Pivot Point Trading in Forex

Pivot points strategy was initially used by the floor traders. It has been in the forex world for quite sometime now. Floor traders could use this technique to easily get an idea of the future market movements, based on simple calculations.
Pivot point is actually the point or level where the market changes course for the day. Pivot point calculation involves plain mathematical estimations on last day’s high, low, close to get a series of point. The points so arrived at can decide important support and resistance. Pivot level thus includes the support, resistance and the pivot points calculated
Pivot points are favored by most traders mainly because of the ease of calculation as also because they can be very analytic. Using previous day’s information traders can assess the potential points for the coming day(s). And since pivot points are used by a large number of traders, it is frequently found that the market really shows reactions at those points. Pivot points are used on a large scale by the traders hence pivot point calculation can give suitable opportunities for trade.

Pivot points are generally calculated using these formulae
PP = (HIGH + LOW + CLOSE) / 3
S1 = (2 * PP) - HIGH
S2 = PP - RANGE
S3 = S2 - RANGE
R1 = (2 * PP) - LOW
R2 = PP + RANGE
R3 = R2 + RANGE

Where PP=Pivot points=Support, R=Resistance.
The above classical calculation uses high, low, and close from the regular trading hours sessions. They are thus based on the original time frame used by floor traders.
There are lot of variation and newer versions of the formulae as well. Most of them incorporate an average of the prices set of the last days high low, open and close and the current day’s open.
The above classical formulae help us calculate the most common support and resistance levels.

Read more...

Spread and Liquidity offered by Forex Brokers

Almost all brokers provide a thin spread for the major liquid pairs. Brokers can be seen to offer a spread of 2 to 3 pips for pairs such as the USD/JPY, EUR/USD, and the GBP/USD USD/CHF respectively. These are some of the most liquid pairs a trader generally focuses on.
Also, most forex brokers do not make a commission on every trade a trader makes. Their profit is based on the bid/ask spread calculated in pips. Like previously mentioned day traders try most to catch the small price fluctuations throughout the day. Profit goals here are smaller compared to a swing trader. For a day trader each pip counts.
Traders usually don't rather can’t afford to, trade with larger spreads because that can lead to the consumption of profit to such an extent where the required risk/reward wont be available. Most forex trading takes place with the more liquid pairs.

Read more...

Trading time for day traders

Since forex market operates on a 24 hour basis throughout except on the weekends it is crucial to understand the different currencies behavior. Day traders need to know the “personality” of the currency pairs they are trading. For instance the GBP/USD pair is the most explosive in the early to mid hours of the European session. Day traders often take lead of the rapid price movements of the pair rather than trading any other pair with slow or no activity. The USD/CAD pair is quieter during this time and gains momentum just before the start of the US session. All release of the Non Farm Payroll sees that most currency pairs have a little price range up to discharge time. Most traders do not consider trading during in these prior to announcement hours with plans based on breakouts. Strategies based on range support and resistance will be smarter.

Read more...

Time frames crucial for intraday forex traders

A day trader’s chief concern would be capture day swings. Of course day trades start and end the same day. Each day matters for intraday traders. This is where time frames come into focus. I always to recommend that day trading be done on 1, 5, 10 minutes bar chart. Intraday trades need to catch various rapid movements within the day and hence these charts are appropriate to focus on. Larger time frames may also be used for analysis. This depends mostly on trader specific strategies and the way of training. For instance some day traders may look at the hourly charts to gain an idea of the market behaviors in the last week. Again this is varies from one trader to another. Still other traders believe that bigger time frame analysis would be more beneficial. From personal experience I can say that more than necessary analysis leads to conflict and still further uncertainties emerge, and especially with novice traders. In other words, day trading can be simplified with smaller time frames and if larger frames hold you up from placing your trade then, it’s best to simply stop.

Day traders can best trade on a volatile and liquid market. Selecting a market here is crucial. For day traders the markets need to as volatile s liquid. The volatility needs to more stable rather than transitory. As I mentioned before, for intraday traders volatility is the ‘refuge’ every trading day. A liquid market will offer you with better order fill. This is vital because as a day trader you target is to make small pips whereas bigger slippage may eat away profits. For a day trader this may add up to a bigger sum.

