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Jul 24 2009
Currency rates and the differential between countries and over time is the meat of the foreign exchange game. They are constantly changing and the better your ability to predict these changes the more money you are going to make over time in this market. So naturally a few tips in this area are worth their weight in gold.
So what are some of the things that should be learned when attempting to understand the changes in currency rates? What affects currency and the perception of their value up against the currency of any number of other countries? I make no guarantees in this article but hope to point you in a few worthwhile directions so that you can understand and therefore profit in this goldmine of a market.
Before I start I want to mention the potential for profit if you understand and are willing to put some time into mastering the factors involved in the changing currency rates. Perhaps the most important thing to understand is that thought this market has been around for a long time relatively few people are taking advantage of it. The market is not saturated and therefore there is a lot more room to compete and be at the top of the game. Why is this? For one thing it just has never been as flashy as the stock market. Part of this is how things have played out in the media and in our economy. Industry is for some reason valued more than the overall economy and the public’s perception of striking it rich is stronger in the stock market. It is true that the potential to strike instant riches is greater in the stock market with new companies forming and old ones failing far faster than countries are forming and failing. However the potential for constant and predictable gain is more in forex.
Why? Well for several reasons. One the currency rates, or in other words the value of a currency is dependent on something that is far easier to evaluate and predict. The chief operator in this game is the overall economy of that country, which is far more stable and predictable than the ability of a company to earn a profit in the cutthroat world of business. You can judge with far more accuracy how a current event or change in leadership is going to affect an economy globally than you can how a company will perform.
The main reason for this is the information differential that there is more information available on current events and the lives and values of governmental leaders than there are on private companies. This is due to the concentration of the media in this area and the fact that it is more important for a company to be private in order to not give an advantage to their competition.
So in order to be good in the currency rates game you have to read your newspaper and have a general idea of the public and global perception of an event and a government and how these things will affect the economy of a country. Something that we do almost every day anyway.
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Jul 24 2009
Options give you unlimited profit potential and limited risk. If used correctly currency options will give you staying power and huge leverage, but most traders don’t know how to use them correctly.
What you need to do is know how to use currency options correctly which the bulk of traders fail to appreciate.
Getting the Odds on Your Side
We are not going to go into details about how currency options work, there’s plenty of free information on the Internet - here we’re going to look at strategies to increase your odds of success.
Potential Rewards are not what they Seem
The first thing a trader needs to consider when buying an option is how much time is needed, and what strike price is a good target.
Many inexperienced currency options buyers look at the profit potential, and don’t consider the potential losses.
They buy strike prices too far out of the money, and options that are to close to expiry.
Just like the mug gambler who always backs the outsider, they lose their bet.
So, How Can You Increase the Odds of Success?
There are two points to keep in mind:
1. Time to expiry of the option
2. The strike price targeted
Firstly, you need to keep time on your side, and buy strike prices that are not to far out of the money - buy “in the money”, or “at the money” options.
Your profit potential may not be as great, but your risk will be reduced - and your chances of Success far greater.
Keep in mind your option does not just need to go your way from when you bought it - it needs to trade in the money by expiry.
For example, a trader sees the pound trading at 1.70 and buys a 1.90 call. The price goes the way they thought and reaches 1.87 - they then run out of time and the option expires worthless. This happens all the time - prices move in the right direction, but the trader makes no money.
The trader feels they were unlucky - and tries the same again.
However, keep in mind “being close” does not make you money in options trading!
To make money in options you need to buy in the money options, with plenty of time value - this will increase your odds of success dramatically.
How to Buy Currency Options in Longer Term Trends
When trading the longer-term trend, position yourself into the trend in the following way.
. Identify the long-term trend via technical analysis
. Wait for a dip in the currency to position yourself in the trend.
. Watch for dips to support - and then look for confirmation with stochastic crossovers, or other momentum tools to initiate the trade.
. A great way of buying options in the long-term trend is to look for dips to the middle of a Bollinger band to time entry. This is a good timing tool in strongly trending markets.
The above is a simple strategy, and one that can help you make big profits from currency trend following. Use options correctly, and you will have limited risk, unlimited profit potential and great odds of success.
Don’t make the mistake that most novice traders do - make sure you use time to your advantage - and keep those strikes in, or near the money, and you will create big capital gains longer term.
