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Monday, February 1, 2010

FOREX Trading Strategy - The Secret of Timing

Once you¡¯ve identified a trading opportunity, the next step is to decide EXACTLY when to buy - and this is where many traders go wrong.

Here we explain how to incorporate better market timing into your FOREX strategy - so that you can make bigger profits.

Most traders time their entry levels incorrectly, so here¡¯s the right way to do it:

Using Support and Resistance Correctly

A basic wisdom of market timing is ¡°buy low, sell high¡± - well, the reality is, if you try this in FOREX trading, you¡¯ll end up losing money. First, let¡¯s define what support and resistance means

A support level is a historical price that traders come in, and buy to ¡°support the market¡± ¨C and the more times it¡¯s tested, the more valid the support will be.

Conversely, a resistance level is a level on the charts that ¡°resisted prices from moving higher¡±- again the more times it¡¯s tested, the more significant it becomes.

Why Buy Low and Sell High doesn¡¯t Work

¡°Buy low, sell high¡± is accepted wisdom by the majority of traders - but this logic is fundamentally flawed - use it in FOREX trading, and you¡¯re asking for trouble. Why? - If you wait for a pullback, you¡¯re going to miss some of the biggest moves.

Think about it - what if a currency starts to trend and doesn¡¯t pullback? (How often have you seen this?) If you¡¯re waiting for a pullback that never comes, you¡¯ll never get in on the trade ¨C and you¡¯ll miss a major opportunity.

You Need to Feel Uncomfortable

When Trading in the FOREX market, you should usually feel uncomfortable (and that¡¯s why most traders don¡¯t make these trades) - as no one likes to buy or sell after the market has started trending - but doing this will make you money.

The fact is, the more comfortable you feel when entering a trade at support, the less likely the trade will be a big winner.

During any given year, most of the big moves in currencies, take place from new MARKET HIGHS with NO pullback.

If you base your FOREX Trading strategy around waiting for a warm comfy entry, at key support, you¡¯re going to miss the biggest and most profitable trades ¨C so step away from the losing majority of traders.

Your FOREX trading strategy should give you a different mindset - most traders ¡°buy low and sell high¡± - so you should ¡°buy high and sell higher¡± ¨C i.e. you should be doing the opposite of what the crowd are doing.

Don¡¯t worry - most traders lose money, and their FOREX Trading strategy is based on the flawed logic we have just discussed - so not doing what they do makes total sense. Therefore, look for breakouts through support and resistance - and sell and buy respectively.

Its Tough Mentally - But it Makes Money!

Sure, it¡¯s hard to do - the majority don¡¯t agree with you - and no one likes to go against the majority. However, it¡¯s the right thing to do, to make your FOREX trading successful. Think about what we¡¯ve just said, and you¡¯ll see it makes logical sense.

Has this Happened to You?

How many times do traders buy into support, and the market breaks support, stops them out and continues to decline. On the other hand, another common scenario is, price never get to support - it simply goes higher - and the trader misses the chance to get in on the trend.

This type of trading is tough mentally - that¡¯s why 90% of traders don¡¯t do it - they want to be comfortable - well being comfortable is great, but you¡¯ll lose money.

Breakouts work, and if you use them in your FOREX Trading strategy, you won¡¯t be comfortable on entry - but you¡¯ll make money - and that will more than compensate.

The way to succeed in FOREX trading is to do what the losing majority don¡¯t do - then you can join the elite 10% of traders who make the big profits - try it and see!

Bollinger Bands Can Give You a Huge Trading Edge

One of the critical pieces of forex education for any Forex trader is to understand the concept of standard deviation of price and how to use volatility to their advantage.

If you understand the concept you can easily apply it with Bollinger bands which are an essential tool for all forex traders.

Let¡¯s look at why Bollinger Bands are so useful and profitable, when incorporated in your Forex Strategy.

If you don¡¯t know what standard deviation is simply check our article on the concept ¨C right, let¡¯s take a look at Bollinger bands.

Bollinger Bands Defined

Bollinger bands are simply volatility bands drawn either side of a moving average.

You calculate Bollinger bands using the standard deviation of price over the same period as moving averages the mean price, then the volatility bands are plotted above and below the moving average.

Moving averages are used to identify the underlying trend of currencies and Bollinger bands take this one step further by:

Combining the moving average of the currency with the volatility of the individual market (or the standard deviation) ¨C this then creates a trading envelope ¨C with a middle mean price (moving average and 2 x bands (expanding or contracting) either side that reflect volatility or standard deviation.

