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Wednesday, May 6, 2009

When Investors should Short a Stock

When Investors should Short a Stock


Shorting a stock is the exact opposite of buying a stock. When you short a stock you are hedging your bets that the stock will go down in price unlike when you buy a stock and believe the price will go up.

Many investors try and short a stock way to early as they believe the stock price is way overvalued. However many times a stock that is overvalued in price may become even more overvalued especially when the stock market is in an extended upward move. The proper time to short a stock is after it has encountered its first major sell off and bounced which sets the stage for a second stronger move to the downside.

Let’s look a specific example form the Spring of 2003. COKE made a strong run from July of 2002 until January of 2003 and gained nearly 75% over a 6 month period.

After peaking in January COKE then sold off but found support near its 38.2% Fibonacci Retracement Level near $59 (point A) and then preceded to rally over the next few weeks on low volume (point B).

COKE then ran into strong resistance as it rallied back to its 61.8% Fibonancci Retracement Level near $65.50 (point C) calculated from the early Janaury 2003 high to the low made during the first week February. This was then followed by an even stronger sell off in which COKE dropped from $65 to $47 over the next three weeks (points C to D).

Thus the best time to short a stock is to wait for it to bounce after it makes its initial sell off and then try and catch the second stronger move downward. When looking for stocks to short make sure they are exhibiting these three characteristics.

1. The stock has already undergone one significant move downward after making a top.
2. The stock then finds support at a certain Fibonacci Retracement Level or Moving Average and rallies on poor volume.
3. The stock then stalls out near its 38.2%, 50% or 61.8% Fibonacci Retracement Level after rallying.

By following these simple rules investors will have a much higher success rate when attempting to short stocks.

Regards,



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Trading Symmetric Triangles

Trading Symmetric Triangles


Although some of the more well know chart patterns to trade off of include the Cup and Handle, Double Bottom and Flat Base another chart pattern to look for is the Symmetric Triangle.

The Symmetric Triangle pattern usually occurs after a stock makes a significant move over a short period of time and then pulls back for a few weeks before making another significant move upward. The weekly chart of OMNI below shows that it made a quick move in early November of 2003 and then developed a Symmetric Triangle. OMNI then broke out again in the early part of December and doubled in price over the next four weeks.

Another example is shown by RADN which formed two separate Symmetric Triangle patterns in November and December of 2003 before moving higher.

Thus recognizing those stocks which are forming a Symmetric Triangle pattern can lead to substantial gains if they break out to the upside.

Regards,
Bob Kleyla



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The Volatility Index

The Volatility Index


An Analysis of the Volatility Index (VIX) over the past 15 Years

Many investors have wondered whether extremely low or high readings in the Volatility Index (VIX) have always given a strong signal as to when the market may be nearing a bottom or top. A plot of the VIX versus the S&P 500 back to 1986 is shown below.

From what I can see the VIX was rather volatile from 1986-1990 especially when the market crashed in 1987. Then from 1991 through 1994 the VIX was pretty stable as the market traded nearly sideways. Meanwhile as the market started to rally strongly beginning in 1995 the VIX gradually became more volatile again by 1997 and has continued to be volatile ever since with strong fluctuations both to the downside and upside. The question is will the VIX eventually transition to a less volatile environment like occurred in the 1991 to 1994 time period when the market began to trade sideways or will it continue to see more strong fluctuations in the future?

If we break down the past 15 years into separate time periods and start with the past 5 years there has been a fairly strong correlation between a rapid drop or rise in the VIX and a nearing market top or bottom. Some examples of nearing bottoms associated with a quickly rising VIX have occurred at points A, B and C and to a lesser extent at points D and E. Meanwhile as the VIX has approached a very low level a nearing market top has occurred at points F, G, H and I over the past 5 years.

Meanwhile from the period of 1991 through 1994 the market traded nearly sideways as the S&P 500 only gained about 75 points during that 4 year period. During this period of time the VIX was pretty stable and really didn’t move strongly in either direction.

Looking further back from 1986 to 1990 the VIX was more volatile and did do a good job of signaling a nearing top before the market crashed in 1987 (point J) and also was at a fairly low level before the market sold off in 1990 (point K). Meanwhile as the VIX spiked sharply higher (point L) with the market crash in 1987 this did help signal a nearing bottom which eventually led to a longer term up trend until the market peaked in the Summer of 1990.

Overall it looks like the VIX has been pretty useful since 1998 with all of the market swings to the downside and upside while in the early to mid 1990’s it wasn’t that useful as the market traded basically sideways. In the mid to late 1980’s there were a few times when it was useful especially when the market was nearing a significant bottom or top.

Regards,




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Stock Target Price

Stock Target Price


Using the 10 Day Moving Average of the VIX (Volatility Index) to time a Reversal in the the S&P 500

Investors can get an idea of when the market may reverse when the 10 Day Moving Average (MA) of the Volatility Index (VIX) becomes significantly stretched away from its 10 Day Moving Average (MA). A simple example is shown below which compares the 10 Day MA of the VIX to the S&P 500.

Notice when the VIX got stretched significantly away from its 10 Day MA (blue line) to the upside (points A) that the S&P 500 made a bottom (points B) and then reversed to the upside.

Thus keeping track of where the Volatility Index is in relation to its 10 Day Moving Average can give investors a clue to when the market may be getting close to a near term bottom and possible upside reversal.

Regards,



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Stock Market Leadership

Stock Market Leadership


Stocks that act well while the Market is selling off may give you a clue to new Leadership

Over the past few years many investors have given up on the market especially when another round of selling has occurred. However this is exactly the wrong time to give up on the market because when the market reverses to the upside those stocks which had been acting well during the sell off may become the next big winners.

Here are a few examples of what I’m talking about. Let us compare the charts of HITK and USNA with the chart of the S&P 500 this past Summer and Fall when the market was selling off.

Looking at HITK first shows that this past Summer and Fall while the S&P 500 was dropping (points A to B) HITK was actually rising (points C to D) while completing the right side of a 1 1/2 year Cup. HITK then traded sideways for 4 weeks while developing a Handle (point E) and then broke out in late October. After breaking out HITK nearly doubled in price over the next few months before topping out in early January.