Read more...

Trend trading works in Forex Trading

Trend pattern trading has emerged as one of the best forex trading styles the last 30 years. “Go with the trend” has become the trading motto of some of the most successful traders across the globe. The reason is simple-trends survive and we can trade up and down for profit!

Of course that’s easier said then done. It’s hard to forecast trends until they are actually recorded. This is where our strategy comes in to action. A sound strategy can let us make the most money of any market sentiments by confining the mass of a trend.
Trend pattern trading is in itself a good trading principle. The market is only profitable because it’s constantly changing. And only if our principles can adjust equally well with them. Adaptability is the watchword-which lets the trader consistently pull profits from within the market.Flexibility in the trading plan has already been highlighted in one of the previous posts.

That said there really is no secret to successful trading except hard work. I always like to say the “holy grail” is actually hard work. Massive trends can be pandemic. They tend to multiply easily. Extreme trends often feed upon themselves progressing rapidly and allowing opportunities for big profits on themselves.
Many traders here go wrong by being interested in understanding it. That right. People have hard time chewing this idea because of the “proportion”. What is more required is that we understand that sometimes small market event can lead to huge market changes. What we require with Trend pattern trading is that we locate and exploit trends before they appear or emerge.

Likewise with the trading systems. The best of systems cannot make up for lack of discipline. The system is only as good as the trader using it.

Read more...

Demand and Supply moves the Forex Market

Forex market is mostly controlled by the universal forces of demand and supply besides world news events.A free floating market such as the forex market runs on traders expectations of future movements of the exchange rates.Foreign exchange trading is also of concern, bedsides the traders, to the common individuals also because goods including clothing, food may be materialized abroad.
As mentioned earlier, an open market as such as Forex works on the principles of demand and supply:
• High supply leads to lower prices, high demand will cause prices to rise
• Abundant supply makes the prices fall
• Similarly, scarcity in supply leads to increased prices
• Higher demand will lead to higher prices; higher supply causes prices to fall

Theoretically, any nation’s currency exchange rates are thus determined by the interaction between the demand and supply. In international trading, a particular currency can be readily available if a lot of investors are selling it at the same time. In case there isn’t an equivalent demand for that currency, prices will move southwards in order to “balance” the demand and supply. The direction in which the currency furthers can cause the cash inflow or outflow of that currency. An appreciation in the currency will cause cash inflow into the country’s assets because investors and traders will take long position to benefit from it.

Read more...

Flexibilty in Your Trading Plan

Trading plans need constant degree of flexibility depending on the previous success or failure of the trades. There are various ways to size a position according to the total equity-simple as well as sophisticated. The easiest of them is not to use any more than 1-2% of the total equity, like discussed in one of the previous posts on risk management. A series of successful trades can let you gradually increase the position size. One of best recommended approaches is to establish the equity and keep the trading “within the means”. Taking too large a position and losing significant amounts on it can always be avoided. Losses lead to shrinking of each subsequent position.


Trading plans also need constant modifications because of the highly volatile nature of the Forex market and its conditions. Trading success is thoroughly determined by planning as well as constantly amending the plan for the better. We really need not carve out the trading plan on stone-the plan must be consistently made better. Here also lays the trap most novice traders get caught into. Changing the plan on very short term conditions can lead to severe results.


The catch is this-trading rudiments need to be robust.That trading plan is the best which can survive the random market changes with some degree of flexibility but that doesn’t need to be reconsidered on every other trade.

Read more...

Tools and Practice decide your Forex Trading Success

I think the most crucial decision a trader makes regarding trading methodology is that of selecting the tools for entering and exiting the trades. Technical analysis can be done with help of trend lines, support and resistance levels, technical indicators, Fibonacci etc. a trading plan is based on the tools the trader chooses. Trading plan outlines the signals a trader is looking for in order to enter and exit a trade. For a trader relying on fundamental analysis a trading plan is equally important which would consist of economic indicators to track along the conditions to enter and exit a market.

