Forex Trading

Forex Expert Advisor Information

noreply@blogger.com (Trading forex) — Thu, 31 Jul 2008 16:39:00 -0700

What is an Expert Advisor ?

A Forex Expert Advisor (a.k.a. Forex Trading Robot, EA, MT-4 EA, Automated Forex Trading Software) is a mechanical trading system written in the MQL-4 programming language and designed to automate trading activities on the MetaTrader 4 platform. Expert Advisors can be programmed to alert you of a trading opportunity and can also trade your account automatically managing all aspects of trading operations from sending orders directly to your broker’s server to automatically adjusting stop loss, trailing stops and take profit levels.

Expert Advisors for MetaTrader 4 are all unique and different in the rules they follow to enter and exit the market. Expert Advisors eliminate emotional trading decisions that cripple novice trading accounts. Forex Expert Advisors allow investors to exercise a very strict trading system without falling outside pre-programmed parameters and it is this rock solid consistency one of the features that make these programs so attractive to serious investors. Am Expert Advisors can also eliminate the emotional trading decisions that usually cripple novice Forex trading accounts. Forex Expert Advisors exercise unmatched discipline when trading and can be designed to evaluate more parameters at the same time than any human could keep an eye on at once.

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All of the technical indicators that are available in the MT-4 platform can be brought to bear in the logic used by an Expert Advisor in almost any way that one can think of thanks to the MQL-4 programming language. All types of moving averages (simple, exponential, etc.), RSI, CCI, etc. You can also create your own custom indicator and call upon it from an Expert Advisor.

There are many different types of MT-4 Expert Advisors depending on their intended application. Some are designed specifically to trade news events and remain out of the market all other times while other MT-4 Expert Advisors are meant to remain active 24x7. Experienced traders who have their own fine tuned manual trading systems sometimes hire MQL-4 programmers to automate their systems thereby creating custom MT-4 Expert Advisors. All expert advisors have the same goal and that is to automate trading operations and generate a profit while doing so.

Expert Advisors make use of technical indicators in order to assess market conditions and make trading decisions. In order for the Expert Advisor to work, it must be attached to an individual chart on the MetaTrader 4 Forex trading platform. An MT-4 Expert Advisor can take into consideration dozens of different factors in an instant in order to decide what to do next. This ability to consider such a broad range of price influencing factors coupled with the discipline of a mechanical trading system devoid of emotion leads to a very successful trading combination.

Throughout the pages of this web site you will find more detailed information about Forex Expert Advisors. If you have a question about Forex Expert Advisors for the MetaTrader 4 platform and you don’t see it here please send us an email and we will try our best to respond as soon as possible.

How does a Forex Expert Advisor work ?

The program works by calculating the different indicators that it was designed to use and take actions when the market conditions meet the correct criteria as described in the source code of the Expert Advisor.

Fore Example. A simple expert advisor may say something like this:

"If the 9 and 20 day moving averages cross with the 9 day MA above the 20 MA and the RSI is higher than 50 then open a long position (buy)"

That is just an example. You can assign countless conditions for entering and exiting the market as well as managing trades for trailing stops and multiple take profit levels.

An MT-4 Expert Advisor is usually divided into three parts: A startup or ‘init’ function, a main function and a ‘deinit’ or cleanup function. The Expert Advisor will run through its startup function once upon startup and will run through its ‘deinit’ or clean-up function once at the end. In the mean time, the MT-4 Expert Advisor program runs through a cycle of its main function over and over with every incoming tick while it is attached to a chart and active. Once running, the Expert Advisor will not start another cycle for a new tick if it is still in the middle of processing the previous one.

Here is a simple outline of what a simple expert advisor could be programmed to do.

(This would be the 'main' part of the EA and takes place every time a tick comes in.)

1- Check my account. Is there enough equity to open a trade? if so, continue. If not, end.

2- Are there any open trades right now?

2a- If there are, do they need to be closed or do they need their trailing stop adjusted? (do so if needed and exit.)

2b- If there are no open trades, are the market conditions right to open one? (do so if needed and exit. )

3- End.

How to use an Expert Advisor

In order to make use of an Expert Advisor you have to install it on MetaTrader and then attach it to the appropriate chart on MetaTrader 4. This is fairly simple as will be described below. If there are any instructions included with your Expert Advisor you should read them in their entirety.

#1- First, you have to put the Expert Advisor in a place where MetaTrader 4 will be able to use it. In most installations of MetaTrader 4 that place is C:\Program Files\MetaTrader 4\experts The actual Expert Advisor is a file without an icon that ends with .EX4

#2- Now that the Expert Advisor is in the correct location within your computer, re-start MetaTrader 4.

#3- When MetaTrader 4 starts up again you will now see the new Expert Advisor on the left navigation menu.

Learn to Make your own Expert Advisors

In order to make your own expert advisor you have to learn the MQL-4 programming language. If you already know C programming then MQL-4 will be very easy as they are quite similar. If you do not know either language, it would be prudent to take a course in C programming. Then, once you understand the structure of C language, MQL-4 will be a snap. If you are not a programmer, do not let this stop you from learning to make your own Expert Advisors.

The following web site has all the official documentation on the MQL-4 programming language.

http://docs.mql4.com

The Different Types of Expert Advisors

There are various different types of Expert Advisors for the MetaTrader 4 platform. Here we will discuss some of the more common types. This is by no means a comprehensive list. There can be other types of Expert Advisors based on the creativity of the programmers who make them.

News Expert Advisor - This is a type of hedging EA. The News EA is designed to take advantage of news events and the large price shifts that can occur during financial news releases.

Breakout Expert Advisor - Designed to open a trade when the price breaks through predefined support and resistance levels.

Hedge Expert Advisor - This is any EA that plays two separate and opposing positions and minimizes the loss on one while facilitating maximum profit on the good trade.

Scalper Expert Advisor - This is the type of EA that will get your account canceled or at least heavily restricted by a broker. It aims to secure small profits as soon as they are available.

What is MQL-4 ?

MQL-4 is short for Meta Quotes Language version 4. This is the programming language created by MetaQuotes Software Corp. (http://www.metaquotes.net) that automates the MetaTrader client terminal.

The following web site has all the official documentation on the MQL-4 programming language.

http://docs.mql4.com

*What is MetaTrader 4 ?

MetaTrader 4 is a free trading platform developed by MetaQuotes Software Corp. (http://www.metaquotes.net) and supported by many different Forex brokers all over the world. MetaTrader 4 easy to learn and very user friendly.

One of the unique qualities of MetaTrader 4 is the ability to automate trading activities through the use of an Expert Advisor.

Can I run more than one Expert Advisor on the same account/client terminal ?

Yes. You can run multiple instances of an Expert Advisor on the same MetaTrader 4 client terminal. As long as all of the Expert Advisors that you are running in the same client terminal have been designed to get along with each other on the same terminal. (not all Expert Advisors can get along on the same terminal) Mainly because they will try to manage each other’s open trades. Programmers get around this by using magic numbers in the market entrance part of the source code of the Expert Advisor.

There are also platform limitations. Only one Expert Advisor can communicate with the trading server at any one time. If multiple Expert Advisors are active on the same terminal and more than one try to communicate with the trading server you will get "Trade context busy" errors in the logs when this happens if you have too many Expert Advisors on one client terminal.

What is Money Management System

noreply@blogger.com (Trading forex) — Tue, 29 Jul 2008 00:39:00 -0700

ue, Jan 8 2008, 09:25 GMT
by Dima Chernovolov

ForexHit

What is Money Management System?

Money management system is the subsystem of the forex trading plan which controls how much you risk when you get an entry signal from your forex trading system. One of the best money management methods used by many professional forex traders is to always risk a fixed percentage of your equity (e.g. 3%) per position. By using this method a trader gradually increases the size of his trades while he is winning and decreases the size of his trades when he is losing. Increasing the size of bets during a winning streak allows for a geometric growth of the trader's account (also known as profit compounding). Decreasing the size of bets during a losing streak minimizes the damage to the trader's equity. You can view interactive demonstration of this technique by opening the forex trading simulator (Please note: The size of this page is 0,6 Mbs and it requires that you have Flash installed and Javascript enabled in your browser).

Trading on forex allows to multiply your account over time - or to make it grow geometrically. Geometric capital growth is produced when the profits are reinvested into the trading which leads to progressively larger positions being taken and, consequently, to bigger profits and losses. The pace at which the account grows is controlled by the size of the profits and by their frequency (which should always be remembered by forex trading system developers). While the geometric equity growth can and should be smooth (i.e. consistent), some traders try to accelerate it by artificially inflating the size of their profits by risking very high percentages of their account. Because the actual sequence of the winning and the losing trades can never be predicted in advance, such practice results in very erratic trading performance (i.e. sharp equity fluctuations). Among other things this practice betrays the trader's lack of confidence in his or her trading system's long-term profit potential. As long as the trader is confident about his trading system he can risk small percentages (%1 to 3%) of his account on every trade and simply watch the system realize its potential. It should be noted that only the geometric capital growth allows to make regular profit withdrawals from an account (as a certain percent of the equity) without seriously affecting a trading system's money making ability. This contrasts sharply with the fixed-dollar-bet money management system (e.g. always risk $500 per trade) whose profits grow arithmetically and where each withdrawal from the account puts the system a fixed number of profitable trades back in time.

Both proper money management and sound trading system are required for a smooth geometric capital growth. The speed (i.e. "geometricity") and the smoothness of the account's growth depend on how much you risk per trade (as set by the money management system) and on the trading system's accuracy and the payoff ratio parameters (trading system's mathematical expectation). Apart from the controlling equity fluctuations by setting a fixed percentage of the capital to be risked on any trade, money management system can also reduce equity swings through diversification (splitting your risk capital among unrelated currency pairs/trading systems).

Quote: "..analysis is the door to fabulous riches, while money management is the key that opens that door.", Robert Balan, in his book, "Elliott wave principle applied to the foreign exchange markets".

How Much to Risk?

Quote: "There is no return without risk", the 1st rule of the 9 Rules of Risk Management, by RiskMetrics.

Trading on the forex market can be a very profitable business. Armed with this fact some traders start determined to make huge sums of money in as little time as possible - by risking too much. In other words, they are aiming for fast geometric growth of their accounts with no regard for the smoothness of the equity curve. Doing so invariably results in severe drawdowns or complete wipe-outs as can be easily seen if you enter values larger than 10 as the “Percent Risked” in the forex trading simulator (Please note: The size of this page is 0,6 Mbs and it requires that you have Flash installed and Javascript enabled in your browser) and model a few equity scenarios with this setting. Risking high percentage of your account might indeed have dramatic effect on the geometric growth of your account balance in the very short-term. However, winning streaks (however long) are always followed by losing streaks (however short) and much of what was “given” by the high percentages is very likely to be “taken away” by the same percentages.

