RichardCox

The Common Workings of ECNs ECNs provide traders with some variations from the Market Maker model in that prices are passed through multiple market sources (banks, Market Makers and other participants connected to the framework of the ECN). Since competition is heightened, ECNs are able to display preferable spread (bid/ask) quotes in the trading platforms of their clients. Additionally, ECN brokers are able to act as counterparties in forex transactions - but it should be remembered that ECNs do not operate on a pricing basis (instead, operating on a settlement basis). While some Market Makers are able to offer fixed spreads, ECNs tend to offer variable spreads which are more reflective of the individual trading activity of each currency pair. When market volumes are at full strength, there will be instances where ECNs will have no spread at all. When this does occur, it tends to be seen in currency pairs with the highest liquidity levels (such as the EUR/USD, GBP/USD, USD/JPY, USD/CHF), essentially the majors and some of the crosses. Money is made in Electronic Networks when customers are charged a fixed commission and authentic ECNs play no role in the way prices are made or settled, so there is less of a chance that retail traders will be the victim of price manipulation. One of the similarities between Market Makers and ECNs is that they can be divided into two categories - Institutional ECNs and Retail ECNs. Institutional ECNs attempt to offer the lowest bid/ask spreads by selecting the best prices available from banks, financial institutions (such as large corporations or hedge funds) and other Market Makers. Conversely, retail ECNs will offer currency quotes to retail traders from a selection of banks or other active traders available on the ECN. Benefits of Trading with ECNs When looking at the benefits of ECNs, examples can be seen in the preferable bid/ask prices that are generally on offer. This occurs because ECNs draw from several sources, which essentially forces additional competition as each source works against the others to provide the best prices. These factors make it possible, in some cases, to capitalize on little or no spread charges, which can help give a small boost to your overall profit and loss ratios. Authentic ECN brokers do not trade against their client traders, because orders are passed on to banks or other institutions which take the opposing side of each trade. With all of these factors, traders will often encounter increased volatility in price activity (which might be viewed as beneficial for traders implementing scalping strategies). In addition to this, it is actually possible to play the role of Market Maker relative to other traders on the ECN, because there is the potential to offer a price for a currency that is somewhere in between the bid and ask values. Drawbacks of Trading with ECNs When looking at the drawbacks of ECNs, most of the negatives can be seen in the fact that many ECNs do not provide integrated newsfeeds or charting packages for their clients. Because of this, traders will need to use multiple trading sources in order to conduct additional methods of analysis. This applies to traders using both technical and fundamental strategies, and many of the trading platforms that are offered by ECNs are not as user-friendly as some of their counterparts. There is the added negative that it can be more difficult to manage active trades (calculating stop loss and breakeven levels), given the variable spreads that can fluctuate and separate the bid and ask prices in each currency pair. Last, there is the added commission factor, as this is a per-transaction charge that is not given to traders using other market options. Conclusion Forex traders should pay special attention to the type of broker that is used to gain access to the broader market. The decision to select one option over another can have a significant impact on your ability to maintain a solid trading performance. When trades are not executed in a fast and efficient manner (and at your chosen price), it can become increasingly difficult to capitalize on profitable trading opportunities as they develop. Worst case scenario, profitable trading opportunities can turn into losses, so forex traders should be careful to weigh all of their options and determine the differences between the potential pros and cons in each broker type.

One of the central differences between equities markets (which trade on exchanges such as the NYSE) and the foreign exchange market is the fact that forex is an unregulated market that is truly global in nature. That is to say, there is no single exchange or central address where the business of currency trading takes place. Instead of using entities like the London or New York Stock Exchange, currency traders enact transactions using over-the-counter (OTC) entities where buyers and sellers from all areas of the world meet to make their transactions. Since these markets lack centralization, it is possible for the prices in a currency pair to see some slight variations between brokers. Most trading activities can be traced back to some of the larger banks in the world, and this is generally referred to as the Interbank Market. Access to this market is limited, however, and retail markets must use intermediaries in order to place transactions here (because retail traders lack the necessary credit connections). Of course, this does not suggest that retail traders are totally excluded from placing forex transactions but in order to make these transactions, a broker must be used. There are two main types of forex brokers that aid in this process - Electronic Communications Networks (ECNs) and Market Makers. Here, we will look at some of the benefits and drawbacks of each type of broker as a way of understanding the ways each can affect the everyday practices of forex traders. The Common Workings of Market Makers Market makers get their name from the fact that they set, or "make," the Bid and Ask prices that are available to their retail clients in trading platform quote screens. The “clients” in these cases can include banking institutions in addition to smaller retail investors and part of the service Market Makers provide is to bring extra liquidity to the forex market. To enable these trades, Market Makers act as a counterparty to every transaction, effectively taking the opposing side of each trade that is initiated by a client. In essence, when a client buys a currency pair, the Market Maker will enter into a sell position. If a sell trade is placed, the Market Maker must buy that currency pair from trading client. Given these factors, it can be concluded that the exchange rates set by Market Makers are at least in some way influenced by their own best interests. Market Maker profits are generated largely from spread charges (the difference between the Bid and Ask prices available to clients), which are typically fixed by the Market Maker. Since Market Makers find themselves in a position to act as counterparties to client trades, there are many cases where they will hedge (cover) the orders by passing them along to a third party. In other cases, these companies will actually hold the orders and trade against the client. Market Makers can be divided into two categories - Retail and Institutional. Institutional market makers tend to be banks or other types of large financial corporations which might offer a bid/ask quote to other banks or financial institutions, ECNs or possibly Market Makers in the Retail space. Retail Market Makers tend to be companies focused on offering forex trading access to individual traders. Benefits of Trading with Market Makers When looking at the trading platforms offered by Market Makers, most of the typical chart and news feed offerings can be found, but, in some cases, the platforms can be more user friendly, given the type of client that is targeted by these companies. Additionally, price movements in currency pairs might be less volatile (relative to the movements seen with ECNs). This will be viewed as a positive by some traders, although it will be a negative factor to others (such as scalpers or news traders) who need greater volatility in order to reach profits. Drawbacks of Trading with Market Makers One of the most common criticisms of Market Makers comes from the possible conflict of interest that can be present when orders are executed. This comes from the fact that Market Makers are put in the position to trade against client orders on a regular basis. With this, there is the added possibility that a Market Maker will display an inaccurate (worse) bid and ask price when compared to other brokerage companies. This comes from the fact that Market Maker’s are able to manipulate their price displays, run client stop losses, and prevent client trades from reaching profit targets. There is also a greater chance of slippage in prices when major news events are released. While this is not to say that all (or even a majority) of Market Makers engage in these practices, it should be acknowledged that these possibilities exist. There are many examples of Market Makers which view scalping strategies as unfavorable and, as a result, some of these companies have placed scalpers on manual execution, which reduces the probability that these traders will be able to enter into the market at their preferred prices. In other cases, there have been cited examples of quote displays from Market makers which have frozen (stalled) during times of enhanced volatility in the markets. In the next section of this article, we will compare these factors with what is typically seen with ECNs in order to give traders a better sense of how their trades are actually placed when new positions are opened.