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Jul 24 2009
With the growing popularity and easy access to the foreign exchange (ForEx) market, more and more people are drawn to it as their financial vehicle of choice. Along with this popularity come all the extras. This includes all kinds of software, trading systems for sale, books, videos, and third party signal party providers. Today I’m going to touch on a few points when seeking out a third party forex signal provider.
Before we get into choosing a provider we need to have a good understanding of what a third party signal provider is. A signal provider is a trader or analyst that generates trades that in turn get placed on your account. You can have several signal providers trading your forex account or just one.
Like anything else, all third party signal providers are not created equal. At first glance a trader may look like a home run. That same trader may well end up completely torpedoing your entire account in one afternoon. To help make sure this doesn’t happen we’ll set down a few guidelines. These guidelines will give us something to look for when choosing our third party signal provider.
1. The first thing I look at is weather the trader is a winner or a loser. This may seem obvious to nearly everyone, but I often see losing signal providers with 50-100 people trading their signals.
2. The next thing I look at is how long they have been a winner. If a trader has been winning for a week that means nothing to me. I recommend that you don’t trade any signal provider with less than a few months of results to show you. Any one can place a few good trades one week and get lucky. If you are going to be trading this trader’s signals they need to be established.
3. Look at the max draw down. This is the largest peak to trough draw down in equity that the trader has historically had. Some traders refuse to take a loss. This causes them to hold on to losing trades forever or until they turn to a winner. Turning a loser into a winner sounds great, but it will eat up a huge chunk of margin and may never turn around. If it doesn’t turn in your direction, you will have your entire account destroyed by a trader that could have taken a 30 pip loss but held on until it was an 800 pip loss.
4. The first three are easy to look at. They will be displayed right on the main screen of signal providers to choose from. Once you get a few signal providers you are thinking of using, its time to dive a bit deeper into their history.
a. Look at their actual trades. Do they have a good win rate because they have opened a ton of trades all at the same time on the same currency pair? They may have 20 winners in a row. This looks great, but if you look a bit deeper you will see that its really only 1 winning trade places 20 times. Not as impressive is it?
b. Look at their draw down on individual trades. Do they let a trade go 300 pips against them and then close it out when it hits 5 pips of profit? This is a trader who lets their losses run out of control and cuts their winning trades short. It’s not a trader that you want in control of your money.
c. Do they add to losing positions? A trader who constantly adds to losing positions hoping it will turn for them is not someone you want trading your account.
5. Choose a signal provider that suits you. Some traders may provide larger returns over time, but take bigger risks leading to bigger draw downs. This might be OK with you. If you are more conservative and cannot stomach large drops in equity you probably should choose a more conservative trader.
These are just a few things to look for when choosing a third party signal provider to trade your forex account. You should always trade a demo account before opening a live account with real money. Remember it’s your account. In the end you choose the signal providers, and you are responsible for what happens.
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Jul 24 2009
Bollinger bands will help you to predict big trending moves, act on big trend reversals and finally, time trading positions with greater accuracy for bigger profits.
Here we have related Bollinger bands to the currency markets (as it is here that they are most useful) - but they are useful in all financial markets.
What are Bollinger Bands?
Developed by John Bollinger, Bollinger bands are volatility bands drawn around a simple moving average.
You calculate Bollinger bands using the standard deviation of price over the same period as moving averages and plotted as lines above and below the moving average.
As moving averages have been traditionally used to identify the underlying trend, Bollinger bands combine this with the volatility of the individual market (or the standard deviation) – to plot a trading envelope.
The distance between upper and lower Bollinger bands reflects the volatility of the market traded.
As prices force themselves away from the longer-term average, the standard deviation rises - and thus the bands will fluctuate in varying amounts, away from the average.
Why Bollinger Bands Work
In any market, the value of currency traded tends to rise slowly over the longer term.
Prices may spike short term, but will normally dip back to the longer term moving average (the centre band) - which represents realistic value.
The volatility of the outer bands therefore gives us an indication of how volatile prices are - and how far away price is from longer-term value.
Most price spikes are caused as much by trader psychology, as the supply and demand backdrop - and this scenario is reflected in the concept of Bollinger bands.
Why are Bollinger Bands so useful?