I find it advisable to trade on demo/virtual accounts on the trading or broker sites for gaining first hand experience before going live. Most pros will tell that trading on the two-demo and live are two different things still. It is planning a trade that counts in both the cases. And demo accounts help a trader do just that-train the trader technically as well as psychologically on practicing discipline on the trading strategy. It can not be decide as to when a trader should move from the demo to the live. Some novice traders shift from demo to live within two months, other may take more than 6 months. Its really a very personal decision .The thumb rule is –go live only after thorough practice. With live trading emotions come into play, because it’s our own money involved. This gives the learning through demo accounts a slight curve.

Read more...

Formulating a Trading methodology in Forex

Losing in trading is obviously terrifying. It’s important that we don’t judge our trading based on a few trades-be they good or bad. What needs to be understood is that fortunes can be made in forex. It is keeping them that that is necessary. In forex you cannot get different results while doing the same thing. And people do sadly believe that same actions will yield different results.

Successful trading requires that we recognize patterns of beliefs/errors and rectify them at the earliest. Same actions cannot bring different results in forex.
Observation and rationale can help us do that. As such it is rather difficult because the nature of market is at the best random corroborations. And traders will vouch for this because forex market can be seen to apparently punish a good follow while rewarding a bad practice.
In fact in forex market as a trader you can lose for all the right reasons and someone else may win for all wrong reasons. This can be confusing as to what might be right even while it is wrong and vice versa of course. This is sole reason forex trading can be confounding and unsuccessful/unprofitable. This requires that traders adopt a comprehensive trading tactic to become competent traders.


Successful Trading in forex depends a lot on your strategy and method. I always like to emphasize that trading methods in forex needs to be comprehensive.
Discipline is one of the chief attributes of a successful trader. Disciplined traders never trade without a plan. In fact planning the trade is the survival tactic in forex trading and planning is the key to steady capital growth. It is here where the most traders fail. While trading in live markets, novice traders especially, find it hard to practice the same discipline they had while on demo/virtual accounts.


I would like to outline some basic trading methodologies for risk and money management in this next and the coming post. By no means would I say a trader has to use any of these although I really hope them to be helpful to novice traders and hope you may find something worthwhile to incorporate.

The first begins with determining the kind of market you are comfortable trading with. There two major preferences for entering the market. As a trader you can either be a trend follower or counter-trend trader. Or let’s say- a “pro trend” and an “anti trend” trader.
Traders who follow the trend mostly try to catch the long range trends.Sorry again for the blurred pictures.
From the above figure it can seen that the EUR/USD is on the downward trend for about two weeks. Now a pro trend trader would try to enter while he sees a probability of the downward trend continuing. See the trader open a short position on 4th Oct and keeping it open until 15th when there is the sign that trend will continue

A counter trend trader, on the other hand tries to trade the consolidations or range in the market. He won’t just stick to markets that show long term trends. Markets are possible to move in three directions at a given pin of time-up, down, or sideward. An anti trend trader will prefer to trade the up and down movements of sideward (ranging) market.
Here, the anti-trend trader will attempt simple philosophy to buy low and sell high or vice versa –sell high and buy low.

It can be seen above that the trader will short the pair while it reaches a certain high level while long it when it reaches a sure low level/s.
These figures show only a basic or say a rough outline of course. This actually requires the trader has sound technical analysis to back up his forecasting abut the market sentiments. An anti-trend trader tends to rely very much on the support and resistance levels and needs to be prepared to trade opposite the current trend if he thinks trend will witness a retraction or a pull back. Such traders also need to be alert about price breakouts which can threaten their position.

Next up let’s see the trading styles, tools and practice.

Read more...

Manage your Risk in Forex

There is one thing that distinguishes Forex Trading from gambling and that is-Money management. Money management in forex is as important as trading itself. In fact, it is the money management that should come first and the actual trading next.
Money management is the same as the “Risk management”. The amount of money invested in a trade is directly related the risk it carries. It is ability to bear the loss in case of a bad trade.

Most trading focuses on only making profit. The real focus should be to “protect the capital invested while making profits”. Unnecessary risks only burn the account with false/ill managed trades. Money management allows us to establish our own system in such a way that will guard the most crucial asset-your investment. Without the capital the game is over.

A few principles can be outlined here.

