Monday, July 29, 2013

What is a Perfect Trade?



Simply put, a perfect trade is a trade of which a trader can be proud of regardless if it is a winning or a losing trade. The thing is, it is impossible to win all the time so traders should focus on making trades that have a high chance of winning. So what are the attributes of those trades? Let’s consider them. 

Entry: The most important part of every trade is the entry. It should be made at a right place in a direction of a trend. The closer it is to a support / resistance area the better. Generally, buy trades should be opened in a support area of an uptrend and sell trades should be opened in a resistance area of a downtrend. Alternatively, buy trades can be opened on a breakout of a downtrend and sell trades can be opened on a breakout of an uptrend.

Take profit. It is generally a very good idea to set up a take profit level together with a newly opened trade. If it is set, there is no need of a constant monitoring of a trade. It frees a lot of time which can be spend on other more meaningful things like looking for new trading opportunities. However, ideally take profit levels should be set up closely to the contrary side of a trading channel or to an opposite trend line. The problem is that they move in time so it is a challenge to predict where the opposite support/resistance would be in the future. To overcome this issue, traders can use previous horizontal support/resistance lines or just put take profit levels at the current opposite side of a channel and leave it there.

A perfect trade should also have a wider take-profit level than a stop-loss.

Stop loss. This level is a must for everyone who trades in financial markets. Ideally, it should be set slightly lower than the support area in a case of a buy trade in an uptrend or slightly higher than the resistance area in a case of a sell trade in a downtrend. Moreover, it should not be set up at any other support or resistance areas. Financial markets have of a lot of those less significant support/resistance areas and stop-loss orders should be set between them in order to lower the potential losses. Any support/resistance area can reverse the price so it would be wrong to set up a stop-loss level where the market can potentially reverse and go in the favor of initial guess.

Finally, a perfect trade should have a proper lot size according to the chosen time frame. Trades opened on a daily time frame, for example, should have very wide take-profit and stop-loss levels so it could take days in order to hit either of them. However, it is very important to trade them because these signals generally have 60%+ winning chance so it is acceptable to use higher lot sizes of up to 2% risk per trade. If there are no signals on a daily time frame, traders can use H4 time frame with lower take-profit/stop-loss and smaller lot sizes because they also represent good trading opportunities.



Monday, July 22, 2013

Support and Resistance – the two key words



To really understand the behavior of a currency on the Forex market it is important to see how it has behaved over a period of time. Taken over the course of a very short space of time, it is possible to make data mean just about anything. This, in turn, means that the data will be almost worthless. Over a longer period of time, however, patterns always seem to assert themselves, and establish a firm basis for predicting the future behavior of a currency price. Among the most important figures that appear in a pattern are the support and resistance points. 

The point of “support” for any currency is the price level beneath which a currency never trades – effectively its market “bottom”. Whenever the price reaches this level, it almost always bounces back upwards, and for this reason many people will invest when a currency hits that point. Conversely, the “resistance” point is the traditional high point of a currency price, above which it never trades. If you are looking to cash out, this is a good reference point. 

Of course, the old saying “there’s a first time for everything” exists for a reason. There will come a time when a currency breaks its support or resistance levels, and this is seen as hugely important. When a currency does this it will be expected to continue this trend, possibly for an extended period of time. It is therefore a good time to get “in” if it is rising or “out” if it is falling.


Monday, July 15, 2013

Trading in 4-hour and Daily timeframes



These two timeframes (H4, D1) are perfect for trading the forex market. 4-hour candles are very popular because the forex market is open 24 hours a day unlike any other market. This fact gives whole six 4-hour candles inside each trading day. Other markets, which are mostly open only 8 hours a day, create only two such candles so they are very much similar to daily candles and it makes them mostly useless. However, let’s focus on the forex market and see how these two timeframes can be used together.

Trading two timeframes is easier than following three timeframes. Moreover, faster timeframes give less profitable signals so it is better to avoid them. H4 and Daily timeframes should give traders approximately one good trade per day per currency pair which is more than enough to make good profits in the forex market. However, novice traders should only focus on eur/usd currency pair as it has lowest spreads and most precise technical behavior than any other currency pair.