Forex traders relying on technical charting strategies have a wide variety of indicators options to choose from when developing a strategy. This can be especially daunting in some cases (particularly for newer traders), so it can be useful in these cases to look at common practices of more experienced traders and to at least have some understanding on the technical indicators that are most commonly used by the seasoned experts. This does not necessarily mean that all traders should actively use the same indicators but it can be useful to see and understand the information that is being viewed (and reacted upon) by the majority of the technical trading community. This can help to give a better sense of where supply and demand areas are clustered, and this can be invaluable in determining whether or not breakouts or range bounces are likely to continue or are simply “false” in nature. At some point, most traders find moving averages (in some form) on their charts. This is generally because moving averages are so often discussed in trading circles and because of their usefulness in identifying trend outlook and momentum direction. Once traders have a firm understanding of how moving averages are commonly interpreted, it can be surprising how quickly different examples of price behavior where before these signals were largely invisible. Situations like these are often responsible for turning the opinions of people who were otherwise skeptical of the advantages of technical analysis strategies as a whole. SMAs vs. EMAs When compared with other technical indicators, it can generally be seen that moving averages have more variations than what is typically seen with technical analysis tools. The two broadest characterizations can be seen in Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs). First, SMAs are calculated by adding the closing price of a currency pair over a set amount of time intervals, and the by dividing the sum by that number of time intervals. EMAs, however, give a greater weight to more recent closing periods. The calculation of EMAs is slightly more complicated but the main point to remember is that EMAs essentially show a faster reaction to more recent price activity. But there are similarities between the two as well (as the name suggests) as both SMAs and EMAs can aid traders in visualizing the dominant trend as they smooth out the price activity in an objective manner. Variations in Time Intervals While some technical traders prefer to use SMAs and others prefer to use EMAs, there are some additional factors to consider when making a decision on which type of moving average to monitor. Specifically, this comes in selecting which time intervals to monitor. In this area, there is a much wider variation in trader activity, with some traders looking to watch shorter term intervals (such as a 10, 20, or 21 day moving average) and others opting to watch a longer term interval (such as a 50, 55, 100, or 200 period moving averages). The examples in the previous paragraph generally mark the most commonly used intervals, but there is no standard that says any of these will necessarily work better than the others. To be sure, some traders will invent their own interval, and base the number of periods on some other technical factor (such as in using a Fibonacci number). Interpretations Interpreting moving averages can make technical analysis generally deals with viewing the relationship of the price next to the moving average readings. Positive momentum is seen when prices are above a moving average while negative momentum can be found when actual price activity is seen below. When viewing more than one moving average at a time, a shorter term moving average heading above a longer term moving average gives a bullish signal while a negative crossover is an argument for a sell position. Additionally, the direction of the moving average itself can be informative, as a moving average that slopes upward is bullish while those sloping downward are bearish. In the attached example, we can see a bullish scenario, supported by the break in prices above the 100 and 200 period EMAs, which is followed by an upward crossover of the 100 EMA relative to the 200 EMA. During most of this scenario, both moving averages slope upward, again supporting the bullish perspective.

The CCI oscillator (the Commodity Channel Index) was devised by Donald Lambert and started to gain popularity in markets during the 1980s as a means for identifying potential entry points for trading positions. This is accomplished by giving an assessment of whether or not a certain asset is overbought or oversold and while it might appear that this trading tool is specifically designed for the commodities markets (given its name), the CCI has grown in popularity amongst forex traders in recent years. Traditionally, the CCI has been used as part of trading systems that look to capitalize on breakout, trends, or range bound strategies but the CCI can also be used with retracements as a way of improving entry levels, so here we will look at some of the characteristics and potential strategy methods that capitalize on the strengths of the oscillator. Oscillator Properties To get a better sense of the mechanics of the CCI, we should first understand that it is an oscillator, which is a tool used in technical analysis that operates between two extreme values to display overbought and oversold conditions that are based on cyclical trend indicators. Oscillators tend to be most effective when clear trend movements cannot be identified (as with sideways, or range bound trading), with bullish reversals likely to come when prices are oversold (hitting the lower end of the oscillator range) and bearish reversals likely to come when prices become overbought (hitting the upper end of the oscillator range). Other commonly used oscillators include the RSI, Stochastics, and ROC. Properties of the CCI The CCI is essentially designed to measure the relative differences between a currency’s price (P), a moving average of that price (A), and the deviations from that moving average that are typically seen (D). This can be expressed in the following equation: CCI = P - A / 0.015*D The similarities with the CCI tool and other common oscillators come mostly from their ability to define oversold and overbought levels. In the CCI, these are seen below the -100 area and above the +100 area but in most cases (70 to 80 percent of the time) CCI values will fall between these range extremes. Because of this tendency, there is a greater probability that prices will reverse once CCI values reach overbought/oversold territory. Trades can be based on these events because of the high likelihood that the underlying prices will be forced to move in a corrective fashion and return to levels that are more representative of the asset’s true value. Using CCI for Retracement Positions Since the CCI tool displays these characteristics, it should be remembered that the oscillator can be used in ways that vary from the more common approaches. Breakout strategies,for example, are often criticized because of their inability to allow traders to “buy low, sell high” and this criticism can be extended to CCI usage as it fails to capitalize on the true strength of the oscillator. Alternatively, retracement strategies offer something of a solution for this, as the dominant trend is generally clear and entry levels are preferable (lower prices for long positions, higher prices for short positions). Attached is a sample structure for a long position. In this structure, there are a few supportive arguments for a long position. In the CCI reading, we can see that prices have become oversold within the dominant uptrend. The CCI level is significant in this case because it is an area that has seen sharp increases in the past. Price activity itself is also clinging to the confluence of moving averages, as well as hitting the 38.2% retracement of the larger rally. With the combination of these factors showing agreement, traders could initiate long positions, in the low 0.6600s, rather than waiting for a break of previous resistance above, allowing the trader to capture a much larger portion of the move. Of course, the reverse scenario would be seen for bearish positions but a similar set of rules would be in place in order to use the true strengths of the CCI oscillator and to position trade entries at more preferable levels.

Traders looking for the perfect moment to open or close a trade are often disappointed because there is such a wide variety of methods that can be used to identify that ideal moment and commit to a decision. Because of this, traders should be aware of the ways indicators are commonly used so that the best timeto buy or sell a currency can be more easily determined. Here we will look at four broad approaches for using technical indicators to identity these decision points. Indicators as Tools for Trend Following For traders that find contrarian approaches too nerve-racking, a more common alternative (used by the majority of traders in the forex markets) involves identifying the dominant trend in a forex pair and then placing trades in that same direction. Mistakes can often occur, however, when trend-following tools are used as trading systems in themselves and while this can lead to potential profits, the true purpose of these tools is to identify the dominant direction and to place appropriate trade (either a buy or sell). Since most technical traders tend to have moving averages on their charts, an example can be seen in a bullish or bearish crossover. While there is generally a wide range of answers for which moving average combination is the best, the reality is that there is no superior combination, as some moving average combos will tend to work better on different time frames. The main point to remember, however, is that these tools are meant to be used in order to determine a directional bias more than they are to be used as a way to time trade entries or exits. Indicators as Tools to Confirm Those Trends Once a trend-following tool is used to identify the dominant trend, the next step is to determine the reliability of the initial indicator (as a means for avoiding choppy trading conditions). Here, indicators can be used to confirm trends but, in contrast with the first category, these tools are meant to be used in order to substantiate an initial bias and increase the probability of a successful outcome (but not necessarily identify an actual trend direction). In the best case scenario, the trend following and trend confirming tools will agree, and make it easier to isolate suitable trading opportunities. An example of a trend confirmation indicator can be seen with the MACD, which measures the difference between two EMAs and then compares this calculation to its own moving average. Traders can use indicators like the MACD to confirm the validity of a bullish or bearish trend. Other examples include the Rate of Change indicator (ROC), but there is a wide variety of choices that can be accessed in your trading station. Using Indicators to Identify Overbought and Oversold Conditions The next issue to consider is whether or not to jump into a trade as soon as a signal agreement is identified, or to wait for pullbacks within the trend. Getting into the trade quickly can lead to less favorable entry levels, but, at the same time, waiting for pullbacks (which might not actually materialize) can lead to missed trades. To help make this decision, indicators can be used as a tool for identifying overbought and oversold conditions. One of the most common choices is the RSI indicator, which calculates the sum total of positive days and negative days over a given time period and assigns an accompanying value between zero and 100. Trader thresholds for overbought and oversold territory can vary but, in general, RSI readings below 30 signal oversold conditions while readings above 70 suggest overbought conditions. More conversative traders will change these levels to 20/80 in order to remove lower probability signals. For this type indicator, traders again will be looking for agreement with other trading signals, as multiple this suggests a higher probability of accurate forecasting. Using Indicators to Identify Profit-Taking Levels Finally, we will look at the use of indicators as a way of determining when to take profits on a successful trade. The RSI indicator is one that can fit into a few different categories, with traders looking to exit long positions once prices become overbought or exiting sell positions once prices become oversold. So, looking at some alternatives, profit-taking can be aided with indicators like Bollinger Bands, which are calculated by adding and subtracting the standard deviations of changes in price data over a given time period. Many traders use Bollinger Bands to time trade entries, but in many cases, this indicator is more useful as a tool in profit-taking decisions. Traders in long positions typically take profits once prices reach the upper Bollinger Band, while those in short positions will exit on approach of the lower Band. Using indicators in these ways can help to take some of the mystery out of trading decisions and help to separate high probability exits and entries from those that are less suitable. With any trade, approaching indicator analysis from a variety of perspectives can help to reduce risk.