For example, if you risk 25% of your account balance per trade with the system accuracy of 50% and the payoff ratio of 2 you can expect to double your account in 6 trades (as you can see from the "Exp # of trades to TR" cell on the forex trading simulator when you use such settings). You can also expect to give away most or all of these profits in the next few traders – as the same percentages will now cut deep into your profits when your trading system generates losing signals. Now try to imagine how you would feel if your car accelerates to a 500 miles per hour in a few seconds then suddenly reverses and flies back at the same speed. You would achieve similar effect on your feelings or your investors' if you got your account up to 100% in a few trades and then lost all of the profits in the very next few trades.

It certainly pays to keep the speed (percent risked) of your car (forex trading system) within reason so that you can reach your destination (e.g. doubling you account balance) without submitting your emotional and financial well-being to excessive risks - as both your financial and emotional strength tends to be limited. At lower percentages of equity risked a winning or a losing streak simply does not have as spectacular impact on the equity curve which results in smoother capital appreciation (and much less stress for the trader or for the investor). This is because when you risk small fractions of your equity (up to 3%) each trade is given less "power" to affect the shape of your equity curve which leads to smaller drawdowns and consequently greater ability to capitalize on the winning signals in the future. In other words, the size of drawdowns is directly proportional to the percent risked. You can see this if you enter progressively larger values in the "Percent Risked" filed in the forex trading simulator and then compare the resultant maximum drawdowns (in "Max DrawDown in %" field) for each of percent values that you entered. In addition to being directly proportional to the % risked, drawdowns are inversely proportional to both the accuracy and the payoff ratio (average win/average loss) of a trading system (as you can see if you enter different accuracy and payoff ratio values in the forex trading simulator). This relationship can be clearly seen with the help of the three 3D charts shown below which plot the combined effect of the payoff ratio and the accuracy of a trading system on the maximum percent drawdown, as seen during 15,000 trading scenarios modelled on the forex trading simulator (5,000 for each of the three different "perecent risked" settings which were tested - 1%, 3% and 5%).

Quote: "..the final return is only a function of how well you would like to sleep at night", Thomas Stridsman, in his book "Trading Systems That Work: Building and Evaluating Effective Trading Systems".

A drawdown is the distance from the lowest point between two consecutive equity highs to the first of these highs. For example, if your account increases from $10,000 to $15,000 (first equity high) then drops to 12,000 (lowest point between equity highs) and then rises again to $20,000 (second equity high) your drawdown will be $3,000 ($15,000-$12,000) or 20% ($3,000/$15,000). When deciding on the percent to be risked on each trade you should keep in mind that as the drawdown grows arithmetically, the profits (and psychological fortitude to stick to the system) required to get out of it increase geometrically (as you can see from the chart below). You can also use the following calculator to model the effect of a losing streak on the equity and the profit required to recoup the loss. The "%" stands for the percent of the equity risked per trade. The "#" stands for the number of consecutive losses. The "loss" column calculates the cumulative damage to the equity in percentage terms. The "recoup" column shows how much profit is required to return to the breakeven. Alternatively, you can just enter the value of loss into the cell below the "Loss" heading to calculate the size of the profit necessary to recoup it.

As can be readily seen from the above calculator it takes only a few trades to severely damage your prospects as a currency trader - if you risk too much in your trading. With this information in mind it is best to always risk a maximum of 1% of the equity if you are managing other people's money and a maximum of 3% of the equity if you are trading with your own funds. As a general rule the higher the accuracy of a trading system AND the higher its payoff ratio the safer it is to risk more per trade. This principle is the basis for the money management calculator (Please note: This calculator requires that Javascript is enabled in your browser) located in the trade forex section of the site.

Note: It is best not to rely too much on the theoretical probability of a large number of losing trades happening in a row. In other words, because the probability of a few losses happening in a row is very low it doesn't mean this cannot happen in your trading. Suppose you trade a system which generates 60 winning trades out of 100 on average. The probability of a profitable trade is always 60%, while the probability of a losing trade is always 40% with such a system. The chances of 5 consecutive losses can be calculated by multiplying 0,4 five times by itself or 0,4*0,4*0,4*0,4*0,4 which results in 1,02%. Even if the probability of roughly one percent does look very remote this is not a zero probability and quite likely to happen in real trading - as you will quickly see if you model just a few equity scenarios in the forex trading simulator with system accuracy set to 60% (be sure to check the "Max. Consec.Losses" cell). Moreover, given that the outcome of any single trade can be considered random there is nothing in the world that can guarantee that your system's next five trades will not be all losses or all profits, for that matter. Therefore, it is best to be prepared for such an outcome in advance by risking less of your account per each trade. Closely related to this is the idea of luck in trading, which can be defined as the clustering of large number of profitable trades in narrow periods of time. For example, you can easily generate a string of 12 winning trades on the forex trading simulator with the system accuracy set to 60%. The probability of such an event is equal to 0,6 raised to the 12'th power or 0,2% or 1 in 500. Despite such a low probability you can expect to see 12 or more successive winners in your trading (be sure to check the "Max. Consec.Wins" cell on the forex trading simulator as you perform the above simulation) when you trade long enough with a system that has success rate equal to %60. Even if the short-term effect on the equity (and trader morale) of such a long series of successful trades can be quite dramatic, it plays little role in the long-term success as a currency trader. In other words, the fact that your trading system has just generated a long run of profitable trades doesn't say very much about its long-term profit potential, which should instead be measured by its mathematical expectation.

Money management system is similar to the forex trading system in that sticking to it is vital to the long-term success in currency trading. Once you decide on the percentage of equity that you will risk per position you should never deviate from this number and try to stay as close to it as possible - no matter how bad or good your system performance is. This question becomes especially important when you decide on the type of account that you open - if it will be a mini or a standard trading account. As you can see from the allocation efficiency calculator (Please note: This calculator requires that Javascript is enabled in your browser) mini accounts are vastly superior to the standard accounts (especially with account balances less than $50,000) when it comes to meeting the constraints of both your money management system (% risked) and your trading system (size of the stop-loss).

Note: When you select the account type you should pay close attention to the level of the leverage offered by your forex broker. Even if high leverage (from 1:100 and up) allows to trade multiple lots with very little money of your own, it can be dangerous when it forces you to overtrade - to assume positions which risk more than the percentage value set by your money management system. For example, you might be compelled to risk $400 (40 pip stop-loss) on a very attractive EUR/USD trade while on a standard account with the maximum allowable risk per trade set at 3% of $10,000 or $300. The only way to stick to your money management system would be to bypass this trade and therefore undermine your system's profitability (and your morale). You wouldn't need to avoid this signal or use smaller stop-loss than the one suggested by your system if you traded at half the leverage (which would mean only $200 risk per trade) or if you traded on a mini account altogether - as is shown by the allocation efficiency calculator.

Mathematical Expectation of a Forex Trading System

Mathematical expectation of a forex trading system is how much of the risked capital you can expect to earn per trade on average. You can calculate the mathematical expectation of a system by the following formula:

Mathematical Exectation= (1+average win/average loss)*(system accuracy) -1

This formula requires that you take into account both the success rate (percent of winning signals) and the payoff ratio (average win/average loss) of any trading system when estimating its long-term profit potential. For example, a system with 50% accuracy and the 2 to 1 payoff ratio has the expectancy equal to +0,5. This means you can expect to earn 50% of the amount that you risk per trade on average. If you risk 2% of your capital per trade you can expect to earn 1% per trade (50% of 2%) on average with such a system. Negative mathematical expectation (e.g. casino roulette) means you will lose your money over the long-term no matter how small or big your positions are. Zero expectation means you can expect your account to fluctuate around breakeven for ever.

Quote:"The difference between a negative expectation and a positive one is the difference between life and death. It doesn't matter so much how positive or how negative your expectation is; what matters is whether it is positive or negative." Ralph Vince in his book "The Mathematics of Money Management: Risk Analysis Techniques for Traders".

You can model various equity development scenarios under the positive, the negative or the zero mathematical expectations by entering the following accuracy and the payoff values in the system controls on the forex trading simulator:

This table demonstrates the value of letting your profits run and cutting your losses short when you start to trade and don’t yet have a reliable currency trading system to follow. When you begin to trade your accuracy tends to be low. To compensate for the larger number of losses you absolutely have to let your profits run and keep you losses small. This will ensure that the profits from the few winners that you are able to capture will more than cover the total loss from all the losses that you take. Not allowing your profits to run at the start of your trading career would simply be "suicidal". This boils down to selecting the trades only with high reward/risk ratios. This will help to improve your payoff ratio and, therefore, your profit potential.

As you can also see from the table above, systems with different accuracy and payoff ratios can have identical mathematical expectations. This means, for example, that in the long run the profit that you can achieve with the system that is the first in the table will be equal to the profit that you will make using the second system - even if the second system is twice as accurate as the first one. You can compare how the equities develop for both of these systems by using the currency diversification simulator (Please note: The size of this page is 0,7 Mbs and it requires that you have Flash installed and Javascript enabled in your browser). Enter 40 in "past accuracy" field for system A and 80 for system B. Payoff ratio should be set to 3 for A and to 1 for B and set the "Percent Risked" to 1. If you wish to compare B with a more dissimilar trading system you can enter 20 as the accuracy and 7 as the payoff ratio on the A's control panel.

The closer the simulated equity performance (shown in the "Actual Accuracy" field) is to the past accuracy of each of the systems the clearer you will see that both systems tend to converge at the same final equity level. Because geometric capital growth is highly dependent on the frequency of the profits - when you increase the Percent Risked - a system with substantially higher accuracy will outperform a less accurate system even if both of them have identical mathematical expectations. This is one of the reasons to strive for the highest possible rate of accuracy in your trading. The other reason is that drawdown duration and size (in both absolute and percentage terms) tend to be much larger with the lower accuracy systems which leads to lower reward-to-risk ratios - as you can quickly see if you check the ""Drawdown time", the "Max Drawdown" and the "Max % Drawdown" fields in the diversification simulator when you do the simulation described above. As a third reason, it is always necessary to give a trading system some "room for error" in real-life trading - or excpect it to trade with accuracy lower than the past accuracy. Very low accuracy and high payoff ratio systems simply do not offer this - which means you should be prepared to sit through very long losing streaks before you see any profit. In contrast, higher accuracy forex trading systems make the currency trading less stressful by ensuring that you take smaller yet much more regular profits.

