education

PARTICIPANTS OF FX MARKET

WHAT AFFECTS EXCHANGE RATES 

In order to make a profit through forex trading a trader must choose a pair of currencies to trade on, pick the right time in which to begin the trade and know when to end it. It all boils down to identifying attractive exchange rates (how much the quoted currency is worth in terms of the base currency). Things which may affect the value of a particular currency are related to the economy in which the currency is used. Generally speaking the currency of a booming economy will maintain its value well. Events such as large scale natural disasters, wars, political unrest and release of worrying macroeconomic data may cause the currency involved to depreciate in value. This will immediately show on exchange rates against other currencies, most importantly the USD. It is also worth mentioning that some traders use solely graphs to analyze the market and as You will see below, some chart patterns on the chart of the currency pair can affect traders’ decision to BUY or SELL therefore affecting the exchange rate. 

The foundation of successful forex trading is the ability of the investor to properly analyze market conditions. 

The “Forex Fundamentals” section of our website is a comprehensive resource for beginner traders looking to build a strong foundation in the basics of the forex market. In this section you will find articles on key topics such as spreads, types of currency pairs, price action, trading sessions hours and charts. Each article is written in an easy-to-understand manner and is packed with valuable information that will help you gain a better understanding of the forex market.

If You are a beginner trader, “forex fundamentals” section is a definite must-read. Learn about the different types of currency pairs and how to choose the best ones for your trading strategy. Understand the importance of spreads and how they can impact your trades. Discover the power of price action analysis and how to use charts to identify potential trade setups. And stay up to date on the latest trading session hours to make sure you never miss a trading opportunity.

Overall, the “forex fundamentals” section is a must-read for any trader looking to succeed in the forex market.

Fundamental analysis and technical analysis. These two approaches to the understanding of finance are generally considered incompatible because they are based on different data and tools. In fact, they are chosen according to the preferences and the style of each one. Nothing prevents anyone from utilizing the two branches of market analysis simultaneously to create an effective synergy and have an even deeper understanding of the markets. 

Definition of fundamental analysis 

Fundamental analysis places the target company or sector at the heart of a stream of complex economic information in order to determine its true value and prospects. The challenge is to obtain an absolute value of a security, its intrinsic value. The number of criteria selected depends on the depth of the analysis performed. Thus, beyond accounting balances, it is the prospects of trade, expansion, innovation and competition that will be taken into account. Similarly, elements of the country’s economic or social policy, plans for redundancies, internal scandals will also affect this value positively or negatively. It is very advisable to read our separate article on Fundamental analysis if you are interested in this area. 

Technical analysis  

Technical analysis considers pure market data available on the charts. All the information will come from observations and statistical calculations on the evolution of the prices, their cycles and their volumes. We use data from the past to project ourselves into the future. In fact, the overall principle is to create, through mathematical models, a curve or zones that will give an image of the movement of the courses or a zone of evolution. This graphic data allows the trader to identify trends, perceive discrepancies, anticipate changes in future trends. The trading platform You will choose will usually have some of the most widely used technical analysis indicators in the market pre-installed so You can easily plot them on a chart of Your choice. Read more on Technical Analysis 

Price has a tendency to repeat past patterns In the Forex market. Nobody really knows why; however it is a statement proved by time. Think of price as an animal. Animals have habits that they exhibit. For example, a man may have the habit of bending down and picking up coins. Will he pick up the coins every time? Maybe, and maybe not. But what if this man makes a notable motion before he picks up his dropped coin. Perhaps he wipes his nose every time after dropping a coin, then he bends down and pick it up. In this case, the act of him wiping his nose will be the pattern that leads to him doing an expectable “trend”. Same in trading – we first try to identify the patterns which lead to known outcomes (or trends). 

Below, you’ll find chart patterns that are known to cause strong trends in the market. 

CONTENTS 

• 1. Symmetrical Triangles  
• 2. Descending Triangles  
• 3. Ascending Triangles  
• 4. Double Tops and Double Bottoms  
• 5. Head and Shoulders 
• 6. Reverse Head and Shoulders  
• 7. Channel  
• 8. Wedge  
• 9. Flag/Pennants 

Triangles 
There are three different types of triangles: 
1) Symmetrical Triangle 

A symmetrical triangle occurs when a trader begins to notice that a currency pairs’ high and lows are converging together at a specific point. This pattern occurs when the market is making lower highs and higher lows. When you use your drawing tool to trace down the lower highs and trace up the higher lows, you will notice the triangle form (seen below). 

What is happening right now is the Buyers and Sellers are in a tug of war and neither one is showing any sign of winning. That is, until price “squeezes” its way out of the triangle, causing a new trend. 

When the lower highs and higher lows converges at a point or when price breaks through one of the lines, a breakout may ensue in the direction in which the resistance or support was broken. 

