Friday, November 22, 2013

Major Styles of Trading







The major styles of trading:
  • Scalping
    The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.
  • Momentum Trading
    Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit.
  • Technical Trading
    Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.
  • Fundamental Trading
    Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.
  • Swing Trading
    Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.
Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice. Register for your demo account now.

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Wednesday, November 13, 2013

3 Factors That Drive the U.S. Dollar

When it comes to the decision of whether you should buy or sell dollars, it all boils down to how the economy is performing. A strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment. Investors always seek out the highest yield that is predictable or "safe." Investment from abroad creates a strong capital account and a resulting high demand for dollars.

On the other hand, American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. If our imports are greater than our exports, we will have a deficit in our current account. With a strong economy, a country can attract foreign capital to offset the trade deficit. The U.S. can continue as the consumption engine that fuels all the world economies even though it's a debtor nation that borrows this money to consume. This also allows other countries to export to the U.S. and thus keep their economies growing. This explanation is simplistic, but it illustrates a point.

Factors Affecting Dollar Value
The point is that when it comes to taking a position in the dollar, the currency trader needs to assess the different factors that affect the value of the dollar to try to determine a direction or trend. The methodology can be divided into three groups as follows:
  • Supply and demand factors
  • Sentiment and market psychology
  • Technical factors
Let's take each group individually.

Supply Versus Demand for Dollars
When we export products or services, we create a demand for dollars because our customers need to pay for our goods and services in dollars and, therefore they will have to convert their local currency into dollars. Hence they sell their currency to buy dollars so that they can make the payment.

In addition, when the U.S. government or large American corporations issue bonds to raise capital, and if these bonds are bought by foreigners then again the bonds have to be paid for in dollars and the customer will have to sell their local currency to buy dollars so they can effect payment. Also, if there is strong growth in the U.S. and companies are expanding their earnings then the desire by foreigners to own corporate stocks in the U.S. also requires that they sell their currency to buy dollars to pay for the purchase of stocks.

Sentiment and Market Psychology
But what if the U.S. economy weakens and consumption slows due to increasing unemployment? Then the U.S. is confronted with the possibility that foreigners may sell their bonds or stocks and return the cash from the sale in order to return to their local currency. Hence they sell the dollars and buy back their local currency.
Technical Factors
As traders, we have to gauge whether the supply of dollars will be greater or less than the demand for dollars. To help us determine this, we need to pay attention to various news and event items, such as the release by the government of various statistics, such as payroll data, GDP data, and other market and economy measuring information that can help us to determine what is happening in the economy and to estimate whether the economy is strengthening or weakening.

In addition, we need to determine the general sentiment regarding what the players in the market think the outcome of events is likely to be. Very often, sentiment will drive the market rather than the fundamentals of supply and demand. To add to this mix of prognostication, besides the measurement of supply and demand factors and sentiment, we also have the historical patterns generated by seasonal factors, support and resistance levels, and technical indicators and so on. Many traders believe that these patterns are repetitive and therefore can be used to predict future movements.

Bringing Them All Together
Since trading relies on the ability of a trader to take a risk and manage it accordingly, traders usually adopt some combination of the three above methods to make their buy or sell decisions. The art of trading exists in stacking the odds in your favor and building an edge. If the probability of being correct is high enough the trader will enter the market and manage his hypothesis accordingly. To stack the odds in our favor we therefore need to take into account each one of the three methodologies and hopefully find them to be congruent, meaning that they all point in the same direction.

An Example
The economic conditions during the recession that began in 2007 forced the U.S. government to play an unprecedented role in the economy. Since economic growth was receding as a result of the large deleveraging of financial assets taking place, the government had to take up the slack by increasing government spending to keep the economy going. The purpose of their spending was to create jobs so that the consumer could earn money and increase consumption thereby fueling the growth needed to support economic growth.

The government took this position at the expense of an increasing deficit and national debt. It financed this increase by essentially printing money and by selling government bonds to foreign governments and investors - resulting in an increase in the supply of dollars. Hence the dollar depreciated as a result. Another concern for countries that rapidly issue debt is that the interest burden will increase and, therefore, more tax dollars will be allocated just to cover the interest rate.

One of the roles of the government is to create the conditions necessary to allow the markets to grow so that is the economy is as close to full employment as possible, but with controlled inflation. Thus when the economy deflates the government will try to do all it can to re-inflate it in a controlled manner.

The Bottom Line
It may be helpful for a trader to keep an eye on the Dollar Index chart to provide an overview of how the dollar fares against the other currencies in the index. By watching the patterns on the chart and listening to the sentiment in the market, as well as monitoring the major fundamental factors that affect supply and demand, a trader can develop a big picture sense of the flow of dollars and thus develop an insight to choose profitable positions in future trades. 



Monday, November 4, 2013

What is Consolidation?



Traders who have experience of Technical Analysis and study charts will be aware of the many price patterns which are created throughout any period of time. One of the most used phrases in trading is “Trade with the Trend” where positions and opportunities are taken in line with the immediate prevailing trend. In essence traders are trying to trade with the prevalent market direction and enter the market on the path of least resistance.

It is generally accepted that a market will move in a trending direction only 20% of the time which leaves a staggering 80% where it has no direction of trend. So what is the market doing 80% of the time?

In real terms the market has reached a decision point where it has no direction and is consolidating its position. Price will have found a barrier where it may not progress further in the immediate direction due to sellers entering the market where once the buyers were more dominant or vice versa.

Essentially a period of Consolidation is found where Price oscillates between two barriers of support and resistance within the market and creates a Trading Range.

Consolidation can be found on any timeframe of chart and their duration can vary from a short period of time to quite lengthy periods. Once the barriers of support and resistance are broken and price breaks out then volatility returns to the market and the move can be quite explosive.

Our recommendations recognize both trending and ranging markets and can capitalize on both market types with equal efficiency!