Bollinger bands perform three major functions for traders:
1. Spotting a Breakout and New Trend
Markets move between low volatility trading ranges, to high volatility trending moves.
When a market makes trades in a narrow range, the Bollinger bands will narrow together and this shows a market with extremely low volatility - however this is a warning that a high volatility trending move is likely to follow.
When prices break above or below the upper or lower band, it is an indication that a breakout and trend is about to develop - traders will then take a position in the direction of the breakout, and try to ride the trend.
2. Timing Entry Levels in a Trend
We all know long term currency trends last for months or years - but we need to get in at the best risk / reward level.
Bollinger bands will help get you in to the trend and time your entry.
All you do is watch for dips toward the centre band - and enter in the direction of the trend - it really is that simple!
To time your entries with greater accuracy, and filter out “false” breaks we recommend using a momentum indicator - such as stochastics, to confirm the move.
3. Spotting Market Reversals
When the price touches the top of the band, a sell is generated, and prices should revert back to mean, or the middle moving average band.
If the price touches the bottom of the band, traders can buy a currency, assuming that it is oversold, and will rally back towards the top of the band.
The spacing, or width of the band, is dependent on the volatility of the market, but gives traders a clear indication of where prices will go, and when to enter.
A Word of Caution!
Bollinger bands are a useful tool - but need combining with other indicators, as with any single indicator, they should not be used in isolation.
We personally feel Bollinger bands should be used with basic charting, to get the big picture - and the best timing indicator is the stochastic as stated, to filter out “false” signals
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Jul 24 2009
The key to the FOREX market for the average investor is the margin. Without margin trading currency trading would be beyond most investors. I will explain what the margin is and how it works.
When you have a margin account you are able to control large amounts of currency with a relatively small cash deposit. When you have a margin account with a broker you are in effect borrowing money from the broker to control a larger lot of currency. Currency is normally sold in lots with a value of $100,000. A common term used when discussing margin accounts is leverage. Leverage is how much you can control with a certain amount of money. The leverage is usually displayed as a ration such as 1:100. That would allow you to control currency worth 100 times the amount of money you have invested.
To better explain this in a FOREX exchange with a 1% margin account you could control $100,000 worth of a currency while only investing $1000. Margin accounts can allow you to greatly increase your profit; they also allow you to increase your risk. With a margin account it is possible for a trader to lose more than their initial investment. With a little prudence though losses can be minimized. Most brokers will terminate a trade before the losses exceed the original deposit.
Benefits
As discussed before a margin account allows you to buy more with the money you have which can greatly increase your profit on successful trades. By controlling a $100,000 worth of currency for only $1000 the potential gain is greater. When dealing with large lots of currency even small changes can produce significant results.
Currency on the FOREX market is traded in far more precise units than actual cash is. As an example the American dollar is traded down to four decimal points. So when you were to quote the dollar against another currency you will see a price like $1.7834 instead of $1.78. A PIP is the smallest unit when trading currencies, when dealing with $100,000 lots then each pip is worth about $10.
If the price of the American dollar changes from $1.7834 to $1.7934, you have a net difference of 100 pips. If you have a lot of $100,000 then that 100 pips will translate to $1000 where as if you were not using the margin your original $1000 would only show a profit of $10. Hardly what most would consider a highly profitable trade?
In short the primary benefit of using a margin account is that it can greatly increase the profit margin of a trade.
Risks
Since there is such a significant increase in profit potential when using a margin account it only stands to reason that there is also an increase. In fact it is quite possible to have your entire margin account wiped out fairly quickly. When using a 1% margin account a shift in the currency of a single penny will cost you $1000.
The FOREX exchange has many safety features to help you reduce the risk of this happening. One example is a stop loss order. A stop loss order will automatically close out your position in a currency if the price crosses the point you have set. This allows you to limit your losses while still having the opportunity to realize a profit.
Another risk that many people overlook is that if the price nears the point where your losses are close to being equal to the value of your margin account your broker may close out your position. If you were trying to rid out a temporary downturn that you expect to turn around soon you could find that your broker has closed it causing you to lose your entire balance and have no option to make a profit if the price moves up again.
This is a basic introduction to margin accounts and how they work, visit the website listed below to learn more about the FOREX market.
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