Tuesday 29 December 2015

The Best Time For Daily Forex Trading

Investors and traders can trade currencies worldwide, in any trading zone, 24 hours a day, in today's foreign exchange market. London, Japan and New York top the top three currency traders among the currency dealers. These currencies are being traded 24 hours a day. The only time that currencies stop trading is on Friday when the Japanese market shuts its doors. There is a one day window after Japan closes before Europe steps in on Monday morning to open for business.

The majority of trading comes from banks, brokerages and investment companies. Companies that sell and buy foreign currencies as part of their business, like independent brokers and currency dealers, make up only a small part of the foreign exchange currency trading. The Forex market will continue to develop and grow at a steady pace as more currency traders become aware of the foreign exchange markets potential for earning and raising capital. The Forex market reaches an average daily turnover 30 times higher than any other U.S. market.

Added to the drive for supply and demand, the Forex market presses on as the enormous scope for profit potential among the currency dealers is steadily rising. The Forex market also uses the free floating system that is considered more practical for today's foreign exchange market which can experience a change in the currency rates at an estimated 4.8 seconds. The Forex market is taking on a prodigious role in the country's economy, after developing from connective financial centers to one unified market. Having expanded worldwide, the Forex market is reflecting the constant growth of all international trades and their countries. When you consider the size of the foreign exchange market, it would be important to understand that any transactions that are made with a future trading broker or an independent broker, can lead to more transactions. This can be due to the brokerage businesses as they work to readjust their positions.
Understanding your overall portfolio and its sensitivity to market unpredictability is necessary in order to be an effective day trader. This is especially important when trading foreign exchange currencies, because these currencies are priced in pairs and no single pair will trade completely independently of the others. Gaining an understanding of these correlations and how they can change will help you use them to your advantage to control your portfolio's exposure.


Correlations 
There is a reason for the interdependence of foreign currency pairs. For instance, if you were trading the British pound (GBP) against the Japanese yen (JPY) or GBP/JPY pair, then you're trading a type of derivative of the USD/JPY and GBP/USD pairs. Therefore, the GBP/JPY must be slightly correlated to one or both of the other currency pairs. Even so, the interdependence amongst these currencies will stem from more than the fact that they are in pairs. While there are some currencies that will move one right behind the other, the other currency pairs can move in different directions often resulting in a more complex force. In the financial world, correlation is the statistical measure of a relationship between two securities.
Then there is the correlation coefficient that ranges between -1 and +1. The correlation of +1 indicates that two currency pairs can move in the same direction nearly 100% of the time. While the correlations of -1 indicates that two currency pairs are likely to move in the opposite direction 100% of the time. If the correlation is zero, this indicates that the relationships between the currency pairs will be completely at random.
Correlations are not always stable. Correlations change, just as the global economic system and other various factors can change on a daily basis, making the ability to follow the shift in correlations very important. The correlations of today may not be in line with the long-term correlations between any two-currency pairs. This is why it's suggested to take a look at the past six months trailing correlation to provide a more clear perspective on the average relationship between the two currency pairs. This change is the result of a variety of reasons — the most common... Read more



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Wednesday 2 December 2015

How to Trade Inside Day Candle In Forex

Inside day is a widely followed trading strategy for securities with range-bound price movements. It suits forex trading in particular due to the nature of price swings observed in forex markets. This article explains inside day breakout trading, what forms this pattern, entry/exit points and what to consider when trying this strategy.

Meaning of Inside Day
The inside day is a candlestick pattern made up of intraday price ranges relating to Open, High, Low and Close (OHLC) prices. When today’s OHLC price band lies completely “inside” the limits of previous day’s OHLC price band, that's an inside day pattern, also known as inside day bar. Note also that the previous day's bar can be known as “mother bar” and today’s bar is referred to as “inside bar”. Simply put, today’s highest price should be lower than yesterday's highest price, and today’s lowest price should be higher than yesterday's lowest price. 

It should look like this:

inside day breakout multiple bar
High liquidity due to large-scale trading (generally by big institutional traders), is mandatory for inside day pattern formation. Effectively, inside day indicates a state of indecision in the overall market i.e. no movement in either direction beyond yesterday’s range. There can be multiple inside day patterns day after day, indicating a continuous reduction in volatility and thus the increasing possibility of a breakout.

