Page 173 – XTrade

Essential Forex Market Basics

Some key forex market basics which really do work are the LSS pivots, divergence indicators, and swing point analysis. Entire trading strategies can be developed around these alone, without taking into account any other methodology or indicator. Unfortunately, many vendors today present the forex market as a trading online made easy product. And they promote all kinds of nonsensical indicators just to satisfy people’s superstitious and numerological beliefs. Anything from astrology to Fibonacci number theory is used to accomplice this. And of course these methods fail miserably in actual trading conditions, because markets could not possibly work that way. Superstitious people lack critical thinking and will always buy these products. Wise traders on the other hand want to see evidence, real hard evidence that an indicator performs better than a coin flip. Otherwise they might as well be tossing coins prior to making trading decisions and keep things simple. But indicators such as LSS and swing point analysis are very fundamental, and they do work. LSS pivots provide clues on momentum. And swing point analysis helps determine the real trend on the daily chart. Even the best forex trading strategy, no matter how good, can still be enhanced through LSS pivots and swing point analysis. Veteran traders have found that the few good indicators that helped them most are these basic indicators. There are also divergence indicators, and daily range analysis, which can also enhance existing trading systems. In any case, traders simply should refrain from using any new method offered to them by vendors and authors. Or any indicator which claims to offer easy success. Forex market basics are about true indicators, which provide difficult but possible profitable trading to beginners.

Important Forex Market Basics

Forex market basics also include important aspects such as volatility analysis. Volatility is hardly ever seriously taken into account, and neither is money management. These two concepts alone are conveniently avoided by many so called gurus and vendors. While the indicators and tools available on volatility are primitive and almost useless in most cases. Volatility has to be studied first, using good analysis. And then money management has to be applied based on volatility expectations. Trading online practice offers unique new insights to all new traders seriously devoted to the task of profitable trading. Traders need to focus on the reality of volatility of the forex market, first and foremost, and then on few other basic principles. Many other indicators out there claim to be based on basics, but these are basic misconceptions and basic superstitions, and not the real forex world.

How to Trade Forex Profitably in the Long Run

All traders who know how to trade forex profitably, base their ideas and strategies on probability, and statistics over large samples of data. Day traders tend to use disciplined trading methods, having many limitations. Whereas swing traders treat each and every trade in a unique way, as if it never happened before. And even though they treat each trade differently, they still base their ideas on probability. In simple mathematical terms, a factor which favors the trade going well is expressed as a number over 1. And a factor which suggests that the trade will turn out to be a loser is expressed as a number less than 1. By assigning appropriate weight to each such factor, for example 1.05, 1.09, 0.95, 0.8 etc. The overall risk can be assessed in a crude but meaningful way. The actual probability of the trade going well or not will depend on the final algebraic product of these numbers being greater than 1 or not. And this whole approach requires a calibration of the numbers around past profitable trades. Even the best forex trading strategy, unbeknownst to the actual user, can be expressed in terms of basic probability theory. So every forex trader can in fact use probability theory to some degree, to figure out things that would other have remained hidden. Oftentimes, the whole secret of success in a well-calibrated probability based trading strategy, is whether a factor is 0.95 or 1.05. This little difference on a couple of indicators can make all the difference on the trade. Data analysis and processing can successfully model the physical world, and financial trading too. In other more sophisticated models, probability theory attempts to predict market direction over the next 30 to 40 minutes. And it has succeeded in doing it. This is how some traders learn how to assess risks, and how to trade forex profitably in the long run. Because visual observation alone is not enough to assess the risks, not unless one is extremely experienced.

How to Trade Forex Profitably the right way — Probability theory is seen by many as being too weak to be useful in direct applications, especially by many academics themselves, who only know to use this theory to make charts for inferring general knowledge; But it also has powerful applications, where it provides conclusive, actionable results.