Stock Market Leadership

Now let us compare USNA with the S&P 500. USNA formed a 2 1/2 year Cup from the early part of 2000 until June of 2002. When the S&P 500 began to sell off last Summer and Fall USNA basically traded sideways during that period of time while developing a 4 month Handle from July through September. Then when the market made a bottom in early October and began to rally USNA broke out of its Handle on huge volume (point F). After breaking out in early October USNA then doubled in price over the next three months.

stocks

As you can see noticing which stocks are acting well when the market is selling off can give you a clue to whom the next leaders will be when the market begins to reverse strongly to the upside.



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Shorting Stocks Strategy

Shorting Stocks Strategy


Shorting a stock is the exact opposite of buying a stock. When you short a stock you are hedging your bets that the stock will go down in price unlike when you buy a stock and believe the price will go up. In order to short a stock you must have a margin account with your brokerage firm. In addition you also have to short individual stocks on an up tick but can short the Exchange Traded Funds (ETF’s) on a down tick. Thus as an investor you have more of an advantage shorting the ETF’s than individual stocks.

Many investors try and short a stock way to early as they believe the stock price is way overvalued. However many times a stock that is overvalued in price may become even more overvalued especially when the stock market is in an extended upward move. The proper time to short a stock is after it has encountered its first strong downward thrust and bounced for a short period of time which sets the stage for a second move to the downside.

Lets look at an example. NTES which made a huge move in 2003 eventually peaked in October of 2003 and then made its first strong downward thrust (points A to B). Notice how NTES then found support near its 200 Day EMA (purple line) and 50% Retracement Level near the $40 level. After finding support near the $40 level NTES then rallied on below normal volume but encountered resistance at its 100 Day EMA (green line) and 38.2% Retracement Level near $48 (point C). This set the stage for a second short opportunity as NTES began to stall out near the $48 level. In this example NTES could have been shorted around the $48 level with a Stop Loss Order placed just above the $50 level just in case NTES broke to the upside instead. During the month of December NTES fell from $48 to $35 a share but did find support just above its 61.8% Retracement Level which was near $34 (point D). Thus investors could have covered their short positions at one of two prices with the first at the 200 Day EMA near $40 and the second near the 61.8% Retracement around the $34.

Thus I believe the best time to short a stock is to wait for it to bounce after it makes its first major thrust downward, after going through an extended upward move, and then try and catch the second move downward. When looking for stocks to short make sure they are exhibiting these three characteristics.

1. The stock has already undergone one significant move downward after making a top.
2. The stock then finds support at a certain Fibonacci Retracement Level or Moving Average and rallies on poor volume.
3. The stock then stalls out near its 38.2%, 50% or 61.8% Fibonacci Retracement Level or Moving Average after rallying.

By following these simple rules investors will have a much higher success rate when attempting to short stocks.

Regards,




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Industry Group Relative Strength

Industry Group Relative Strength


The Importance of Industry Group Relative Strength

Knowing which Industry Groups the Institutional Money is flowing into and out of is very important to recognize. If your invested in Stocks that reside in low Relative Strength Industry Groups then they may remain poor performers until that Industry Group shows signs of increasing Relative Strength. Sometimes it can take many months or even a few years before an Industry Group will finally begin to show signs of life.

Lets look at a couple of Industry Groups over the past few years and see how they compare based on Relative Strength and Price Performance. The Gold and Silver Sector has been very strong since the first of the year which has been reflected in its Industry Group Relative Strength and Year to Date price Performance.

Notice how this Industry Group was strong in the Fall of 2001 but gradually became out of favor in November and December of 2001 as the Groups Relative Strength dropped to 8 (highlighted in blue). However things began to change by January as the Group’s Relative Strength began to increase and has been very strong since February with values consistently in the 90’s (highlighted in red).

If we look at the individual stocks in the Mining-Gold/Silver/Gems Industry Group all of them have performed well except for one. The Average Year to Date Return for the Group since January 1st is over 130% as of May 24, 2002. This is why it’s important to notice which Industry Groups are starting to show signs of increasing Relative Strength.

Now lets look at a Industry Group (Medical-Generic Drugs) which has been exhibiting low Relative Strength values over the past several weeks. Notice in the table below how this Industry Group was strong in the Fall of 2001 but quickly fell out of favor as the Relative Strength values dropped from 96 in October to as low as 1 by January of 2002 (highlighted in blue). During the past several weeks the Relative Strength values have continued very low (highlighted in red) as this Industry Group has remained out of favor with the Institutional Money.

If we look at the individual stocks that make up this Industry Group several of them have been performing very poorly since Jaunary 1st with an Average Year to Date Return of -16% through May 24, 2002..

We track over 180 different Industry Groups each week as this allows me to notice which Groups are showing signs of decreasing or increasing Relative Strength and where the Institutional Money is flowing into or out of. Recognizing these trends can be very beneficial to investors as typically the best performing Stocks will reside in high Relative Strength Industry Groups as shown by the above examples.

Regards,



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How Sales and Earnings Growth is related to a Stock’s Performance

How Sales and Earnings Growth is related to a Stock’s Performance


If you go back through the history of the stock market there is a recurring theme among those stocks which have had some of the strongest price appreciation and it’s related to their Sales and Earnings Growth. If you plot a chart of Sales and Earnings Growth versus a companies Stock Price there is a usually a strong relationship between the two.

Here is a recent example during the past year. USNA has been one of the strongest performing stocks during the past year and has been experiencing accelerating Sales and Earnings Growth over the past year. A table of USNA Sales and Earnings Growth is shown below.

Meanwhile if we take the table above and make a graphical plot of USNA’s Earnings Growth versus its Stock Price shows a very strong relationship. Notice how USNA’s stock price (blue line) began to rise significantly as its Earnings Growth (red line) started to accelerate beginning in the Spring of 2002 (point A) and has continued through the Spring of 2003 (point B). From March of 2002 until mid June of 2003 USNA has seen its stock price rise from $1.60 to over $50 a share for a return of over 3000%.