Why and how do inside day patterns get formed?
Understanding the reasons behind the formation of such patterns can help traders spot subsequent symptoms. Here are the key reasons why inside day patterns form:

1) Trend Reversals – The probability of inside day pattern formation is high when an asset trades around support and resistance levels. Around resistance levels, sellers start taking short positions and buyers start profit booking for their long positions. The opposite happens for support levels, when buyers start building long positions and sellers cover their short positions. In both cases, trading occurs in a tighter price range as a trend reversal proceeds from one day to the next, creating inside day patterns. 

inside day breakout trend reversal

2) Breakouts – Before an asset price breaks any long perceived support or resistance level, a period of consolidation is observed. During this time, the price remains in tight range, touching support/resistance levels a few times, and then breaks out steeply in one direction. In this period just prior to breakout, buyers and sellers build their positions, leading to inside day patterns.

3) Consolidation during up and down trends – During strong up or down trends, several inside day patterns develop sporadically. This happens as traders either book profits or add to profitable positions. Losers attempt to cut losses or average out and new entrants advance, expecting continued momentum. The net result is a lot of range-bound trading activity, leading to the formation of an inside day pattern.


4) Low liquidity periods – Even the most volatile and liquid stocks enter a stagnant phase of low market activity caused by market sentiment, the macroeconomic situation, less activity by institutional traders or a holiday season. Such periods also give way to inside day pattern formation.


How to trade inside day pattern
Inside day patterns often arise, but traders should note that not all inside day patterns are profitable. Heed the important points below:
  • The frequency of trading inside bar patterns varies according to the trader’s preference. It can be used an hourly, daily or weekly basis. For an average trader, daily is recommended because of the free and easy availability of charts and data, less need for monitoring and no overtrading.
  • Choose instruments that have high liquidity and high volume trading (like major currency pairs). The ones known to be regularly used by large institutional traders to build substantial positions are the best fit. 
  • Though going against the trend is tempting for many traders, it is better to follow trends for the inside day breakout trading strategy. Empirical evidence indicates higher success rates for going with the trend in anticipation of breakouts.
  • It's advisable to make an entry for breakouts when momentum is high – i.e. a clear steep and strong move is visible, which can be determined by looking at lower frequency periods. For example, while following a daily inside day pattern, one can look for strong moves at 2, 3 or 4 hour intraday periods.
  • To anticipate reversals, it is recommended to take a position opposite to the current trend.
  • Inside day trading should be avoided during low liquidity periods. The corresponding patterns do form, but they are caused by low trading activity and not the desirable inherent factors of high accumulation and distribution.
Stop-losses
Inside day strategy offers one of the simplest stop-loss mechanisms. It should one or a few, points below or above the inside bar level for a long or short position respectively. Forex traders use up to 5 pips below or above the bar levels for their stop-losses.
inside day breakout stop loss

Profit Taking
The point of effectively trading inside day is to enter long or short positions at lower levels in anticipation of a breakout (either from trend reversal or continued momentum). Compared to the previous day, the entry price is always better by the inherent nature of inside day bar. A tighter price range with each passing day ensures further favorable entry prices. Forex traders build models and strategies based on this concept. 

As with any trading strategy, it is important to keep a target for taking profits. Inside day breakouts offer limited risk and high reward for breakout patterns. The risk-reward ratio for inside day trading pattern (1:3 and above) is higher compared to other trade strategies (1:2), indicating high profit potential.

Multiple inside bars can help traders build cumulative positions i.e. accumulating more positions each day based on a trader's criteria. Once the expected breakout occurs, the profit potential is significantly higher. The stop-loss level can be retained at that of the first day and while high reward can be accomplished with multiple inside bars. In fact, if followed in a disciplined manner, there is potential to cover multiple losing trades with one single profitable trade thanks to the better risk-reward ratio (1:3 and above).

The Bottom Line
The simplicity of inside day breakout patterns, combined with the high profit potential and lower underlying risk, makes it a very popular trading strategy. Forex is the most suitable trading asset because of its range-bound price patterns with frequent breakouts. Highly liquid stocks are also strong candidates for this strategy. Before trying this method out, traders should research carefully and backtest the pattern before finally choosing an...Read more

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The Art of Setting Stops and Targets in Forex Trading

Placing stops and targets is an essential part of any trading strategy – it is how you limit risk and take profits in a disciplined fashion. While placing stops and targets is a broad topic, there are certain basic things that you need to think about before you ever execute a trade.

