Tag Archives: site:tradeadvisorpro.com

Basic Forex Trading Strategies For Beginners Revealed

Basic Forex Trading Strategies For Beginners

The concepts about the Forex market might be daunting because of its very complicated out of this world, non average terms being used, however, it is quite funny that most of us already have a first hand experience with the said market. The mere fact that every time we go to a currency exchange station to change our money into another currency is already a basic participation of the Forex market.

It is understandable that we get overwhelmed because of its encompassing entity to other capital markets but the concepts about trading currencies are let’s say, simple. Now, I would want to share to you the basic Forex Trading Strategies for Beginners out there.

Read more about Forex Trading Strategy: Price Action Trading Patterns

Forex Trading Strategy : 8 Majors

If you have an experience in trading in the stock market, you need to choose a stock out of thousands of stocks however in the currency market, you only need to be updated with the Economic data being released almost daily by the countries that belong to the 8 Majors. It will provide you the best undervalued or overvalued opportunities.

Here are the countries that make up the 8 Majors in the currency market:

  • United States
  • Eurozone (the ones to watch are Germany, France, Italy and Spain)
  • Japan
  • United Kingdom
  • Switzerland
  • Canada
  • Australia
  • New Zealand

The following countries belong to the most sophisticated financial markets in the world. It is strictly advised that following the 8 Majors is a way to take advantage of earning interest income on the most credit-worthy and liquid instruments in the market.

Forex Trading Strategy : Yield & Return

“Yield drives return” is a key to always remember.

A spot market is a commodities or securities market in which goods are sold for cash and delivered immediately. In dealing with foreign exchange spot market, you are actually buying and selling two paired currencies because each currency is valued in relation to another. For example, if the PHP/USD pair is quoted as 39.8500 that means it takes PHP 39.8500 to purchase one USD. Therefore, in every foreign exchange transaction, you are buying one currency and selling another. Furthermore, the country’s central bank places an interest on the currency, which means that you are obligated to pay the interest when the currency is sold however earning potentials are possible on the currencies that you have brought.

For example, let’s look at the New Zealand dollar/Japanese yen pair (NZD/JPY). Let’s assume that New Zealand has an interest rate of 8% and that Japan has an interest rate of 0.5% In the currency market, interest rates are calculated in basis points. A basis point is simply 1/100th of 1%. So, New Zealand rates are 800 basis points and Japanese rates are 50 basis points. If you decide to go long NZD/JPY you will earn 8% in annualized interest, but have to pay 0.5% for a net return of 7.5%, or 750 basis points. (Source: Investopedia)

Forex Trading Strategy : Leveraging Returns

Sometimes leveraging creates good profits but sometimes too, it generates huge losses. It can be a double-edged sword which comes with great risk and great opportunity. The Forex market offers tremendous leverage, as high as 100:1, which means that when you can control $10,000 worth of assets with a capital of $100.

Using the most conservative 10:1 leverage, the 7.5% yield on NZD/JPY would translate into a 75% return annually. Therefore, if you were to hold a 100,000 unit position in NZD/JPY using $5,000 worth of equity, you will have a daily interest of $9.40, which could be translated to a $3,760 annually. It is quite different when you would invest your money in a bank that will only give you a yield of $250 in return however the only edge it gives is assurance because it is much risk free compared to the Forex market.

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

Forex Trading Strategy : Carry Trades

Since currency values is constantly dynamic, it paved way to one popular Forex trading strategy of all time, the carry trade. Carry traders look for positions to appreciate in value other than earn the interest rate differential between paired currencies. Here are some historical examples of carry trades:

Between 2003 and the end of 2004, the AUD/USD currency pair offered a positive yield spread of 2.5%. Although this may seem very small, the return would become 25% with the use of 10:1 leverage. During that same time, the Australian dollar also rallied from 56 cents to close at 80 cents against the U.S. dollar, which represented a 42% appreciation in the currency pair. This means that if you were in this trade – and many hedge funds at the time were – you would have not only earned the positive yield, but you would have also seen tremendous capital gains in your underlying investment. (Source: Investopedia)

Australian Dollar Composite

Figure 1: Australian Dollar Composite (2003 – 2005)
Source: eSignal

The carry trade opportunity was also seen in USD/JPY in 2005. Between January and December of that year, the currency rallied from 102 to a high of 121.40 before ending at 117.80. This is equal to an appreciation from low to high of 19%, which was far more attractive than the 2.9% return in the S&P 500 during that same year. In addition, at the time, the interest rate spread between the U.S. dollar and the Japanese yen averaged around 3.25%. Unleveraged, this means that a trader could have earned as much as 22.25% over the course of the year. Introduce 10:1 leverage, and that could be as much as 220% gain. (Source: Investopedia)

Japan Yen Composite

Figure 2: Japan Yen Composite (2005)
Source: eSignal

Forex Trading Strategy : Carry Trade Success

It is not only pairing up two currencies with the highest interest rate against a currency with the lowest rate for the goal of earning but also look for paired currencies that have the potential to appreciate in value. Here is an example of a currency with an interest rate that is in the process of expanding against another currency.