How to Trade Forex Profitably and Wisely

Those who know how to trade forex profitably and more wisely than most, rely more or less on the same indicators that every body else is using. The difference is that they have assigned a different weight of importance to each one of these indicators. So they know when to fade an indicator which they followed very closely in the days before, and when to follow it again. This complexity of the forex market is the whole task of trading. Only few know how to handle it and navigate through it. Most forex courses offer tips and methods which fail to address this complexity, and as a result attendees of these courses learn very little information. Complexity makes the markets more interesting and trading non-routine, which is great as nobody likes routine tasks. But this riddle, that the complexity of indicators presents, is overwhelming to new traders, and makes them lose. And when one has been losing money trading for too long, may end up losing faith. And yet the same traders have a lot of faith in their infant skills when first handling complexity. This kind of naive wishful thinking is what makes people see the world from a distorted probability perspective, rather than a realistic one. So that the probability of winning the lottery seems high, but an equally likely form of cancer somehow seems less probable. Successful traders put probability ahead of wishful thinking, and welcome all adverse moves in the market. They are always reminded that market price will follow the path of maximum confusion. And that’s all they need to start their analysis. Long before they put faith in their forex trading business opportunity.

Why Learn Currency Trading Basics

Many traders think that having to learn currency trading basics is redundant as they already master their trading relatively well. But what if you ever face tasks such as having to calculate the dollar value of a pip, or the overnight interest charge. And you don’t actually know the formulas for calculating these figures. A review of the basics, in greater depth, can help you improve your trading strategy and pay more attention to important details. Details which in some advanced trades may prove critical. In fact, the more a trader advances their trading methods and pushes into new territory, the more critical the basic definition of forex trading becomes. This is why the effort of trying to learn currency trading basics, in more depth, is well worth it! You can learn these basics while you practice currency trading ideas and concepts. It’s a fact of life, that all theories and educational materials become much more interesting when there is a strong motive for learning all these materials. All foreign exchange currency trading online for beginners provides that motive for beginners and others, to learn from a brand new perspective. Perhaps the most boring aspect of forex is that of money management. And even that becomes very interesting, when one puts things into practice. Because the learning trader gets to see the positive impact of a good money management system right away. As large losses become smaller and profits continue to be generated. And the risk of blowing the trading account is removed through a series of steps which at first seem counter-intuitive.

Learn Currency Trading Basics The Fast Way — Learning can be colorful and interesting, when the benefits of utilization are seen in action. Learning just for the sake of learning or for passing exams, is not a true motive.

Learn Currency Trading Basics and Make Good Habits out of Them

If you learn currency trading basics covering definitions, choosing entry points, and money management. Then you will have covered all key aspects. Money management however can get much more complicated as one seeks to maximize the efficiency of a trading strategy. Ultimately, money management becomes a multi-variable algebra problem, which may seem intimidating. But if traders formulates the problem right, they could in principle optimize their trading beyond recognition. All by algebraically (and through the use of a spreadsheet) calculating key parameters, such as trade size at any one moment, stop loss size — and also hedging trade possibilities which are part of all serious CFD trading strategies. But in order for these calculations to be right, the trader has to know the basic definitions well. Instead of using just number of pips, exact pip dollar figures have to also be used. And on entry points, the trader has to use more parameters so as to define market risk in terms of volatility. Not just a number of pips reflecting maximum acceptable dollar loss. And if the account used is large, even more parameters have to be used, so as to take into account the fluctuation of the value of the entire account. Based on the fluctuation of the currency the account is in, versus all other major currencies. What would happen for example, if a trader has a $100,000 account, trades profitably, but the US dollar index is about to decline 20%? That would cause a subtle loss, which only good money management can protect against. As you dig deeper, you will see that all advanced problems lead back to basic definitions. A lack of knowledge of those definitions, is a severe limitation to solving these advanced problems.