2) Descending Triangle 

In a descending triangle, we notice a convergence from equal lows and lower highs. In other words, if you were to draw this pattern onto a chart, you would notice that the lower line was flat and the top line is slanting down and to the right. 

This pattern could be an indication of a bearish signal, but traders should observe the break, as descending triangles may lead to a continuation pattern or a strong reversal signal. 

Example below: 

In this example note the green line indicating the lower highs, while the blue line indicates the equal lows. After the lines converge, traders may expect a powerful trend to emerge. 

3) Ascending Triangle 

While the descending triangle is characterized by equal lows and lower high, the ascending triangle is characterized by equal highs and higher lows. When drawing an ascending triangle, you’ll notice that the top line is fairly flat and the bottom line will make its way up and to the right. 

This may be considered a bullish signal, but this isn’t always the case. As with the other triangles, once a convergence is made, a powerful bullish or bearish trend may occur. Traders must keep an eye on the market to see which way this trend is going. 

4) Double Top and Double Bottom 

In the market place, double tops and double bottoms occur when the market tries to breakthrough a previous high or low, but doesn’t have the strength to do so. 

An easy way to think of it would be if you imagined the currency candles on your chart as a person trying to swim upstream. They go as far as they can, get exhausted and are pulled back by the tide. They make one more valiant attempt to swim upstream and make it to the same spot as they did before. Now that they are really tired, there’s no place for them to go but to float downstream. 

This is what happens in the market place. 

In the picture above, we see a Double Top. Note the large M formation that price has made. 

When you spot the Double Bottom, which resembles a large W, we have an indication of a bullish trend emerging. Adversely, a Double Top, which looks like a large M, may indicate a bearish trend. 

5) Head and Shoulders 

Named after its appearance, the Head and Shoulders looks much like its namesake. A trader can spot the Head and Shoulders formation when price has made three highs; two equal highs with one greater high occurring between the two equals. Much like the double top and double bottom patterns, price was rejected and a breakout was unable to occur. As a result, we have a strong reversal trend will ensue after the right price has moved past the resist point, known at the neck line (the line formed by the low points between the left shoulder and head and the head and right shoulder). 

In the example above, you can see  the neckline as the blue line. It can be estimated in this example that price has a good chance, but not necessarily, of moving below the neck line, therefore causing a bearish reversal trend. 

6) Reverse Head and Shoulders 

The Reverse Head and Shoulders pattern follows the same rules as the Head and Shoulders pattern, except the pattern signifies a bullish trend. In the Reverse Head and Shoulders pattern, we are looking for three instances where price has made new lows; one low followed by a greater low, followed by a low equal to the first low. This formation will create our “reversed” left shoulder, head and right shoulder. 

After the formation is complete, a bullish trend may occur if price moves past the neckline (which is formed by tracing the two equal highs between left shoulder and head of right shoulder.) 

In this example, the signal finding software estimates that there’s a 70% chance a bullish signal will emerge. In this case, the trend will emerge the moment that price moves up past the green neckline. 

7) Channel 

A channel forms when we’re able to trace a currency pair’s highs and lows and draw a parallel line from these highs and lows. A channel may indicate a relatively strong trend with price staying in the lines until a breakout occurs. 

8) Wedge 

Wedges are very similar to the Triangles patterns that we have listed above. Both patterns are formed by tracing lows and highs to a certain convergence point. The difference between triangles and wedges is that support and resistance lines with wedges aren’t positive and negative slopes. In other words, a wedge is a convergence of highs and lows where the support and resistance lines are sloped in a similar direction. 

If we take a look at the above example, we can see that this formation is similar to a triangle formation, but in this case both the resistance and support lines are sloped in a positive direction. 

9) Flag/Pennant 

Flag and pennant patterns occur after the market has made a powerful up or down trend and is followed by a sideways market. To better visualize what is happening during a flag pattern, think of the powerful up or down trend as the flag’s “pole” and the sideways market as the flag or pennant’s “cloth”. 

Flag patterns happen quite often in the market. Traders should take note of when price begins to level out after a powerful trend (flag). Depending on the flag’s slope, this may be an indication of a continuation pattern (which means that price will continue with the trend) or a reversal pattern (which means that a trend will occur in the opposite direction). 

Given the small time frame, the shape of the flag is not completely evident. By looking on the left, we see three red candles, signifying the downtrend. Price is moving up, trying to find a new high. However, as we can see in the last two candles on the right (red candles), price can’t quite seem to find a footing and continuation of a downtrend seems imminent. 