There are some technical tools to trade charts and all of them allow taking a small advantage in trading. They include classical reversal patterns like double-tops, triple-tops and head-and-shoulders. They also include basic horizontal support/resistance lines, trend lines and channels. Any of the above technical tools can be applied to trading in two timeframes; however, to keep this article simple, let’s focus on basic trend lines. It is a great technical tool which tends to work in any financial market.

To trade in two timeframes consider the following technique. Firstly, open a daily (D1) timeframe of your preferred currency pair and draw most probable potential trend lines. If there are a lot of them, it is a bad situation. In this case, try to choose the most appealing one from above for the resistance line and one from below for the support line. Next look whether the price is near one of these levels which just have been drawn. If the price is near to ascending support trend line then it’s a potential buy situation. Likewise, if the price is close to descending resistance line it’s a potential sell situation. These are the best two signals you can ever get in trading trend lines. Unfortunately, this happens rarely, only once in a month or so. Thereby, if there is a signal on a daily timeframe then it is better to wait while the price gets closer to these levels and then take action. Otherwise, if the price is far from daily resistance/support trend lines and there is no chance that the price can hit those levels in the near time (~ 24 hours) then it is better to switch to 4-hour timeframe.

In the 4-hour timeframe, there is a much bigger chance to find a good signal. You have to repeat all of the above steps and draw all the lines. Once you find a trend line which is close to the current price, you’ll have to wait till the price hits it in order to take action. However, there is a catch. The market always pays more attention to daily timeframe. So, if you’re going to open trades in H4 you should always check whether your entry and most importantly exit levels do not interfere with trend lines of a daily timeframe. Although it should happen rarely because trades in H4 should be done quick with much tighter stop-loss and take-profit targets.


Monday, July 8, 2013

Forex Trading: A Tool to Create Wealth



Forex Trading
If executed properly Forex trading can be used to accumulate great wealth for a person that develops a trading plan and executes it.  Most people that start trading think of getting rich quickly which is faulty thinking.  Instead people should be thinking long term on how to use Forex trading to accumulate wealth.  We will be discussing the key elements that are needed in order to use Forex trading to accumulate wealth. The main components that a trader must possess to create wealth are: using trading as an additional stream of income, having a trading plan, and using discipline to control emotions.

Additional Stream of Income
Many traders that start trading Forex crash and burn because they start out thinking they are going to quit their jobs and be full time traders. While this is a great dream that we encourage people to pursue, it is better to look at trading more objectively.  The idea we have embraced that has helped me, is to use trading as an additional stream of income that can be used to accumulate wealth for you if you are following a specific long term wealth creation plan.  The income generated from trading will grow much quicker if you have additional income coming in from other sources, such as a job or business. That way you can use all of your trading income to be added into your trading and that will work to compound your profits.  One additional way to help boost your Forex trading wealth is to add to your Forex account on a monthly basis.  The idea of saving monthly income to be used to generate more income is one that has been used by wealthy people for generations. If you are going to be wealthy you must think like a wealthy person and that means having a vision and a long term plan. Once you have substantial trading account that can pay you the amount of income that you need to live comfortably then that is the right time to become a professional forex trader, but not before.

You Need a Plan
We hope that you might be thinking a little differently now about how you manage your trading. Now that perhaps you have new mindset on how to generate wealth with Forex trading, let’s talk about how to develop a plan and execute it. It is important to manage your money with a complete plan on how you will spend your money and also what you will do to increase it. That’s because there is more to making money on Forex trading. The plan should be comprehensive and cover all areas of your life. We say that money management is important in trading but it is important in your life as well. Actually you should have good management skills with your personal money first and then bring that into your Forex trading. We don’t have time or space to talk any more about that in this article but there are many resources on the web that talk about how to create a wealth building plan.

Trading Plan Components
The first thing you need to start creating extra income with your Forex trading is to have a written Forex trading plan. We say written plan specifically because the plan must be written with specific rules so that the trader can be accountable to that plan. Many traders will say that the plan is in their head but that is not enough to be accountable it must be typed or written and displayed near your trading computer so that you can view it and review it on a regular basis. A complete Forex trading plan will have 4 elements to insure that it is fully functioning to give your the best chance for success. The plan must contain a Forex strategy that explains how to enter the market and also how to exit. In addition to a Forex strategy the plan must contain money management rules. The trading plan should also include the goals you have for your trading, both long term and short term goals. You will have to review your trading plan regularly to make sure that you are following it correctly and to make any adjustments as necessary.

