TRADING TECHNIQUES
Trading techniques can be divided in two general groups: long term and short term. Below I will provide a summary of some of the advantages and disadvantages of those two basic groups before I give a more detailed description of each of the components they include.
In long-term trading, traders base their analysis on end-of-day data and look to hold trades for a few weeks or even up to many months. They usually follow the trend. The advantages of long-term trading are that There is no need to watch the markets intraday and that traders perform much fewer transactions, thus lowering any commission costs. In addition, there is no need for using fancy equipment or software because the time spent analyzing and watching the markets is very short. However, long-term traders will need to set much larger stops and will experience large equity swings. Thus, they will need to be well capitalized and prepared for this eventuality. Trades are very few, and exceptional trades are fewer. Much patience is needed to wait for a trend to develop to its full potential.
In short-term trading traders will depend on the analysis of intraday data and aim to hold their positions for a few days or up to one or two weeks. A shorter-term trading approach is referred to as day trading, where trader try to take small profits from intraday swings, exiting all positions before or at the daily market close. The advantages of short-term trading are that there are much more opportunities for trades, thus also less chance of experience losing months, and that traders do not have to rely on one or two trades a year to make money. With day trading in particular, since positions are closed daily, there is absolutely no overnight risk.
On the negative side, the cost of their transactions will be higher in short-term trading (traders will be paying more spread). Swing traders also incur in overnight risk. Day traders have to confront more difficulties psychologically because of the frequency of trading and having to monitor the markets constantly. The need to exit positions at the end of the day will limit their profits.
SCALPING
The main idea behind the scalping strategy in FOREX trading is to take very small profits very quickly from very small movements of price, such as 5 to 10 pips.
The trades normally are entered and exited within minutes or even seconds. Small profits add up because the number of daily trades can be very high, ranging from 20 to 100 trades on average. Scalping is considered to be a risky trading style.
However, this will depend on which times of the day and which types of markets are used. High volatility or news releases are not recommended because of a higher risk involved.
The strategy has to be very well determined in advance, as for any trading system, especially in terms of risk management. A fast reaction and decision time are paramount, getting out of bad trades as soon as possible with low pip losses. Since the trader will be taking many more trades throughout the session, it is better to take profits as they present themselves, small pips here and there, not aiming for more because the strategy is to sum up the overall quantity of trades. Scalping is usually performed on very short time frames; thus, the average range available is also very small, and one shouldn’t expect more than 5 to 10 pips on average.
INTRADAY TRADING
Intraday or day trading is a technique that requires all positions to be closed at the end of each day. The number of trades is much lower than in scalping, and although very short time frames can be used to pinpoint better entries, trades are usually analyzed and performed over short- and medium-term time frames, such as 1-hour or 30-minute charts, with 15 minutes for entries. Traders can use a variety of technical analysis tools and wait for the appropriate signal or opportunity to open a position. If there is no good opportunity, they can stay on the sidelines and wait for a better chance the next day.
POSITION TRADING
The position- trading technique is a strategy in which you increase your position size incrementally as the trade evolves, maintaining the same initial level of risk. It is also called averaging into a position; the trader adds a new position of the same size and in the same direction every time the risk of the previous one can be covered.
For example, you could buy 0.1 lot of EUR/USD at 1.2550 and set the stop loss at 1.2500. Your risk would be of $50. When the price goes up, you buy a second mini lot at 1.2600 with a stop loss at 1.2550, setting the stop of the first position at breakeven (1.2550). You now will have two mini lots while maintaining your overall risk at $50. If the price keeps on rising, you can buy a third 0.1 position at 1.2650, setting the stop loss at 1.2600, and trail the stop of the first two positions equally to 1.2600. Should you be stopped out, all three mini lot trade are now at breakeven! Should the price continue rising, you can buy a fourth mini lot at 1.2700, setting all the stops for the positions at 1.2650, which will protect your profits. You then buy a fifth mini lot at 1.2750, setting all the stops as previously, and your protected profit amounts to $250 ($150 + $100 + $50, with the fourth mini lot at breakeven and $50 risk on the last position).
NEWS TRADING
is the action of placing both a buy and a sell pending stop order above and below the current price. No direction is expected, and the trader prepares for the eventuality of a move either way. Straddles are used commonly in news trading and are implemented before the outcome of a news release kicks in. All the usual elements of trading are set up in the straddle, such as stop losses and target prices.
SWING TRADING
Swing trading is a style which is centered around executing trades based on medium term market views. Swing trades are those which are normally held anywhere from several days, weeks or months. Trades which run for such periods of time are most often analyzed first hand from a higher timeframe chart such as the 4 hours, daily, weekly and monthly. Swing trades usually are kept open for a few days, as long as the swing or trend is continuing.
As soon as the price seems to be reaching a top or a bottom, the trader will enter short or long the market to profit from the expected move. Markets usually range most of the time around 70 to 80 percent of the market activity being done sideways. However, those are “trends within trends” because each side of a sideways move is a small trend in itself and can yield many profits because the time frames used are higher than in scalping. A swing trade usually can give around 100 or more pips per trade.
FUNDAMENTAL ANALYSIS
All right, below is the boring stuff that nobody wants to hear simply because many people think that this subject is too complicated, and you need to have Economics degree to understand and trade based on Fundamentals. Don’t worry, we’re going to simplify the subject and focus on what matters in Forex Markets only. The Fundamentals could be as difficult as you wanted them to be; there is no need for making this subject even more mind blowing as it is on its own. Like I said, this is the stuff that majority of people are falling asleep over, yet statistically majority of people loose in Forex Markets. I know; it is hard to wrap your head around some Fundamental concepts. However, if you internalize these concepts, you will change the way you look at Markets forever.