The Forex markets offer plenty of rich opportunities for you to leverage large gains when you trade efficiently. However, many Forex players, whether they are novice traders or seasoned investors, at times struggle to achieve maximum performance. Often, they fall victim to short-term thinking, fear, over-trading and ignoring price action, among other factors. The six tips discussed below will help you overcome these obstacles and help You optimize Your trading approach:

1. 1. Focusing on Daily Charts
2. 2. Leveraging only the Most Profitable and Low-Risk Trades
3. 3. Managing Your Capital Base
4. 4. Streamlining Your Trading Approach
5. 5. Emphasizing Price Action
6. 6. Not over-trading

STICK TO THE DAILY CHARTS

Traders often make the mistake of trying to trade off charts showing price movements hourly or even minute-by-minute. This typically can be a recipe for disaster as these price moments are often unreliable and don’t demonstrate a true picture of the currency market you are trying to leverage. Instead, rely strictly on the daily charts of the currency pair you are seeking to exploit.

TAKE ONLY THE BEST TRADES

By focusing on the daily charts, you will be able to identify the most profitable trades both in terms of price action and risk. Learning to recognize and play these moves in the Forex market will help you to leverage great setups with confidence. Too often currency market players try to exploit multiple trades and end up coming away with nothing. Instead, learn to focus your efforts on those trades that will yield the greatest returns with the least amount of risk.

MANAGING YOUR CAPITAL BASE

Greed and elation can often cause Forex investors to bite off more than they can chew in the market. Because of this, it is imperative that you refrain from risking more than 3 percent of your account on a single trade. Risking more puts you in jeopardy of losing a significant portion of your capital on a single trade. Rest assured that you can always add more to a position as it proves profitable and you believe it will continue to work in your favor.

KEEP IT SIMPLE

Overtime it is important to develop a trading system that suits your approach. For example, learn which indicators and data points best suit your needs. It’s better to rely upon a simple set of factors rather than an exhaustive list, as this will only cause confusion and/or hesitation in opening and closing positions. Examine your approach through reflection and keeping a journal of your market activity. This will help you to rely more upon your analysis and instinct more confidently, thereby enabling you to seize upon opportunities.

TRUST PRICE ACTION

The tape never lies. In other words, regardless of how rigorous and thorough your analysis is, price action is the deciding factor in terms of profits and losses. Relying upon price action on the daily charts often is the most potent approach to leveraging gains in the Forex world. In the end, trust the tape.

PERILS OF TRADING TOO MUCH

Over-trading most often is the Achilles’ heel of most currency market investors. Most think the more they trade the more profitable they will be when, in fact, less is more. Identifying a few solid set-ups per day is often the best approach for winning in the Forex world. Trying to trade too much often results in wasted capital and empty accounts in the long run.

Margin and Leverage – Everything A Beginner needs to Know!

For novice traders, understanding the concept of margin and leverage can be a bit difficult. Here, we take you through what leverage is, its advantages and disadvantages, and should you consider using it in your trading strategies as a beginner.

What is Leverage?

Fundamentally, leverage is a loan. However, it is a loan that is given with an explicit purpose: to trade. Traders can use borrowed money to trade larger positions than they would otherwise be able to.

While leverage is prevalent in most asset classes, it is most common in forex trading. Since currencies change at a very slow pace, leverage allows traders to earn better returns than they would otherwise be able to (albeit with a higher risk).

Forex brokers allow their clients different amounts of leverage depending on the asset traded and the type of account. In forex, it is common to see leverage ratios of 100:1. This means that for every $1 capital that the trader has, they can use $100 to trade. The additional amount that they get to trade with is known as leverage.

What is Margin?

Margin and leverage are inherently related. Margin is the initial amount required to place a trade. For example, if the leverage ratio is 100:1 (as in the example above), the initial margin required to trade $200,000 would be $2,000 (200,000/100).

When it comes to standard forex contracts, they require 100,000 units of currency. The most common leverage ratios offered by brokers are 50:1 and 100:1. However, it is possible to find brokerages that offer higher leverages, especially for clients that have larger trading volumes.

Remember that when you are trading on margin, you need to maintain a margin requirement. This is the minimum amount of balance you must have in your account to make sure that you can use leverage in your trades. If your balance falls below this amount, your positions will be closed. This is known as a margin closeout, sometimes also called ,margin stop-out.

Advantages and Disadvantages of Leverage

At its core, leverage only has a singular effect on your trades, and that is both its primary advantage and disadvantage. Leverage magnifies both the profits and the losses experienced on your trades. As such, it can lead to higher profits, but it can also lead to higher losses.

This is basically what leverage is for beginners. At the advanced level, it has other benefits such as allowing traders to manage risk and combat low volatility. However, even professional traders often experience gigantic losses due to leverage, and many renowned financial institutions have gone bankrupt because they experienced losses on heavily leveraged trades.

Should Beginners Use Leverage?

