Forex Recipe

Forex trading plan is perhaps as important as having knowledge about forex trading and market basics. A good trading plan and the agreement to stick to it – both are needed if you want to be a profitable forex trader.

A forex trading plan shows you the right direction. As we know that it is important to know how you are fairing as a forex trader, you also need to follow a system to evaluate your performance. Your trading plan helps you on focusing on the target. As it is said that a well beginning is half done, a well-structured plan keeps you ready for the various market situations.

A workable trading plan should have a trading system, a system that is thoroughly back tested, and you have traded on it at least two months with a demo account. You should have all necessary details at place like the time frames you are going to use for your forex trading, how you are going to take your entries and exits, what would be the risk during each trade, currency pairs you would trade, what would be the lot size, etc.

Trading routine is an important component of your trading plan. This would help you in analyzing the market trend and when to start trading. Your attitude toward forex trading should also be considered while developing a trading plan. Keeping out the psychological component from trading is important for your success as a forex trader. Knowing your weaknesses is helpful because now you know what you need to improve. It is important to be aware while trading forex. For example if you identify that you tend to exit early on your trades, you know ways and means to improve it.

Have a realistic goal. They can be either trade related or personal. Keep a trading journal. It helps you in becoming a better trader.

Candlestick is an age-old Japanese method of technical analysis. It was created to analyze rice trade. After many centuries the technique was rediscovered in the and slowly earned immense popularity in the 90s. The technique is extremely visual and with a supporting picture the analysis becomes extremely easy to comprehend.

To start at the very basic level it can be said that Candlesticks are formed using the open, high, low, and close values in the trading market. With practical values from the forex trading, patterns are generated for predicting future trend.

A hollow candlestick, which is displayed as white is created when the close is above the open. The hollow or filled section of any candlestick is known as real body or body. A filled candlestick, depicted as a black stick is created when the close is below the open.
The thin lines created above and below the body shows the high or low range, and these are known as shadows. The top of the upper shadow shows the high. The bottom of the lower shadow shows the low.

In forex, long bodies show strong buying or selling trend. Longer body shows more intense buying or selling pressure. Short bodies show very little buying or selling action.

The beauty of the candlestick patterns is a single pattern depicts thousand words. Only by looking at the candlestick you get to know many details on one go. For example, a long white candlestick will implicate strong buying pressure. Longer white candlestick means further close above the open. This also suggests that prices increased significantly from open to close and buyers were quite aggressive.

If you find a long black filled candlestick, you know it implies a strong selling pressure. The longer the black candlestick becomes, the further the close goes below the open. This will tell you that prices fell considerably from the open and here the sellers were aggressive.

Initially candlesticks and their implications may appear to be rather complex. But once you go on unearthing the meanings you learn more and more. Keep exploring!

Pivot points are used by professional traders and market makers to spot important support and resistance levels in the forex market. A pivot point and its support or resistance levels are areas where the direction of price movement can perhaps change. They are particularly of importance to short-term traders who wish to take advantage of small price movements.

Both range-bound traders and breakout traders can utilize pivot points. For range-bound traders, pivot points are to be used for identifying reversal points. On the other hand, breakout traders would use pivot points to make out key levels that are needed to be broken for a move to be considered as a real deal breakout.

You can calculate the pivot point and associated support and resistance levels with the last trading session’s open, high, low, and close values. As the Forex market is open for 24 hours, most of the traders use market timing s of New York as closing time, which is 4:00 pm EST as the previous day’s close.

Pivot point can be calculated as

Pivot point or PP= (High + Low + Close) / 3, which means it is an average of the three values.

For calculating the support and resistance levels the formula are:

For the first level support and resistance:

First support or S1 = (2 ´ PP) – High

First resistance or R1 = (2 ´ PP) – Low

For the second level of support and resistance levels the formula are:

Second support or S2 = PP – (High – Low)

Second resistance or R2 = PP + (High – Low)

Almost all the automated charting software will calculate these support and resistance level within a fraction of seconds and plot a chart accordingly. Some of the charting software can also provide additional pivot point like a third support and resistance level and other intermediate levels or mid-point levels.

These “extra levels” aren’t as significant as the main five but it doesn’t hurt to pay attention to them. Here’s an example:

Pivot points are extremely elementary yet powerful tool for any traders involved in forex trading. It is therefore wise to understand the implications of pivot points in forex trading.

Many traders opt for spot foreign exchange trading over currency exchange trading because of the greater liquidity offered by the Spot foreign exchange market. The cost of trading is also lower as compared with currency futures. Financial institutes, banks, and brokers in spot foreign exchange can quote markets round the clock.

Moreover, the spot foreign exchange market is not held back by exchange and fees imposed by regulatory authorities like National Futures Association or NFA. And, these are generally passed on to the customer as higher commissions. Because of this, almost all professional traders and institutions carry out most of their Forex dealing in the spot forex market and not through currency futures.