Tips on Forex Market Analysis

Forex market analysis relies on chart patterns, chart indicators. But also on off-chart oscillators and indicators, and fundamentals analysis. Forex charts are confusing because all these different indicators tend to disagree with one another. And also a single indicator can give conflicting signals even on two correlated currency pairs. Wise traders assign an order of importance on their indicators. And through the years, they have figured out that chart patterns tend to override all other chart-derived indicators. It’s only the fundamentals, and more specifically the medium term (quarterly fundamentals) that can override anything else. In all other cases, chart patterns provide the basic road map for trading a market. Off-chart indicators are helpful in that they often provide leading signals, often not seen on the charts and their patterns. But these indicators suffer from poor timing, and they fail to predict the exact day where the signal in question will likely be triggered. Chart patterns, especially on the daily chart, help to improve the use of these off-chart indicators. So for example, the CCI indicator may provide a divergence signal, which warns of a possible reversal or correction. But no exact day can be detected on the CCI graph. This is where swing point analysis and several patterns on the daily market chart may provide sufficient clues. Forex market analysis can be greatly improved through the use of these concepts. The hardest part which will always remain a puzzle to traders, is dealing with medium term fundamentals. Fundamentals in general are very hard to make sense of. Because they are not as simply as buy or sell. Many times, they act more like complex signals which impact the markets in more ways than one. And each component of the impact acts at a different moment in time. Fundamentals are so complicated that no economics model can beat them. And even top investment banks always have conflicting opinions on quarterly and annual market outlook. Sometimes one analyst is right, and sometimes some other analyst, using a different approach, is proven right. The bottom line is that one cannot trade the forex market based on the recommendations and opinions of even the top investment banks.

What is Forex Market Analysis — Investment banks are large and well financed. They also trade a great deal through futures contracts (whose pricing is non linear and can diverge from market price). This divergence often reflects an increase in the risk premium, similar to how car insurance premiums can go up if a driver is seen as too risky. This and other kinds of divergences between spot market price and futures prices, allow wise CFD traders to figure out the intentions of the investment banks. And these methods work well when the market is about to reverse. CFD traders are smaller by comparison but they trade and act much more wisely. Futures traders themselves are clueless, and if they are not investment bankers, they will have a hard time figuring out the next market move.

Improving Forex Market Analysis

In order for traders to improve their forex market analysis methods, they would have to better define their objectives and time frames of interest. The daily chart carries a lot of weight, much more than other time frames. And it is also more useful for short term trading, than the weekly chart is. The first success in online trading can be achieved through analysis on the daily chart first. Traders can also use the 30 minute or 60 minute charts as a secondary time frame for fine tuning their analysis. But it is always the daily chart which seems to contain more information than any other chart. Because of the swing points that are formed daily, the high and the low, and the different active trading hours. The daily chart is also much more immune to market noise and intimidating trading action. It does produce false signals, but wise traders have learned how to figure them out. Wise traders use CFDs to trade or just hedge various commodities and currencies, including of course important commodity currency pairs. Online CFD analyses used by these traders range from chart patterns, to more sophisticated methods. One of them is watching for divergences between the spot market and the Futures market. Or even divergences between two Futures contracts having different delivery dates. Futures contracts do sometimes provide leading clues through these divergences, because they have no linear pricing. And the Futures themselves act as an indicator. Sometimes these divergences can be quite dramatic. Wise CFD traders use Futures and their divergence patterns as indicators, and they trade the actual market through the highly linear CFD contracts.

Best Automated Forex Trading Systems

Automated forex trading systems are not what will make a trader millions, based on multi-fold capital gains. But they still do have a place as a routine trading solution. Even the best forex trading strategy can be enhanced through some added automation on the side. This automation can deal with routine tasks, as part of a strategy which for example captures linear trends in the market. Or even small tiny trades overnight, such as in a scalping strategy. Anyone with experience studying forex charts will have observed that automated trading can capture some of the trading action, and make profits. But just to use automated trading, in any way, also requires extensive knowledge and understanding of market volatility and risk management. Knowledge which beginners do not have. So automated trading is not actually a substitute for trading experience, and neither should it be regarded as such. Ambitious beginner traders need to realize that automated trading especially that provided through cheap forex robots and Expert Advisors will not make them any money in the long run. This kind of automation is average to bad. And even if such a product is good, the new trader lacks the experience to change the parameters as needed, month after month. Automated trading can only enhance the trading of experienced traders, and those who understand volatility well. Specifically, it is parameters such as volatility, derivatives of volatility, stop loss size, and the impact of the news, which are totally ignored by new traders. Vendors on the other hand have to keep things simple, and keep these issues out of the presentation. Because consumers will not buy anything that will realistically present risk. Most of these cheap automated forex trading products use Martingale principles in one way or another, thereby risking to blow your account. The same Martingale principles in the hands of an experienced trader who pays attention to volatility and news, will not blow the trading account. So, in that regard, only experienced traders can profit from automated forex trading systems. No matter how good the product is. And if the product is really good, it will ultimately require manual adjustments from month to month, something which only experienced traders well versed in volatile markets can do.