Discipline in Trading
Finally, It is important that you understand that to create wealth by trading you must have Forex discipline to follow everything that you have planned and learned. A trader must use their discipline to be completely free from emotions that might stop a trader from executing their plan. Emotions such as fear and greed can enter into a trader and cause them to move away from their Forex trading goals and when they allow that to happen traders usually end up not reaching their goals. Emotional thinking is disastrous to your goals of accumulating wealth using Forex trading, that is why we are emphasizing the importance of discipline. We are writing this as a warning so that you can avoid unnecessary losses that will get you off track.  To set yourself up for success in maintaining discipline we recommend that you practice self-reviews on a weekly basis to determine if you actually followed your plan with discipline or rather allowed your emotions to get you to make bad trading decisions. If you still are not practicing discipline than get an objective person to review with you and hold you accountable for your trading. We still to this day share our trading decisions with some trusted traders that we associate with so that they can encourage us to stay on track.
In conclusion, Forex Trading is a tool that can be used to accumulate wealth if you have a well-executed long term plan. Many traders enter into trading with objectives that are much too aggressive, with no real plan. If traders use trading as an additional income stream, with a solid plan and exercise the discipline to carry out that plan then Forex trading can be a the right tool to generate massive wealth.



Monday, July 1, 2013

5 Most Important Forex News Worth Trading



For traders to know when to trade we will reveal below five major news events that have the biggest impact on the forex market. The convenience of these events is that they have a constant schedule and may create a huge volatility on the financial markets. 

1. Manufacturing PMI. German and French PMIs are the most important European leading indicators. They are released in one day with just a slight delay between reports. Moreover, they have some sort of correlation between each other, so the first one is more important. Chinese Manufacturing PMI is also perfect for trading as it hugely affects risk currency pairs like Eur/Usd and Aud/Usd.

2. GDP reports. These are very important reports that have a big impact on the forex market. Usually a GDP report comes out every quarter. The exception is only for Canadian GDP which is released every month. There are 3 GDP reports in the US: Advanced, Preliminary and Final GDP. The first one makes the most impact on the forex market.

3. Monthly employment reports. The most awaited US reports are NFP employment change and the unemployment rate. The ADP report which represents the estimates of the official data comes 2 days earlier than the official report and it also can have an impact on the forex market. However, it needs more deviation from the estimates to change the mood of the financial markets. Australian and European unemployment reports are also closely monitored by traders.

4. Interest rates decisions. Only those decisions that differ from the expectations increase the volatility on the forex market. However, the biggest trends usually happen after the official data release during press conferences which are usually translated live over the internet. Traders are looking for clues from central banks leaders that could suggest the future of interest rates. Dovish tones lead to a currency sell-off and hawkish tones make the currency stronger.

5. Inflation reports. Inflation reports usually do not impact the eur/usd; however, we can’t ignore them in this article. The thing is, that inflation of the US and European economies usually comes in range of 2-3%. However, central banks only take action when inflation comes outside of these borders but for the past ten years it happened only during the global financial crises and recovered rather quickly. Thereby, small deviations within the desired range usually come unnoticed by the market participants. Moreover, inflation is calculated monthly for these economies making the impact lower than for Australian and New Zealand economies where the inflation is calculated on a quarterly basis. Thanks to that, the CPI reports of these economies create nice trends on the forex market.
Trading the above events is surely much safer than trading other less significant news. It is always a good idea to monitor them and trade accordingly whether you are a technical or fundamental trader. These events can have an impact on the markets for a long period of time, up to the next 24 hours, so there is no need to rush and close the trades with small profits during important shifts in the economy. However, sometimes it can be hard to predict the exact outcome of the news. So, even if a stop loss gets hit soon after the news release, it is still a good idea to reverse the position and trade in the opposite direction together with the market. The volatility of the markets increases so high during these events so the price simply can’t stop and calm down. This significant regularity makes it simple for traders to “ride” the trends during news releases.