If you want to know the future direction of currency movements, then you must actively seek out forex news. Financial and political events directly impact the market, no matter where these events occur. A political revolution or an earthquake will have a huge impact on a specific country and on its currency. Therefore, all currency pairs related to this country will also be affected. And this kind of forex news is exactly what an experienced and smart forex trader will make use of.
There are two sub-types of Fundamental Analysis:
1: Macro-Fundamental Analysis - The Top Down Approach.
Macro-Fundamental Analysis centers around broad economic factors that impact the exchange market altogether. The concept of Macro-Fundamental Analysis begins with the overall assessment of the Economy. Then it moves to analyze its effects on sectors, groups and lastly down to specific trading asset class in the industry groups. The Top-Down Approach focuses on Employment, Inflation rate, Growth Rate as well as numerous mixtures of other Economic activities. It is worth noting that investment management companies and large brokerage firms substantially prefer Macro-Fundamental Analysis as their conventional method of approaching the Markets as it provides structure and more organized framework.
Macro events:
The forex market is primarily driven by overarching macroeconomic factors that influence the decisions of the traders who ultimately decide the value of a currency at any given point in time. The economic health of a nation's economy is an important factor in the value of its currency. Overall economic health, however, is shaped by numerous economic events and information that may change on a daily basis, contributing to the 24/7 nature of the international foreign exchange market.
Things that move the Forex Market on a Grand scale, these events include:-
1-Fiscal policies
These are laws, and regulations set by the government relevant to taxation as well as spending. Fiscal policy's objectives are price stability, economic growth, maximum employment. Fiscal policies may also be used to increase or reduce business activities.
Here is an example, let’s say the government decides to increase taxation, then consumers would likely have fewer net incomes, which leads to lesser spending on goods and services. Tax policies and regulations are among many tools the government uses to induce or slow down the Economy.
The following are the three basic financial policies: neutral, expansionary, and contractionary.
• Neutral – Government spending is roughly equal to its revenue.
• Expansionary – Government spending is higher than its revenue.
• Contractionary – Government spending is lower than its revenue.
How it works
Let’s say a government has a budget deficit due to an expansionary financial policy. To finance the deficit, the government can work with the central bank to print fresh currency (also known as quantitative easing).
The newly printed money can be used by the government in their economic development projects. The increase in money supply can end up being inflationary and lead to the weakening in value of the domestic currency in relation to foreign currencies.
2-Monetary Policies
The handling of interest rates and money supply by a Central Bank. In the U.S., it will be the Federal Reserve. Monetary policy is put in place as part of a strategy to keep control over Inflation and achieve currency stability. Compare to Fiscal policy, Monetary policy is directed more at financial markets, and its effects in changes could be noticeable right away rather than subtle as compared to Fiscal policy. Monetary policy is one of the two practices that the Fed uses to influence supply and demand of Money.
Monetary Policy is implemented by a central bank or currency board and involves controlling the following areas;
• Money supply in order to control inflation.
• Maintain or stimulate economic growth.
• Lower unemployment.
• Maintain a stable exchange rate.
Depending on the economic conditions a central bank may set a monetary policy that affects one area positively but has a negative effect on another area.
For example; To control inflation the central bank will decrease money supply which can lead to a slowdown in economic growth and unemployment. Increasing money supply would lower unemployment and increase economic growth but will eventually lead to inflation.
3-Elections and political events
The political landscape of a nation plays a major role in the economic outlook for that country and, consequently, the perceived value of its currency. Forex traders are constantly monitoring political news and events to gauge what moves, if any, a country's government may take in the economy.
Elections are always viewed as a cause of Volatility in Forex Markets. It is only natural for the traders to be more cautious with such events. As long as political uncertainty is in the air and psychological tensions arise, this behavioral pattern will continue to repeat.
For instance, an upcoming election is always a major event for currency markets, as exchange rates will often react more favorably to parties with fiscally responsible platforms and governments willing to pursue economic growth.
Example… The victory of Emmanuel Macron in France’s presidential election prompted foreign exchange markets as the trading week got underway in Asia. Euro was 3.5% up against dollar, resulting to a 250 pips gap on EURUSD, the pair has been bullish for months after the elections
2. Micro Fundamental Analysis - The Bottom Up Approach.
The Bottom-Up Approach or better known as Micro-Fundamental Analysis is an examination of certain behaviors and economic patterns that trigger events leading to an Economic activity. For instance, it analyses economic releases, corporate or company actions, social policies, workforce activities and a whole lot more. Simply put Microeconomics tries to forecast Economic trends.
Micro events:
This is what makes the Fx Market “tick” on a daily basis - Micro events & Geo- Political events.
Economic releases:
On a day-to-day basis, Currency's exchange rate fluctuates because of imbalance in Supply & Demand. Nothing more is so powerful in affecting this imbalance as High- Impact Economic releases. Currencies can move a great amount of distance in a matter of seconds. Checking Economic calendar for the scheduled news events carries an outmost importance for Fx speculators.
News Headlines:
You have to be News literate if you wish to be involved in Fx speculations. Following News on Bloomberg or Reuters even as a background, will keep you in the loop of any developing global events
. Commentary from Gov. officials:
Rules and regulations, as well as verbiage that is used by Central Banks officials, definitely carry significant weight in the Fx World. Central Bank’s minutes and press releases can bring an enormous volatility and sometimes change the whole outlook on the currency.
Geo–Political events:
The whole array of non-Economic events ranging from wars to natural or manmade disasters, including terrorists’ attacks, regime changes, major workers’ strikes, elections, and etc.
"RISK WHAT YOU CAN AFFORD TO LOOSE"
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