I first featured USNA as a Stock to Watch based on its accelerating Sales and Earnings Growth and Cup and Handle chart pattern in August of 2002 when it was trading around $7 a share. If you don’t believe it click here for the report. Notice how USNA formed a 2 1/2 year Cup followed by a 3 month Handle before breaking out in October of 2002.

As this example shows regardless of market conditions companies which have accelerating Sales and Earnings Growth have the potential to perform very well until their Sales and Earnings Growth begins to decelerate. If you don’t believe this go back and research some of the best performing stocks of all time and a majority of them will exhibit similar characteristics.

The key is to recognize those companies which are starting to establish a trend of accelerating Sales and Earnings Growth before everyone else does which takes a lot of time and research. This is what I do every week as I spend over 20 hours a week looking for companies that are starting to show signs of accelerating Sales and Earnings Growth. This is how I found USNA well before its stock price took off.

Regards,



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How Sales and Earnings Growth can affects a Stock’s Performance

How Sales and Earnings Growth can affects a Stock’s Performance


If you go back through the history of the stock market there is a recurring theme among those stocks which have had some of the strongest price appreciation and it’s related to their Sales and Earnings Growth. Let’s look at two companies over the past few years and compare their Sales and Earnings Growth.

First let’s look at Microsoft (MSFT) which has hard meager Sales and Earnings Growth in 2002 and 2003. Since the market made a bottom in October of 2002 MSFT has seen very little price appreciation since then. Back in early October of 2002 MSFT was trading around $22 a share and in late March of 2004 MSFT was trading near $24 a share. Thus while the major averages saw significant gains from October of 2002 into the early part of 2004 MSFT was only up 9%.

Now let’s look at a stock which has been exhibiting strong Sales and Earnings Growth over the past year or so. As you can see below Taser (TASR) has seen accelerating Sales and Earnings Growth over the past two quarters which has been reflected in its stock price. TASR formed a "Cup and Handle" pattern before breaking out in September of 2003 and rose nearly 800% from September of 2003 through mid February of 2004.

As these examples show those companies which have accelerating Sales and Earnings Growth have the potential to perform very well while those with poor Sales and Earnings will languish even in a Bull Market environment. I would imagine those investors who have held MSFT over the past few years aren’t very happy as the stock price has virtually gone nowhere since October of 2002 into the early part of 2004.

The key is to recognize those companies which are starting to establish a trend of accelerating Sales and Earnings Growth before everyone else does which takes a lot of time and research. This is what I do every week as I spend over 20 hours a week looking for companies that are starting to show signs of accelerating Sales and Earnings Growth.

Regards,




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Earnings Growth and Stock’s Performance

Earnings Growth and Stock’s Performance


Why Earnings Growth is Important to a Stock’s Performance

If you go back through the history of the stock market there is a recurring theme among those stocks which have had some of the strongest price appreciation and it’s related to their Earnings Growth. If you plot a chart of Earnings Growth versus a companies Stock Price there is a usually a strong relationship between the two.

Here are a few examples over the past few years. First lets look at ELNT and its associated table of Earnings Growth and Stock Price over the past two years.

Meanwhile if we take the table above and make a graphical plot of ELNT’s Earnings Growth versus its Stock Price show a very strong relationship. Notice how ELNT’s stock price (blue line) began to rise significantly as its Earnings Growth (red line) started to accelerate beginning in December of 1999 (point A) and continued through September of 2000 (point B). From September of 1999 until September of 2000 ELNT saw its stock price rise from $9 to over $90 a share for a return of nearly 900%.

Next look what happened as ELNT’s Earnings Growth peaked in September of 2000 and began to decelerate over the next several months. As you can see ELNT’s stock price dropped in unison with its Earnings Growth (points B to C) and eventually gave back much of its gains that had occurred in 2000.

Now lets look at another example which proves that even in a Bear Market stocks can do well if they have strong Earnings Growth. BEL was a company that had major problems with its Earnings Growth in 2000 as shown by the table below. BEL didn’t start to see any positive Earnings Growth until 2001 but when it did finally occur BEL’s Earnings Growth accelerated strongly in the latter half of 2001 into early 2002.

As shown by the graphical chart of the table above BEL’s stock price went nowhere in 2000 (points D to E) as their Earnings Growth remained negative. However as BEL’s Earnings Growth accelerated in 2001 into early 2002 investors took notice as BEL’s stock price exploded in early 2002 (point F to G). Since the Fall of 2001 BEL’s stock price has risen from around $4 to over $20 a share for a return of 375% even in a negative market environment.

As these examples show regardless of market conditions companies which have strong accelerating Earnings Growth have the potential to perform very well until their Earnings Growth begins to decelerate. If you don’t believe this go back and research some of the best performing stocks of all time and a majority of them will exhibit similar characteristics.

The key is to recognize those companies which are starting to establish a trend of accelerating Earnings Growth before everyone else does which takes a lot of time and research. This is what I do every week as I spend over 20 hours a week looking for companies that are starting to show signs of accelerating Earnings Growth. This is how I found BEL and ELNT well before their stock prices took off.





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An Analysis of Secular Bear Markets and Secular Bull Markets since 1900

An Analysis of Secular Bear Markets and Secular Bull Markets since 1900


From a historical perspective since 1900 there have been 3 Secular Bull Markets and 3 Secular Bear Markets as shown by the tables below of the Dow and S&P 500. As you can see during a Secular Bull Market the Average Annual Return (highlighted in red) is considerably higher than during a Secular Bear Market (highlighted in blue). Thus the long term Buy and Hold strategy that worked well in the 1980’s and 1990’s for investors may have not worked very well during the Secular Bear Markets of 1906-1921, 1929-1949 and 1966-1982.

