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Forex Trading For Beginners – Risk And Benefits #4

In every investment, there is always a risk involved. In this article, we will take a look at some of the risks associated with the Forex market as well as the benefits it has to offer. Also, we will differentiate the Forex market from the Equity Market so that we will fully understand how Forex works in order to learn to trade Forex.

Read more about Forex Trading Strategy: Price Action Trading Patterns

We have already discussed some of the important factors (size, volatility, structure among other things) about the Forex market, that contributed to its successful and growing state. In terms of liquidity, the Forex market is highly liquid in nature where in a trader could invest huge amounts of money without affecting any given exchange rate. This is made possible by the low margin being required by most Forex brokers. For example, it is possible for a trader to invest US $1,000 for a position of US $100,000, a 100:1 leverage. This amount of leverage acts as a double-edged sword because investors could either rip large gains or run the risk of a massive loss when movements aren’t favorable. Because of the leverage that the Forex market could offer, it attracts many speculators in the midst of many foreign exchange risks.

Read more about Forex Trading Strategy Made Very Simple – Price Action

Not only that the Forex market is highly liquid but also it is mostly open 24 hours a day, which is favorable for traders who have a tight schedule. In the chart below shows the major trading hubs and their trading hours.

Time Zone Time (ET)
Tokyo Open 7:00 pm
Tokyo Close 4:00 am
London Open 3:00 am
London Close 12:00 pm
New York Open 8:00 am
New York Close 5:00 pm

With the high leverage of the Forex market, it poses a higher risk in comparison to trading equities. It is important to understand that because of the large amount of money involved and some of the impulsive moves made by traders, it will lead to a sharp change in the price of a currency pair. Though currencies don’t tend to move as sharply as equities on a percentage basis, it is the leverage that creates the volatility. For example, in a 100:1 leverage, if you put US $100,000 into a currency and the currency’s price moves 1$ against you, the value of the capital will have decreased to US $99,000, which means a loss of US $1,000 (a 100% loss). On the other hand, in the equity market, there is no leverage being used most of the time, so if there is a 1% loss in stock’s value on a US $1,000 investment, it will only give you a US $10 loss.

Read more about Forex Trading Strategy – Buy The Rumor Sell The Fact In Price Action

To go deeper regarding the difference between the Forex Market and  Equity Market, let’s look at the number of traded instruments. The Forex market has only a few in comparison to the Equity Market. There are only seven different currency pairs and the four major includes: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Also, there are three commodity pairs USD/CAD, AUD/USD, and NZD/USD. All other pairs are just different combinations of the same currencies – called cross currencies. It makes it easier to choose and monitor the instruments in the Forex market compared to trading in equity that you have to carefully pick thousands of stocks of the best value.

In trading equity, it is difficult to open and close positions because of the shrinking volumes and activities of the stock. Furthermore, one could make a profit in a declining equity market only while one could make profit both in the rising and declining Forex market. It is a simultaneous buying and selling and even short-selling. In addition, since the Forex market is so liquid, waiting is not required for an uptick (A transaction occurring at a price above the previous transaction) before they can enter into a position as they are required in the equity market. Furthermore, not only that the Forex market offers a low margin, it also has a lesser commission fee compared to in the equity market.

Read more about Forex Trading Strategy – Price Action For Dummies

By now you already have a good grasp of the risk and benefits that a Forex market contains. In the next chapters, we will be tackling about fundamental analysis, trading strategies, technical analysis and technical indicators. Keep on reading about Forex trading strategies and Forex trading for beginners to learn to trade Forex. Understanding Forex Trading is not a quick and easy process but it requires utmost patience and determination to be able to Learn the Market and eventually Learn How to Trade Currencies. With this continuous effort to gather Best Forex Trading Strategies in order to come up with a step by step Forex Course: Learning Forex Trading for Beginner for everyone all for FREE. Once again, keep learning and happy investing!

Source:

  • Forex Tutorial: Foreign Exchange Risk and Benefits. Retrieved April 13, 2013. http://www.investopedia.com/university/forexmarket/forex3.asp

FOREX TRADING FOR BEGINNERS:

  1. Introduction to Forex Market
  2. History Of Forex Market
  3. Common Used Forex Terms
  4. Risk And Benefits

Forex Trading Strategy Made Very Simple – Price Action

If you plan to trade in the market using the technical analysis perspective of trading, you have to keep in mind the basic Forex Trading Strategy that most profound trader would use, which is price action. It is the use of “lagging indicators” as a primary decision making tool. With the knowledge and application of price action, a trader can technically analyze the market without the much exhaustion of other indicators. More importantly, it could guide traders in controlling the possible risk in trading.