It stands to reason that the higher the mathematical expectation of a trading system the faster your account will grow. Very good trading systems have mathematical expectation close to 0,8. Common definition of an excellent trading system is that its payoff ratio is one point better than the payoff ratio of a breakeven system with the accuracy of 10 percent less. For example, the payoff ratio for a breakeven system with 40% success rate is 1,5, therefore an optimal system with 50% accuracy will have 1,5+1 = 2,5 payoff ratio. The following calculator allows you to compute the payoff ratio for a breakeven system and an optimal system:

Quote: "The first part of your system design should focus on building the highest possible expectancy into your system" by Van K. Tharp in his "Special Report on Money Management".

Note: You can get the most reliable measure of mechanical expectation of a trading system when you can translate it into computer code. One example of a simple trading system which can be readily backtested to calculate its expectancy is the moving average crossover system. Most of the advanced forex charting packages (e.g. FXtrek IntelliChart™ Copyright 2001-2007 FXtrek.com, Inc.) allow to construct wholly mechanical trading systems and to backtest them over historical price data. If you are using interpretive technical analysis tools in your trading (like price patterns, trendlines) you can only generate the statistics required for the calculation of your system's expectation by using the information from your trading log (where you enter individual trade results when you test-trade your trading system on a demo account). However, since these statistics are generated using interpretive analysis methods their validity will stay the same only if you continue to interpret price formations in exactly the same manner as you did before. Because signals of mechanical trading systems are never open to conflicting interpretation, their mathematical expectation is more reliable measure of future system performance than the expectation of interpretive trading systems.

Diversification in Currency Trading

Diversification is the distribution of the risk capital across unrelated currency pairs and/or trading systems for the purpose of increasing the consistency of trading performance. For example, if you trade one system on two unrelated currency pairs you can protect yourself against long losing streaks that any of these pairs can go through on its own. When you get a losing signal on the first pair, the second pair might generate a winning trade which will cover the loss of the first pair or vice versa. By splitting the risk capital (% of your equity) among two pairs you can be sure that when both pairs generate losing trades at the same time your total risk will not exceed the maximum value set by your money management system. This way you can achieve smoother capital appreciation than you would be able to do if you traded only one pair. For an interactive demonstration this concept please visit the currency diversification simulator. It should be noted that this calculator assumes zero correlation between the pairs or systems (more on correlation below).

Be sure to compare the values in the "Consistency" cells for each of the pairs when they are traded separately with the value of consistency achieved when trading them together (in the "Trading A&B" column). The combined consistency will almost always exceed the consistency of either of the pairs when they are traded individually.

The more unrelated pairs or systems you add to your portfolio the better protection you can have against the risk. For example, when trading one trading system on two absolutely uncorrelated currency pairs you decrease the probability of a losing trade (two pairs generating a losing trade simultaneously) by the percentage value equal to the system's accuracy. Suppose your system has the success rate of %60, therefore the probability of a losing trade for each pair is %40. The probability that both pairs will generate a losing signal is calculated by multiplying %40 by itself - which results in %16. This is the %60 decrease (24/40=0,6) in the probability of a losing trade achieved when you trade both pairs simultaneously. If your system has %70 success rate you can reduce the probability of a loss by %70 if you trade two unrelated pairs instead of one. The probability of a losing trade occurring for both pairs at the same time is %9 (%30*%30) which is a %70 decrease in the likelihood of a loss if you traded only one pair (21/30=0,7). I will note that even if you diversify into two or more weakly correlated currencies/trading systems, this won't eliminate the drawdowns completely. However weak is the correlation between the pairs or trading systems, they are likely to go through the losing streak all at once, at some point in the trading. You can see this by modelling the performance of two similar trading systems with the help of the currency diversification simulator (e.g. set accuracy to 40 and payoff ratio to 2 for both A and B) and checking if the yellow curve on the DRADOWN chart is moving in sync with the other two curves.

There is a weak relationship between two pairs if the absolute value of their correlation coefficient (usually denoted by r) doesn't exceed 0,3 (i.e. it can be anything from -0,3 to +0,3). A medium strength relationship exists when the absolute value of the coefficient is greater than 0,3 but less than 0,5. There is a strong relationship between two pairs if r is greater than 0.5 in absolute terms (i.e. bigger than 0.5 or less than –0.5). Currencies are said to be highly correlated if the absolute value of their correlation coefficient is equal to or bigger than 0,8. You can visualize these concepts with the help of the interactive correlation simulator. (Please note: This calculator requires that you have Flash installed and Javascript enabled in your browser)

Suppose you trade two currency pairs which are highly positively correlated like the EUR/USD and the GBP/USD (daily r is equal to 0,8 on average). When you get a sell signal for EUR/USD your system is likely to generate the same signal for the GBP/USD. If the first signal results in a loss this increases the probability that the second signal will not be profitable either. The same holds if you are trading very negatively correlated pairs with the same system - like EUR/USD and USD/CHF (daily r is equal to -0,9 on average). Selling one lot of EUR/USD and buying one lot of USD/CHF at the same time (e.g. on the break of a trendline which usually is simply a mirror image of the trendline visible on the other pair's chart - e.g. set "Target Correlation" to -0,9 on the correlation simulator and notice how similar are the imaginary trendlines for A and B) amounts roughly to selling 2 lots of EUR/USD or buying 2 lots of USD/CHF individually - with no reduction in risk whatsoever.

Quote:"Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large." Bruce Kovner in Jack D. Schwager's book "Market Wizards: Interviews with Top Traders ".

In contrast, when you trade two uncorrelated or loosely correlated pairs you can expect your system to perform differently on each pair which should result in smoother overall trading performance. As an example you can buy a touch of a uptrendline on one pair (e.g. USD/JPY) and sell the top of the range on another unrelated pair (e.g. GBP/CHF, which has an average r of 0,3 with USD/JPY) without having to worry that price developments in USD/JPY might "spill over" into GBP/CHF (or the other way round) and by doing so spoil your whole trading setup. As the next best alternative, you can reduce the risk by opening opposing trades in the positively correlated pairs or same direction trades in the negatively correlated pairs - by using a different system for each of the pairs, as is described below. Yet another way you can use correlation is to select among highly correlated pairs that pair which offers the highest reward potential under the current market conditions and trade only it.

You can monitor the correlations between the currency pairs that you trade by using the information on the currency correlations page (which contains most up-to-date correlation data for the commonly traded currency pairs). I will note that it is best to keep the number of the currency pairs in your portfolio to a minimum because the number of the correlations to be tracked and the time required for this rises geometrically with the addition of each new pair. The formula for calculating the number of correlations between n number of pairs is [n*(n-1)]/2. You can start with one currency pair and gradually increase to a maximum of four pairs (with 6 correlations to monitor) as your experience grows.

When you diversify into different trading systems you should look for a combination of systems which results in the lowest possible correlation between their returns. Ideally you would trade only two systems which are perfectly negatively correlated (r=-1). This means that whenever one system generated a losing signal the other would produce a winning signal and vice versa. Examples of this possible combination are a mean-reversion system (e.g. RSI) and a trending system (e.g. Moving average) - for more examples please consult Richard L. Weissman's book "Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis". If you could find such a perfect combination of systems you would not see a single loss (as their net result) because the loss of one system would always be covered by the profit of the other. You can see how this works if you enter minus one into "Target Correlation" cell on the system correlation simulator (Please note: The size of this page is 0,7 Mbs and it requires that you have Flash installed and Javascript enabled in your browser). In practice, it is extremely hard to find perfectly negatively correlated systems. Nevertheless, even if systems traded are only mildly negatively correlated the trader can expect to benefit from the risk reduction offered by the diversification.

Quote: "The correlations of the different market systems can have a profound effect on a portfolio. It is important that you realize that a portfolio can be greater than the sum of its parts (if the correlations of its component parts are low enough). It is also possible that a portfolio may be less than the sum of its parts (if the correlations are too high)." Ralph Vince in his book "The Mathematics of Money Management: Risk Analysis Techniques for Traders".

Note: You can create and autotrade your own portfolio of loosely related trading systems created by the top forex signal providers with the help of the firms listed in the invest in forex section of our site.

Mastering Money Management in Forex Trading

The key to mastering money management is shifting your attention from the dollar value of your profits and losses to their percentage value of your account balance. Once you have trained yourself to think of your profits and losses exclusively in percentage terms it will be a simple mathematical task to stick to your money management system (e.g. just enter your constraints into the money management calculator and it will give you the number of lots to trade). As you account grows this practice will help you to avoid the hesitation in placing the trades when the absolute value of the dollars risked becomes very large - since you will know at that moment that you are still risking no more than amount dictated by your money management system (which will have played a major role in getting your account to that level in the first place).

You should also remember that the outcome of any single trade is almost always random. It is, therefore, not practical to attach yourself too strongly - either emotionally or financially (by risking too much)- to the result of any one trade or a series of trades. This concept of randomness is incorporated into all the trading simulators on this site which use random number generators to determine if any single trade is profitable or not.

As with the forex trading system, you can receive protection from your own destructive tendencies by closely following your money management system. It will protect you from greed and pride (which always demand that you overtrade) when your system generates unusually large number of winning signals in a row. It will also protect you from trader paralysis (inability to open new positions) when your system goes through a losing streak because you will know that, as long as you risk a small fraction of your equity per each trade (as is set by your money management system) and use a currency trading system with positive mathematical expectation, no string of losses can wipe out your trading account.

Five Guiding Principles of Trading Psychology

noreply@blogger.com (Trading forex) — Tue, 29 Jul 2008 00:32:00 -0700

Brett N. Steenbarger, Ph.D.

www.brettsteenbarger.com

When I recently participated in an online chat presentation for John Forman, I assembled my ideas into ten basic principles that have guided my thinking about the psychology of traders and the psychology of markets. In the very near future, if my testing continues to be promising, I hope to present a market indicator for swing traders that rests firmly upon these principles. Stay tuned! In the interim, here are the five principles that pertain specifically to trading psychology. Next up will be five principles for trading the markets.