Secular Bear Markets vs Secular Bull Markets and Dow Performance

The big question is now are we in the beginning stages of a 4th Secular Bear Mark

et which started in 2000. The average length of the previous 3 Secular Bear Markets was 18 years with a minimum of 16 years and a maximum of 21 years. Thus if you add 18 years to the year 2000 and take + or - 3 years on either side then the next Secular Bull Market may not begin until sometime in the 2015 to 2021 time period if we are now entering a 4th Secular Bear Market. However I would like to point out that even in a Secular Bear Market there can still be Bull Markets lasting a year or two as the longer term charts of the Dow show below.

Notice after the Secular Bull Market of 1922-1928 which was followed by a Secular Bear Market from 1929-1949 that the Dow still had impressive gains during the early to mid 1930s (points A to B) before going through another Bear Cycle prior too and during World War II (points B to C). This was then followed by another Bull Cycle from 1943-1946 (points C to D). However from the early part of 1937 (point B) until the end of 1949 (point E) the Dow virtually had a net gain of 0% as its basic overall pattern was a series of up and down movements which pretty much cancelled each other out.

Meanwhile after the Secular Bull Market from 1950-1965 the Dow once again went through another Secular Bear Market from 1966-1982. Notice after the Dow peaked in early 1966 (point F) that it had a lot of upward and downward movements from 1966 through 1982 but it basically went nowhere and actually was lower at the end of 1982 (point G) versus its peak in early 1966 (point F).

Looking at the current chart of the Dow shows that it has been exhibiting a choppy pattern similar to previous Secular Bear Market environments after experiencing a Secular Bull Market from 1983-1999. One has to wonder during the next 10 years or so whether the Dow will continue to exhibit a similar pattern that occurred from the mid 1960’s through the 1970’s in which it had a lot of downward and upward moves but the overall net gain was negligible.

Even if we go through another Secular Bear Market over the next several years there will still be plenty of smaller Bull Markets and if taken advantage of properly will still lead to some excellent investment opportunities in the future.

Regards,


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Essential Elements of a Successful Trader

Essential Elements of a Successful Trader


Courage Under Stressful Conditions When the Outcome is Uncertain

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you’re taking.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a ’hold on until it comes back’ strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.




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Questions From Email Inbox

Questions From Email Inbox


Thank you for inviting people to learn from your experience. I found that to be very generous. I was hoping you may be able to shed little light on just how to go about finding the right currency pairs to buy.

This is where charting software will make it self-evident for you to know what pairs are ’trending’. Technical analysis using charting software: Elliott Wave, Retracements, Fibronacci patterns, short term trending, etc. Good charting software is invaluable! Look at it as one of your ’costs of doing business’.

I have just begun learning how the FOREX works. There are so few opportunities for the lower economic class to achieve financial independence.

It took us a full year to learn to trade forex to achieve consistent profits, but well worth the time and effort. Forex trading can be the great leveler of the self-investor playing field. I and we believe that with dedication to sound, risk-management trading methods you can succeed.

I’m trying to build a financial base, but I just can’t find a door in. Is it possible for me to participate directly in the FOREX with smaller amounts - like $1000?

Beginning with $1K. is more of a challenge and more of a risk (but not impossible). $1K represents 1 lot in Forex Trading, and that is the minimum (leveraged) trade that can be made. Perhaps that $1K would be better spent on trading education?

I have participated in Forex ’Games’ and other types of online investments that claim to be investing in Foreign Currency (among other things), with returns of 50% a month and more. I actually did get paid. Opinions please?

We strongly urge you to resist any further temptation to send your money away to an investment-type pool (by this we mean do not send your money away to be under someone else’s control and in someone else’s account). It is unjustified risk, there are much better ways to begin to experience profits from forex trading. Many such online investments have totally disappeared into the Internet ethers from which they came. Typically these investments give no contact information, claiming to be ’offshore’, ’for privacy reasons’. They last a few months, their bulletin boards or email newsletters extoll their climbing numbers of ’members’ and pay-outs, then without warning their site goes off-line forever. And you never knew who they were that disappeared with your trust and your money or e-gold.

How do you forecast which currency is next in line to increase?

It is not so much that you want to know when any one currency is going up. You can make profits whether a currency is going up (buy), or down (sell). All Currencies are continually rising and falling relative to other currencies, and forex trading is in fact trading one currency relative to another. Good trading opportunities are always present when you know how to recognize them. Technical analysis using charting software, market sentiment, experience will show you which currencies to pair to trade. Forex Trading is a skill of identifying (and acting on) the probabilities.

How do you choose when to rollover or close positions?

Technical analysis using charting software that (when you learn how to identify what you are seeing) depicts resistance levels (how high it will likely rise to) or support levels (how low it will likely stop dropping at). This is helpful for determining whether to rollover the trade for a bigger forecasted profit the next day. However, a rollover does have additional clearinghouse fees attached. Quick in-and-out trades are closed intentionally with the goal of a smaller profit gain (such as a 4 pip profit).

For example, Beginners, who are learning to read their charts, can do very well closing positions at whatever point they have gained +4 pips profit. This represents a $40. profit (in this example we are trading 1 lot Euro/USD, so 1 pip equals $10.). A $40./4 pip gain is a relatively small move on the chart and may not seem impressive until you consider that If you do this successfully 4 times a day you have made $160. profit. With 4 such daily trades in a four day trading week you will have made $640. (consider also that this is even without the magic of compounding). We leave the monthly and yearly calculations to you.

What indicators do you utilize?

We have tried everything we could ever get our hands on. Over time we have selected the ones that are most consistent and well suited to our trading style. See our review of different indicator tools in Tools of the Trade. You will develop your own trading style (best times of day, favorite currency pairs, best instinctual moving-average chart pattern etc.). But experience with basic technical analysis using charting software is always the starting point. Then you add forex forecasting email subscriptions, Allan Greenspan’s body language (no kidding) etc.

Are there any real time & reliable direct (commission free) market maker entry sites online?

Yes. It is not necessary to pay a clearinghouse (also known as a market maker, or forex brokerage house) an additional ’commission’ for self-trading using their platform/services. They are usually compensated in the ’spread’ between the buy price and sell price.