Forex markets are governed by the primitive forces of supply and demand, as alternate sides of the market buy and sell currencies and prices attempt to reach an equilibrium point (which is the most efficient market price, showing agreement between buyers and sellers). While this point is never actually seen with any element of finality, traders tend to look for reasons to explain why certain price movements happen rather than viewing these movements more broadly and in simpler terms. In its most basic sense, however, supply and demand is ultimately what dictates whether prices will rise or fall over a given period – positive sentiment tends to be created by supportive news, which leads to increases in demand and decreases in supply while negative sentiment leads to the reverse. Supply and Demand Defined Supply in the forex markets, it should be understood, is simply the quantity of currency that is available for purchase at any given time. Demand, on the other hand, refers to the interest the broader market shows in purchasing that currency. As supply of the currency increases, the price of that currency tends to fall, as it becomes much easier to obtain. Conversely, as market interest in that currency increases, prices tend to rise, as it becomes more difficult to find willing sellers and obtain that currency. This can be seen in the chart graphic below: Theoretically, prices attempt to find an equilibrium point (seen in the center of the chart) but this is never actually reached in the forex markets, as the market is essentially a living organism that is constantly moving and changing (and trading is slightly inefficient ways). As we can see, when prices become cheaper, interest increases (as traders look for bargin rates). But when prices increase, this demand begins to disappear. Influencing Price in Forex Markets In essence, supply and demand push against each other in the forex marketplace to determine the price that will be paid for a given currency and the number of monetary units that will be seen changing ownership over a given time period. Free markets determine prices in this fashion and while there are some inefficiencies that exist (and limit purely free exchange) this is the over-riding driver that determines bullish and bearish movements in the markets. Since the forex market is the most liquid and voluminous market in the world should not be surprising that these forces apply. Examples of events that can improve sentiment with respect to a certain currency can be seen if prices break a major psychological levels (creating a support or resistance breakout) or a fundamental event such as a central bank raising interest rates. In both cases, traders tend to see increased incentives to purchase the currency in question. As a result, available supply deacreases and prices move higher. Signs of Markets Attemtping to Find Equilibrium But even when these major events are seen (whether technical or fundamental in nature), there is only so far prices can travel before market participants become discouraged with the prospects of a trend and interest begins to dissipate. In these cases, it is a signal to traders that markets forces are attempting to reach the equilibrium point and the trend (positive or negative) is in danger of reversing, if not ready for an all-out reversal. When traders zoom in to shorter term time frames, and secondary trends become apparent, traders are able to identify these market forces at work and to adjust position biases accordingly. Failing to identify these market forces as they become visible can lead to late trade exits and lesser gains in previously profitable positions.

Trade management can be difficult for new traders, especially the traders that feel their work has been done once they have decided on which currency pair to trade and which direction they feel prices will move in the future. But the reality is that there is much more to trading than what is seen in these initial steps and in order for traders to achieve successful results on a regular and repeatable basis, each position must be actively managed from the time it is opened until the time it is officially closed. The fact is that losing trades require much less active management than successful trades because there will be many cases where a trade simply moves in the “wrong” direction right from the beginning and there is little the trader can do other than wait for a stop loss to be hit and to move on to the next opportunity. To be sure, these trades can be closed early and a smaller loss can be taken but the initial exit and entry parameters are usually in place for a reason and, more times than not, it makes sense to let the market work itself out and violate your initial parameters before allowing the trade to close. Essential Values of Trade Risk Management Unfortunately, many traders do not learn the value of true risk management until it is far too late and account values are diminished. Proper risk management runs counter to the natural “greed impulse” that lures many people into forex trading in the first place. Since this is a characteristic of basic human nature, it can be difficult for many traders to look at this aspect of their positions in a logical and objective fashion. Traders will take varying times (and varying amounts of trading losses) before they learn these lessons, so here we will look at one of the most often-used strategies for managing positions once they have been opened and achieved some success by moving into positive territory: Moving your stop loss to break-even. Break-Even Stop Losses So that the term is clear, it should be remembered that a break-even stop loss is used once a position has moved into positive territory (achieved an unrealized gain). Once the position has reached a certain level, the trader will move their stop loss up from negative territory and set it at the original place of the trade entry. For example, if you bought EUR/USD at 1.32, and had an original stop loss set at 1.3135, you could move your stop upward (back to 1.32) once the position has achieved some level of gains. This action removes the original risk that was involved when the trade was originally placed. As long as your broker guarantees your stop losses, it will be impossible to accrue losses at this stage. Common Reasons for Reluctance Many new traders will be reluctant to implement this strategy, as they feel moving the stop loss to the Entry Level will increase the likelihood that the trade will be closed early and no gains will be made. While there is, of course, some truth to this, but the more important point to remember is that there is the additional likelihood that if prices return to your entry level, prices might not return to profitability. If this occurs, your original risk parameters will come back into play. So, even when a trade is stopped out at break-even it should be remembered that losses could have accrued if no action was taken in proper stop placement. Always remember, there is always another trading opportunity as long as your account remains viable. When to Move a Stop Loss When to move a stop loss (using a relative pip count or percentage level) will determine on your overall risk tolerance as a trader. If stop losses are moved too quickly, too many trades will be stopped out at neutral territory. Slippage is another risk factor when dealing with fast-moving markets. But at the same time, if traders inappropriately wait to move a stop loss, there is the increased chance that prices will reverse and turn your initial gains back into a loss. So, the appropriate time to move your stop will depend on your trading strategy, your investment goals, and your trading style. Here we will define some potential intervals for moving stop losses based on different trading styles - aggressive, moderate and conservative: Aggressive Traders: Will move stops quickly, and do so when unrealized profits reach 50% of initial risk. So, if initial stop loss is equal to 100 pips, traders will move stops to break-even when unrealized profits reach 50 pips. Moderate Traders: Will move stops less quickly, and do so when unrealized profits reach 75% of initial risk. So, if initial stop loss is equal to 100 pips, traders will move stops to break-even when unrealized profits reach 75 pips. Conservative Traders: Will move stops slowly, and do so when unrealized profits reach 100% of initial risk. So, if initial stop loss is equal to 100 pips, traders will move stops to break-even when unrealized profits reach 100 pips.

On March 1st of this year, MetaTrader finished its beta testing for the newest version of its trading platform and released MetaTrader5 to the public. Given that this is the most popular trading platform in forex trading and there are some software significant improvements in terms of execution and efficiency, a look at some of the platform features could be useful for traders looking to make the transition. The software uses a newer programming language that is more intuitive, as well as superior tools for charting and fundamental analysis. MetaTrader5 Basics MetaTrader was designed by the software development company MetaQuotes, which offers its independent trading platform to investors in a wide variety of markets. MetaTrader has become increasingly user-friendly in each of its previous incarnations and its free analytical tools can be used across a wide variety of brokerage accounts. This is perhaps one of the best overall features of the software, as all of your analysis setting can be maintained even if you plan to switch your forex broker. Custom indicators and Expert Advisers are some of the features preferred by more advanced traders, as these flexibility tools allow for more in-depth strategies that can not be implemented with platform tools that are less sophisticated. This is one of the primary reasons many traders choose some brokers over others, as some of the chart offerings from some of the industry leaders lack in these areas. Features Seen in MetaTrader5 Some of the criticism directed at MetaTrader5 has come from the last that it has taken so long to be released. But during the 5-year development period, some key advancements have been added, not the least of which is the increased market access to a wider variety of trading instruments. In addition to this, the programming language was expanded to improve the performance of automated systems. With roughly 80 analytical tools and 21 time frames accessible (only 8 were available previously) in each trading instrument, traders also have the ability to open 100 charts at a given time, which is another large expansion. The “Depth of Market” feature is another interesting aspect, as the platform makes it easier to identify trading volumes in the more thinly traded instruments. But looking at the order types, there are some more features traders will find useful, and these include the “request” and “exchange” order options. Changes to the pending orders options include the Buy Stop Limit and the Sell Stop Limit. The Buy Stop Limit order combines a stop order with a Buy Limit order while a Sell Stop is a Stop order for a Sell Limit. Traders who are looking for more control over the number of clicks involved in placing trades, it should be noted that single click trade is now can be accomplished and trades can be altered directly from the charts once they are opened. For fundamentally based strategies, MT5 allows for quick access to an economic calendar so that all of the relevant macro data can be found in a single source. Renewed Focus on EA Trading But with all of these changes, it remains clear that most of the focus was placed on expanding the efficiency of EA trading. This has been another area of interest of many traders calling for additional EA support, and MetaTrader has met this demand by allowing for enhanced functionality in complicated Expert Advisers that are capable of producing increasingly accurate backtesting results. Comparisons to MT4 Traders looking for reasons to make the transition from MT4 to MT5 should note the stability improvements that are present in the new software. MT5 is much more object-oriented than its predecessor, it is faster and more efficient and also allows for the creation of more complicated Expert Advisers. These factors, along with the enhanced charting flexibility features will likely be enough for most traders to want to make the transition to the newer software.