Principle #1: Trading is a performance activity - This is the core idea behind my most recent book. Like the playing of a concert instrument or the playing of a sport, trading entails the application of knowledge and skills to real time performances. Success at trading, as with other performances, depends upon a developmental process in which intensive, structured practice and experience over an extended time yield competence and expertise. Many trading problems are attributable to attempts to succeed at trading prior to undergoing this learning process. My research suggests that professional traders account for well over three-quarters of all share and futures contract volume. It is impossible to sustain success against these professionals without honing one's performance--and by making sure that you don't lose your capital in the learning process. Confidence in one's trading comes from the mastery conferred by one's learning and development, not from psychological exercises or insights.

Principle #2: Success in trading is a function of talents and skills - Trading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one's level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one's talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.

Principle #3: The core skill of trading is pattern recognition - Whether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading--technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile--are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals.

Principle #4: Much pattern recognition is based on implicit learning - Implicit learning occurs when people are repeatedly exposed to complex patterns and eventually internalize those, even though they cannot verbalize the rules underlying those patterns. This is how children learn language and grammar, and it is how we learn to navigate our way through complex social interactions. Implicit learning manifests itself as a "feel" for a performance activity and facilitates a rapidity of pattern recognition that would not be possible through ordinary analysis. Even system developers, who rely upon explicit signals for trading, report that their frequent exposure to data gives them a feel for which variables will be promising and which will not during their testing. Research tells us that implicit learning only occurs after we have undergone thousands of learning trials. This is why trading competence--like competence at other performance activities such as piloting a fighter jet and chess--requires considerable practice and exposure to realistic scenarios. Without such immersive exposure, traders never truly internalize the patterns in their markets and time frames.

Principle #5: Emotional, cognitive, and physical factors disrupt access to patterns we have acquired implicitly - Once a performer has developed skills and moved along the path toward competence and expertise, psychology becomes important in sustaining consistency of performance. Many performance disruptions are caused when shifts in our cognitive, emotional, and/or physical states obscure the felt tendencies and intuitions that lie at the heart of implicit learning. This most commonly occurs as a result of performance anxiety--our fears about the outcome of our performance interfere with the access to the knowledge and skills needed to facilitate that performance. Such performance disruptions also commonly occur when traders trade positions that are too large for their accounts and/or do not maintain sound risk management with their positions. The large P/L swings cause shifts in emotional states that interfere with the (implicit) processing of market data. Cognitive, behavioral, and biofeedback methods can be very useful in teaching traders skills for maintaining the "Yoda state" of calm concentration needed to access implicit knowledge.

The most important question I can ask an aspiring trader is: Are you engaged in a structured training process? Education--simply reading articles in magazines, websites, blogs, and books--is important, but it is not training. Training is the systematic work on oneself to build skills and hone performance. It requires constant feedback about your performance--what is working and what isn't--and it requires a steady process of drilling skills until they become automatic. No amount of talking with a coach or counselor will substitute for the training process: not in trading, not in athletics, and not in the dramatic arts. Training yourself to proficiency is the path to a positive psychology.

Price Smoothies

noreply@blogger.com (Trading forex) — Wed, 2 Jul 2008 19:20:00 -0700

A moving average is simply a way to smooth out price action over time. By “moving average”, we mean that you are taking the average closing price of a currency for the last ‘X’ number of periods.

Like every indicator, a moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can make general predictions as to where the price will go.

As we said, moving averages smooth out price action. There are different types of moving averages, and each of them has their own level of “smoothness”. Generally, the smoother the moving average, the slower it is to react to the price movement. The choppier the moving average, the quicker it is to react to the price movement.

We’ll explain the pros and cons of each type a little later, but for now let’s look at the different types of moving averages and how they are calculated.

Simple Moving Average

Simple Moving Average (SMA)

A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. Confused??? Allow me to clarify.

If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.

If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.

If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.

If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.

Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.

Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!

Here is an example of how moving averages smooth out the price action.

On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA. This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.

The SMA’s in this chart show you the overall sentiment of the market at this point in time. Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now make a general prediction of its future price.

Exponential Moving Average

Exponential Moving Average (EMA)

Although the simple moving average is a great tool, there is one major flaw associated with it. Simple moving averages are very susceptible to spikes. Let me show you an example of what I mean:

Let’s say we plot a 5 period SMA on the daily chart of the EUR/USD and the closing prices for the last 5 days are as follows:

Day 1: 1.2345
Day 2: 1.2350
Day 3: 1.2360
Day 4: 1.2365
Day 5: 1.2370

The simple moving average would be calculated as
(1.2345+1.2350+1.2360+1.2365+1.2370)/5= 1.2358

Simple enough right?

Well what if Day 2’s price was 1.2300? The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down, when in reality, Day 2 could have just been a one time event (maybe interest rates decreasing).

The point I’m trying to make is that sometimes the simple moving average might be too simple. If only there was a way that you could filter out these spikes so that you wouldn’t get the wrong idea. Hmmmm…I wonder….Wait a minute……Yep, there is a way!

It’s called the Exponential Moving Average!

Exponential moving averages (EMA) give more weight to the most recent periods. In our example above, the EMA would put more weight on Days 3-5, which means that the spike on Day 2 would be of lesser value and wouldn’t affect the moving average as much. What this does is it puts more emphasis on what traders are doing NOW.

When trading, it is far more important to see what traders are doing now rather than what they did last week or last month.

SMA vs. EMA

Which is better: Simple or Exponential?

First, let’s start with an exponential moving average. When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to go. These can help you catch trends very early, which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits!

The downside to the choppy moving average is that you might get faked out. Because the moving average responds so quickly to the price, you might think a trend is forming when in actuality; it could just be a price spike.

With a simple moving average, the opposite is true. When you want a moving average that is smoother and slower to respond to price action, then a longer period SMA is the best way to go.

Although it is slow to respond to the price action, it will save you from many fake outs. The downside is that it might delay you too long, and you might miss out on a good trade.

	SMA	EMA
Pros:	Displays a smooth chart, which eliminates most fakeouts.	Quick moving, and is good at showing recent price swings.
Cons:	Slow moving, which may cause a lag in buying and selling signals.	More prone to cause fakeouts and give errant signals.

So which one is better? It’s really up to you to decide. Many traders plot several different moving averages to give them both sides of the story. They might use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade.

In fact, many trading systems are built around what is called “Moving Average Crossovers”. Later in this course, we will give you an example of how you can use moving averages as part of your trading system.

Time for recess! Go find a chart and start playing with some moving averages. Try out different types and look at different periods. In time, you will find out which moving averages work best for you. Class dismissed!

Summary

A moving average is a way to smooth out price action.

There are many types of moving averages. The 2 most common types are: Simple Moving Average and Exponential Moving Average.

Simple moving averages are the simplest form of moving averages, but they are susceptible to spikes.

Exponential moving averages put more weight to recent prices and therefore show us what traders are doing now.

It is much more important to know what traders are doing now than to see what they did last week or last month.

Simple moving averages are smoother than Exponential moving averages.

Longer period moving averages are smoother than shorter period moving averages.

Choppy moving averages are quicker to respond to price action and can catch trends early. However, because of their quick reaction, they are susceptible to spikes and can fake you out.

Smooth moving averages are slower to respond to price action but will save you from spikes and fake outs. However, because of their slow reaction, they can delay you from taking a trade and may cause you to miss some good opportunities.

The best way to use moving averages is to plot different types on a chart so that you can see both long term movement and short term movement.

Pivot Points

noreply@blogger.com (Trading forex) — Fri, 27 Jun 2008 02:41:00 -0700

Professional traders and market makers use pivot points to identify important support and resistance levels. Simply put, a pivot point and its support/resistance levels are areas at which the direction of price movement can possibly change.

Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.

Pivot points can be used by both range-bound traders and breakout traders. Range-bound traders use pivot points to identify reversal points. Breakout traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.

Here is an example of pivot points plotted on a 1-hour EUR/USD chart:

How to Calculate Pivot Points

The pivot point and associated support and resistance levels are calculated by using the last trading session’s open, high, low, and close. Since Forex is a 24-hour market, most traders use the New York closing time of 4:00pm EST as the previous day’s close.

The calculation for a pivot point is shown below:

Pivot point (PP) = (High + Low + Close) / 3

Support and resistance levels are then calculated off the pivot point like so:

First level support and resistance:

First support (S1) = (2*PP) – High

First resistance (R1) = (2*PP) – Low

Second level of support and resistance:

Second support (S2) = PP – (High – Low)

Second resistance (R2) = PP + (High - Low)

Don’t worry you don’t have to perform these calculations yourself. Your charting software will automatically do it for you and plot it on the chart.

Also keep in mind that some charting software also provides additional pivot point features such as a third support and resistance level and intermediate levels or mid-point levels (levels in between the main pivot point and support and resistance level).

These “extra levels” aren’t as significant as the main five but it doesn’t hurt to pay attention to them. Here’s an example:

How to Trade with Pivot Points

Breakout Trades

The pivot point should be the first place you look at to enter a trade, since it is the primary support/resistance level. The biggest price movements usually occur at the price of the pivot point.

Only when price reaches the pivot point will you be able to determine whether to go long or short, and set your profit targets and stops. Generally, if prices are above the pivot it’s considered bullish, and if they are below it’s considered bearish.

Let’s say the price is hovering around the pivot point and closes below it so you decide to go short. Your stop loss would be above PP and your initial profit target would be at S1.

However, if you see prices continue to fall below S1, instead of cashing out at S1, you can move your existing stop-loss order just above S1 and watch carefully. Typically, S2 will be the expected lowest point of the trading day and should be your ultimate profit objective.

The converse applies during an uptrend. If price closed above PP, you would enter a long position, set a stop loss below PP and use the R1 and R2 levels as your profit objectives.

Range-bound Trades

The strength of support and resistance at the different pivot levels is determined by the number of times the price bounces off the pivot level.

The more times a currency pair touches a pivot level then reverses, the stronger the level is. Pivoting simply means reaching a support or resistance level and then reversing. Hence, the word “pivot”.

If the pair is nearing an upper resistance level, you could sell the pair and place a tight protective stop just above the resistance level.

If the pair keeps moving higher and breaks out above the resistance level, this would be considered an upside “breakout”. You would also get stopped out of your short order but if you believe that the breakout has good follow-through buying strength, you can reenter with a long position. You would then place your protective stop just below the former resistance level that was just penetrated and is now acting as support.

If the pair is nearing a lower support level, you could buy the pair and place a stop below the support level.

Theoretically Perfect?

In theory, it sounds pretty simple huh? Dream on, pal!

In the real world, pivot points don’t work all the time. Price tends to hesitate around pivot lines and at times it’s just ridiculously hard to tell what it will do next.

