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...