Trading with enough capital:
There isn’t a worst blunder than giving trading a shot without “sufficient” capital. Sufficient has the connotation of the spare/extra money you may have which you can afford to lose. A trader with restricted capital is not only always looking for cutting losses beyond what is realistic and hence always worried. The is one of sure shot way to fail in trading. In India only we have stories of traders committing suicides because the loss was too heavy to bear. Forex is risky by nature. Trading with the hard earned money will only cause heart burn.


Be disciplined:
Forex trading needs to be extremely disciplined. The word has been used to the extent of it becoming a cliché now. Nonetheless its significance has not lessened. And it needs to be continuously emphasized with being equally difficult to master. A disciplined trader will plan the trade and trade as per the plan. If its one word that separates Successful traders from others-it is Discipline.


Rule of thumb: don’t risk more than 2% of your total capital
How many trades will be successful in a system is never certain. Without money management you can be broke even before you can recover with further successful trades. It will require a new deposit each time. With 1% risk the trade is even more secure. But the key is not to risk any more than 2% of your total equity.


To sum it up
• Discipline saves from any unnecessary losses
• Risk is best minimized to a small percentage of the total capital.
• Use the risk-return ratio where less is more.

Read more...

Trading Journals in Forex :Turn your Weaknesses into Strengths

Keeping a trading journal helps a lot as it eventually becomes a valuable self written and analyzed resource. It really helps us better out trade because we have detailed information and can recognize and further eliminate/avoid making previously committed errors again and again.

I cannot over emphasize the importance of keeping a trading journal. One of chief reasons is that you can classify your errors into certain groups like “didn’t stick to the strategy”, changed time frame”, “and went against stop”, “stopped it too soon” etc and then easily identify a short coming in your trading strategy and work in the direction of not repeating it. I always like to focus on a single error and wipe it completely and then get on to the other-eventually mastering your weaknesses.

And then we have such varied options to do the same. It becomes extremely simple with a word doc, Excel spreadsheet,you blog or a thread on the forums. The last one is particularly interesting and useful for novice traders as you can readily share your trading experiences with others.I also like to participate here in other such sites where you can answer other people's queries.

But we cannot find all traders keep a journal. And there’s a reason. Keeping a journal is not hard however it needs “work” and a certain level of consistency. If it aint for that it is rather worthless. The key here again is that it gets better with time. The key to successful trading is to continuously measure, chase and keep it focused. I always like to say that two things in Forex trading can be disastrous- half baked knowledge and half –hearted efforts. Keeping a journal helps fight both.

You can include all the details in your journal
Fundamental and technical trading strategies
A profile of major currency pairs
Trade parameters for different market conditions
What moves the currency market?

With your trading journal you can enter the market with confidence and exit with exits!

Read more...

Popular Currency Crosses in Forex

Currency pairs in forex trading exclusive of the USD are commonly termed as cross currency pairs.
Pairs which include the Euro are referred to s the Euro crosses like EUR/JPY and EUR/CHF. Other pairs that do not deal with the euro can simply be called cross rates as the CAD/JPY, GBP? CHF etc.Currency crosses are the next most important pairs in forex after Major currency pairs.

The Yen is fast becoming a favorite due to lower interest rates on it and it trades excellent with NZD. NZD/JPY can let traders be eligible for good day interest fees if the pair is held long.

Trading the EUR/JPY
It is one of the highest traded cross currencies influenced chiefly by the movements of the EUR/USD and USD/JPY. Differential interest rates and growth rates in Japan and the Euro zone are crucial drivers. Oil price again is important as Japan nearly all its oil requirements.


Trading the EUR/GBP
UK’s second largest trading ally is the Euro zone. If you want to trade the British pound, this is one of the pairs you can trade as GBP/USD is affected more by the market outlook of the USD.

Vital points to be considered are the interest rates differences between the Bank of England and that of Europe (ECB). Other related economic data of the two zones with their growth differences is inevitable.


This pair is great for rather novice traders as it’s relatively low on volatility. And can be traded by using and analyzing the technical analysis with the fundamental.


Trading the EUR/CHF
Euro is a major trading associate of the Swiss zone. The pair is attractive currency cross for carry traders as the CHF has rather low interest rates while the largely tech and fundamental perspective supports the pair.
The interest and growth rate differences of the ECB and national Swiss bank and the fundamentals of the concerned zone are imperative.