Sometimes the price will stop just before reaching a pivot line and then reverse meaning your profit target doesn’t get reached. Other times, it looks like a pivot line is a strong support level so you go long only to see the price fall, stop you out, then reverse back into your direction.

You must be very selective and create a pivot point trading strategy that you intend to strictly follow.

Let’s go look at a chart to see just how difficult and easy pivot points might be.

Ooooh pretty colors! We like...

Look at the orange oval. Notice how the PP was a strong support but if you went long on PP, it never was able to rise up to R1.

Look at the first purple circle. The pair broke down through PP but failed to reach S1 before reversing back to PP. On the second break down though (second purple circle), the pair did manage to reach S1 before once again reversing back to PP.

Look at the pink oval. Again, PP acted as strong support but never was able to rise up to R1.

On the yellow circle, the pair broke out to the downside again, sliced right through S1, and managed to fall all the way down to S2.

If you ever attempted to go long on this chart, you would have been stopped out every single time.

Personally, we would have not even thought about buying this pair - Why not? Well we have a little secret. What we didn’t show you regarding this chart was that this pair was trending down for quite some time now.

Remember the trend is your friend. We don’t like to backstab our friends, so we try our best to never trade against the trend.

In the next lesson, you will learn how to use multiple timeframes to trade with the correct trend direction so you’re able to minimize possible mistakes such as the one above.

Forex Pivot Point Trading Tips

Here are some easy to memorize tips that will help you to make smart pivot point trading decisions.

If price at PP, watch for a move back to R1 or S1.
If price is at R1, expect a move to R2 or back towards PP.
If price is at S1, expect a move to S2 or back towards PP.
If price is at R2, expect a move to R3 or back towards R1.
If price is at S2, expect a move to S3 or back towards S1.
If there is no significant news to influence the market, price will usually move from P to S1 or R1.
If there is significant news to influence the market price may go straight through R1 or S1 and reach R2 or S2 and even R3 or S3.
R3 and S3 are a good indication for the maximum range for extremely volatile days but can be exceeded occasionally.
Pivot lines work well in sideways markets as prices will most likely range between the R1 and S1 lines.
In a strong trend, price will blow through a pivot line and keep going.

Summary

Pivot points are a technique used by professional traders and market makers to determine entry and exit points for the trading day based on the previous day’s trading activity. It’s best to use this technique after determining the direction of the trend.
As the charts above show, pivots can be extremely useful in Forex since many currency pairs usually fluctuate between these levels.
Range-bound traders will enter a buy order near identified levels of support and a sell order when the pair nears resistance.
Pivot points also allow breakout traders to identify key levels that need to be broken for a move to qualify as a bona fide breakout.

The simplicity of pivot points definitely makes them a useful tool to add to your trading toolbox. It allows you to see possible areas that are likely to cause price movement. You’ll become more in sync to market movements and make better trading decisions.
Learn to use pivot points along with other technical analysis tools such candlestick patterns, MACD crossover, moving average crossovers, Stochastics overbought/oversold levels. The greater the confirmation, the greater your probability of success!

Fibonacci

noreply@blogger.com (Trading forex) — Thu, 26 Jun 2008 17:48:00 -0700

We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother. Fibonacci is a huge subject and there are many different studies of Fibonacci with weird names but we’re going to stick to two: retracement and extension.

Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.

Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber geek, who had an “aha!” moment and discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe

The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ……

This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.

After the first few numbers in the sequence, if you measure the ratio of any number to that of the next higher number you get .618. For example, 34 divided by 55 equals 0.618.

If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.

These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the ratios you have to know:

Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618

You won’t really need to know how to calculate all of this. Your charting software will do all the work for you. But it’s always good to be familiar with the basic theory behind the indicator so you’ll have knowledge to impress your date.

Traders use the Fibonacci retracement levels as support and resistance levels. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation.

Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this tool usually works due self-fulfilling expectations.

Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.

A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

Let's take a closer look at Fibonacci retracement levels...

Fibonacci Retracement

In an uptrend, the general idea is to go long the market on a retracement to a Fibonacci support level. In order to find the retracement levels, you would click on a significant Swing Low and drag the cursor to the most recent Swing High. This will display each of the Retracement Levels showing both the ratio and corresponding price level. Let’s take a look at some examples of markets in an uptrend.

This is an hourly chart of USD/JPY. Here we plotted the Fibonacci Retracement Levels by clicking on the Swing Low at 110.78 on 07/12/05 and dragging the cursor to the Swing High at 112.27 on 07/13/05. You can see the levels plotted by the software. The Retracement Levels were 111.92 (0.236), 111.70 (0.382), 111.52 (0.500), and 111.35 (0.618). Now the expectation is that if USD/JPY retraces from this high, it will find support at one of the Fibonacci Levels because traders will be placing buy orders at these levels as the market pulls back.

Now let’s look at what actually happened after the Swing High occurred. The market pulled back right through the 0.236 level and continued the next day piercing the 0.382 level but never actually closing below it. Later on that day, the market resumed its upward move. Clearly buying at the 0.382 level would have been a good short term trade.

Now let’s see how we would use Fibonacci Retracement Levels during a downtrend. This is an hourly chart for EUR/USD. As you can see, we found our Swing High at 1.3278 on 02/28/05 and our Swing Low at 1.3169 a couple hours later. The Retracement Levels were 1.3236 (0.618), 1.3224 (0.500), 1.3211 (0.382), and 1.3195 (.236). The expectation for a downtrend is if it retraces from this high, it will encounter resistance at one of the Fibonacci Levels because traders will be placing sell orders at these levels as the market attempts to rally.

Let’s check out what happened next. Now isn’t that a thing of beauty! The market did try to rally but it barely past the 0.500 level spiking to a high 1.3227 and it actually closed below it. After that bar, you can see that the rally reversed and the downward move continued. You would have made some nice dough selling at the 0.382 level.

Here’s another example. This is an hourly chart for GBP/USD. We had a Swing High of 1.7438 on 07/26/05 and a Swing Low of 1.7336 the next day. So our Retracement Levels are: 1.7399 (0.618), 1.7387 (0.500), 1.7375 (0.382), and 1.7360 (0.236). Looking at the chart, the market looks like it tried to break the 0.500 level on several occasions, but try as it may, it failed. So would putting a sell order at the 0.500 level be a good trade?

If you did, you would have lost some serious cheddar! Take a look at what happened. The Swing Low looked to be the bottom for this downtrend as the market rallied above the Swing High point.

You can see from these examples the market usually finds at least temporary support (during an uptrend) or resistance (during a downtrend) at the Fibonacci Retracements Levels. It’s apparent that there a few problems to deal with here. There’s no way of knowing which level will provide support. The 0.236 seems to provide the weakest support/resistance, while the other levels provide support/resistance at about the same frequency. Even though the charts above show the market usually only retracing to the 0.382 level, it doesn’t mean the price will hit that level every time and reverse. Sometimes it’ll hit the 0.500 and reverse, other times it’ll hit the 0.618 and reverse, and other times the price will totally ignore Mr. Fibonacci and blow past all the levels like similar to the way Allen Iverson blows past his defenders with his nasty first step. Remember, the market will not always resume its uptrend after finding temporary support, but instead continue to decline below the last Swing Low. Same thing for a downtrend. The market may instead decide to continue above the last Swing High.

The placement of stops is a challenge. It’s probably best to place stops below the last Swing Low (on an uptrend) or above the Swing High (on a downtrend), but this requires taking a high level of risk in proportion to the likely profit potential in the trade. This is called reward-to-risk ratio. In a later lesson, you will learn more money management and risk control and how you would only take trades with certain reward-to-risk ratios.

Another problem is determining which Swing Low and Swing High points to start from to create the Fibonacci Retracement Levels. People look at charts differently and so will have their own version of where the Swing High and Swing Low points should be. The point is, there is no one right way to do it, but the bad thing is sometimes it becomes a guessing game.

Fibonacci Extension

The next use of Fibonacci you will be applying is that of targets. Let’s start with an example in an uptrend.

In an uptrend, the general idea is to take profits on a long trade at a Fibonacci Price Extension Level. You determine the Fibonacci extension levels by using three mouse clicks. First, click on a significant Swing Low, then drag your cursor and click on the most recent Swing High. Finally, drag your cursor back down and click on the retracement Swing Low. This will display each of the Price Extension Levels showing both the ratio and corresponding price levels.

On this 1-hour USD/CHF chart, we plotted the Fibonacci extension levels by clicking on the Swing Low at 1.2447 on 08/14/05 and dragged the cursor to the Swing High at 1.2593 on 08/15/15 and then down to the retracement Swing Low of 1.2541 on 08/15/05. The following Fibonacci extension levels created are 1.2597 (0.382), 1.2631 (0.618), 1.2687 (1.000), 1.2743 (1.382), 1.2760 (1.500), and 1.2777 (1.618).

Now let’s look at what actually happened after the retracement Swing Low occurred.

The market rallied to the 0.500 level
fell back to the retracement Swing Low
then rallied back up to the 0.500 level
fell back slightly
rallied to the 0.618 level
fell back to the 0.382 level which acted as support
then rallied all the way to the 1.382 level
consolidated a bit
then rallied to the 1.500 level

You can see from these examples that the market often finds at least temporary resistance at the Fibonacci extension levels - not always, but often. As in the examples of the retracement levels, it should be apparent that there are a few problems to deal with here as well. First, there is no way of knowing which level will provide resistance. The 0.500 level was a good level to cover any long trades in the above example since the market retraced back to its original level, but if you didn’t get back in the trade, you would have left a lot of profits on the table.

Another problem is determining which Swing Low to start from in creating the Fibonacci Extension Levels. One way is from the last Swing Low as we did in the examples; another is from the lowest Swing Low of the past 30 bars. Again, the point is that there is no one right way to do it, and consequently it becomes a guessing game.

Alright, let’s see how Fibonacci extension levels can be used during a downtrend. In a downtrend, the general idea is to take profits on a short trade at a Fibonacci price extension level since the market often finds at least temporary support at these levels.

On this 1-hour EUR/USD chart, we plotted the Fibonacci extension levels by clicking on the Swing High at 1.21377 on 07/15/05 and dragged the cursor to the Swing Low at 1.2021 on 08/15/15 and then down to the retracement High of 1.2085. The following Fibonacci extension levels created are 1.2041 (0.382), 1.2027 (0.500), 1.2013 (0.618), 1.1969 (1.000), 1.1925 (1.382), 1.1911 (1.500), and 1.1897 (1.618).