The working principle for trading spot forex is similar to that of currency futures. The difference lies however on the way the currency pairs are quoted. In Currency futures, the quotes are always made with currency versus the US dollar. In Spot forex, some currencies are quoted like this but for some other pairs, it is just the opposite, which is US dollar versus the currency.

In spot forex, for example, EUR/USD is quoted just like it would be quoted for Euro futures. This means, if the Euro strengthens, EUR/USD will rise just as the case with Euro futures. But, for USD/CHF, which is quoted as US dollars with respect to Swiss Francs, is the opposite of Swiss Franc futures. So, inn this case, if the Swiss Franc strengthens with respect to the US dollar, USD/CHF will fall in spot forex and will rise in Swiss Franc futures.

For spot forex the rule is the currencies are quoted in terms of the first currency in the pair, in terms of direction. If you take the two previous examples, EUR in EUR/USD and USD in USD/CHF is the currency that is being quoted.

Some spot currencies move parallel to the futures contract and some move inversely to the futures. For example, GBP/USD, EUR/USD, AUD/USD, and NZD/USD move parallel in spot and futures. But, USD/JPY, USD/CHF, USD/CAD move inverse for spot and forex.

Spot trading has an advantage over trading currency futures contracts. The first is the margin rate or leverage that clients are offered, which is low for trades done 24 hours a day. In currency futures, however, the client receives one margin rate for day trades and a different margin rate for overnight positions. In spot, the margin rates vary from 1 to 5% depending on the size of transactions.

Hedging is a technique to protect your investment from some forex trading risk. You can draw an analogy between hedging and insurance. When you hedge, you insure yourself against negative events. This, however, does not mean that when a negative event occurs you will come out completely unaffected. But, if you properly hedge yourself, you will not face a big impact. As this is quite an effective risk management technique, it is better for an investor to learn hedging while investing in currency trading. The easiest method is to hedge an investment with another investment. It is to invest in two different things, which have mutually negative correlations.

The techniques of hedging are done with derivatives, which are complicated financial instruments and may appear to be a bit difficult for new investors. Hedging is purely intended to protect your losses. You may not gain huge profit by it. So, you should always justify your expenses in hedging.

Futures contract is one of the most popular instruments that investors use to hedge their investment. It is an agreement to exchange one currency for another at a specified date in the future at the price of the currency on the last closing date. For example, if you use dollars to take a long position in euros but worried that the price of euros will fall relative to the dollar, you can take out a futures contract on dollars using euros. If owing to the market dynamics the euro weakens, the futures contract prices rise, and vice-versa. This way you eliminate the risk from your investment.

Traditional forex options can also work as a great hedging tool. These derivatives allow the buyer to purchase any amount of currency from another trader for a set price. For example, if you buy an allotment of euro with dollars to hedge against the price of euro falling relative to the dollar, you can buy an option to purchase the same amount of dollars using euro at the price you originally bought the euro. If the price of euro rises, you make a profit on your long position and you are out of the money you used to buy the option. But, if the dollar gets stronger relative to the euro, you can wait and exercise the option, buying additional euro at the now reduced rate as specified by the currency option.

The concept of hedging may be complex and you may not use it ever during your currency trading, but it is always better to know to have an insight on the functioning of the forex trading.

Forward Outrights can be describe as a type of transaction in which two parties agree to buy or sell a given volume of currency at a prearranged rate at some date in the future. In forex forward contracts, the contract holders are compelled to buy or sell the currency at a specified price, at a specified quantity, and on a specified future date, and these contracts cannot be transferred.

Forward outrights are tool applied by forex traders quite frequently for hedging risks for futures forex transactions and to take the advantage of interest rate differentials between currencies. Settlement on the value date chosen in the trade implies that although the trade is carried out immediately, a small interest rate calculation is left. The interest rate differential does not typically affect trade considerations if you plan to hold a position with a large differential for a long period of time.

Interest rate differential varies depending on the cross being traded. For example, on the USD/CHF, the interest rate differential is rather small, whereas the differential on NOK/JPY is huge. The reason behind this is when the NOK/JPY pair is traded, you get nearly 7% annual interest in Norway and almost 0% in Japan. If you borrow money in Japan to finance the trade and buying NOK, you receive a positive interest rate differential. The differential is calculated and added to your account. As you can either have a positive or a negative interest rate differential, it may work for or against your trade.

Like this forex forward outrights helps you in taking advantage of the interest rate differentials between two currencies and to hedge your exposure risks. When you purchase a currency for a future date and at a fixed price using a forward outright, you eliminate the risky exposure to foreign exchange rate fluctuations. You can purchase forex forward outrights online through your broker or through trading platform that gives a strong price indication almost immediately.

Cross Rate in Forex trading is the exchange rate between any two currencies that are not of the country in which the currency pair is quoted. For example, if you are in the U.K., a quote involving USD/JPY would be considered a cross rate. But this would not be a cross rate if you are either in U.S. or in Japan.