As prices move away from the longer-term average, the standard deviation rises - and thus the bands will fluctuate in varying amounts, away from the average.

Why they work

In any market, the value of a currency traded tends to rise slowly over the longer term.

Prices can and do spike quickly in the short term, but will normally return to the longer term moving average - which represents fair value.

The standard deviation of the outer bands (how far they are from the mean) shows how far prices are from longer-term value.

Most price spikes are caused by trader psychology with greed and fear to the fore and this can be graphically seen with Bollinger bands.

So how should you use Bollinger bands?

There are 3 main ways to use them.

1. Spotting price spikes

When the bands are a long way from the mean you can use Bollinger bands as profit taking signal on existing trades or use them to spot contrary trades.

2. Enter exisiting trends

If you have a good trend in the forex markets then you can use dips to the middle band to buy at fair value.

3. Entering new trends

When prices are trading in tight range and start to breakout with a change in volatility a great new trend could be emerging.

Bollinger bands can certainly give you a new dimension to your forex trading strategy and any currency trading system can benefit from the extra insight that they can give you.

A word of warning

Like all technical indicators you should not use Bollinger bands in isolation to enter trades, however combined with timing indicators such as, the stochastic or RSI, then you have a powerful combination for greater FX profits.

With regard to forex education, knowing what standard deviation is and how to apply the concept through Bollinger Bands, will give you a huge trading edge, so make sure you use them.

Online Forex Trading Strategies

Forex trading strategies are the key to successful forex trading or online currency trading. A knowledge of these forex trading strategies can mean the difference between a profit and a loss and it is therefore imperative that you fully understand the strategies used in forex trading.

Forex trading is very different from trading in stocks and using forex trading strategies will give you more advantages and help you realize even greater profits in the short term. There are a wide range of forex trading strategies available to investors and one of the most useful of these forex trading strategies is a strategy known as leverage.

This forex trading strategy is designed to allow online currency traders to avail of more funds than are deposited and by using this forex trading strategy you can maximize the forex trading benefits. Using this strategy you can actually utilize as much as 100 times the amount in your deposit account against any forex trade which will make backing higher yielding transactions even easier and therefore allowing better results in your forex trading

The leverage forex trading strategy is used on a regular basis and allows investors to take advantage of short term fluctuations in the forex market.

Another commonly used forex trading strategy is known as the stop loss order. This forex trading strategy is used to protect investors and it creates a predetermined point at which the investor will not trade. Using this forex trading strategy allows investors to minimize losses. This strategy can however, backfire and the investor can run the risk of stopping their forex trading which could actually go higher and it really is up to the individual trader to choose whether or not to use this forex trading strategy.

An automatic entry order is another of the forex trading strategies that is commonly used and this strategy is used to allow investors to enter into forex trading when the price is right for them. The price is predetermined and once reached the investor will automatically enter into the trading.

All these forex trading strategies are designed to help investors get the most from their forex trading and help to minimize their losses. As mentioned earlier knowledge of these forex trading strategies is vital if you wish to be successful in forex trading.

Learn Forex Trading - Which Forex Strategy Is Right For Me

Learning to trade Forex is not an easy task, but by no means is it difficult either. Learning to trade Forex does not require a great intellect or a college degree. Doctors have failed as traders and construction workers have become millionaires. Trading is all about discipline, determination and perseverance.

The key is to understand who you are as a trader and trade to your strength. Leveraging your strength can be magnified by deploying the appropriate Forex trading strategy. There are hundreds, if not thousands of Forex trading strategies out there. Logic will tell us that there is a currency strategy out there which leverages our strengths. It is not a one-size-fits-all world. To immediately cut to the chase and take away the magic, it all comes down to two basic Forex strategies; trend-following and range-bound. All Forex trading strategies use a variety of indicators and combinations, MACD, Moving Averages, Stochastic, Chart Patterns, Candlesticks, Pivot Points, Fibonacci ratios, Elliott Wave analysis, Bollinger Bands and the list goes on and on. Let¡¯s take away the magic again. These indicators and studies are merely measuring support and resistance and trend in the Forex market.

But which strategy really works? This is the age old question?

First, we must understand who we are as traders. Does our personality fit the pip sniper mode or does our disposition attract us more towards swing trading. Finding your trading personality will mean studying and experiencing the different time frames and associated Forex trading strategies. Over time you will notice a higher level of success and/or comfort trading one style over others. Pay attention! The market is telling you where your skill is more capable of extract consistent profits for the market. This is why journaling is so important to your Forex trading routine.