Now let’s look at what actually happened after the retracement Swing Low occurred.

The market fell down almost to the 0.382 level which for right now is acting as a support level
The market then traded sideways between the retracement Swing High level and 0.382 level
Finally, the market broke through the 0.382 and rested on the 0.500 level
Then it broke the 0.500 level and fell all the way down to the 1.000 level

Alone, Fibonacci levels will not make you rich. However, Fibonacci levels are definitely useful as part of an effective trading method that includes other analysis and techniques. You see, the key to an effective trading system is to integrate a few indicators (not too many) that are applied in a way that is not obvious to most observers.

All successful traders know it’s how you use and integrate the indicators (including Fibonacci) that makes the difference. The lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone.

Summary

Fibonacci retracement levels are 0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci extension levels are 0, 0.382, 0.618, 1.000, 1.382, 1.618

In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.

A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

Elliott Wave Theory

noreply@blogger.com (Trading forex) — Mon, 23 Jun 2008 04:45:00 -0700

Back in the old school days during the 1920-30s, there was this mad genius named Ralph Nelson Elliott. Elliott discovered that stock markets, thought to behave in a somewhat chaotic manner, actually, did not.

They traded in repetitive cycles, which he pointed out were the emotions of investors and traders caused by outside influences (ahem, CNBC) or the predominant psychology of the masses at the time.

Elliott explained that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns he called "waves". He needed to claim this observation and so he came up with a super original name: The Elliott Wave Theory.

The 5 – 3 Wave Patterns

Mr. Elliott showed that a trending market moves in what he calls a 5-3 wave pattern. The first 5-wave pattern is called impulse waves and the last 3-wave pattern is called corrective waves.

Let’s first take a look at the 5-wave impulse pattern. It’s easier if you see it as a picture:

That still looks kind of confusing. Let’s splash some color on this bad boy.

Ah magnefico! Me likes colors. It’s so pretty! I’ve color-coded each wave along with its wave count.

Here is a short description of what happens during each wave. I am going to use stocks for my example since stocks is what Mr. Elliott used but it really doesn’t matter what it is. It can easily be currencies, bonds, gold, oil, or Tickle Me Elmo dolls. The important thing is the Elliott Wave Theory can also be applied to the foreign exchange market.

Wave 1
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.

Wave 2
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.

Wave 3
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.

Wave 4
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.

Wave 5
This is the point that most people get on the stock, and is most driven by hysteria. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. People start coming up with ridiculous reasons to buy the stock and try to choke you when you disagree with them. This is when the stock becomes the most overpriced. Contrarians start shorting the stock which starts the ABC pattern.

ABC Correction

The 5-wave trends are then corrected and reversed by 3-wave countertrends. Letters are used instead of numbers to track the correction. Check out this example of smokin’ hot 3-wave corrective wave pattern!

Just because I’ve been using a bull market as my primary example doesn’t mean the Elliott Wave theory doesn’t work on bear markets. The same 5 – 3 wave pattern can look like this:

Waves within a Wave

The other important thing you have to know about the Elliot Wave Theory is that a wave is made of sub-waves? Huh? Let me show you another picture. Pictures are great aren't they? Yee-haw!

Do you see how Wave 1 is made up of a smaller 5-wave impulse pattern and Wave 2 is made up of smaller 3-wave corrective pattern? Each wave is always comprised of smaller wave patterns.

Okay, let’s look at a real example.

As you can see, waves aren’t shaped perfectly in real life. You’ll also learn its sometimes difficult to label waves. But the more you stare at charts the better you’ll get.

Okay, that’s all you need to know about the Elliott Wave Theory. Remember the market moves in waves. Now when you hear somebody say “Wave 2 is complete.” You’ll know what the heck he is talking about.

If you wish to become an Elliott Wave Theory guru, you can learn more about it at www.elliottwave.com.
Summary

According to the Elliott Wave Theory, the market moves in repetitive patterns called waves.
A trending market moves in a 5-3 wave pattern. The first 5-wave pattern are called impulse waves. The second 3-wave pattern are called corrective waves.
If you look hard enough at a chart, you'll see that the market really does move in waves.

What is a Candlestick?

noreply@blogger.com (Trading forex) — Sun, 22 Jun 2008 00:37:00 -0700

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick.

Okay so what the heck are candlesticks?

The best way to explain is by using a picture:

Candlesticks are formed using the open, high, low and close.

If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
The hollow or filled section of the candlestick is called the “real body” or body.
The thin lines poking above and below the body display the high/low range and are called shadows.
The top of the upper shadow is the “high”.
The bottom of the lower shadow is the “low”.

Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.

Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.

Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time!

Long black (filled) candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.

Mysterious Shadows

The upper and lower shadows on candlesticks provide important clues about the trading session.

Upper shadows signify the session high. Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and close.

Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bided prices higher, but for one reason or another, sellers came in and drove prices back down to end the session back near its open price.

If a candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower, but for one reason or another, buyers came in and drove prices back up to end the session back near its open price.

Spinning Tops

Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.

The pattern indicates the indecision between the buyers and sellers

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.

Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.

If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Marubozu

Sounds like some kind of voodoo magic huh? "I will cast the evil spell of the Marubozu on you!" Fortunately, that's not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close. If you look at the picture below, there are two types of Marubozus.

A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the whole entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. This is a very bearish candle as it shows that sellers controlled the price action the whole entire session. It usually implies bearish continuation or bearish reversal.

Doji

Doji candlesticks have the same open and close price or at least their bodies are extremely short. The doji should have a very small body that appears as a thin line.

Doji suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.

When a doji forms on your chart, pay special attention to the preceding candlesticks.

If a doji forms after a series of candlesticks with long hollow bodies (like white marubozus), the doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down.

Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open.

If a doji forms after a series of candlesticks with long filled bodies (like black marubozus), the doji signals that sellers are becoming exhausted and weakening. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. Look for a white candlestick to close above the long black candlestick’s open.

Prior Trend

For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trendlines, moving averages, or other aspects of technical analysis.

Hammer and Hanging Man

The hammer and hanging man look exactly alike but have totally different meaning depending on past price action. Both have cute little bodies (black or white), long lower shadows and short or absent upper shadows.

The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.

When price is falling, hammers signal that the bottom is near and price will start rising again. The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.

Word to the wise… just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger. A good confirmation example would be to wait for a white candlestick to close above the open of the candlestick on the left side of the hammer.

Recognition Criteria:

The long shadow is about two or three times of the real body.
Little or no upper shadow.
The real body is at the upper end of the trading range.
The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the session. Buyers were able to push the price back up some but only near the open. This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price. .

Recognition Criteria:

A long lower shadow which is about two or three times of the real body.
Little or no upper shadow.
The real body is at the upper end of the trading range.
The color of the body is not important, though a black body is more bearish than a white body.

Candlesticks are formed using the open, high, low and close.

If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
The hollow or filled section of the candlestick is called the “real body” or body.
The thin lines poking above and below the body display the high/low range and are called shadows.
The top of the upper shadow is the “high”.
The bottom of the lower shadow is the “low”.

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.

Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.

Upper shadows signify the session high.

Lower shadows signify the session low.

Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The pattern indicates the indecision between the buyers and sellers

Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close.

Doji candlesticks have the same open and close price or at least their bodies are extremely short.

The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.

The inverted hammer occurs when price has been falling suggests the possibility of a reversal.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.

The History of Japanese Candlesticks

noreply@blogger.com (Trading forex) — Sat, 21 Jun 2008 23:24:00 -0700

Throughout Candlestick Analysis you are going to find many war-like references. Between 1500 and 1600 the territories of today's Japan were at constant war. Each daimyo (feudal lord) was in constant contention to take over their neighbor. This one hundred year period is known as Sengoku Jidai or the "Age of Country at War". This was a definite period of turmoil. It slowly came to order in the early 1600's through three dynamic generals - Nobunaga Oda, Hideyoshi Toyotomi, and Leyasu Tokugawa. Their combined leadership prowess has become legendary folklore in Japan's history. Their achievements are described as: "Nobunaga piled the rice, Hideyoshi kneaded the dough, and Tokugawa ate the cake." All the contributions from these great generals unified Japan into one nation. Tokugawa's family ruled the country from 1615 to 1867. This become known as the Tokugawa Shogunate Era.

While the Candlestick methodology was being developed, a military environment persisted in Japan. Understandably, the Candlestick technique employs extensive military terminology for its explanations. Investing is correlated to battle. It requires the same tactical abilities to win. The investor has to prepare for winning trades as a general prepares for battle. A strategy is required, the psychology of coming events have to be thought through. Competition comes into play. Aggressive maneuvers and strategic withdrawals are required to eventually win the war - to achieve financial success.

As stability settled over the Japanese culture during the early 17th centuy, new opportunities became apparent also. The centralized government lead by Tokugawa diminished the feudal system. Local markets began to expand to a national scale. The demise of local markets created the growth of technical analysis in Japan.

Osaka became regarded as Japan's capital during the Toyotomi reign. Its location near the sea made it a commercial center. Land travel was slow and dangerous, not to mention costly. It became a natural location for the development of the national depot system, assembling and disbursing supplies and market products. It rapidly evolved into Japan's largest city of finance and commerce. Osaka, the "Kitchen of Japan" with its vast system of warehouses, eventually established an atmosphere of price stability by reducing regional imbalances of supply. Osaka became the profit center of all Japan, completely altering the normal social standards. In all other cities the quest for profits was despised. Japan was composed of four classes, the Soldier, the Farmer, the Artisan, and the Merchant. It was not until the 1700's that the merchants broke down the social barrier. "Mokarimakka" which means " are you making a profit?" is still the common greeting in Osaka today.

Under Hideyoshi's reign, a man named Yodoya Keian become a successful war merchant. He had exceptional abilities to transport, distribute and set the price of rice. His reputation become so well known, his front yard become the first rice exchange. Unfortunately, he became very wealthy. Unfortunate because the Bakufu (the military government lead by the Shogun) relieved him of all his fortune. This was done based upon the charge that he was living a life of luxury beyond his social rank. This was during a period in the mid 1600's when the Bakufu was becoming very leary of the merchant class. A number of merchants tried to corner the rice market. They were punished by having their children executed. They were exiled and their wealth was confiscated.

