Forex analyzing Education

Forex Money Management

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With a strong knowledge on how to read your forex chart, you are now ready to trade. However I will like to take this chance to talk about something known as the trade management. Without proper trade management, you will never be profitable as you will always find yourself being stopped out in the end.

This is the exact thing that I do whenever I am trading and I hope that you will put it to practice as well.

The most important thing in trade management is never to adjust your stop loss to put you to greater risk as well as cutting short your target profit. This will lead to you constantly trading with low risk reward ratio.

For example: You enter a SHORT trade and you see the price slowly moving toward your stop loss of 30 pips and you decide to shift the stop loss to 50 pips hoping that the market will eventually move in your favour.

Most of the time, you will find that the price will still stop you out at the 50 pips which means that you are now trading with more losses. As a trader, we have to accept the fact that we are in a wrong trade whenever the price moves to stop us out and not to shift the stop loss to incur bigger loss in the end.

This is a very common mistake made by new traders as they are unable to accept any loss in their trading. So I am going to share with you something that I usually do in my trading.

Whenever the price moves against my position, I will stick to my stop loss and if the price ultimately stops me out, I will accept it and look for another trade to occur.

If the price moves in my favour, I will slowly shift my stop loss to breakeven and eventually wait for the price to hit my target. In this case, even when the price reverses to stop me out, I am not losing a single pip and this is how I protect my capital.

The creation of a speculators’ wealth comes from how they manage.

Until you use a money management approach, you will be a two-bit speculator, making some money
here, losing some there, but never making a big score. The brass ring of commodity trading -will always be
out of your grasp as you sashay from one trade to another.

As a trader, it is very important for you to understand the importance of protecting your capital. To a professional trader, protecting his/her capital is more important than winning a trade. If you are planning to become a profitable trader one day, you must understand and apply this good trade
management skill to your trading.

Another approach to this money management system I want to show you is a more conservative/safe tweak that can be added, at the cost of some reward potential.
Instead of opening one trade order, you open two instead, both with the same stop loss and entry
prices. The only difference is you split the total amount of money you want to risk on the trade
between the two orders. So if you want to risk $200 on the trade, you set the two trades at $100 risk
each with your lot sizing.
On one of the trades, set your target for a risk/reward of 1:1
On the other trade, set the target as your original target price for the trade.
When the 1:1 target trade gets hit, you collect $100. This $100 now covers the risk on your second
trade which is still open. This makes the second trade a “free trade”, because if the second trade was to get stopped out, you would lose no money. First trade was +$100, second trade gets stopped out
-$100. The only way you can lose money with this tweak, is if the 1:1 trade does not hit target and
both trades get stopped out.

What is the Trend Line

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What is the Trend Line

Before we get started, we have to determine what a trend is before we can trade it. A trend, to a trader, is based largely on the timeframe they are trading. As you have learned, the 2 most important timeframes, as far as I’m concerned, is the timeframe you are trading and the next higher timeframe.

For example, if you are trading the 1 hour timeframe, the important timeframes would be both the 1 hour and the 4 hour. The 1 hour is the timeframe you trade, the 4 hour becomes the timeframe that helps you decide if you are trading in the right direction. This relationship exists with both trend trading and counter trend trading.

When we look to find a trend, we will be looking at the timeframe we are trading and the next higher timeframe, but the focus will largely be on the timeframe we are trading.

A trend is a continuous move in the market either up or down. During a trend, the market will make small corrections (or pullbacks) along the way, giving you a zig zag look, but overall, the market is moving in one direction.

Below you see an artistic example of an uptrend. The overall direction is upwards as price moves from the lower left to the upper right. During the move there are small retracements against the trend, but overall, the direction is up.

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Below is an example of a downtrend. Price moves from upper left to lower right, and even though there are small corrections along the way, the overall move is down.

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How To Identify The Trend

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Here is where things get crazy!
Not really, actually this is the simplest part of the entire method. Albert Einstein once said “Make things as simple as possible, but not simpler”, and to that end, here is a good way to identifying if a market is in a trend.