Since it is impossible to just instinctively know where prices are heading in a given currency pair at a given time, all traders can do before placing positions is to take the information that is commonly available and use it to isolate high probability trading setups that will have successful results over the long run. Charting analysis plays a major role in all of this but there are some common mistakes that are seen in many cases as traders look to limit their fields of information in order to focus on a certain pricing pattern or support/resistance level. This is essentially the primary value of charts in forex trading, that they can show traders the history of the various ways a currency's value has changed and performed over time. Using these histories, traders can identify key areas where markets have met excessive supply (resistance) and have have difficulties rallying or where markets have met excessive demand (support) and have failed to continue bearish moves. This information can be essential in determining trading parameters (in setting trade exits and entries) and in identifying where the momentum lies for the next impulsive move. But, in many instances, traders can become overly myopic or granular in the way their charts are viewed and while it is true that some information must be isolated (of course, it is impossible to take all of the available information into consideration), there is also a very common mistake that is made when traders look at price activity that is contained in a range that is too small for the stop loss parameters that are being implemented. In these cases, traders can easily “miss the bigger picture” and get caught on the wrong side of the next impulsive move for your chosen time frame. Avoiding an Overly Myopic Viewpoint When traders become overly myopic when viewing charts (which essentially means expanding these charts to the point that only a few dozen candles are visible), the larger trends can be missed and some of the main beneficial charts can provide can be lost. Consider the example below in the AUD/USD: Depending on your trading strategy this chart can be viewed in a few different ways. To many, this chart would appear to show that prices are in a downtrend and have shown a corrective retracement into the 1.0580 region. While there is nothing wrong with this analysis, it should be remembered that this is a zoomed focus on the Hourly chart and that pulling out to a wider angle can yield a very different picture: Here, the wider view seems to show the opposite scenario, that longer term price momentum is in the upward direction and that more recently prices have made a corrective retracement to the downside. These are both Hourly charts, but the results are very different when a zoomed focus is used. Setting Chart Parameters From the example above, we can see that longer term and shorter term views can very greatly, even on the same charting time frame. Because of this, some general rules should be established in your trading plan so that the “bigger picture” is not missed when trading currency pairs. Of course, there might be very little difference in viewing 100 price bars versus viewing 99 but failing to see a “full view” of price activity in a given time frame can leave a trading analysis distorted of where prices are operating on that time frame. A better idea, in general, is to start with the larger picture, and work your way into the smaller view if your trading plan requires more details. It should be remembered that shorter time frames can be used in lieu of the expanded chart view and, as a general rule traders should consider the following ranges for the accompanying time frames: 15 minute charts: 3 to 5 trading days worth of price information Hourly Charts: 2 weeks worth of price information 4 Hour Charts: 4 to 6 weeks worth of price information Daily Charts: 1 year's worth of price information

There are trading tutorials that approach the topic the same way a gambler would approach a casino, using the argument that it is impossible to know what what is going to come next in forex markets, so attempting to forecast future prices is no different than guessing the outcome of a coin toss. While it is true that short-term price fluctuations in the forex markets can be difficult to forecast, statements like these should be viewed with some skepticism, as looking to solve these uncertainties with a gambling approach can, in many cases, turn a bad strategy into a terrible one. The reason for this is that this logic assumes that the outcome of each change in prices for a given time period (ie. 15 minutes, 30 minutes, 1 hour) has no relationship to the outcome of the previous period. That is to say, if you are looking at 4 hourly bars and one of them (let's say the second bar) has a bullish outcome, this result will have no influence on whether or not the other bars in the sequence finish in the same way. But this would change completely if the opposite assumption is true, that there is memory in trading activity and that the outcome of one price bar will influence those around it. If this latter assertion is accurate, it suggests that price activity can be tamed and that mathematical tools can be applied to reduce losses and maximize gains. So, let's take a look at some potential strategies as a way of assessing their validity. The Martingale Strategy Developed in France in the 1700s, the martingale strategy was based on the prevailing math and science ideas of the time. The strategy calls for larger betting sizes each time a losing bet is seen. If you enter into a bullish trade for your first price bar, you would double your trading size and bet on the same direction in bar 2. If this trade is also unsuccessful, the trade size would be increased to 4 times the initial size, and the next bullish trade for bar 3 would be initiated. This process continues until either a winning trade is placed or until the trader goes bankrupt. The logic of this method is simple to understand. Any initial losses can be erased (and eventually improved on) once a winning trade is seen. In this case, the trader is operating under the assumption that each trade has some influence on the next, and that a losing streak can only continue for so long. But if trading results are independent, it would not be uncommon to see a long string of up or down periods, which makes long losing streaks very possible. The Anti-Martingale Strategy In the anti-martingale trading strategy, the opposite actions are taken but a similar outcome is reached. This is because each outcome is independent of the others and an infinite losing streak would be impossible. In this case, the trader will double only on winning trades, so if a successful trade is followed by a losing trade, the same trading size would be taken during the next opportunity. This would continue until a winning trade is seen, and this is when the trading size would double. Of course, the problem with this strategy is that there is no reason to double the trading size the following price bar in not influenced by the previous bar. The Gambler's Fallacy The Gambler’s Fallacy suggests that a rare series of events (such as a long streak of “heads” coin tosses) will lead to a regression to the mean later. So, a martingale strategy would rely on an increased probability of a win after a long streak of losing trades, as this would constitute a reversion to the mean. But the fact remains, the coin toss probabilities will be 50/50 on each occasion with an infinite number of coin flips. Limiting the number of events, however, will also reduce the odds of a successful trade each time an unsuccessful trade is seen. It should remember that the reverse is also incorrect. So, suggesting that random events (such as coin tosses) that occur in succession will influence the next event in order to conform to the event series as a whole is an equally incorrect assertion. So, the Gambler's Fallacy can be valid only in cases where events are random (based on z-scores), and where there is no causal relationship between each event in the series.

One of the characteristics that separates new traders from experienced traders is the way each uses leverage. One reason for this is that since many starting traders recklessly abuse leverage, they lose their entire trading accounts and are not able to stay in the game long enough to actually become experienced traders. The ones that are able to use leverage responsibly are the ones that are able to construct workable trading plans that can be successfully repeated over time. In fact, you can almost guess how a trader will use leverage based on the amount of money that is in a trading account. Newer traders tend to have smaller amounts of capital when starting and accounts with less than $5,000 tend to approach position sizes in aggressive ways. Since these accounts are much smaller, it becomes very easy for a few trades to go wrong and wipe out the account entirely. Traders with larger account sizes tend to be in less of a rush to make money and the result of that leverage tends to be approached in more conservative ways. Protective Position Sizes Many experienced traders advise newbies to apply leverage ratios of 10:1 or less (which means that at least $1 is deposited for every $10 in a position size). More experienced traders (and those with larger account sizes) tend to have successful trades in larger percentages. While this might seem to be something of a tautology, a large part of how this happens comes with effective uses of leverage that are not overly risky yet still allow for sizable gains. One of the most important trading rules to remember is that excessive leverage levels can quickly magnify losses and leave new traders feeling overly emotional, as though trading is impossible or even that your broker is running a scam operation. These factors can snowball and create a dangerous cycle that can lead new traders discouraged and unwilling to continue. Leverage as Part of Your Strategy Another key point to remember is that recklessly using leverage can even destroy what would otherwise be a solid and successful strategy. So, using leverage effectively can have a significant and direct impact on your overall profits and losses. Since no trading strategy can prepare you for changing market conditions 100% of the time, so it must always be understood that losses can be taken on at any time. The surest way of protecting against these potential changes is to always use stop losses and to keep trading sizes at conservative levels. When constructing your trading strategy it is always a good idea to keep this simple equation in mind, based on the equity in your account: Total Account Equity * Preferred Leverage Ratio = Maximum Trade Position Size (for all open positions combined) So, if you are trading at the upper end of the acceptable leverage range (10:1), an account with $1,000 in total equity will never allow open positions to pass $10,000. Your preferred leverage ratio however, will vary. More conservative traders will be able to use ratios of 2 or 3 to 1, or, perhaps, no leverage at all (a ratio of 1:1). More aggressive traders can still sustain their accounts with slightly higher levels. Of course, leverage can be managed either by adding to your account equity or by decreasing the size of your trades. Most successful traders tend to place their focus on the amount of money that is being put at risk, rather than the potential gains of a trade. Leverage is a powerful tool that can cause one losing trade to completely erase a strong of successful trades. Keeping leverage at conservative levels can help to slow losses when they do occur and can help to protect against losing streaks. Successful traders have confidence in their methods while being sensible in their profit expectations. Successful strategies generally require a sufficient amount of trading capital of sufficient capital (trading accounts worth at least $5,000) and conservative approaches to leverage (with ratios not exceeding 10 to 1).