When it comes to most other assets such as stocks, conventional wisdom dictates that beginner traders should not use leverage. However, trading forex without leverage is almost impossible, as the profits are made on the tiniest of currency movements.

Most brokers will offer leverage beginning from 30:1. This is what we would recommend for most people who are just starting out in forex trading. This is to make sure that you do not end up losing a lot of money from beginner mistakes. Eventually, you will want to switch to 100:1, which is the standard leverage used by most traders (even most of the advanced ones).

Forex social trading has several aspects which must be fully understood by anyone who wishes to participate in this type of trading. Investors who want to engage in this type of trading should: 

1. 1. Decide on a model which works for them and their trading style 
2. 2. Select from a wide variety of trading platforms 
3. 3. Develop a clear understanding of how to select a platform 
4. 4. For followers, learn the metrics behind leader selection  
5. 5. For Money managers, learning how to make their signals marketable. 

Social trading is educational and potentially profitable. Why not take advantage of this innovative solution that turn a newbie trader into a seasoned professional?  

THE BIRTH OF SOCIAL TRADING  

The forex market has evolved greatly in the last 20 years. Not only has the daily turnover increased by hundreds of percent in the last decade, but several new technologies have been created which have allowed many innovations to occur in the market. The concept of social media and online communities was infused into trading creating the concept of social trading – traders from all over the world come together to trade as a community, usually under the guidance and leadership of a few, select master traders. This could be in the form of a community, or as a structured trading product where signals are delivered by several master traders, while less experienced traders follow the trade alerts of these master traders for a fee.  

THE UNDERSTANDING OF SOCIAL TRADING  

This phenomenon did not kick off until sometime in 2006 when the first auto trading platform was launched. This was not a full-fledged network, but the concept was well received by the market. It was not long after that other companies began to set up their own full-fledged social trading platforms. As the years went by, these platforms were modified as companies tried to improve on existing models.  

SOCIAL TRADING MODELS  

Various models for social trading exist, but the most popular and most beneficial to traders is the one that has Money managers (MM) and followers. 

The MMs are the master traders who are skilled at trading. Their signals are provided to the rest of the retail market for use on the platform or if it is a PAMM account, his trades will also be executed on his followers’ accounts. Read more on PAMM accounts 

The Followers are the traders who, since they are not skilled, do not have the time or simply prefer the easy way out, opt to follow the trade alerts of the MMs or connect to their MM account in case of PAMM account.  

SELECTION OF A SOCIAL TRADING PLATFORM OR A LEADER 

Money Managers and followers have different reasons for using a social trading platform. MM will look for the offer with the best compensation for their work. Followers will look for a platform where they can find leaders who can provide good rates of success. All of them will be seeking for a platform/broker with reasonable fees. Selecting a platform also goes hand in hand with selecting a Money Manager. Various metrics can be used and these are provided by the platforms. MM do not need to select followers. They simply need to create a good trading history and when they do, the word will go round.  

YOU CAN ENGAGE IN SOCIAL TRADING TOO 

There are many reasons why you should engage in this type of trading. Institutional trading firms who cart away billions from the market are run by a team of traders at various levels, with experienced traders guiding inexperienced ones until they gain enough experience and start to command the same results. Another plus is that it brings isolated retail traders together and mimics the structure of institutional trading teams.  

A PAMM (Percent allocation management module), also called “managed account”, is a form of investment for those who would like to invest their money in forex without having to trade themselves. By choosing a managed  account the responsibility for the trading is transmitted to a money manager, however it is very important to remember that all potential profits, as well as potential losses are going to be Yours, therefore You’ve got the final word and are fully liable for Your funds in any case.  

Below is some advice for choosing a reputable money manager to care for a managed account: The asset manager should offer different strategies which cover a variety of financial instruments. This allows for risk diversification of the investment. Sticking to a single strategy with only one category of assets puts the money manager at risks of poor performance (such as a decline in volatility) where other assets won’t be able to compensate due to the difficult market environment. This asset manager loses the election against a competitor that offers of house from a variety of policies and instruments. 

Managed Accounts include historically generated returns in general. Theoretical back-test results must not be mixed with real trading history and only real trading history should be accounted for.   

The money manager must make sure that the risk / reward ratio of individual trading strategies is understandable to the investor. This is the only way he can assess the risk that he would like to subject his followers in order to hit his targeted return. From this point of view you should be aware to invest in some lucrative offers that promise you several hundred per cent return per month. Such yields can be generated in exceptional cases and ONLY by taking excessive risks which will carry the risk of a total loss of Your investment.  

The asset manager should allow the investor insight into trading activity in real-time. In addition he should grant full access to all trading reports and account statements. The investor should have the ability to communicate directly and without detours via intermediaries with the money managers.