Use two Exponential Moving Averages:

21 EMA
55 EMA

When the 21 EMA is over the 55 EMA, the trend is up.
When the 21 EMA is under the 55 EMA, the trend is down.

This definition of a trend is an oversimplification, but it’s where we start.

Keeping my charts clean is important to me, and adding the additional moving averages can make things a little more cluttered than I usually like to see.
For this reason, I color the 21 and 55 EMA’s a grey color so they blend into the white background of my charts to some degree. On a black background, a darker grey color for the EMAs would be my preference.

Below is an example of what my chart looks like with the 21 and the 55 EMA’s.

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The lighter grey color on the white chart doesn’t become overwhelming and distracting, and this is important to note. As we trade FMM, we will be taking trades that occasionally go through the lines, and other times we will be using the lines as both targets and as areas of support and resistance.

I don’t want you to become too distracted by the lines, and having them subdued  is one way to keep them in the background. They are there when we need then and quiet when we don’t.

Why the 21 and 55 EMAs ?

You can experiment with other settings as you like. The 13 and 21 are common for moving averages. Over a lot of testing, I have found the 21 and the 55 to be the most reliable in determining a trend. They are slow enough that they determine when a real trend has legs, but fast enough to not lag behind the change of a trend too long.

As you look at a chart with the 21 and the 55 EMAs, you will see that both of  these MA’s are extremely strong levels of dynamic support and resistance, and this element makes these great MA’s for trend following.

Price never strays too long before returning to the 21 EMA and then the 55 EMA.
This is an important aspect to counter trend trading, price moves away from the moving averages, but very quickly will return to these levels. And because of the excellent ability to provide support and resistance, these moving averages also make incredible targets.

The 21 and the 55 EMAs work on all the timeframes, from the 1 minute to the monthly. This simplifies things as well, not having to look at different MAs for different timeframes, and as you know, simple is good!

Feel free to try out your own settings, experiment with many combinations, with  exponential and simple, or a combination of the two, you might find something that you feel works better for you. Either way, the following pages will show you how to use them.

21 EMA and 55 EMA as support:

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21 EMA and 55 EMA as resistance:

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Even as the 21 and the 55 are great areas of support and resistance, they are also excellent at drawing the price back to it. This concept all on its own makes these moving averages great targets on counter trend trades.

Below is an example of Gold (AU). Lately, Gold has been on an incredible trend,  and as you can clearly see, the moving averages have provided excellent support as price has been moving up, but at the same time, Gold prices have always come back to the moving averages.

Viewing the MAs as support, resistance and targets opens up a new world of  trading possibilities!

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Confirming The Trend

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Here is where we get to the goods, the actual techniques used to trade with the trend.

The first question you might have is “do we need a divergence setup to trade with the 21 and 55 EMAs”, and the answer to this is no. We are taking advantage of a trend, so I will show you how to capitalize on the market’s ability to move with the trend.

Hidden Divergence is an awesome tool, but as a trend continues, there are more opportunities to enter the market than Hidden divergence will always allow for.

First, the beginning of a new trend direction is when the 21 EMA crosses over the 55 EMA. When 21 crosses above, we have the potential start of an upward trend, when the 21 crosses below the 55, we have the potential start of a downward trend. I say “potential” because even though we get a crossover of the MA’s, we don’t always get a trend that forms from it.

Next, we look for confirmation of the new trend. What we look for is a bounce off one of the moving averages. When the 21 crosses up over the 55 to begin a new uptrend, we want price to drop back down to either the 21 or 55 and use it as support. This is confirmation that that new upward trend has formed.

Below you see an image of the 21 EMA crossing over the 55 EMA signalling the potential for a new trend, and then we get a bounce off the 55 EMA confirming the new trend.

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Prior to the chart example above, below you see three examples of the 21 EMA crossing over the 55 EMA, but in each case, we do not get the confirming price bounce off either of the moving averages. Price simply crosses back across the EMAs never using them as either support or resistance.