The pair is characterized by going long on a high yielding (euro) currency against a low yield (CHF). Traders can earn day interest as the rollover fees if hold the pair long.


Trading the NZD/JPY

This pair is always excellent for carry trades as the pair has one of the highest interest rates differences. It also becomes appealing as the currency cross to long on carry trade with the technical and fundamental outlook mostly supporting the rise of NZD/JPY.
Important elements are the interest rate differences between the Bank of Japan and the reserve Bank of New Zealand. As also the fundamentals of both the zones.

The pair can be traded by using the technical and fundamental news reports from the respective zones. Traders can earn rollover fees when holding this pair long.
The pair attractive mostly due to the big differential interest rates between the NZD (7%) and JPY (0.25%).


Trading the GBP/JPY
The pair sees most of action. If its volatility that you are looking for look no further than this pair-it can move 300 pips in a single day.

The interest rate difference between the two concerned banks-that is the Bank of England and that of Japan is important. As also the differential growth rates between the zones. Oil price is very crucial as Japan imports 99% of it oil requirements.
GBP/JPY come across as an extremely volatile cross currency pair and hence is no pair to cut teeth.

Read more...

Commodity Pairs in Forex Trading

Continuing from the last post on Major Currency Pairs, lets talk about here the Commodity Pairs.

Three pairs have maximum association with the commodities namely the Australian dollar (AUD), the Canadian dollar (CAD) and the New Zealand dollar (NZD). Of these the AUD/USD and NZD/USD are the pairs very much related with rise and fall in gold price.
And the USD/CAD is the pair benefiting most from any rise in oil prices.

It is always a good idea to consider the associated commodities while trading with the commodities pairs. It assists us greatly in forecasting any movements. Suppose you can see gold continuously rising, then you can think of buying the Australian dollar because it’s highly directly related to gold.


Trading the AUD/USD
Australia is the third largest exporter of gold in the world, hence the apparent high direct Connection of the AUD with this yellow metal. As mentioned above, if gold can be seen to increase in price consistently, it may be good strategy to favour a commodity based currency like the Australian dollar.
Two points are important here:
I find myself reiterating this however if you believe gold prices will continue to rise, then it may be a sound to favour the AUD, because it is around 80% positively related to gold.
As AUD/USD is directly correlated to bullion, I always like to compare the gold charts and AUD/USD to predict further movements. Consider this: If AUD/USD doesn’t break resistance level with gold breaks above a vital resistance level, chances are high that AUD/USD will break above also. Thus gold can be seen to escort the movement of AUD/USD.

Trading the NZD/USD
New Zealand’s economy is related to Australia. Hence the natural very high positive relation between the NZD and AUD. the NZD can be found to have even more positive correlation with gold prices. And this correlation can has been increasing in the recent times with the correlation being as high as 88% in past three years. Here again if you can see gold rising there’s good reason to favour a currency like NZD because with gold rise it is extremely probable to follow suit.
Thus we can find that NZD is very much directly related to gold price and a good strategy may be to buy it when gold is rising.
Comparing the gold charts with NZD/USD helps in forecasting future moves of the pair.



Trading the USD/CAD
This pair is one of the biggest benefactors of the rise in the oil prices. Canada is one of biggest exporter of oil to the US. We can see Canada will have a boost in its economy if the oil price continues to gain. Thus, oil price rise furthers the CAD. The Association between CAD and oil price has been pretty high with sometimes it being as high as 80% in last few years.
You can consider buying the CAD if you can see the oil rise in the future.
Then again, comparing the USD/CAD and the oil charts is helpful in predicting future movements of the Canadian dollar. If you can find the CAD hasn’t broken the resistance level in spite of the oil breaking above a vital level, USD/CAD is mostly likely to break above too. This explains how the movements of USD/CAD are lead by oil price.

Next up we'll see about the popular currency crosses.

Read more...

Major currency pairs in Forex Trading

The US dollar serves as the one of the currency for the seven most liquid pairs traded in forex.First fours are the major pairs followed by three commodity pairs. Pairs that include the Euro as also referred to as the currency crosses as the EUR/GBP, EUR/JPY, and EUR/CHF etc.