The goal in this article is to teach you one of the important Forex trading strategies in relation on how to analyze and grade trends, enter trades, and manage risk while looking at support and resistance. Before we begin in depth, there are few important points to establish first.

Forex Trading Strategy: Price Action

Analyzing Trends

Before jumping in, you should observe and analyze if there are any trends that are occurring on the chart. After a thorough assessment, by then you have already distinguished any biases that may exist or how the attitude is fluctuating at the time.

Refer to the Diagram A-1, it depicts the higher-highs and higher-lows in currency pairs to denote up-trends, lower-lows, and lower-highs to qualify for a downtrend.

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Diagram A-1

Entering Trades

After the trend analysis, you are well equipped to look for trades in the market since you already have an idea of the sentiment on the chart and also the trend in currency pair.

Here are some of the different Forex Trading Strategies in entering trade that you can use:

1. Price Action Pin Bars – The Pin Bar is highlighted by the elongated wick that ‘sticks out’ from price action. It is a reversal price bar on a chart which shows an obvious change in sentiment during that period. The price bar has a long tail with the close price near the open.  Pin Bar occurs after an extended move up or down.  The bar looks like a pin thus the name Pin Bar. To visualize what a Pin Bar looks like, refer to Diagram A-2.

 

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Diagram A-2

2. Fake Pin Bars – If the long wick does not stick out from previous price action; they are not a genuine Pin Bar, but rather ‘Fake Pin Bars’, which differs Fake Pin Bars from Pin Bars. Basically, the difference between a Pin Bar and a Fake Pin Bar is determined by recent price action. Trading Fake Pin Bars requires additional analysis, as the signal of a short-term reversal in prices may not be as consistent as that of a genuine pin bar. To visualize what a Fake Pin Bar looks like, refer to Diagram A-3.

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Diagram A-3

3. Double-Spikes – There are two types of Double-Spikes that you should know of: Double-Spike Breakout and Double-Spike Fade.

  • Double-Spike Breakout – If the price is rebuked for more than once by the support or resistance then the trader should anticipate a Double-Spike Breakout.
  • 4Double-Spike Fade – If there is a continuous anticipation of support and resistance then it is considered to be Double-Spike Fade.

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Managing Risks

  • Identify Price Action swings

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  • Identify an up-trend

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  • Identify Positive Risk-Reward Ratios

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Bottom line is that the price action is one of the most important Forex Trading Strategies out there in relation to analyzing the trend, trading and managing risks.

Breaking through Dynamic Support and Resistance

Breaking through Dynamic Support and Resistance

From the previous article, it has now become clear that moving earnings could possibly behave as support and resistance.  By mixing a few of them creates what we call the zone. But it’s also wise to know that they’ll break, as with every support and level of resistance!

Let us visit again the 50 EMA on GBP/USD’s 15-min chart.

Dynamic Support and Resistance

Within the chart above, we have seen the 50 EMA held like a strong level of resistance for some time as GBP/USD frequently returned off it.

However, as we have outlined with the box, cost finally broke through and increased. Cost then retraced and examined the 50 EMA again, which demonstrated to become a strong support level.

So this means that moving averages may also behave as dynamic support and resistance levels.

One thing to remember about  using moving averages is the fact that they are always changing, meaning you can easily let it rest in your chart and do not have to keep searching in time for you to place potential support and resistance levels.

 

You will know that the line probably represents a moving market. The only issue obviously is determining which moving average to make use of!

Dynamic Support and Resistance

Dynamic Support and Resistance

Aside from determining the trend, another use of moving averages is to use them as dynamic support and resistance levels.

We name it dynamic because it is not like the regular horizontal and resistance lines. As the word dynamic suggests, it is constantly changing, reacting to recent price changes.

Traders use these moving averages as support and resistance, that they will buy when price goes down and tests the moving or they will sell as price rises and touches the moving average.

Below is an example of a chart for GBP/USD with 50 Exponential Moving Average:

Dynamic Support and Resistance

From the chart above, we can see that every time the price nears the 50 EMA, it is working as a resistance and the price goes back down.

Note that this doesn’t happen all the time. Sometimes, price may go up your EMA line before it goes back down and follow a trend.

There are even instances that the price will go all the way up, intercepting your EMA line. This is why some traders plot two moving averages. They only buy or sell when price is within the space the two moving averages create.

Here’s an illustration:

the Zone

You can see that the price went above the first EMA line but went down afterwards. During the times the price is inside the two horizontal EMA lines, as we call it “the zone”, this is the best time to buy or sell.

Forex Trading Strategy – Find Entry and Exit Points in an Uptrend