It is very common to hear people discuss "trading" and "investing" as if there is no difference between these two activities. It is true that both “traders” and “investors” both actively participate in the same foreign exchange market, the two sides tend to have very different goals and very different strategies for meeting those goals. Both sides, however, are vital for efficient market performance, and here we will look at some of the benefits both sides contribute to the overall function of the Forex markets. Investor Characteristics Investors are market participants that are most commonly associated with financial markets and they tend to buy assets on long term time horizons based on fundamental beliefs that economic factors will cause the price of the asset (currency) will rise in the future. Generally, investors will pay attention to Value and Relative Performance. For example, if the fundamental conditions of two currencies is similar but the price of those two currencies shows a wide variation, the less expensive currency will typically provide the better value as markets are likely to respond to economic growth in favorable ways over the longer term. These valuations will also depend heavily on the stated strategy of the central bank in that country – as well as the market's credibility view of these policy strategies as they are implemented. Value analysis is also done through macroeconomic data that serves as the equivalent of what would be seen in the balance sheet of a company. Growth possibilities over the long term serve as the primary basis for many investment strategies implemented by investment banks and other large financial organizations. Retail investors (individuals that invest in Forex markets using personal accounts) are also gaining in influence as the market gains in popularity. Trader Characteristics Traders, on the other hand, tend to show different characteristics by focusing on the market as a whole, rather than on the values of individual currencies. Traders tend to base their decisions on the idea that economic fundamentals are impossible (or at least very difficult) to understand in their entirety, and to combat this traders tend to focus on pricing patterns and the influence of supply and demand. Traders feel that these pricing levels and behaviors give the best indication of market sentiment as the collective market analysis of all market participants is already contained in the price itself. One of the essential benefits that traders being to markets is in providing liquidity in Forex markets as there are more participants willing to take the other side of a trade. Because of this, traders are an essential section of the marketplace but there are still lessons that can be learned from investors when strategies are being developed. Learning from Investment Strategies While it is true that, in terms of market volume, traders have a much larger and more regular contribution in Forex, there are some lessons that traders can benefit from when refining their own strategies. Two of the most significant lessons can be seen in asset diversification (never focusing on too few assets) and in avoiding the habit of rapid trading exits that can limit gains as larger pricing moves are missed. It is true that both traders and investors are a necessary combination in functioning markets – traders provide investors with liquidity to buy and sell at chosen price levels, and investors give traders a basis for their price history forecasts. Together, these groups form the basis of the Forex markets in operation today. But it is always prudent to have some sense of what the other side is thinking (and how they are approaching their strategies), as this will help to limit significant surprises and positively impact position probabilities.

The Kelly Criterion is generally viewed by stock investors as a way of achieving diversification in a portfolio. But the principle can be applied to forex markets as well, since the essential themes relate to money management and the levels of investment that should be placed in each trade. Since money management systems can also give traders an idea of when to buy or sell a trade, we can look at the Kelly Criterion as a technique for giving traders strategies for more effective money management. Foundations of the System Initially, John Kelly developed the Kelly Criterion for AT&T as a way of handling noise problems in long distance telephone calls, originally calling his theory "A New Interpretation Of Information Rate." But as we will see, the theory has a wide variety of applications and the horse racing gambling community was the first to seize on these advantages and to optimize betting systems to increase returns over the longer term. In its most modern applications, investors have begun to use the system as a money management strategy to achieve the same results. Basic Components of the Kelly Criterion The Kelly Criterion has two essential components: Maximizing Win Probabilities – Increasing the chances that individual trades will create positive returns Improving Win to Loss Ratios – Improving the positive amounts relative to negative trade amounts These elements then become part of Kelly's general equation (the Kelly Percentage), which is: The Kelly Percentage = Winning Probability – [(1 – Winning Probability) / Win to Loss Ratio] Applying the Kelly System to Your Trades The Kelly system can be applied to your trading by first looking at your previous 50 trades. This can be done by looking at your account's trading history or using back-testing applications. But it should be noted that the Kelly Criterion assumes that future trading activity will mirror your previous trading activity. Next, we calculate the Winning Probability, which is done by dividing the number of positive trades by the total number of trades. Numbers above 0.5 are acceptable while 1 is ideal. Next, we calculate the Win to Loss Ratio, which is done by dividing the average gain in your positive trades by the average losses in your negative trades. If you average gain is greater than your average loss, this number will be greater than 1. Numbers lower than once can still be acceptable, however, if the total number of losing trades is minor. Next, these numbers are put into the Kelly Equation and the total percentage will give you your key figure. The percentage will tell you the position size that should be used in your trades. For example, a Kelly percentage of 0.03 suggests that each trade should be equal to 3% of your total trading activity. Excessively high percentages, however, should be disregarded (anything above 20%), as this places too much risk in one trade. Conclusion While it is true that there are no ideal or perfect money management systems, the Kelly Criterion can still help traders to manage trades in a more efficient way. Of course, the system has limitations, as the Kelly Criterion cannot tell you which trades to take and the system can falter if traders begin to trade inconsistently (or in the case of significant market crashes). The Kelly Criterion can, however, help to manage those surprises by increasing overall efficiency. Random changes in volatility and market conditions will become a key variable to watch, as these things will have an impact on your total returns even when the Kelly Criterion is implemented. Temporary fluctuations in account values are unavoidable but over the long term, your main goal should be to achieve higher levels of consistency and efficiency. While money management alone will not ensure enormous trading gains, it can help you to maximize your returns by limiting your losses as your trades are appropriately diversified. The Kelly Criterion is one method for helping to create this type of diversification in your trading account.

Volume is often overlooked by Forex traders because there is no central exchange in the way that there is in stock markets but when we look at the volume that is present behind certain price moves, it can help us to determine the validity of that move. By extension, this can also help us to determine the likelihood of a continuation or reversal. When a currency pair shows an impulsive price move in either direction, one of the best indicators of whether or not the momentum will continue can be seen in the volume levels as it occurs. Higher volumes help to support the validity of the move, while moves that are generated by lower market volumes are more likely to encounter unpredictable reversals or generally choppy trading conditions. Keeping an awareness of volume conditions will allow traders to separate important market moves from the “head fakes” as it helps to give a better sense of what the majority of the market is actually thinking. Measuring Forex Volumes Volume measurements can make a large difference when assessing price action, especially for the closing prices in a period. Closing prices can be described as being a more accurate reading of market sentiment when volumes are high, as a greater consensus is present and this gives traders a better sense of a currency's real value. But since Forex is not a centralized market, how can volumes be measured accurately? Volume measurements in Equity markets are conducted in a very straightforward manner, as each share is assigned 1 volume unit. So, buying or selling 10 stock shares in an exchange is equal to generating 10 units in volume. But since the Forex market is decentralized there is no single body to conduct these measurements on a daily basis. Instead, Forex volumes are based on the number of price changes (tick changes) that are seen over a given time period. Price changes cannot occur without a certain number of trading contracts changing hands, so individual tick changes become the primary indication of market participation for each period. Volume Readings as Trend Indicators New traders should be sure to not confuse the fact that Volume readings are not to be viewed as primary trend evidence, but rather a secondary or “confirmation” evidence. When trend signals begin to build (higher highs/lows or lower lows/highs) there should also be a build in volume activity. Without this, the trend should be viewed with skepticism, as this reduced validity suggests there is a greater chance reversals at a later stage. In addition to this, significant changes in volume can be viewed as a primary indication that an equally significant change in price is about to occur. What is not present at this stage, however, is the direction of the move but if what is seen is an increase in volume, traders will be getting a signal that suggests sustainable momentum is building. Major declines in volume can also lead to significant price changes, as it takes fewer participants to create large changes in price. These price changes, though, should be viewed as less sustainable. Conclusion Volume measurements in the Forex markets is an often overlooked aspect of trading and this comes in part because because stocks and currencies are not traded in the same fashion. While it can be argued that currency volumes are much more difficult to calculate, it is not impossible and traders that neglect this aspect of market activity will likely miss some early signals that could have indicated the beginning or end of a trend. Volumes will not give traders an indication of price direction itself but it can give some valuable clues with respect to the validity of the price momentum that is in place during a given time period.