Source : forex-trader.com



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How to Read a Chart & Act Effectively

How to Read a Chart & Act Effectively


Introduction

This is a guide that tells you, in simple understandable language, how to choose the right charts, read them correctly, and act effectively in the market from what you see on them. Probably most of you have taken a course or studied the use of charts in the past. This should add to that knowledge.

Recommendation

There are several good charting packages available free. Netdania is what I use.

Using charts effectively

The default number of periods on these charts is 300. This is a good starting point;

  • Hourly chart that’s about 12 days of data.
  • 15 minute chart its 3 days of data.
  • 5-minute chart it’s slightly more than 24 hours of data.
You can create multiple "tabs" or "layouts" so that it’s easy to quickly switch between charts or sets of charts.

What to look at first

1. Glance at hourly chart to see the big picture. Note significant support and resistance levels within 2% of today’s opening rate.

2. Study the 15 minute chart in great detail noting the following:

  • Prevailing trend
  • Current price in relation to the 60 period simple moving average.
  • High and low since GMT 00:00
  • Tops and bottoms during full 3 day time period.

    How to use the information gathered so far

    1. Determine the big picture (for intraday trading).

    Glancing at the hourly chart will give you the big picture – up or down. If it’s not clear immediately then you’re in a trading range. Lets assume the trend is down.

    2. Determine if the 15 minute chart confirms the downtrend indicated by big picture:

    Current price on 15-minute chart should be below 60 period moving average and the moving average line should be sloping down. If this is so then you have established the direction of the prevailing trend to be down.

    There are always two trends – a prevailing (major) trend and a minor trend. The minor trend is a reversal of the main trend, which lasts for a short period of time. Minor trends are clearly spotted on 5-minute charts.

    3. Determine the current trend (major or minor) from the 5 minute chart:

    Current price on 5-minute chart is below 60 period moving average and the moving average line is sloping downward – major trend.

    Current price on 5-minute chart is above 60 period moving average and the moving average line is sloping upward – minor trend.

    How to trade the information gathered so far

    At this point you know the following:

  • Direction of the prevailing trend.
  • Whether we are currently trading in the direction of the prevailing (major) trend or experiencing a minor trend (reaction to major trend).

    Possible trade scenarios:

    1) Lets assume prevailing (major) trend is down and we are in a minor up-trend. Strategy would be to sell when the current price on 5-minute chart falls below the 60 period moving average and the 60 period moving average line is sloping downward. Why? Because the prevailing trend is reasserting itself and the next move is likely to be down. Is there more we can do? Yes. Look for further confirmation. For example, if the minor trend had stalled for a while and the lows of the past half hour or hour are very close to the 5 minute moving average then selling just below the lows of the past half hour is a better place to enter the market then just below the moving average line.

    2) Lets assume prevailing (major) trend is down and 5-minute chart confirms downtrend. Strategy would be to wait for a minor (up trend) trend to appear and reverse before entering the market. The reason for this is that the move is too “mature” at this point and a correction is likely. Since you trade with tight stops you will be stopped out on a reaction. Exception: If market trades through today’s low and/ or low of past three days (these levels will be apparent on the 15 minute chart) further quick downward price action is likely and a short position would be correct.

    3) A better strategy assuming prevailing trend down, 5-minute chart down, and just above days lows is to BUY with a tight stop below the day’s low. Your risk is limited and defined and the technical condition (overdone?) is in your favor. Confirmation would be if today’s low was a bit higher than yesterday’s low and the price action indicated a very short-term trading range (1 minute chart) just above today’s low. The thinking here is that buyers are not waiting for a break of today’s or yesterday’s low to buy cheaper; they are concerned they may not see the level.

    4) Generally speaking, the safest place to buy is after a sustained significant decline when the bottoms are getting higher. Preferably these bottoms will be hours apart. By the third or forth higher bottom it is clear a bottom is in place and an up-move is coming. As in the example above your risk is limited and defined – a low lower than the last low.

    5) The reverse is true in major up-trends.

    Other chart ideas

  • There are always two trends to consider – a major trend and a minor trend. The minor trend is a reversal of the major trend, which generally lasts for a short period of time.
  • Buying above old tops and selling below old bottoms can be excellent entry levels; assuming the move is not overly mature and a nearby reaction unlikely.
  • When a strong up move is occurring the market should make both higher tops and higher bottoms. The reverse is true for down moves- lower bottoms and lower tops.
  • Reactions (minor reversals) are smaller when a strong move is occurring. As the reactions begin to increase that is a clear warning signal that the move is losing momentum. When the last reaction exceeds the prior reaction you can assume the trend has changed, at least temporarily.
  • Higher bottoms always indicate strength, and an up move usually starts from the third or fourth higher bottom. Reverse this rule in a rising market; lower tops…
  • You will always make the most money by following the major trend although to say you will never trade against the trend means that you will miss a lot of opportunities to make big profits. The rule is: When you are trading against the trend wait until you have a definite indication of a selling or buying point near the top or bottom, where you can place a close stop loss order (risk small amount of capital). The profit target can be a short-term gain to nearby resistance or more.
  • Consider the normal or average daily range, average price change from open to high and average price change from open to low, in determining your intra-day price targets.
  • Do not overlook the fact that it requires time for a market to get ready at the bottom before it advances and for selling pressure to work it’s way through at top before a decline. Smaller loses and sideways trading are a sign the trend may be waning in a downtrend. Smaller gains and sideways trading in an up trend.
  • Fourth time at bottom or top is crucial; next phase of move will soon become clear… be ready.
  • Oftentimes, when an important support or resistance level is broken a quick move occurs followed by a reaction back to or slightly above support or below resistance. This is a great opportunity to play the break on the “rebound”. Your stop can be super tight. For example, EURUSD important resistance 1.0840 is broken and a quick move to 1.0860, followed by a decline to 1.0835. Buy with a 1.0820 stop. The move back down is natural and takes nothing away from the importance of the breakout. However, EURUSD should not decline significantly below the breakout (breakout 1.0840; EURUSD should not go below 1.0825.
  • After a prolonged up move when a top has been made there is usually a trading range, followed by a sharp decline. After that, a secondary reaction back near the old highs often occurs. This is because the market gets ahead of itself and a short squeeze occurs. Selling near the old top with a stop above the old top is the safest place to sell.
  • The third lower top is also a great place to sell.
  • The same is true in reverse for down moves.
  • Be careful not to buy near top or sell near bottom within trading ranges. Wait for breakaway (huge profit potential) or play the range.
  • Whether the market is very active or in a trading range, all indications are more accurate and trustworthier when the market is actively trading.

