Forex Mom

Archive for the ‘1-Introduction to the Forex’ Category

It is important to know the Daily Trading Range for each currency. Although this is just an average range for each currency, when the currency reaches this range it is likely to be exhausted and the trend will not continue.
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You can see that the London session returns the most pips.

These are the worse times to trade:

Fridays: Fridays are very unpredictable. This is a good day to trade if you want to lose all the profit you made during the rest of the week.

Sundays: There is very little movement on these days. Trade this day if you want to start off your week with NEGATIVE pips.

Holidays: Banks are closed which means very little volume for whatever country is having the holiday. Holidays are great to trade when you would rather lose your money than take a day off and enjoy the other finer things in life.

News Reports: No one really knows where the price will go when a news report comes out. You could lose a fortune trading during news releases if you don’t know what you’re doing. Price acts like a drunken monkey during these times and become unpredictable.

If you can’t trade the best times, try these suggestions:

Long-term Traders will usually refer to daily and weekly charts. The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily. Trades usually from a few weeks to many months, sometimes years.

Advantages:

• Don’t have to watch markets intraday
• Fewer transactions means less paying of spreads

Disadvantages:

• Large swings which require large stops
• Usually 1 or 2 good trades a year so patience is required
• Bigger account needed to ride longer term swings
• Frequent losing months

Short-Term Traders use hourly time frames and hold trades for several hours to a week.

Advantages:

• More opportunities for trades
• Less chance of losing months
• Less reliance on one or two trades a year to make money

Disadvantages

• Transaction costs will be higher (more spreads to pay)
• Overnight risk becomes a factor

Intraday Traders  use minute charts such as 1-minute or 5-minute. Trades are held intraday and exited by market close.

Advantages:

• Lots of trading opportunities
• Less chance of losing months
• No overnight risk

Disadvantages:

• Transaction costs will be much higher (more spreads to pay)
• Mentally more difficult due to frequency of trading
• Profits are limited by needing to exit at the end of the day.

Shorter time frames allows you to make better use of margin and have tighter stop losses. Larger time frames require a bigger account so you can handle the market swings without facing a margin call.

Would you like a tool to help you calculate the number of lots you should risk?

The website, fxstreet.com, has some pretty good ones. Check this out.

http://www.fxstreet.com/forex-tools/money-management-calculator/

Support and Resistance are not lines, but areas or zones. Mapping them is not a exact science, it is an art. Let me explain.

When you find support and resistance, you look for areas that it touches several times. The more times it touches, the stronger the support or resistance.

The red line shows one Support/Resistance area. This area was testing many times.

Another way of showing Support and Resistance areas is to use Ichimoku clouds.

The dotted area is the cloud of support and resistance. After the candles broke through the cloud, they dropped rather nicely.

What is a pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. If the USD/JPY moves from 89.52 to 89.53 that is ONE PIP.

The JPY currency pairs (like USD/JPY or EUR/JPY, etc) are shown with 2 numbers to the right of the decimal point, all other currencies are shown with 4 numbers to the right of the decimal point.

Some brokers will show 3 or 5 digits to the right of the decimal position.  For example, the broker could show EUR/USD moving from 1.22500 to 1.22510, and it still is just ONE PIP.

What is a lot?

1 standard lot is $10 per pip. 1 mini lot is $1 per pip. $ micro lot is $.10 per pip.

What is the spread?

The broker lists a bid and an ask price for a currency. The difference between the bid and ask price is called the spread. This is how the broker makes his money, from the spread.

 When you buy a currency, you pay the ask price. For example, the EURUSD  bid price might be 1.3627 and the ask price might be 1.3630. Notice there is a 3 pip spread between the bid and ask price. You would buy at 1.3630. But you sell as the bid price, so you would sell at 1.3627. So if you went in and then sold right away, you would loose 3 pips. This is the brokers fee.

Whether you win or loose, the broker always gets his pound of flesh (spread).

What is leverage?

You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

For example, if the leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, you broker would set aside $1,000, or the “margin”. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

What is margin call?

In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

• No commissions.
  No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the spread.
• No middlemen.
  Spot currency trading eliminates the middlemen, and allows you to trade directly.
• No fixed lot size.
  In Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250.
• Low transaction costs.
  The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage.
• A 24-hour market.
  There is no waiting for the opening bell – from Sunday evening to Friday afternoon EST, the Forex market never sleeps.
• No one can corner the market.
  The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
• Leverage.
  In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
• High Liquidity.
  Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
• Free “Demo” Accounts, News, Charts, and Analysis.
  Most online Forex brokers offer ‘demo’ accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with ‘play’ money before opening a live trading account and risking real money.
• “Mini” and “Micro” Trading:
  You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn’t. Online Forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we’re not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn’t have a lot of start-up trading capital.

The most popular currencies along with their symbols are shown below:

The Ten Keys to Successful Trading by Jared Martinez

Click on this link to down this book for free. It is a great introduction to the Forex.
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