It is very common for new and experienced traders alike to get caught up in the confusion of which time frames should be watched and paired together and this comes from the fact that there is never a “best” or “most appropriate” time frame what will be suitable for all cases. The problem becomes more confusing with the latest enhancements that are made to trading stations, which are offering more and more time frames and in some cases even customization features that allow for charting durations that are less commonly used. Two General Approaches From all of this, there are two general arguments that are made with respect to which time frames should be most closely watched and considered when new position strategies are put in place. Some traders tend to believe that the most common charting time frames (hourly and daily), because this will allow you to have an idea of the same price levels and pattern structures that are being watched by a majority of the market. There are, however, those with a contrarian view who suggest that this is the totally wrong approach, as these time frames will prevent you from anticipating the next market move ahead of the majority. These traders might, for example, choose to use a 3-minute chart, rather than a 5-minute chart. This rationale has less to do with watching a shorter time frame than it does with watching a different time frame, and allowing you to focus on patterns differently as they begin to emerge. Charting Limitations Unfortunately, a direct answer to the question is difficult to construct as any chart will have some limitations given the fact that we can never include all necessary information. So, how can these limitations be reduced? And how can we use multiple time frames in conjunction with each other so that trading goals can be accomplished on a consistent basis? In many cases, using different time frames together will create conflicting signals. For example, Bullish patterns might emerge on a shorter-term while a Bearish trend is shown on the longer-term time frames or vice versa. In these cases, it can be difficult to know which signal is more valid, and which should be trusted when determining trading bias. It is for these reasons that it is important for traders to plan for which time frames will be used as trading strategies are developing. Using Multiple Charts at a Time As a general rule, traders will benefit from using more than one time frame at a time, as this will give a broader perspective of what is happening in the near and long term. Additional information is never a bad thing (unless it becomes too confusing) so traders should keep in mind that multiple time frames are preferable but too many time frames can give a “muddied” picture. Longer-term time frames will give traders a larger sense of where the majority of price momentum is headed. But since past price movements will not necessarily tell you what will happen next, an addition of a shorter-term perspective will usually provide a highly valuable of when entry opportunities are presenting themselves within that larger trend. This implementation of multiple vantage points can prove to be one of the best ways of spotting trade signals as the new patterns emerge. An additional benefit can be seen when the shorter-term time frame gives you a specific price level that enables you to maximize risk to reward ratios. This is generally a requirement for traders looking to implement “swing” trading strategies, but can be applied to any strategy as long as the information that is being given does not become a distraction and confuse more than inform.

Looking at the table in the previous article, we can see that while correlations do remain similar (for the most part), there are very clear changes that are reflective of macro economic influences and changes in sentiment. Correlations that exist today might not be in place over the longer-term, so pulling out to longer time frames will tend to give a more accurate picture of how each currency behaves in relation to its major counterparts. Calculating correlations is actually a relatively simple process but these figures are posted in enough areas that making your own tables isn't totally necessary. So now that we know what these numbers are telling us, how can this information be used to structure trades and advantageously manage our total risk exposure? Using Currency Correlations to Manage Risk First, it should be understood that one of the most obvious mistakes that even experienced traders often make occurs when multiple positions are opened which have the total effect of canceling each other out. This can occur in instances where two currency pairs with historically high correlation levels are opened in opposing directions (for example, a buy is opened in the EUR/USD while a sell position has already been established in the GBP/USD). While the argument can be made that there are acceptable reasons for doing this (such as evidence of a trend reversal or a newly visible entry zone that makes the new trading decision difficult to pass up), it has to be remembered that the overall effect of these opposing positions will be roughly neutral (removing the possibility for substantial gains). This will be more obvious when pairs that are commonly denominated (such as the EUR/USD and the GBP/USD) but the correlation tables can help us to identify important relationship in pairs that are not commonly denominated (such as in the EUR/USD and the GBP/JPY). In other cases, errors can be made when similar positions are taken in highly correlated pairs (such as in the AUD/USD and the NZD/USD) are taken in the same direction (with both being buys or sells). There is the argument that taking the new position can be advantageous if the price levels are different (effectively improving your average price) but in essence, this is roughly similar to holding a double-size position in one of these pairs and in many cases this could violate your risk management plans. Diversifying your Positions Another way to advantageously use correlation tables is to view the readings as a means for diversifying your positions. Since pairs like the EUR/USD and the EUR/JPY have high correlation values, dual positions in these pairs can be used to express a certain market outlook (such as a risk averse market environment or a macroeconomic view relative to an individual country). Keeping risk management planning in mind, positions can be scaled down and split into different pairs to avoid shocks or surprises relative to any single currency. Diversified positions can be opened when there is a potential event risk to be seen that will effect one of the currencies you have bought or sold. While the general direction of the correlated pairs is likely to continue to show agreement, the slight variation in the correlations in the diversified positions will reduce risk levels (albeit to a marginal degree). Conclusion For traders looking to balance risk, diversify positions, or to find new currency pairs to express a market view, correlation values can be an important element to consider before new trades are placed. Failing to understand how currency pairs behave in relation to each other can lead to unproductive (mostly neutral) positions or excessive risk exposure that could have otherwise been easily avoided. Given the drastic differences (or similarities) that some currency pairs posses, a proper understanding of these relationship must be present in order to effectively manage multiple trades.

I dont think anyone was interested in this post. I also do not think that you have enough money to risk a position of any size. #foodstamps

If you want to simply argue for the sake of arguing, sure, everything is priced against something. If I buy a buy a playstation I am trading against the value of the xbox (or carrots, or whatever else) because I don't own those other things.

One of the things that separates the forex markets from those where other asset types are traded is the fact that currencies are priced in pairs. Essentially, what this means is that we are never buying or selling a currency by itself. Instead, currency performance can only be viewed in relative terms and this can have drastic on the type of trades that should be placed and the various strategies that should be implemented. If this didn't complicate things enough on its own, another factor that traders must understand is that some currencies are highly correlated with some of its counterparts and inversely correlated with others. But while it might seem to be a daunting task to research and memorize the ways various currencies align with each other, currency correlations can provide traders with potential trading opportunities and tactics for managing your total risk exposure at any given moment. Understanding Correlation Comprehending the interdependence that is seen in currency pairs is easier in some cases than it is in others. For example, when dealing with the EUR/JPY we would expect there to be some similarities to others, such as the EUR/USD and the USD/JPY. A trading session particularly strong buying activity in the Euro would likely send the EUR/JPY higher but if the same trading period saw the EUR/USD trading lower, we would know that the US Dollar was the strongest of the three currencies that session, with an inevitable run higher in the USD/JPY. More specifically, correlation can be measured using the “correlation coefficient”, which ranges from +1 (highly correlated) to 0 (unrelated or random) to -1 (inversely correlated). Currencies with a coefficient of +1 would essentially move in lock-step with each other. Currencies with a coefficient of 0 would have no decipherable relationship with each other. Currencies with a coefficient of -1 would show price patterns that are mirror images of each other. Of course, most currencies will not fall exactly into one of these categories and instead will fall into some interval degree of these three coefficients. Correlation Tables Many currency brokers offer currency tables that display the correlation coefficients of the most commonly traded pairs. These are updated regularly, so traders will always have the most up to date information. Below is the currency table that is offered by OANDA, separated by regular time intervals: The table above shows the relationships between the EUR/USD forex pair and its commonly-traded counterparts (along with silver and gold). Relative to the EUR/USD, the EUR/JPY has a 1-week correlation coefficient of 0.81, while the USD/JPY has a 1-week correlation coefficient of 0.57. To better understand these coefficients, the following descriptions are given: 0.0 to 0.2 Very weak to negligible correlation 0.2 to 0.4 Weak, low correlation (not significant) 0.4 to 0.7 Moderate correlation 0.7 to 0.9 Strong, high correlation 0.9 to 1.0 Very strong correlation From this, we can see that the 1-week correlation between the EUR/USD and the EUR/JPY is “strong,” while the 1-week correlation between the EUR/USD and the USD/JPY is “moderate.” The EUR/USD and the EUR/JPY will move in the same direction 81%, while the EUR/USD and the USD/JPY will move in the same direction 57% of the time. These numbers, of course, are constantly changing depending on the various market conditions currently in place. In this case, the longer term 1-year correlation became stronger in the EUR/USD – EUR/JPY, while it weakened in the EUR/USD – USD JPY. Interestingly, looking at the table above, the EUR/USD and the USD/CHF had a perfect negative correlation of -1 during the latest 1-week to 3-month periods. With this, we can see that these pairs moved in opposing directions 100% of the time. In the next article, we will look at ways this information can be used to construct trading plans.