    Limitations of charts

    Scheduled economic announcements that are complete surprises render nearby short-term support and resistance levels meaningless because the basis (all available information) has changed significantly, requiring a price adjustment to reflect the new information. Other support and resistance levels within the normal daily trading range remain valid. For example, on Friday the unemployment number missed the mark by roughly 120,000 jobs. That’s a huge disparity and rendered all nearby resistance levels in the EURUSD meaningless. However, resistance level 200 points or more from the day’s opening were still meaningful because they represented resistance to a big up move on a given day.

    Unscheduled or unexpected statements by government officials may render all charts points on a short-term chart meaningless, depending upon the severity of what was said or implied. For example, when Treasury Secretary John Snow hinted that the U.S. had abandoned its strong U.S. dollar policy.




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    Forex Glossary

    A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

    A

    Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.

    Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or. Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

    Appreciation - A currency is said to ’appreciate’ when it strengthens in price in response to market demand.

    Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.

    Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs.

    At Best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.

    At or Better - An order to deal at a specific rate or better.

    B

    Balance of Trade - The value of a country’s exports minus its imports.

    Bar Chart - A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

    Base Currency - The first currency in a Currency Pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the US Dollar is normally considered the ’base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

    Bear Market - A market distinguished by declining prices.

    Bid Price - The bid is the the price at which the market is prepared to buy a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs.

    Bid/Ask Spread - The difference between the bid and offer price. Big Figure Quote - Dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes.. For example, a USD/JPY rate might be 117.30/117.35, but would be quoted verbally without the first three digits i.e. "30/35".

    Book - In a professional trading environment, a ’book’ is the summary of a trader’s or desk’s total positions.

    Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. In contrast, a ’dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

    Bretton Woods Agreement of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies.

    Bull Market - A market distinguished by rising prices.

    Bundesbank - Germany’s Central Bank.

    C

    Cable - Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s.

    Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

    Cash Market - The market in the actual financial instrument on which a futures or options contract is based.

    Central Bank - A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank.

    Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.

    Cleared Funds - Funds that are freely available, sent in to settle a trade.

    Closed Position - Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will ’square’ the postion.

    Clearing - The process of settling a trade.

    Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the ’Asian Contagion’.

    Collateral - Something given to secure a loan or as a guarantee of performance.

    Commission - A transaction fee charged by a broker.

    Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction.

    Contract - The standard unit of trading.

    Counter Currency - The second listed Currency in a Currency Pair.

    Counterparty - One of the participants in a financial transaction.

    Country Risk - Risk associated with a cross-border transaction, including but not limited to legal and political conditions.

    Cross Currency Pairs or Cross Rate - A foreign exchange transaction in which one foreign currency is traded against a second foreign currency. For example; EUR/GBP

    Currency symbols
    AUD - Australian Dollar
    CAD - Canadian Dollar
    EUR - Euro
    JPY - Japanese Yen
    GBP - British Pound
    CHF - Swiss Franc

    Currency - Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

    Currency Pair - The two currencies that make up a foreign exchange rate. For Example, EUR/USD

    Currency Risk - the probability of an adverse change in exchange rates.

    D

    Day Trader - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

    Dealer - An individual or firm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

    Deficit - A negative balance of trade or payments.

    Delivery - An FX trade where both sides make and take actual delivery of the currencies traded.

    Depreciation - A fall in the value of a currency due to market forces.

    Derivative - A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.

    Devaluation - The deliberate downward adjustment of a currency’s price, normally by official announcement.

    E

    Economic Indicator - A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

    End Of Day Order (EOD) - An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET.

    European Monetary Union (EMU) - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. On Janaury1, 1999 the transitional phase to introduce the Euro began. The Euro now exists as a banking currency and paper financial transactions and foreign exchange are made in Euros. This transition period will last for three years, at which time Euro notes an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, the national currencies of the member countries will cease to exist. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

    EURO - the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU).

    European Central Bank (ECB) - the Central Bank for the new European Monetary Union.

    F

    Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US.

    Federal Reserve (Fed) - The Central Bank for the United States.

    First In First Out (FIFO) - Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.

    Flat/square - Dealer jargon used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.

    Foreign Exchange - (Forex, FX) - the simultaneous buying of one currency and selling of another.

    Forward - The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

    Forward Points - The pips added to or subtracted from the current exchange rate to calculate a forward price.

    Fundamental Analysis - Analysis of economic and political information with the objective of determining future movements in a financial market.

    Futures Contract - An obligation to exchange a good or instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts - ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

    FX - Foreign Exchange.

    G

    G7 - The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

    Going Long - The purchase of a stock, commodity, or currency for investment or speculation.

    Going Short - The selling of a currency or instrument not owned by the seller.

    Gross Domestic Product - Total value of a country’s output, income or expenditure produced within the country’s physical borders.

    Gross National Product - Gross domestic product plus income earned from investment or work abroad.

    Good ’Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.

    H

    Hedge - A position or combination of positions that reduces the risk of your primary position.

    "Hit the bid" - Acceptance of purchasing at the offer or selling at the bid.

    I

    Inflation - An economic condition whereby prices for consumer goods rise, eroding purchasing power.

    Initial Margin - The initial deposit of collateral required to enter into a position as a guarantee on future performance.

    Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks.

    Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

    K

    Kiwi - Slang for the New Zealand dollar.

    L

    Leading Indicators - Statistics that are considered to predict future economic activity.

    Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.

    LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

    Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below 102. (ie 116.50)

    Liquidation - The closing of an existing position through the execution of an offsetting transaction.

    Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability.

    Long position - A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.

    Lot - A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.