The Dojima Rice Exchange, the institutionalized market that developed in Yodoya's front yard, was established in the late 1600's. Merchants were now capable of grading the rice, and negotiated setting the market price. After 1710, actual rice trad

USD/JPY - Dollar Yen, European Session - 10/06/08

noreply@blogger.com (Trading forex) — Mon, 9 Jun 2008 23:04:00 -0700

106,64. USD JPY broke 106,30 resistance. The volatility is high. Bollinger bands are parallel and form the trend. ForexTrend 1H, 4H (Mataf Trend Indicator) is in a bullish configuration. 1H, 4H ForexSto (Modified Stochastic) indicate a bullish pressure on USD JPY. The uptrend should continue to gather momentum. The price should find a resistance below 107,30 (65 pips). If the resistance is broken then the target will be 109,00 (235 pips).
=> We could take a long position at 106,50. We will put the stop loss below 106,00 (-50 pips). The targets are 107,50 (+100 pips) 109,00 (+250 pips). Each trade is dangerous, take care and put your stop loss. Trade configuration (1 Speculative -> 4 Trend following): 2.

Resistances: 106,90 - 107,30
Supports: 106,00 - 105,30

USD/JPY - Dollar Yen

noreply@blogger.com (Trading forex) — Fri, 6 Jun 2008 03:18:00 -0700

USD/JPY - Dollar Yen

Short term (Intraday)

106,08. USD JPY is in a consolidation after the last bullish movement. The price is just bellow 106,25 resistance. The volatility is low. Bollinger bands are flat. ForexTrend 1H, 4H (Mataf Trend Indicator) is in a bullish configuration. 1H, 4H ForexSto (Modified Stochastic) indicate a bullish pressure on USD JPY. The consolidation should continue. The price should find a resistance below 106,25 / 106,50. If the resistance is broken then the target will be 108,00.
We are waiting for a break of resistance to take a long position.

EUR/USD - Euro Dollar, European Session - 06/06/08

noreply@blogger.com (Trading forex) — Fri, 6 Jun 2008 03:17:00 -0700

1,5579. EUR USD broke 1,5480 resistance. EUR USD is in a consolidation after the last bullish movement. The volatility is high. Oscillators are neutral. The consolidation should continue. The price should continue to move in 1,5480 / 1,5630 range. We won’t take a position.

Resistances: 1,5630 - 1,5680
Supports: 1,5520 - 1,5480

EUR/USD - Euro Dollar

noreply@blogger.com (Trading forex) — Wed, 4 Jun 2008 22:20:00 -0700

EUR/USD - Euro Dollar

Short term (Intraday)

1,5403. EUR USD broke 1,5430 support. EUR USD is in an downtrend directed by 1H exponential moving averages. The volatility is high. Bollinger bands are deviated. ForexTrend 1H (Mataf Trend Indicator) is in a bearish configuration. 1H, 4H ForexSto (Modified Stochastic) indicate a bearish pressure on EUR USD. The downtrend should continue on 1,5350 (50 pips) support. We won't take a position. The risk/reward ratio is too high to take a position..

USD/JPY - Dollar Yen

noreply@blogger.com (Trading forex) — Wed, 4 Jun 2008 22:15:00 -0700

USD/JPY - Dollar Yen

Short term (Intraday)

Resistances: 105,60 - 105,90
Supports: 105,00 - 104,65
Long term chart: USD/JPY - Dollar Yen

updated 05 juin 2008 04:50 GMT

USD/JPY - Dollar Yen

noreply@blogger.com (Trading forex) — Wed, 4 Jun 2008 08:27:00 -0700

USD/JPY - Dollar Yen

Short term (Intraday)

105,15. USD JPY is in a consolidation after the last bullish movement. USD JPY moves without trend and swings around exponential moving averages (EMA 50 and 100). The volatility decreases. Bollinger bands are tightened. Oscillators are neutral. The price should continue to move in 104,00 / 106,00 range. We won't take a position.

EUR/USD - Euro Dollar

noreply@blogger.com (Trading forex) — Wed, 4 Jun 2008 08:22:00 -0700

EUR/USD - Euro Dollar

Short term (Intraday)

1,5459. EUR USD is in a consolidation after the last bearish movement. The volatility decreases. Bollinger bands are tightened. ForexTrend 1H (Mataf Trend Indicator) is in a bearish configuration. 4H ForexSto (Modified Stochastic) indicate a bearish pressure on EUR USD. The downtrend should continue on 1,5350 (100 pips) support.
=> We could take a short position at 1,5460. We will put the stop loss above 1,5500 (-40 pips). The targets are 1,5350 (110 pips) 1,5280 (180 pips). Each trade is dangerous, take care and put your stop loss. Trade configuration (1 Speculative -> 4 Trend following): 2.

Currency Majors Technical Analysis

IMF: Asian Countries Should Prepare Crisis Contingency Plans

   By Tom Barkley
  Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Asian countries should prepare "contingency plans" in case the global financial crisis spills over into the region, an official from the International Monetary Fund said Friday.

"Given the risks that we're seeing in global financial markets, I think monetary and regulatory authorities around the region need to monitor financial institutions and financial markets carefully and think about how they would cope with further pressures there," said David Burton, director of the IMF's Asia and Pacific Department.

Preparations should be made for providing liquidity and bank capitalization, while regulatory frameworks should also be reviewed over the medium term, he said.

Asia hasn't been immune to the financial market turmoil, but so far there haven't been any signs of a "significant credit squeeze," he said.

The economic outlook remains "quite favorable," he said, but risks are "tilted" to the downside.

The Chinese government's upward revision Thursday of its 2007 growth estimate to 11.9% from 11.4% will likely alter the IMF's forecasts for 2007 and 2008 for both China and the region a little, but "won't change the overall picture," he said.

The IMF's growth estimate for China, released earlier in the week, is 11.4% for 2007 and 9.3% for 2008. The 2008 forecast was slashed by 0.7 percentage points from the fund's January estimate. The IMF expects emerging Asian countries to grow 7.6% in 2008 and 7.9% in 2009.

"At the same time that growth is starting to slow, inflation is rising significantly across the region," said Burton, adding that the price pressures constrain how much central banks can ease.

Forex - Dollar struggles as risk appetite falls

noreply@blogger.com (Trading forex) — Fri, 11 Apr 2008 08:34:00 -0700

Fri, Apr 11 2008, 15:08 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - The U.S. dollar has been struggling against the yen as risk appetite has fallen following a slide in US stocks, prompted by weak earnings at the world's biggest industrial conglomerate General Electric Co.

GE's profits warning raised fears on the stock markets that the credit crunch is severely impacting the manufacturing sector in the US and is not just a concern among finance companies.

A worse than expected survey into US consumer confidence stoked concerns further. Sentiment, as measured by the Reuters/University of Michigan index, fell to 63.2 in early April from a reading of 69.5 in late March. Economists polled by Thomson's IFR Markets had expected sentiment to fall to 68.0.

"This has fuelled fresh losses in dollar/yen, which has fallen to new session lows of 100.63," said Rhonda Staskow, analyst at Thomson IFR Markets.

Adding to the pressure has been a fall in US ten-year bond yields to session lows of 3.451 percent, Staskow said.

"The US 2-year yield spread over JGBs has collapsed to 113 basis points today, down from 124 basis points yesterday and this is adding to the dollar/yen selling pressure," said Staskow.

The market's main point of interest is this weekend's G7 meeting of finance ministers and central bankers in Washington.

Analysts said that with the focus likely to be on improving liquidity conditions to help ease the economic impact of the credit crunch, currency issues are likely to take a back seat.

Moreover, market participants noted that China is allowing its currency, the yuan, to appreciate relatively quickly -- at an annualised rate of 18 percent in the first quarter of the year.

In addition, a weak dollar will support exports from the near recessionary US and that a strong euro will help dampen down inflationary pressures in the euro zone, to the likely relief of the ECB, which yesterday kept borrowing costs unchanged, in contrast to the Bank of England.

Thursday's comments from Jean-Claude Trichet, the European Central Bank's president, that he deplores volatility in currency markets suggest that the Europeans will at least bang the drum for tighter language in the communique. Overnight, the euro climbed to a new all-time high of 1.5895 dollars.

Despite Trichet's concerns, the U.S. is unlikely to agree to any tougher language and may note that the dollar's rate of collapse has stalled.

"If the G7 fails to harden its language at least on FX volatility then the knee jerk reaction on Monday would likely be to sell the dollar," said Benedikt Germanier, currency strategist.

"Trichet's comments that he deplores FX volatility suggest that at least the Europeans will be arguing for tighter language," he added.

Elsewhere, the euro struck a new all-time high of 0.8037 pounds amid ongoing concerns about the state of the UK economy following yesterday's Bank of England quarter point rate cut.

London 3.40 p.m. London 8.58 a.m.

U.S. dollar

yen 100.91 down from 101.68

Swiss franc 0.9995 down from 1.0017

Euro

U.S. dollar 1.5831 up from 1.5830

yen 159.78 down from 161.00

Swiss franc 1.5831 down from 1.5864

pound 0.8031 up from 0.8009

Pound

U.S. dollar 1.9701 down from 1.9756

yen 199.00 down from 201.03

Swiss franc 1.9703 unchanged 1.9803

Australian dollar

U.S dollar 0.9304 down from 0.9328

pound 0.4722 up from 0.4720

yen 93.97 down from 94.95

ECB's Weber Sees No Room At All To Discuss Interest Rate Cut

noreply@blogger.com (Trading forex) — Fri, 11 Apr 2008 08:27:00 -0700

Fri, Apr 11 2008, 14:51 GMT
http://www.djnewswires.com/eu

ECB's Weber Sees No Room At All To Discuss Interest Rate Cut

WASHINGTON -(Dow Jones)- European Central Bank governing council member Axel Weber said Friday he doesn't share the International Monetary Fund's view that there is room for an interest rate cut by the central bank, as the fund underestimates upward pressures on prices.

Weber, who is also president of the Deutsche Bundesbank, told reporters ahead of the Group of Seven leading industrialized nations' meeting of finance officials in Washington that the global economy is still in a robust state and the euro-zone and German economies are in a better shape than that of the U.S.

"There is no leeway at all to discuss a rate cut," Weber said. Inflation in the euro zone is likely to have peaked in March - a preliminary estimate for the month showed consumer inflation at an annual clip of 3.5% - but the consumer price index is expected to stay above 3% for most of the year before falling below 3% toward the end of the year.

On the growth outlook, Weber said that the IMF has focused too strongly on a risks scenario and a possible impact of the financial crisis on the world economy. He stressed that the outlook is too pessimistic.

Speaking at the same briefing, German Finance Minister Peer Steinbrueck also said that the IMF's growth outlook is too pessimistic.