Cross rates can be calculated if major exchange rates for involved pairs are known. The formula for calculating is the Pip = lot size ´ tick size ´ base quote / current rate. For example, if 100,000 EUR/GBP is currently traded at .6750, and EUR/USD at 1.1840, then 1 pip = 100,000 ´ .0001 ´ 1.1840 / .6750, which is $17.54.

Another way of expressing the cross rate, for example, for GBP/JPY is: GBP/USD = 1.7464 and USD/JPY = 112.29, so the cross will be GBP/JPY = 112.29 ´ 1.7464 = 196.10.

For all the online trading platforms and online brokers you get to know the cross rates almost instantly. They update the streaming prices periodically for investors to know the market trend. You can also download small free online applications for calculating the cross rates for any given pairs.

These applications continuously download data feed to auto-update the currency rates. So, you get real-time quotes. You can customize any currencies that the feed can provide. You would need a browser that supports Java. Before buying or downloading you can also have a live demo of the application.

Ralph Nelson Elliot, in late 1920s, established a correlation between financial market moves and a pattern, which is a totally disciplined pattern as opposed to any chaotic behavior. He pointed out that this repetitive pattern occurred because of emotions of investors influenced by outside sources/news at any particular time.

He divided the market movements into three distinct groups, trends, corrections, and sideways. He also assigned a wave terminology to these specific periodic movements like trend movement as “Impulsive Wave” and a correction movement as “Corrective Wave”. He also showed that a treading market moves in a “5-3 wave pattern”. The first five-wave pattern is the impulse waves and the last three-wave pattern is the corrective waves. Although the Elliott Waves were first conceived for explaining the market behavior of stock, it can be applied to Foreign exchange as well.

The waves formed can be explained on the basis of market psychology. When you watch an upward move, it reflects many investors feeling that the price of the particular currency will go up and as the current price is low, it is better to buy more. If you find a downward trend followed by this upward move, it says, many investors considered the currency to be overvalued and took profits. This causes the price to go down.

Likewise, there are subwaves inside the wave patterns, where each wave section can again be divided into 5 smaller waves. An analyst can judge the performance of the currency with the Elliott wave patterns. Because of the repetitive nature of Elliot waves, you will be able to make a pretty accurate forecast of how the market is going to behave next.

The major difference between the Elliott wave principle and any other cyclic theories is that Elliott wave do not suggest any absolute time requirement for a cycle to complete. This poses some interpretive challenge for the theory.

The forex markets are extremely popular trading and investment market. Forex brokers constitute a very important element in this market. There are four types of forex brokers. They are market operators, market makers, small brokers, and kitchens. Forex brokers generally do not charge any commissions. Have you wondered ever how do they make profit?  The answer is spread, which is the difference between bid and ask price.

So, more wide the spread becomes, higher is the ask price and lower the bid price. As a result of which you pay more while buying and get less while selling and earn less from your trades. That is why it is advised to look for a broker who is offering tightest spread. But, do not believe the promise of best spread. If it is “too good to be true” an offer, be cautious. Good quality always demands a fair price. Brokers, however, do not normally earn the full spread, particularly when they hedge the client positions.

Spread policies vary significantly from one broker to the other. Often, the policies are not transparent. Some brokers offer a fixed spreads that will remain the same regardless of market condition and liquidity. Others offer variable spreads depending on market liquidity. For them, it is tighter when there is good market liquidity and wider when liquidity is less.

Some brokers who have fully automated trading systems and no direct human involvement can offer the tightest spread. They are electronically connected to many liquidity providers. These liquidity providers can hedge the client’s positions. For every hedging trade, they select the provider with most attractive price. The broker, in tern, can pass on this price saving to their clients as tighter spreads.

The forex markets are extremely popular trading and investment market. Forex brokers constitute a very important element in this market. There are four types of forex brokers. They are market operators, market makers, small brokers, and kitchens. Forex brokers generally do not charge any commissions. Have you wondered ever how do they make profit?  The answer is spread, which is the difference between bid and ask price.

So, more wide the spread becomes, higher is the ask price and lower the bid price. As a result of which you pay more while buying and get less while selling and earn less from your trades. That is why it is advised to look for a broker who is offering tightest spread. But, do not believe the promise of best spread. If it is “too good to be true” an offer, be cautious. Good quality always demands a fair price. Brokers, however, do not normally earn the full spread, particularly when they hedge the client positions.

Spread policies vary significantly from one broker to the other. Often, the policies are not transparent. Some brokers offer a fixed spreads that will remain the same regardless of market condition and liquidity. Others offer variable spreads depending on market liquidity. For them, it is tighter when there is good market liquidity and wider when liquidity is less.

Some brokers who have fully automated trading systems and no direct human involvement can offer the tightest spread. They are electronically connected to many liquidity providers. These liquidity providers can hedge the client’s positions. For every hedging trade, they select the provider with most attractive price. The broker, in tern, can pass on this price saving to their clients as tighter spreads.