Secondly, if you are using someone else¡¯s strategy, a most of us are, deploy this strategy without change until you fully and completely understand all aspect of the strategy through back-testing and actual experience. As I was told; dance the dance you have been taught until you learn a dance of your own!

Don¡¯t fall into the trap of jumping from strategy to strategy or combining different strategies when the one you are using doesn¡¯t yield immediate success. This is only a recipe for disaster. Take the time to really understand the trading strategy. Study the components individually so a deeper understanding of the strategic mechanisms is mastered.

Above all, know when and when not to deploy this strategy. You will not find consistent success implementing a trend following system in a range-bound currency market.

So what¡¯s the right strategy for you? It is simple, the one that works. It doesn¡¯t matter if it is complicated or simple, trend-following or range-bound, uses Fibonacci studies, pivot points or both. If you understand the components, internalize its use, and drive consistent profits into your trading account, then you have your Forex trading strategy.

It doesn¡¯t matter what the experts say, your account balance is the ultimate judge and jury for your Forex trading strategy.

Swing Trading Strategy

Swing trading is a popular method of capitalizing on the short-term price variations of the stock market. It has earned a reputation of being a powerful method of maximizing profits at lower risks. The best swing trading strategy involves choosing the right stock and the right market. Swing traders usually choose the stocks that fluctuate at extreme ends. Swing trading strategy is employed in a stable market, because here the prices tend to have minor variations on which the swing trader can capitalize. In a rapidly rising or crashing market, swing trading strategy cannot be employed.

Newcomers to the stock market often choose swing trading owing to the low risk and shorter period involved. To achieve higher profits in this short period, the right swing trading strategy is to trade in stocks of big companies. These stocks, usually called large cap stocks, are widely traded on most stock exchanges. Their prices show higher variations compared to other stocks. This translates into more profits for the swing traders. A swing trader may follow a stock during its upward journey for a few days. In case the stock reverses its trend, the trader simply switches over to another rising stock. The choice of the right stock thus forms an inseparable part of a successful swing trading strategy.

Apart from the choice of stock, the choice of market plays a key role while deciding on a proper swing trading strategy. In a market that is on a rising or falling trend, the stock prices generally move in a single direction. There is not much of a variation by which the swing trader can profit. The best strategy here is to trade on the long term basis. A swing trader best operates on a stable market, where the index rises for some days and falls over the next few days. Although the value of major stocks remains roughly the same, the short-term variations provide the much required opportunity for the swing trader. The best swing trading strategy is thus the proper choice of the right stock and right market.

Forex News Trading Tip: How To Trade The FOMC

The Federal Open Market Committee (FOMC) decision on interest rates is one of the most powerful market movers in the forex market and when the markets move traders trading the news have the opportunity to make money.

The FOMC sets the discount rate or federal funds rate and because interest rates are set higher to induce foreign investment and therefore fight inflation during times of prosperity and lower to increase spending during recessions they are one of the main factors influencing the strength of the dollar.

Economic indicators play a huge role in the forex trading especially for traders who approach the market through fundamental analysis and trade the news. The Federal Open Market Committee (FOMC) interest rate decision is one of the most influential indicators for the US dollar and you can be sure after the news is released there is going to be volatility in the markets and volatility is what traders thrive on.

I have heard many 'traders' say never to trade the news and especially the FOMC. Although the FOMC interest decision is a news event and can fall under the category of through fundamental analysis I am a technician and I believe that charts always price everything in. However I guarantee the market does not know what exactly the Feds comments and decision will be, therefore it is not priced in yet and this will cause the markets to react when they do find out. This is confirmed by the change in price after the decision and the continuation in the days following.

I have been trading the Fed for eight years now and yes I have been burnt in the past and that is exactly how I have come to learn how to trade it properly. The most common pattern to trade the Fed is the whip-saw. But do not be fearful of it, embrace it. Here is how it happens, first there is a large spike one direction (traders come in and follow that direction)followed by a large spike in the opposite direction (those same traders now sell their first position at a loss and reverse their position - this is when I take a position in the direction of the original move)followed by an extended move back in the direction of the original spike (all the emotional trades are left sick to their stomachs) and I am left holding a very nice position setting myself up to capture a larger than average market move.

If this pattern does not play out exactly as outlined I stand on the sidelines and do not trade at all. Because the markets are moving fast in the period following the FOMC interest rate decision I am watching a very short time frame, mainly the one and five minute charts.