    M

    Margin - The required equity that an investor must deposit to collateralize a position.

    Margin Call - A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer.

    Market Maker - A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.

    Market Risk - Exposure to changes in market prices.

    Mark-to-Market - Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.

    Maturity - The date for settlement or expiry of a financial instrument.

    N

    Net Position - The amount of currency bought or sold which have not yet been offset by opposite transactions.

    O

    Offer (ask) - The rate at which a dealer is willing to sell a currency. See Ask (offer) price

    Offsetting transaction - A trade with which serves to cancel or offset some or all of the market risk of an open position.

    One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.

    Open order - An order that will be executed when a market moves to its designated price. Normally associated with Good ’til Cancelled Orders.

    Open position - An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

    Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

    Overnight Position - A trade that remains open until the next business day.

    Order - An instruction to execute a trade at a specified rate.

    P

    Pips - The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.

    Political Risk - Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

    Position - The netted total holdings of a given currency.

    Premium - In the currency markets, describes the amount by which the forward or futures price exceed the spot price.

    Price Transparency - Describes quotes to which every market participant has equal access.

    Profit /Loss or "P/L" or Gain/Loss - The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.

    Q

    Quote - An indicative market price, normally used for information purposes only.

    R

    Rally - A recovery in price after a period of decline.

    Range - The difference between the highest and lowest price of a future recorded during a given trading session.

    Rate - The price of one currency in terms of another, typically used for dealing purposes.

    Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

    Revaluation - An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.

    Risk - Exposure to uncertain change, most often used with a negative connotation of adverse change.

    Risk Management - the employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

    Roll-Over - Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.

    Round trip - Buying and selling of a specified amount of currency.

    S

    Settlement - The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

    Short Position - An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

    Spot Price - The current market price. Settlement of spot transactions usually occurs within two business days.

    Spread - The difference between the bid and offer prices.

    Square - Purchase and sales are in balance and thus the dealer has no open position.

    Sterling - slang for British Pound.

    Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.

    Support Levels - A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.

    Swap - A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.

    Swissy - Market slang for Swiss Franc.

    T

    Technical Analysis - An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc.

    Tick - A minimum change in price, up or down.

    Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.

    Transaction Cost - the cost of buying or selling a financial instrument.

    Transaction Date - The date on which a trade occurs.

    Turnover - The total money value of all executed transactions in a given time period; volume.

    Two-Way Price - When both a bid and offer rate is quoted for a FX transaction.

    U

    Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains’ Losses become Profits/Losses when position is closed.

    Uptick - a new price quote at a price higher than the preceding quote.

    Uptick Rule - In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

    US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.

    V

    Value Date - The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.

    Variation Margin - Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.

    Volatility (Vol) - A statistical measure of a market’s price movements over time.

    W

    Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.




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    Forex FAQ

    What is Foreign Exchange?

    The Foreign Exchange market, also referred to as the "Forex" or "FX" market, is the largest financial market in the world, with a daily average turnover of approximately US$1.5 trillion. Foreign Exchange is the simultaneous buying of one currency and selling of another. The world’s currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.

    Where is the central location of the FX Market?

    FX Trading is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over the Counter (OTC) or ’Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.

    Who are the participants in the FX Market?

    The Forex market is called an ’Interbank’ market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

    When is the FX market open for trading?

    A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

    What are the most commonly traded currencies in the FX markets?

    The most often traded or ’liquid’ currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

    Is Forex trading capital intensive?

    No. FXA requires a minimum deposit of $250. FXA allows customers to execute margin trades at up to 200:1 leverage. This means that investors can execute trades of $10,000 with an initial margin requirement of $50. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 20:1 but ultimately depends on the investor’s appetite for risk.

    What is Margin?

    Margin is essentially collateral for a position. If the market moves against a customer’s position, FXA will request additional funds through a "margin call." If there are insufficient available funds, FXA will immediately close out the customer’s open positions.

    What does it mean have a ’long’ or ’short’ position?

    In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every FX position requires an investor to go long in one currency and short the other.

    What about terms like "bid/ask", "spread", and "rollover"?

    FXA has an extensive Glossary that provides detailed definitions of all Forex related terms.

    What is the difference between an "intraday" and "overnight position"?

    Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of FXA’s normal trading hours at 4:30pm EST. Overnight positions are positions that are still on at the end of normal trading hours (4:30pm EST), which are automatically rolled by FXA at competitive rates (based on the currencies interest rate differentials) to the next day’s price.

    How are currency prices determined?

    Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.

    How do I manage risk?

    The most common risk management tools in FX trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor’s position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.

    What kind of trading strategy should I use?

    Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.

    How often are trades made?

    Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day. Most importantly, by not charging commission, FXA customers can take positions as often as necessary without worrying about excessive transaction costs.

    How long are positions maintained?

    As a general rule, a position is kept open until one of the following occurs: 1) realization of sufficient profits from a position; 2) the specified stop-loss is triggered; 3) another position that has a better potential appears and you need these funds.

    I am interested in foreign exchange trading, but would like some additional information. Any suggestions?

    In The Forex Market section we describe the foreign exchange market in some detail. In order to gain a practical understanding of foreign exchange trading, there is no better way than to open a demo account, where you can experience what it’s like to trade the Forex market without risking any capital.



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    What makes a good Trading Strategy?

    What makes a good Trading Strategy?


    Ask most NEW traders, and they will tell you about some moving average or combination of indicators or a chart pattern that they use. This is, as the more experienced trader knows, an entry point and not a strategy.

    Any trader who is more experienced will say a strategy should also include money management, risk control, perhaps stop losses and of course, an exit point. They might also say that you must let your profits run and cut your losses short. A well-read trader will also tell you that your strategy should fit with your trading personality.

    BUT there is one other vital ingredient that many traders forget - and that is to fully understand the "personality" of what you trade. Some traders specialise in say, gold or Brent crude or currencies or they might specialise in a particular index such as the FTSE 100 or the Dow but many traders choose to trade shares. Indeed some traders dabble in a bit of everything. I think this is the area that causes many traders to fail or at least not reach their full potential.