 

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Follow and trade the trend

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Now that we have determined that there is a trend happening, we are going to finally start to trade it. There are a few different ways to take advantage of a trend, let’s look at them…

– Support and Resistance

The first and most basic method for trading a trend is by using the most recent level of support or resistance as our entry level. The recent swing highs and lows create levels that will be broken by price if it is to continue on its way in a trend.

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You can choose a couple of different entry methods:
You can firstly wait for a close of a candle past the level of support or resistance and enter on the close of that candle.
You can secondly place an order to enter when price gets a few pips above the level of resistance or a few pips below the level of support.

– Trendlines

This is my preferred entry. I like to see a cross of a trendline by price before I take a position in the direction of a trend. Granted, we can’t always draw a trendline, but when we can, this is the tool best utilized.
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The Volume in Forex

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VOLUME is a piece of important information should be included on the bar chart—volume. Volume represents the total amount of trading activity in that market for that day. It is the total number of futures contracts traded during the day or the number of com-mon stock shares that change hands on a given day in the stock market. The volume is recorded by a vertical bar at the bottom of the chart under that day’s price bar.

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A closer look at the Intel daily bar chart. Each bar measures the day’s price range. The opening price is marked by the small tic to the left of each bar. The closing tic is to the right. The bars along the bottom mea-sure each day’s volume.
the volume was heavier for that day. A smaller bar represents lighter volume. A vertical scale along the bottom of the chart is provided to help plot the data.

FUTURES OPEN INTEREST :

Open interest is the total number of outstanding futures contracts that are held by market participants at the end of the day. Open interest is the number of outstanding contracts held by the longs or the shorts, not the total of both. Remember, because we’re dealing with futures contracts, for every long there must also be a short. Therefore, we only have to know the totals on one side. Open inter-est is marked on the chart with a solid line along the bottom, usu-ally just above the volume but below the price.

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A daily line chart of a Treasury Bond futures contract. The vertical bars along the bottom measure the total daily volume. The solid line along the middle represents the total outstanding open interest for the Treasury Bond futures market.

Total Versus Individual Volume and Open Interest Numbers in Futures :

Futures chart services, along with most futures technicians, use only the total volume and open interest figures. Although figures are available for each individual delivery month, the total figures for each commodity market are the ones that are used for fore-casting purposes. There is a good reason for this. In the early stages of a futures contract’s life, volume and open interest are usually quite small. The figures build up as the contract reaches maturity. In the last couple of months before expiration, however, the numbers begin to drop again. Obviously, traders have to liquidate open positions as the contract approaches expiration.

Therefore, the increase in the num-bers in the first few months of life and the decline near the end of trading have nothing to do with market direction and are just a function of the limited life feature of a commodity futures con-tract. To provide the necessary continuity in volume and open interest numbers, and to give them forecasting value, the total numbers are generally used. (Stock charts plot total volume fig-ures, but do not include open interest.)

Volume and Open Interest Reported a Day Late in Futures :

Futures volume and open interest numbers are reported a day late. Therefore, the chartist must be content with a day’s lag in obtaining and interpreting the figures. The numbers are usual-ly reported during the following day’s trading hours, but too late for publication in the day’s financial newspapers. Estimated volume figures are available, however, after the markets close and are included in the following morning’s paper. Estimated volume numbers are just that, but they do at least give the• futures technician some idea of whether trading activity was heavier or lighter the previous day. In the morning paper, therefore, what the reader gets is the last day’s futures prices along with an estimated volume figure. Official volume and open interest numbers, however, are given for the day before. Stock chartists don’t have that problem. Volume totals for stocks are immediately available.

The Value of Individual Volume and Open Interest Numbers in Futures :

The individual open interest numbers in futures do provide valu-able information. They tell us which contracts are the most liquid for trading purposes. As a general rule, trading activity should be lim-ited to those delivery months with the highest open interest. Months with low open interest numbers should be avoided. As the term implies, higher open interest means that there is more interest in certain delivery months.

How To Calculate The Value Of A Pip !