Let’s see how the four major pairs fare.
EUR/USD
GBP/USD
USD/JPY
USD/CHF





Sorry for blurred pic.You can click on it for better veiwing.

Trading the EUR/USD
The pair is both days traded and swing traded. Since the pair is one of the strongest, advances as well as the new traders invest in it.


Trading decision can be based on analyzing and applying Technical and Fundamental news from the Euro and Us zone. Unexpected economic news release can drive the pair to further ahead in a single direction without any retracements.
Another point to be considered is the comparison between the EUR/USD and USD/CHF.
Euro-USD is mostly inversely correlated to USD/CHF, thus comparing charts for both help in future movement predictions. To illustrate- the EUR/USD is likely to break under the support level if, the USD/CHF breaks above a significant resistance level and the euro USD doesn’t break support level. In a way, USD/CHF seems to escort the movement of EUR/USD.


Trading the GBP/USD
This is third most traded pair in forex. And also one of the most volatile. Novice traders are not advised to trade in this pair until some experience is gained.

News from the UK and US zone assists making trading decision for this pair. The pair is prone to false breakouts. Other factors that affect the pound are, firstly, the difference between the interest rates of the Federal Reserve and the Bank of England. Secondly, high growth in the UK can push the pound further.



Trading the USD/JPY
This pair accounts for the second most traded pair in forex. News from the Asian zone is crucial to make related trading decisions. The USD/JPY often sees sustained breakouts.
Other factors that affect the pair can be the difference of interest rates of the Federal Reserve and the bank of Japan. Any interference of the Japanese government to strengthen the Yen, can worsen the pair



Trading the USD/CHF
It is least traded major pair. As mentioned above this pair is negatively related to EUR/USD.
Traders with moderate experience and of course the learned traders can trade in this pair.
Trading news from US and CHF is relevant. USD/CHF pulls through the geopolitical volatility. Also global stability will mark further movement in this pair.

Most of the pairs are both swing and day traded. While the average spread varies between 2-4 pips for EUR/USD and USD/JPY, for GBP/USD and USD/CHF its 4-5 pips.
Next post sees the personality traits of the commodity pairs.

Read more...

About this Blog

I have been trading stocks and forex for close to four years now. This blog was long pending. I would like to make the posts as understandable as possible for noobs while trying not to compromise on its quality. And so the pros should find it equally interesting.I hope to post daily updates from my Forex Broker site as well. You can see some posts dedicated to updates , in the future.

All comments, suggestions are welcome.

Happy Trading!

Read more...

An Introduction to Forex Trading

Forex or the foreign exchange market is where the brokerage firms, banks and traders are linked over the network, now mostly electronic, which lets them convert one currency into other .Of course forex trading is not as simple as it sounds. Forex is today as full fledged a profession/business as any other.

Forex market is world’s most liquid markets for the obvious reason that it deals in actual currencies. The market is also the largest with more than $1.5 trillion traded daily.
Forex trading has gained more significance in the last decade than ever before. Currency trading which was only limited to international government and commercial banks and companies has become increasingly accessible to the common man for private trading, and more so with the World Wide Web.

The majority currency traded is the US dollar in combination with the Euro, Bitish, Pound, Japanese Yen, Canadian and Australian dollar and the Swiss Franc. The forex market is characterized by it’s throughout working of 24 hours on weekdays. The actual trading does not take place in a place such as in the stocks and futures market. Thus currency trading is global.

The deal of currency involves buying one currency and selling another. Thus we have pairs of currencies like EUR/USD, USD/JPY etc. the first of the currencies in any pair traded is the “Base” while the other is the “quote” or counter currency. For Eg A trade is executed when the values of currency you purchased increases in comparison to the currency you wish to sell. The US dollar is one of strongest money in the world and it therefore found to be the base in most pairs. We often find the change for other currencies in terms of US dollars.

Contract size is one of the very vital terms in forex, which is normally a batch of 100,000.in other words, with each standard you are controlling 100,000 units of a base currency. Each Profit in Percentage, PIP , is therefore equivalent to $10. Mini accounts are also available , nowadays, for 10,000 units with each pip worth $1.

The next post will be about the major pairs traded and their characteristics. As also the risk element in forex trading.

Read more...