In the previous USD/JPY example, between 2005 and 2006 the U.S. Federal Reserve was aggressively raising interest rates from 2.25% in January to 4.25%, an increase of 200 basis points. During that same time, the Bank of Japan sat on its hands and left interest rates at zero. Therefore, the spread between U.S. and Japanese interest rates grew from 2.25% (2.25% – 0%) to 4.25% (4.25% – 0%). This is what we call an expanding interest rate spread. (Source: Investopedia)

Forex Trading Strategy : Getting to know interest rates

It is compulsory to monitor the economic data being released by every country to be able to know the health of its economy, whether it is conditioned for investment. To know the underlying economics of the country is a way to know where interest rates are heading. In general, countries that have good economic condition, meaning strong growth rates and increasing inflation will likely increase interest rates to be able to control inflation and growth. On the other hand, countries in an economic crisis ranging from a broad slowdown in demand to a full recession will likely to reduce interest rates.

Bottomline is the abundant resources that are readily available and accessible are right at your finger tips. In the advent of technology, there are programs that are available for you to use in monitoring your position in trading. It is just a way on how you would exhaust such availability of these things. Happy Investing with the basic list of Forex trading strategies!

Source:

  • 8 Basic Forex Market Concepts. Retrieved April 02, 2013. http://www.investopedia.com/articles/forex/08/forex-concepts.asp

Using Moving Averages

Using Moving Averages

The most important use of moving averages is it determines the market trend.

To make it easier, traders plot a single moving average into a chart. When price action maintains above the moving average that means the price is generally in an uptrend. If the price action stays below the moving average then it would only mean that the price action is in a downtrend.

As we have discussed in our previous articles, when it becomes too simplistic, it can give you a ‘fake’ analysis if you are not too careful.

Let’s say for example, USD/JPY has been going in a downtrend. But all of a sudden, a news report came out, causing a sudden surge.

If you are to plot this on a chart, the sudden surge in price makes it look like it is above the moving average. If you are not too careful, you may think that this is the best time to buy! So impulsively, you just do exactly that.

But continuously looking at it shows that USD/JPY is still going a downtrend. The sudden lift on price action was just dictated by traders reaction to the news. So if you just did exactly what you thought, you could have been faked out!

What most traders do, is they plot two moving averages on their charts as oppose to just one. How will this help you?

So we said you create two moving averages: one the “faster” moving average, and the other one – “slower” moving average. In an example, a 10-period  moving average (faster) and a 20-period moving average (slower) on one chart.

When there is an uptrend, the “faster” moving average is always above the “slower” moving average.

So when you see on your chart that the 10-period moving average is above the 20-period moving average, this signals an uptrend. This can further help you to decide if you would go long or short currency.

Do not limit yourself with just two moving averages. You can always go more than two, from fastest to slowest moving average to give you a better view of an uptrend or a downtrend.

 

Exponential Moving Averages

Exponential Moving Averages

By creating a graph based from the moving average, it gives you a visual idea of the mathematical and scientific direction of market prices. It serves as a calculated indicator used to forecast future prices.

In our last post, we discussed about Simple Moving Average. Here’s another type of moving average we shall discuss, the Exponential Moving Average.

We will discuss how simple moving averages can be inaccurate at times and how exponential moving average can eliminate this distortion.

Let’s take an example:

Using the simple moving averages, the closing prices for the last 5 days are:

Day 1: 1.3172
Day 2: 1.3231
Day 3: 1.3164
Day 4: 1.3186
Day 5: 1.3293

The sum of the five prices divided 5 will give you the simple moving average of 1.3209.

However, what if we change the ending price of Day 2 to something sporadic; say closing price on Day 2 is 1.3000. Let’s take a look how it will have an impact to our 5-day SMA.

It will be computed as follows:

(1.3172 + 1.3000 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3163

This gives you the impression that the price was actually going down because of a lower result from the SMA. When in fact, it is only the Day 2 which caused this change.