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There are many great online calculators that will help you determine the value of a pip, but very few traders can do it on a piece of paper. This is a very short guide that presents you with the formulas you need to calculate the value of a pip, should you choose to do it on your calculator. But first, a few things we need to know…

Base Currency and Quote Currency

Every currency pair is made up of 2 currencies.
The first currency is called the Base Currency. The second currency is called the Quote
Currency.

In the example GBP/USD: GBP is the Base Currency and USD is the Quote Currency.
In the example USD/CAD: USD becomes the Base Currency and CAD is the Quote Currency.

1 unit of the Base Currency is worth the price of the Quote Currency.
If the price of the EUR/USD is 1.4263, this means the 1 Euro is equal to 1.4263 US dollars.
If the price of the USD/JPY is 80.64, this means the 1 US Dollar is equal to 8.064 Yen.

“PIP” is an acronym for “Percentage In Points”. One pip is the smallest move in value a currency pair can make. For non-JPY pairs like AUD/USD, UAS/CAD or GBP/USD for example, the smallest change in price will be 0.0001. There will be 4 places after the decimal.

For JPY pairs, like USD/JPY, EUR/JPY or GBP/JPY, the smallest move these pairs can make is 0.01. There will be only 2 places after the decimal.

In calculating the value of a pip, the value is expressed in US dollars.

The value of a pip will change due to the amount of currency you are trading. You can each lot is a certain amount of currency, the more currency traded, the higher the pip value. We need to know how many of what kind of lots we are trading before we can determine the value of a pip.

1 lot = 100,000                                      1 mini lot = 10,000                                          1 micro lot = 1,000

The Formulas
DIRECT Quotes
Calculating Direct Quote Pip Value

“Direct Quotes” are the currency pairs where the USD is the quote currency (the second currency in the pair). Examples are EUR/USD, GBP/USD, AUD/USD, and NZD/USD.

We’ll refer to the “Tick size” is the smallest possible change in price (1 pip).
The Pip Value for direct quotes is calculated according to the following formula:

Formula: 1 Pip = lot size x tick size
1 Pip Value = lot size(dollar amount being controlled) x tick size(1 pip)

Example for 100,000 GBP/USD contract (1 lot): 1 pip = 100,000 (lot size) x .0001 (tick size) = $10.00 USD
1 lot of GBP/USD will make each pip worth $10.00 US Dollars.

INDIRECT Quotes
Calculating Indirect Quote Pip Value

Indirect Quotes are currency pairs where the USD is the Base currency (the first currency in the
pair). Examples are USD/CAD, USD/CHF, USD/JPY.

We’ll refer to the “Tick size” is the smallest possible change in price (1 pip).
The Pip Value for Indirect Quotes is calculated according to the following formula:

Formula: 1 Pip = lot size x tick size / current rate
1 Pip Value = lot size (dollar amount being controlled) x tick size(1 pip) / current price

Example for 100,000 USD/CAD contract currently trading at 0.9649:
1 pip = 100,000 (lot size) x .0001 (tick size) / 0.9649 (current rate) = USD $10.36 per pip

Example for 100,000 USD/JPY contract currently trading at 80.64:
1 pip = 100,000 (lot size) x .01 (tick size) / 80.64 (current rate) = USD $12.40 per pip

CROSS Quotes
Calculating Cross Rate Pip Value

There are currency pairs that do not involve the USD currency. These pairs are called Cross Currencies.
Some examples are EUR/GBP, AUD/NZD and CAD/JPY. Even though there is no US dollar in the pair, we have to use the US Dollar in the calculation of the value of these pips.

We’ll refer to the “Tick size” is the smallest possible change in price (1 pip).
The Pip Value for Cross Quotes is calculated according to the following formula:

Formula: Pip = lot size x tick size x base quote / current rate  1 Pip Value = lot size (dollar amount being controlled) x tick size(1 pip) x current base/USD rate / current price


Example for 100,000 EUR/GBP contract currently trading at 0.8882, and EUR/USD currently trading at 1.4263:

1 pip = 100,000 (lot size) x .0001 (tick size) x 1.4263 (EUR/USD base quote) / .8882 (current EUR/GBP) = USD $16.06 per pip

Example for 100,000 CAD/JPY contract currently trading at 83.81, and USD/CAD currently trading at 0.9617 (important, because it’s a base quote, we have to make USD/CAD turned into CAD/USD. The formula for this is 1/0.9617) = 1.0398:

1 pip = 100,000 (lot size) x .01 (JPY tick size) x 1.0398 (CAD/USD base quote) / 83.81 (current CAD/JPY) = USD $12.40 per pip

Trade with MACD – Most profitable indicator

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The Moving Average Convergence-Divergence, or simply the MACD, is a trend-following momentum indicator. It describes the difference between two Exponential Moving Averages (EMAs).