Automated Forex Trading Systems Tips — Automated trading systems rely on algorithms executed by neural networks, and attempt to control a situation where the objectives are well defined. The problem is they are still too primitive and manual adjustments are required. As of today, market volatility ends up fooling all such systems in existence, and parameters have to be updated manually to maintain profitability.

Automated Forex Trading Systems Put to the Test

Many automated forex trading systems are put to tough trading tests, and are evaluated by wise veteran traders. The results for some of these systems are very positive. The bad news is that they can only be used by a small number of veteran traders. This is too small of a niche market for any developer to target. And yet these good systems could sell for many $1000s each, to the right client. Such a system can trade even a $5,000 forex account, relatively safely, with manual adjustments, and make good money. With perhaps as much as 10% per month profit, experienced traders would gladly buy it. But someone who has just started to learn forex trading will not be able to handle the parameters, and will end up messing up and blowing their account, and then would blame the developer for their failures. This is why vendors have to focus on training their clients, and provide their products at much higher prices. And they should also provide a secondary software tool just for assessing volatility metrics and key parameters.

How to Assess and Trade Forex News

To trade forex news data, the trader has to pay great attention to volatility, and less attention to market direction. Forex news creates the illusion that the market moves because of the effects that this or that news story has caused. But this isn’t so. The market trend as seen on the daily charts, can never change and reverse, in a single day. Not for any reason! And because news is released into the market on a daily, intra-day basis, it cannot change the established daily trend. All it can do it cause a deviation, at most. Day trading forex live is all about watching volatility, momentum, and little clues on price direction. But volatility is easier to figure out through the news release times. Because all markets tend to trade quietly, or in a mean-reverting way just prior to news release. And after the actual release, all hell breaks loose as volatility skyrockets. During this increased volatility traders know that there will be false breakouts, false breaches of pivots, and all kinds of misleading trading action. So instead of being worried of missing out on the action, they focus on the daily chart. If the fast moving market is moving in the direction of the daily trend, it may or may not be a good idea to jump in. If it is moving against, it is a superb idea to look to jump in, in the direction of the daily trend. Hence actually minimizing the impact of the news. That’s how wise traders trade forex news, and simply don’t care what this or that news number means. These news numbers are impossible to make sense of anyway. Only amateur traders attempt to predict market direction based on the news. And they end up being wrong and losing money about 80% of the time. Because the logic involved is flawed. They see news as a binary event, which can only have 2 possible outcomes. But in reality, news items are not binary events, and they can produce 8 or more outcomes. Market price tends to sweep across all 8 or more possible market price levels, hence the wild volatility. The only binary outcome here is the progress of probability, as the number of possible outcomes doubles for every additional risk factor. If one more binary unknown is involved, the possible outcomes increase from 8 to 16, and so on.

Read Trade Forex News — In most cases, there are 3 binary events to every market news story. And these 3 are independent from one another. The net probability of predicting market direction correctly based on the news, for day trading purposes, is 1/8 or 12.5%. And not 50%! These 3 binary events are the 3 possibilities, what if the news is better or worse than the last one, what if the news is better or worse than analysts expect, and what if the news has or has not been priced in by the market already. And 12.5% is the best case scenario, if one more binary event is introduced, the probability halfs to 6.25% and so on.

How to Trade Forex News on Probability

To trade forex news directly on direction, is impossible. Nonetheless one can get around that using the properties of the daily chart discussed above. Though this requires extending day trading into a more relaxed, and longer term strategy from time to time. Though Forex trading live can be very profitable on these principles alone, what traders need is boldness and experience. A cool forex trading business opportunity appears almost every other day in the markets, based on volatility. Knowing how news creates this volatility, helps time it much better. Beyond that, it’s good to know that the supposed probability analysis mentioned above is based on the assumption that news is binary, perceived as either bad or good by the market. But if each news is perceived as a 3-outcome event, which is even more accurate, then things become much more complicated, and volatility becomes much more relevant. In reality, the binary assumption is most of the time correct, it works just like the 3-outcome event in most cases. Except in the few cases where a news number, is exactly identical as the last time it was reported. For example the CPI inflation number, is a piece of news which is possible to remain unchanged over two consecutive reporting times, but it’s very rare.