This is because SMA can be too simplified that it overlooks one-time periodic and erratic change like this. The remedy – Exponential Moving Average!

Exponential Moving Averages attribute more weight to the most recent periods technically giving more value or importance to the recent closing prices,  putting more emphasis on what traders are doing recently.

In our example above, Days 3, 4, and 5 would have more weight than Days 1 and 2. With Day 2 having lesser weight, the spike caused by the price on Day 2 would have lesser impact using the EMA than it would using the SMA.

Here’s a 4-hour chart of USD/JPY showing side-by-side comparison of SMA and EMA:

 

exponential moving averages

exponential-moving-averages chart

This shows that the EMA represents the price actions more accurately than SMA putting more emphasis to the more recent incidences.

When trading it is important to pay attention to what traders are doing now, and Exponential Moving Averages help us realize this.

Forex Market Preview November 5, 2012

Simple Moving Averages

Simple Moving Averages

A simple moving average stands out as the simplest kind involving moving average. Seems complicated right? Essentially, a simple moving average is calculated by adding the last “X” period’s closing prices and dividing that number by another X.

Does it sound confusing?

No problem, we’ll help it become very obvious.

Should you plotted any 5 simple moving average within the 1-hour chart, you’d build up the closing costs over the past 5 several hours, after which divide the number by 5.There is an average closing price during the last five hrs! String that average prices together and you receive a moving average!

Should a person plot a 5-period simple moving average about the 10-minute graph or chart, you should gather the ending rates from the very last 50 mins after which divide it by 5.

In case you plot a 5 period simple moving average within the half hours chart, you’d collect the closing prices from the last 150 minutes after which divide it by 5.

Should you plot the five simple moving average around the 4 hr. chart..well, I think you already got the method.

Many organizing bundles is going to do every aspect of the information for you.

Focusing on how an indicator works means you are able to adjust and make different methods as the marketplace surroundings changes.

Currently, compared to just about any indicator offered, moving averages operate having a delay. Since you’re taking the averages of past cost history, you’re really merely seeing the overall path to the past along with the actual general direction regarding “future” temporary cost action.

And here is some sort of a good illustration of how moving averages lessen the cost action.

Simple Moving Averages

On graph above, we get plotted three different SMAs around the 1-hour chart of USD/CHF. The more the SMA period is, the greater the item lags behind the charge.

See how 62 is farther from the cost 30 and 5 SMAs.

In that illustration, the 62 SMA accumulates the closing prices of your last 62 periods and divides it by Sixty two. The more period you make use of with the SMA, the slower the period of time it’s to be able to respond to the cost movement.

The SMAs within this chart demonstrate the belief from the market in this specific time. Here, we can easily observe that the pair is trending.

Rather than looking in the current cost coming from the market, the moving averages provide us with a more substantial view, and that we are now capable to gauge the entire path of their particular future cost. Through the use of SMAs, we are capable of telling whether several pairs are trending up, trending lower, or simply just varying.

There’s a single downside to the straightforward moving average and it’s that they are at risk of spikes. When this occurs, this can provide people with bogus signals. We may believe that a brand new style might be developing truly, practically nothing changed.

Up next, we will show you the other type of moving average to make things clearer.

Summary: Fibonacci

Fib Levels
The key Fibonacci retracement levels to keep track of would be the 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The ones that appear to hold the most weight are the 38.2%, 50.0%, and 61.8% levels. All these are usually normally included in the default settings of anyFibonacci retracement software.
Traders make use of the Fibonacci retracement levels as possible support and resistance. Given that a lot of traders watch these same levels and put buy and sell orders on them to go in trades or position stops, the support and resistance levels may becomea self-fulfilling prophecy.

These people importantFibonacci extension levels are the 38.2%, 50.0%, 61.8%, 100%, 138.2% and 161.8%.

Traders use the Fibonacci extension levels as potential support and resistance areas to set profit goals. Once more, given that numerous traders are usually viewing these levels and setting buy and sell orders to take profits, this tool has a tendency to function due self-fulfilling expectations.

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

is a candlestick together with no less thantwo lower highs on both the left and right of itself.

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

make use of the Fibonacci software, those levels tend to become self-fulfilling support and resistance levels or areas ofinterest.

Any time while using Fibonacci tool, possibility of success could increase when using the Fib tool along with other support and resistance levels, trend lines, and candlestick designs for spotting entry and stop loss factors.