Let’s begin with stops. This is perhaps the most important topic, since this is the way that you prevent large losses. Disciplined traders should spend more time thinking about how to manage risk than capture awards, since a single large loss can wipe out a significant portion of their trading account.


Placing a stop can be a delicate balance. A stop should be placed at the price level where it becomes clear that the trading signal that triggered your trade is no longer valid. Many traders make the mistake of setting their stop too close to the purchase price, not because they are timid but because they want to trade a large position. Never set your stop based on your position – instead, set your stop based on the analysis you have made, and then decide what size of position you want to trade based on that. Otherwise, normal fluctuations may take you out of your position to early. Also, don’t exit your position manually before your stop kicks in because you are scared – only do this if there is clear price action that indicates your trade isn’t going to succeed.

Of course, the actual placement of your stop will depend on your particular trading strategy. For instance, if you are trading pin bars, place your stop 1 to 10 pips above the high of a bearish pin bar in a falling market and reverse the strategy in a rising market – put it just below the low of a bullish pin. Similarly, if you using trading ranges between a lower support level and upper resistance level, put your stop just outside the trading range boundary. Of course, there are as many stop position strategies as there are trading strategies, but the important thing is to use a logical position in each case.

Placing profit targets is often a difficult task, both technically and emotionally. The problem is that none of us want to exit a profitable position when we think that there is more money to be made. However, it is far better to take a reasonable profit rather than lose everything because you have overreached. Your profit target should take into account the amount of risk associated with the trade – if you can’t see your way to making that profit level with the current trading conditions, then you shouldn’t open the position in the first place.

Again, specific profit target positioning depends on the strategy that you are trading. However, the first thing to look at is where a reasonable profit is given the risk in the trade, and then to see out there any barriers such as resistance levels between the current price and that target level. If there are, then don’t execute the trade – don’t kid yourself into thinking that your trade will breakthrough levels and achieve profits if a completely logical look at market conditions says...Read more


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Using Flag and Pennant to Analyze the Forex Market



The flag and pennant patterns are two continuation patterns that closely resemble each other, differing only in their shape during the pattern's consolidation period. This is the reason the terms flag and pennant are often used interchangeably. A flag is a rectangular shape, while the pennant looks more like a triangle

These two patterns are formed when there is a sharp price movement in one direction followed by generally sideways price movement, which is the flag or pennant. The pattern is complete when there is a price breakout in the same direction of the initial sharp price movement. The following move will see a similarly sharp move in the same direction as the prior sharp move. The complete move of the chart pattern - from the first sharp move to the last sharp move - is referred to as the flag pole. 

The flag or pennant is considered to be flying at half-mast, as the distance of the initial price movement is thought to be roughly equal to the proceeding price move. The reason these patterns form is that after a large price movement, the market consolidates, or pauses, before resuming the initial trend. 



The Flag 
The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trendlines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trendlines sloping. 



In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping. 

The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be on heavier volume to improve the signal of the chart pattern. 


The Pennant The pennant forms what looks like a symmetrical triangle, where the support and resistance trendlines converge towards each other. The pennant pattern does not need to follow the same rules found in triangles, where they should test each support or resistance line several times. Also, the direction of the pennant is not as important as it is in the flag; however, the pennant is generally flat. 




General Ideas While the construct of the pause in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move. 

Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are...Read more








Let us use the  USDJPY chart below as an example.


USDJPY is consolidating in a bullish pennant as investors are eagerly awaiting tomorrow's ECB decision and NFP report on Friday. The pair is congested within the bullish pennant and logically it should break to the upside which will confirm the validity of the pattern. If it fails the patter will be unsuccessful.
Target for the bullish breakout is determined by adding the height of the flagpole to actual breakout point. We can also see that H3 WPP is making a confluence with the actual pennant which is telling us that it is preferred that we see H1 strong candle or H4 close above H3 which could be a breakout/continuation move. Due to the nature of a bullish pennant the only valid setup is to the upside. The target is 124.10 zone. Any drop below the pennant (or continuation to the downside) will negate the bullish outlook.

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