Breakout trading is something of a controversial topic amongst experienced traders. When forex traders entering into technical analysis charting, one of the first lessons that is often learned is that major breaks of support or resistance will lead to price extensions that are valid enough for the establishment of new positions in the direction of the break. For example, a major failure at critical support (whether it be a psychological, Fibonacci, historical, moving average, or any other clearly defined line in the sand) should, in theory, lead to significant downside extensions and sell positions could be established once the break occurs. The same, it is often taught, is true for breaks of resistance levels, as these will present bullish trading opportunities. Many experienced traders, however, disregard this logic, with various statistics that are regularly quoted. Such as, when a trader might say that only 30% of breakouts actually see significant follow through. So, which line of logic is more accurate? Many would assume that traders with more experience must have a higher level of understanding, and experienced traders tend to shrug off breakouts as amateurish. If the experienced traders are correct, why do so many beginner lessons focus on the trading setups that are offered by breakouts? Is there no valid reasoning in breakout trading that can be applied to breakout strategies, or is it more a matter of identifying strength of individual breakouts? Types of Breakouts When looking at the potential breakout forms, we can see that prices can either form a continuation breakout, which occurs when prices continue to move in the same direction as the dominant trend (ie. A break of resistance in an uptrend or support in a downtrend). Conversely, we might see a reversal breakout, which occurs when prices reverse and move in the direction opposite the dominant trend (ie a break of resistance in a downtrend or a break of support in an uptrend). For any trader implementing a breakout strategy, the key problem is seen when false breakouts occur. This is the case when prices quickly reverse once the direction of the initial break and “fake” traders into accepting the wrong direction. Indicator Confirmation One of the most common methods breakout traders use is to combine the behavior of an indicator, such as the Moving Average Convergence Divergence (MACD). This indicator helps to determine the strength or weakness of underlying price momentum. The indicator histogram shows the difference between the fast and slow MACD lines and a larger histogram suggests that momentum is building and getting stronger. Conversely, smaller histograms indicate momentum weakness. Spotting Reversals and Continuations When a breakout is showing a trend reversal, “divergence behavior” might sometimes be seen in the MACD. This essentially is when indicator readings and price activity to not match (ie prices are making new highs while indicator readings are not). MACD displays price momentum, so trend continuation requires a larger histogram. If this is not the case, we are seeing evidence that trend momentum is coming to an end and a price reversal could be imminent. Putting it All Together While breakout trading has its proponents and opponents, there are few who can deny that this is one of the most commonly implemented strategies in the forex market. Ideal situations (which create the highest probability trading scenarios) occur when a confluence of events is seen and the evidence is agreeable. An ideal bullish situation, for example, could show that prices are pushing through clearly defined resistance highs as the MACD is crossing above the zero line that the histogram is growing in size (indicating growing momentum). Conversely, an ideal bearish situation might show that a bearish momentum is in place, with indicator readings suggesting weakness along with a break of clearly defined support levels. In any case, a simple price breakout is not sufficient for establishing new positions. Other confirmation tools should be utilized to create higher probability trading scenarios.

One of the most commonly used technical indicators that is implemented by experienced traders is the Average True Range, or ATR, which helps traders to measure volatility during a given time interval. The system was one of the many developed by J. Welles Wilder in the landmark technical analysis book “New Concepts in Technical Trading Systems” and as been a widely watched gauge of market activity ever since. Calculations Specifically, the ATR focuses on the range that develops for the time period you are watching and to do this certain calculations are required, and once these calculations are made, the highest value is taken: 1 - The interval high minus the interval low 2 - The absolute value of the interval high minus the previous close. 3 – The absolute value of the interval low minus the previous close. As you can probably see, these calculations provide some variations, so that both bullish and bearish tradings can be factored in and the average true range is plotted finally as a 14 period moving average of the calculated ranges. Market Applications and Volatility The ATR can be applied to any of the major asset markets but is probably most famous amongst experienced forex traders as a means for setting stop losses and potential trend extension. Broadly speaking, the ATR measures volatility in the underlying price activity, so currency pairs with high ATR levels will be the most volatile (and, as a result, have the greatest potential for gains and losses). Lower ATR forex pairs (such as the EUR/CHF) display lower volatility levels. Establishing Trading Parameters So how can the ATR be used to establish trading parameters, such as entries, stop losses and profit targets? Since this can be one of (or perhaps the most) difficult part of any trading strategy, traders will do well do look into placing an ATR reading on their charts before new trades are made. Since the ATR essentially gives us a trading range that is dependent on volatility, trades that are based on pairs with higher ATR readings will require stop losses that exposure your trade to greater risk amounts. The positive is that since volatility works both ways, these pairs (GBP/JPY or AUD/NZD come to mind) will offer also the greatest potential for gains. Stop Losses Many new traders have difficulty establishing (and obeying) stop loss levels. In fact, one of the most commonly reported practices of new traders is to re-adjust their stop loss levels once they are close to being hit. But one of the best indications that the true market momentum is working against you can be seen when a currency pair violates the ATR in an unpredictable way. To help work against this, traders will often apply stops that are equal to the ATR, as any moves in excess of these levels suggests that deeper market activity is taking places. Trade Entries and Profit Targets The ATR can also be used on the other side of the equation, as traders look to set profit targets on anticipation of prices reaching the end of the daily range in the other direction. Once trades are “in the money” positions should be closed when prices near extreme territory, as this is a signal that momentum is likely to begin stalling. At the early stages of the trade plan, support and resistance levels start to become more important, as extended ATR readings that are posted when prices approach support (for long positions) or resistance (for short positions) can provide trades with excellent risk to reward ratios. The ATR is best suited for traders who like to keep things relatively simple and use techniques that are generally described as “classic” technical analysis.

One of the most common problems that traders of all experience levels inevitably run into on a fairly regular basis occurs when we fail to cut losses quickly and allow profits to run to their full potential. Anyone who tells you that they are able to avoid this problem is either significantly inexperienced or is just flat out not telling the truth. Often times, traders will close a profitable trade too quickly, as these traders are too excited to actually see a trade move in a profitable direction and there is the fear that the price will reverse into a loss at some later stage. During negative trades, the reverse is often true: Traders will often hang onto losers too long, essentially hoping that prices will change back into their initially forecasted direction. These traders are afraid to close their positions because it will result in a guaranteed loss and they instead opt to wait for the lower probability chance that the trade will eventually see gains. Accumulating Losses Unfortunately, the result of this fear is that the losses accumulate (or even accelerate) and in many cases this type of behavior is what costs new traders their entire deposit account. As if these tendencies were not already bad enough, many of these long held losers do eventually reverse and would have returned to profitability at some stage, if the initial trade had be structured in a more responsible and logical manner. Despite the basic nature of this problem, it is something that all traders (even the most successful ones) run into on a fairly regular basis. So, the question all traders should be asking themselves is – How can these situations be limited? One key point to remember is that these negative situations do tend to be reduced with experience, so new traders should not feel overly panicked. What does need to be understood is that losing trades are inevitable. They happen to all of us. They key is reducing their impact relative to our long term gain percentage. All traders need to be equally willing to accept both gains and losses as they relate to your initial trading plan, not as they relate to your emotional response to seeing prices work for or against you. A big part of this removal of emotion comes from not risking more capital than you can afford to lose. If your trading losses will not materially affect your lifestyle, it is much easier to be rational when deciding to close a losing position. Losses are an inevitable part of the game, and any trader that thinks this can be avoided is completely delusional. Focusing on Probability, Not Emotion Once the reality of the market is understood (nobody can predict market behavior, all we can do is isolate higher probabilities from lower probabilities), it is much easier to allow your original trading plan to work itself out to completion. Probability is really the name of the game and when these things are based on overall trend direction, or a break of major support or resistance, traders need to be willing to exit those positions once the original criteria become invalid. These areas (such as the break down of a technical pattern or a reversal in trend) should be where stop losses are initially placed and rigorously obeyed, as prices moving to these areas were viewed as unlikely in the original trading plan. Trade sizes are another factor to consider, as higher probability trades can allow for larger position sizes, while more risky trades should be accompanied by lower risk exposure. Once a trader has done the work to isolate higher probability trading scenarios, stop losses and profit targets generally become more obvious as most trading patterns (such as a head and shoulders or flag patterns) have specific price projections that can be used for determining trade parameters (ie when to exit a position, either for a gain or a loss). Once these parameters are set, obey your rules and let the trade work to completion. While there might be times when parameters need to be adjusted, the original trading plan is usually the best and alterations tend to be based more on emotion rather than statistical probability. This, needless to say, needs to be avoided as much as is possible.