Basically, convergence occurs when the two EMAs are moving closer together as the difference between them gets smaller, while divergence occurs when they are moving apart because the difference between the EMAs is getting larger. The MACD  has 3 basic parts.

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1. The Zero Line serves as the midline or neutral line between the bullish (upper) and bearish (lower) zones of the MACD.

2. The Histogram represents the distance between the slow and fast EMAs, the 26 EMA and 12 EMA respectively. It displays the degree of convergence or divergence between the EMAs.

3. The Signal Line or MACD SMA is a 9 period Simple Moving Average of the difference of the slow (26 EMA) and fast EMA (12 EMA).

The MACD can be used to identify the trend of the market, trade divergences, and identify relative levels of overbought or oversold conditions. However, I use it mainly to confirm the trend direction.

As I mentioned earlier, the MACD has two zones, the Bullish (upper) and Bearish (lower) zones divided by the Zero line.

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Basically, when the price is increasing, the histogram forms above the zero line, and this is considered as an uptrend. But when the price is decreasing, it forms below the zero line, which means it’s in a downtrend.

Early signals of pending price reversals can be seen by the relative positions of the histogram and the signal line. From the bearish or negative zone, a crossover of the signal line under the histogram is considered a possible reversal signal to the up side. A crossover of the histogram above the zero line is a bullish confirmation.

On the other hand, in the bullish or positive zone, a crossover of the signal line over the histogram is considered a possible reversal signal to the down side, and is confirmed when the histogram crosses below the zero line. Now you know how to use MACD indicator. Happy trading …

what is the trending market !

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what is the trending market !

A trending market is simply a market that is consistently making Higher Lows (HLs) and Higher Highs (HHs), or a market that is doing the inverse – moving down and making Lower Highs (LHs) and Lower Lows (LLs). See below how the Dow Jones was in a nice bullish uptrend.

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As you can see, the best time to enter a bull market is when it dips down and forms a higher low.
This is called a ‘pullback’, or retracement, and it is here we look for signals to go long. The inverse is true for bearish trending markets, look for sell signals at lower highs. The chart below is a nice bear market on the USD/JPY

 

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Relative Strength Index RSI – easy and accurate indicator

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Relative Strength Index (RSI)

The RSI is a momentum oscillator indicator , and it measures the speed and change of the price movement by comparing a market’s gains to its losses and plotting that on a 0 to 100 scale.

 

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Basically, if the RSI is less than 30, it means the market is oversold and the price will eventually increase. Once the reversal is confirmed, a buy trade can be placed.

Conversely, if the RSI is more than 70, it means it’s overbought and the price will soon decline. After a confirmation of the reversal, a sell trade can be placed.

The 50 level is the midline that separates the upper (Bullish) and lower (Bearish) territories.  In an uptrend, the RSI is usually above 50, while in a downtrend, it is below 50.

The RSI can be used to identify overbought and oversold conditions, trade midline crossovers, and trade divergences. But I use the RSI quite differently here. Lets check together ,,,

I apply a 5 period RSI (RSI 5) over the default 14 period RSI (RSI 14) and watch for crossovers.
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With the RSI 14, there are times when the market does not reach the oversold or overbought levels before shifting direction. A short period RSI is more reactive to recent price changes, so it can show early signs of reversals.

When the RSI 5 crosses above the RSI 14, it means that recent prices are getting higher. A buy signal is generated.

When the RSI 5 crosses below and becomes lower than the RSI 14, it means recent prices are declining. This is a sell signal.

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