of the X’s and at the tops of the O’s.

Using the point-and-figure charts is simple. Almost all chart patterns and analysis techniques that work with the classic time-based charts work with the point-and-figure charts too. The trends are very easy to visualize in the P&F charts because the square dimensions of the boxes (X’s and O’s) form nice 45-degree angle trendlines. Look at the example:

Apart from the chart pattern analysis, P&F charts offer a sort of trading signals. When the trend direction changes, a new position can be opened in this new direction with a stop-loss equal to the reversal distance. But such trading technique requires some thorough optimization of the box size and the reversal distance for the given currency pair and the market conditions.

You can also find a free e-book on the point-and-figure chart patterns here:

http://www.earnforex.com/blog/2009/08/point-and-figure-patterns-e-book/

If you have any questions or comments regarding point-and-figure charting, feel free to reply in the commentaries to this post.