Technical analysts at some stage in their careers tend to look back on the work that has been done previously so that we can get a sense of how the science of price activity has developed. Some of the names that come to mind are Welles Wilder, Elliot, or Gann and what does tend to become clear is that most of these foundational ideas came a long time ago. One of the more recent innovators can be seen in Thomas Demark, who developed a series of indicators that help traders time the markets and identify trade entries. Demark analysis attempts to deconstruct markets in an objective way and pays no attention to asset class or historical tendency. The Demark indicators differ from most of the other options available to technical analysts in that the main aim is to isolate regions marking significant trend activity and trend completion before those areas are clear with other forms of analysis. Demark’s Calculations Demark’s analysis depends on current market conditions, largely as a function of whether or not the open is higher or lower than the close of the session. When the session close is greater than the session open, the following calculation applies: Daily High + Daily Low + Daily Close + Daily High = X Projected Price High: = X/2 – Daily Low Projected Price Low: X/2 – Daily High When the session close is less than the session open, the following calculation applies: Daily High + Daily Low + Daily Close + Daily High = X Projected Price High: = X/2 – Daily Low Projected Price Low: X/2 – Daily High When the session close is equal to the session open, the following calculation applies: Daily High + Daily Low + Daily Close + Daily High = X Projected Price High: = X/2 – Daily Low Projected Price Low: X/2 – Daily High As can be seen from Demark’s calculations, most of the attention is paid to the extremes of price activity, relative to where prices closed for the given time interval. Many traders argue against any special focus placed on interval openings and closings, but DeMark is in the camp that suggests that these charting areas have special significance as this is likely where the majority of price activity is centered. Market Assumptions What new traders should remember is that DeMark’s indicators do not restrict trading methods to any one approach. Instead, trading plans can be constructed using other approaches to price analysis that view markets in alternate ways. Some of these options relate to intraday or short term methods while others can be viewed on a longer term basis to include daily or even weekly charting time frames. The main point to remember is that the DeMark areas represent inflection points that are likely to contain price activity. Some of the methods that can be used in conjunction with this analysis involve trend positions or contrarian trades. Because of this, traders can use these support and resistance levels to adhere to a wide variety of trading styles and amounts of risk tolerance. Prevalence in Market Consciousness One of the main areas of strength for this form of analysis lies in the fact that it has remained within the market consciousness since its inception. Technical analysis, for better or worse, tends to work on this type of premise, as charting strategists work on self-fulfilling exercises. Demark indicators have been used by institutional firms and individual traders alike. Trend tendencies are viewed as being just as important as time frames as traders look for inflection points to gain an advantage on other areas of the market.

Ichimoku Kinko Hyo is a trend-based charting method that can be applied to any asset market and is unique in its utilization of a variety of data points that allow traders to view price activity in a more objective manner. Ichimoku analysis is largely visual in nature and this allows traders to quickly analyze price activity and discover trading opportunities that have high probabilities of success. The Ichimoku Kinko Hyo was originally developed in the 1930s by a Japanese newspaper writer that was researching price behavior in rice markets. For the most part, traders in the West have not paid much attention to the method but, starting since the 1990s, its popularity has gradually increased as traders begin to truly understand the enhanced predictive ability that can be achieved with this type of chart analysis. Identifying Price Equilibrium Ichimoku Kinko Hyo is Japanese for “one glance at the balance chart” and this is an accurate description of what the system looks to identify. Each Ichimoku component part should be viewed in tandem (not individually) as these combine to form a cohesive whole. Quickly viewing the Ichimoku charts can allow traders to understand the underlying momentum and trend activity in your chosen market. In addition to this, traders can also quickly assess the strength of these trends by looking at other areas of the chart. The main goal of the chart indicators is to gauge the equilibrium or balance in the current price action. This looks at the cyclical nature of market activity and the tendency for prices to gravitate back to their longer term averages. The five components of the Ichimoku analyze prices in terms of this balance and trading opportunities are generated based on this activity. 5 Elements of Ichimoku Charts Ichimoku charts appear difficult to understand when first exposed to the method but when each element is taken individually, some of the mystique is removed. Ichimoku is comprised of 5 essential elements: The Tenkan Sen (or turning line), the Kijun Sen (or standard line), the Chikou Span (or lagging line), the Senkou Span A (or first leading line), and the Senkou Span B (or second leading line). These last two components work together to form the central piece of the Ichimoku chart, the “cloud” or Kumo. Trading Signals In Ichimoku analysis, trading signals are generated when the various line cross over, similar what trading signals generated by moving average crosses. Relative to the cloud, when price activity is seen to the upside, trend momentum is positive. Prices below the cloud are representative of a downtrend. Prices inside the cloud suggest sideways (or neutral movement). In this case, trades should not be entered as predictive ability is diminished. Other signals can be seen when the various chart lines cross. For example, an upward sloping Tenkan Sen that crosses above the Kijun Sen would indicate a buy signal. Similar results can be seen when the price level crosses above the Chikou Span, but in reverse, as an upward cross in the Chikou Span would indicate a sell signal. Price activity inside the cloud tends to move in the same direction as the Tenkan Sen but the strength of the signal is not enough to produce a tradable position signal. It should also be noted that both the Kijun Sen and the edges of the cloud should be viewed as significant support and resistance levels that are likely to hold on first test.

It is widely understood that the forex is the most widely leveraged financial asset market in the world and this has some implications that many traders fail to consider. To get some perspective, standard margin levels in equity markets is 2:1. In options and futures, these levels rise to 10:1 and 20:1, respectively. Meanwhile, many retail traders trade using leverage of as much as 500:1 for a single trade. While using leverage of this type might seem reckless to many, it is obviously still a widespread occurrence and, as a result, it remains clear that stop loss strategies are even more important in forex than in other markets. Without well managed stop loss strategies, many new traders will catch themselves in precarious positions and in many cases will unnecessarily deplete their entire trading accounts. Luckily, there are strategies for avoiding this that are relatively easy to implement. In equity markets, many traders (usually using no leverage) might avoid using stop losses entirely and simply use patience to wait for prices to turn to a more favorable level. But most forex traders do use some sort of stop loss strategy and here we will look at some strategies to capitalize on the way stop losses are commonly used in forex markets. Stop Hunting With the unique character of the FX market, stop hunting has proven to be a successful strategy for a wide section of the market. Some traders have moral hang ups relative to this method (as it does require heavy losses to be accrued by those trading on the other end), it has to be remembered that trading is a business, not a charity and if a trader willingly places his stop loss in the wrong area, there is nothing wrong with identifying this as an opportunity and taking advantage of it. Stop runs flush out weak positions and allow the longer term, dominant trends to reestablish themselves. Investment banks and hedge funds are famous for running stops as a means for generating sustainable momentum in the market. The fact is, this practice is so prominent that many traders do not even realize it and these players are likely to accrue losses as a result. Psychological Levels Specifically, since most traders pay attention to psychological levels ending in 00 (such as 1.3200 in EUR/USD) stops tend to be placed under or above these areas more than others. Knowing that this is a common occurrence in forex is valuable information, as it suggests that retail traders should know to set their stop losses in more unusual areas. This helps to avoid being victimized by excess volatility created by the herd mentality. Instead, traders should be looking at this more as an opportunity for profitability. Because these markets are so heavily influenced by stop loss momentum, there are many instances for short term trading opportunities. Trading Setups For trading setups, mirroring big speculative stop hunting requires a short term price chart and a single technical indicator. When prices are approaching a psychological 00 figure, draw horizontal lines 20 points above and below the level. This becomes the critical trading zone, as it allows for high probability and momentum based setups. Once markets have entered this region speculators will be hunting for stops on the other side of the figure. Longs can be taken on an upward approach into the trading zone, with 15 point stop losses (as this level would then be outside the trading zone, and successful trades will rely on building momentum). Initial profit targets can be set at the risk level (15 points) with the second profit target set at twice the risk level (30 points. This allows the trader to quickly exit the position as the weak selling trades are stopped out and a quick momentum thrust is seen. A final point is that since these trades are based on momentum, they should only be taken in the direction of the larger trend and in conjunction with your indicator readings, which should show that the current move is not over extended.