In its World Economic Outlook report Wednesday, the IMF forecast 1.4% growth for Germany for this year and only 1.0% for 2009. In October, the IMF in its economic outlook report forecast 2.0% real gross domestic product growth while in its annual economic policy consultation on Germany from February, it only forecast 1.5% growth for the country.

The IMF's most recent prediction is less than the 1.6%-1.7% Steinbrueck forecasts for 2008 German economic growth.

For the euro zone, the IMF now forecasts 1.4% growth for 2008 and 1.2% for 2009.

Steinbrueck reiterated that there is no reason to cut the government's 2008 growth forecast of 1.7%.

Looking ahead at 2009, Steinbrueck said it is currently hard to predict the country's economic performance as the financial crisis will "to a certain extent" hurt the German economy, albeit to a lesser extent than it will the U.S. economy.

"The U.S. are facing a recession," Steinbrueck said.

Steinbrueck also said he can't follow the IMF's recent estimate that the financial market crisis might lead to potential losses from write-downs of bad debt approaching $1 trillion, particularly since in February it estimated the potential losses to reach around $400 billion.

Asked whether the weak U.S. dollar will play a role in the G7 discussions, Steinbrueck said that it would, but behind closed doors He said that a euro trading at $1.60 "will massively touch upon German economic interests."

His comments come as Germany's economy over the recent years has strongly depended on export growth. In the past, Steinbrueck has been known for saying he "loves" the strong euro, but he hasn't repeated such comments in recent months.

Currency Majors Technical Analysis

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Yen Steals the Show ahead of ECB & BoE

The Japanese yen steals the show from ECB & BOE today and is indeed the biggest mover so far, boosted by new that Singapore unexpectedly set a higher trading range for its currency. Note that we've been pointing out the loss of upside momentum in yen crosses as well as the possibly that short term tops are around the corner, if not already formed. Note that USD/JPY and GBP/JPY has taken out some intraday support level already. Further weakness in EUR/JPY will strengthen the case that yen's strengthen has come back broadly.

EUR/GBP hits another record high of 0.8026 on expectation of closing rate gap between ECB and BOE after today's announcements. ECB is widely expected to keep rates unchanged at 4.00% today. Given re-emergence of inflation risks, which saw flash estimate of Eurozone CPI hitting a new high of 3.% in Mar, far above ECB's target of 2%, Trichet is expected to maintain the hawkish stance in the post meeting press conference. Improvement is business confidence, which is shown in Germany's Ifo Index's improvements from Jan's 103.4 to Mar's 104.8 is also giving the ECB another bullet to be on hold in the near future even though there are still risks to the down side in growth.

On the other hand, BoE is widely expected to cut rates by 25bps to 5.00% today. Recent data showed further deterioration in consumer confidence as well as deepening in housing market recession. However, like other parts of the world, BoE is also facing the problem of re-emergence of inflation risk. Hence even though further rate cuts are still expected from BoE down the road, the pace will likely be unchanged at 25bps per quarter.

Data released earlier saw Australian unemployment climbed from 4.0% to 4.1% in Mar. But the economy added more than expected 14.8k jobs. Japanese trade surplus surged to 1035b in Fe. Machine too orders, on the other hand, fell less than expected by -12.7% mom in Feb, leaving yoy rate at 2.4%. Looking ahead, Trade balance from UK, US and Canada will be released together with jobless claims and Fed budget in US.

More Technical Analysis Reports Here

USD/JPY Daily Outlook

Daily Pivots: (S1) 101.24; (P) 102.03; (R1) 102.59; More.

USD/JPY dives sharply to as low as 100.72 today. Break of the inner rising trend line as well as 101.44 support indicates that whole rebound from 95.77 should have completed with three waves up to 102.94. Intraday bias is now flipped to the downside and further break of 98.55 support will confirm this case and bring retest of 95.77 low. On the upside, above 101.89 will turn intraday outlook neutral again and suggest that another high could be seen before a reversal. Decisive break of 103.59 resistance zone is still needed to indicate underlying upside momentum is still strong.

In the bigger picture, as discussed before, USD/JPY has broken out of multi-year triangle consolidation pattern that started in 1998 at 147.68. The decline from 124.13 has met 76.4% retracement of 79.75 to 147.68 at 95.78 so far. Some support is seen at this level. But still, there is no sign of reversal yet. Also, the structure, of the current fall from 124.13 argues that USD/JPY is still in the middle of a larger down trend only.

Medium term outlook remains bearish as long as 103.59 cluster resistance (61.8% retracement of 108.59 to 95.77 at 103.69) holds. Sustained trading below 95.78 will encourage further fall to next important psychological level at 90 first. However, firm break of 103.59 cluster resistance will argue that a medium term bottom is already in place. In such case, stronger medium term rebound should be seen to correct the whole fall from 124.13.

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Dollar fell versus the majors, but rallied against the commodity currencies on Wednesday

noreply@blogger.com (Trading forex) — Thu, 10 Apr 2008 05:52:00 -0700

Markets review

In March Australia’s economy created 14.800 jobs, above a consensus forecast for a 10.000 increase. The unemployment rate was 4,1% in March. After the promulgation the AUD hits a session high of 0,9346.

The EUR/GBP hit a record low of 0,8027 on market expectations that the BOE will cut interest rates to 5% from 5,25% later in the day. Sterling came under pressure after data showed that UK consumer morale fell and Britain’s economic growth slowed to 0,5% in the three month to March from 0,6% in the three month to February.

The USD/JPY fell broadly on Thursday. The dollar’s yield advantage has been lost through aggressive rate cuts by the Federal Reserve, which is widely expected to lower interest rates further at its April meeting. Traders mentioned the USD weakness may also be partly related to a CNBC report that Merrill Lynch has to record write-downs between $6 to $6,5 billion and will likely post a quarterly loss.

Technical analysis

USD/JPY

With the beginning of April, the market starts a side movement. The level where the market moves is around 102,00. On his way it uses the whole range between 101,35 and 102,90. The first clear move over one these lines could be a sign for the next trend direction.

EUR/USD

At the end of March stopped the strong up trend. The EUR/USD broke through the lower trend line of the channel. After a short period with down movements, it came back at 1,5854 and established a resistance at this level. Should it break through this level there could be more long potential.

Pivot Points – Daily FX Support and Resistance Levels
Currency	Support 2	Support 1	Pivotpoint	Resistance 1	Resistance 2
EUR / USD	1,5610	1,5720	1,5792	1,5902	1,5974
USD / JPY	100,68	101,22	102,03	102,57	103,38
GBP / USD	1,9587	1,9669	1,9730	1,9812	1,9873
USD / CHF	0,9855	0,9932	1,0050	1,0127	1,0245
AUD / USD	0,9219	0,9253	0,9294	0,9328	0,9369
USD / CAD	1,0082	1,0135	1,0176	1,0229	1,0270
NZD / USD	0,7894	0,7935	0,7970	0,8011	0,8046
EUR / AUD	1,6745	1,6893	1,6977	1,7125	1,7209
EUR / CAD	1,5807	1,5963	1,6053	1,6209	1,6299
EUR / CHF	1,5737	1,5795	1,5875	1,5933	1,6013
EUR / GBP	0,7943	0,7978	0,8001	0,8036	0,8059
EUR / JPY	160,16	160,66	161,07	161,57	161,98
GBP / CHF	1,9552	1,9669	1,9839	1,9956	2,0126
GBP / JPY	199,33	200,19	201,38	202,24	203,43

Daily Calendar & Key FX Events
Date	Time (GMT)	Economic Indicator	Last
10.04.2008	08:30	GB Trade Balance GBP	-7,50
10.04.2008	11:00	GB BoE rate decision	5,25
10.04.2008	11:45	EZ ECB rate decision	4,00
10.04.2008	12:30	USInitial claims	407
10.04.2008	12:30	USInternational trade, $	-58,20
10.04.2008	12:30	CAExports C$	37,98
10.04.2008	18:00	USFederal budget, $	-96,27

US Jobless Claims -53K To 357K In Apr 5 Week; Survey -19K

noreply@blogger.com (Trading forex) — Thu, 10 Apr 2008 05:48:00 -0700

Thu, Apr 10 2008, 12:45 GMT
http://www.djnewswires.com/eu

US Jobless Claims -53K To 357K In Apr 5 Week; Survey -19K

   By Maya Jackson Randall
  Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The number of idled U.S. workers filing new claims for unemployment benefits fell last week, a week after rising to its highest level in more than two years, a government report said Thursday.

Initial claims for jobless benefits dropped by 53,000 to 357,000, after seasonal adjustments, in the week that ended Apr. 5, the Labor Department said.

Still, the four-week average of new claims, which economists use to smooth out weekly volatility, last week increased by 2,500 to 378,250 from a revised average of 375,750. The last time claims the average was that high was October 8, 2005.

The number of new jobless claims filed nationwide dropped more than Wall Street had expected. Economists surveyed by Dow Jones Newswires forecast a 19,000 dip in new claims for the week ended Saturday.

A Labor Department analyst said there were no special factors.

The previous Labor Department report for the week ended Mar. 29 showed that claims sharply surged to 407,000, a worrisome level according to economists. Even so, new jobless claims for the week ended Mar. 29 were revised up to 410,000, according to the report released Thursday.

The softening labor market has prompted lawmakers on Capitol Hill to call for new measures to prevent the economy from slipping into a severe, prolonged recession. A separate Labor Department report last week showed that the economy lost 80,000 jobs in March, the biggest decline in five years.

Lately, federal officials have acknowledged that a severe downturn is possible as the labor market shows signs of weakness, the credit market faces turmoil and more homeowners go into foreclosure.

The Labor Department report Thursday included the total number of workers drawing unemployment benefits in the week that ended Mar. 29, the latest period for which that particular data are available. The number - known as continuing claims - rose by 3,000 to 2,940,000, the highest level since July 17, 2004. The unemployment rate for workers with unemployment insurance was unchanged at 2.2%.

Indiana reported the biggest increase in new claims the week of Mar. 29, at 7,443; there were layoffs in the automobile, trade and manufacturing industries. Pennsylvania had the biggest decrease, at 2,513; there were fewer layoffs in the electrical equipment, food, transportation and utilities industry.

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USD/JPY - Dollar Yen, European Session - 10/06/08

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European Session

EUR/USD - Euro Dollar

GBP/USD - British Pound Dollar

USD/CAD - US Dollar Canadian Dollar

USD/CHF - Dollar Swiss Franc