    In my view: You absolutely MUST specialise.

    I am sure that on the surface most people would say that sounds sensible but here is why it is a MUST!

    Superficially, many charts look the same. I bet if you had not seen the charts for some time and someone where to show you a chart of Brent Crude over 6 months and then a chart of Barclays PLC over the same 6 months you would be hard pushed to say which was which purely on the look of the chart.

    However, I bet that if you found a trader who trades ONLY Barclays day in and day out and also found someone who trades ONLY Brent Crude day in and day out, both of them would easily identify which was which. WHY?

    Because every share, index or commodity has it’s own "personality".

    Some will be volatile intra-day, some will follow their sector or the main index (market followers), some will do their own thing, some will spike up and down regularly, some will stop at key moving averages and some will just plough through. Some will move by 5% on average before they retrace and some by 2%. Some will gap up or down regularly, some will not. You get the idea!

    Therefore, no matter how good you are at analysing indicators, moving averages, trends and patterns, the same strategy WILL NOT work for everything. I would go so far as to say that a strategy that works well for Bovis Homes, for example, is likely NOT to work for BT Group - they have very different "personalities".

    So let’s return to our question: What makes a good trading strategy? Let me answer with a series of ten questions that you need to find answers to, in order to build a REALLY GOOD strategy.

    1. What do you want to trade (share, index, commodity, currency, etc)? If your answer is shares (plural) I would urge you to pick one typical share at this stage to really specialise. You can add more later.
    2. What "personality" does that share, index etc have?
    3. What entry system is the most reliable for that share?
    4. What stop loss system is the most effective for that share?
    5. What average risk will a typical trade carry?
    6. What exit system works well for that share?
    7. What is your trading personality (attitude to risk, losses, discipline, how much do you worry etc) and can you trade that strategy without overriding it?
    8. What timescale do you want to trade? (Using intra-day or end of day data)
    9. How much data do you keep on past trades to help identify strategy weaknesses?
    10. How does all this fit with your trading objectives?

    Once you have an answer to each question you need to do one final thing. Make sure all those things fit together and complement each other. For example, if the ideal stop loss position represents a big average risk and conflicts with your own attitude to risk, you need to start again. If you will override your exit point because greed makes you hang in for more, you need to think again. Perhaps you shouldn’t trade that stock in the first place - look for one with a different "personality" which will lead to a strategy you can trade comfortably.

    It is a long and sometimes painful iterative journey. You might need to go round and round in ever decreasing circles over a long time. Testing and refining, testing and refining before you can truly have a reliable and repeatable strategy that REALLY WORKS for you.

    THEN, you can look for other things to trade that have the same "personality" as your specialist stock, index, commodity or currency.

    But if it were easy, everyone would be doing it right?

    Good luck and enjoy your trading.

    David Graeme-Smith





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    Day Trading Indicators and Indicator Trading



    Did You Begin Day Trading As An Indicator Only Trader?

    Did you start day trading after buying a book on technical analysis, and getting a charting program - probably a free one that you found online - in order to save money? While reading your book you learned about trading indicators which could ’predict’ price movement, and what do you know, the ’best’ indicators were actually included in your free charting program - let the games begin.

    Now that you have all the day trading tools that are necessary, the book for education AND the free charting program with those ’best’ day trading indicators, you now need a day trading plan so you can decide which ones of those ’magic’ day trading indicators you are supposed to use. This really is a great book, besides telling you how to day trade using indicators to ’predict’ price - it also said that you need a trading plan to day trade.

    So what should this plan be? The book told you about trend following using an indicator called macd, and it also told you how it was possible to pick the top or bottoms using an indicator called stochastic; my guess is that you picked the stochastic indicator to start your day trading - this must be the ’best of the best’ since this indicator was going to ensure you of entering your trades with the ’best’ price. Amazing, simply amazing how easy this day trading stuff really is. In fact, why even bother taking the trades, each time your indicators give a signal - just call up your broker and tell him to stick $100 in your account.

    My book was Technical Analysis of the Futures Markets. My charting program was TradeStation with an eSignal fm receiver; that was the one that if you hung the antennae wires just right, and you put enough foil on the tips, you might even get quotes. I had sold a business before I started trading so I did have some capital - isn’t that how everyone gets into trading, you either sell a business or you lose your job? My indicator was the macd as I had decided that I was going to be a ’trend follower’ instead of a ’top-bottom picker’. I also decided that I was going to be ’extra’ clever, if one indicator was good than two indicators must be better, so I added a 20 period moving average. My first trade was a winner, then after many months of extensive therapy, I was finally able to forget the next twelve months - ahhh the memories ƒº

    Learning To Day Trading - The Learning Progression

    Beginning to day trade, or learning to day trade, as an indicator trader is very typical. This is also logical when you consider - HOW are you supposed to initially learn how to trade? Trading indicators are available to anyone who has a charting program, and simply using line crosses, or histogram color changes, provide ’easy’ signals to understand. If you will also take the time to learn the arithmetic behind your indicators, as well as learning what each indicator is specifically intended to do, not only is this a logical way to begin, it is also a good ’step’ in your learning progression - understanding the WHAT you are doing, instead of attempting to create ’canned’ indicator only trading systems, without any regard as to WHY you are trading this way.

    This does become one of the ’sticking’ points in your learning progression, as you come to find out that you are unable to profitably trade indicators as signals only - now what? Now what - you ’can’t’ develop your own indicators, so you start doing google searches for day trading indicators and start buying your ’collection’ - they don’t ’work’ either. Now what - you buy a mechanical trading system - what does hypothetical results may not be indicative of real trading or future results mean? Now what - you start subscribing to signal services OR you start joining the ’latest and greatest’ chat room - am I really the only person using the signals who isn’t profitable?

    Now what - you never learn how to trade.

    I began trading as an indicator trader, and I did try to learn everything that I could about the various indicators, as well as trying to combine indicators that were consistent with how I wanted to trade - I just could never develop a mechanical day trading system from what was available to me. I read a couple more books that didn’t really help me, so I then started looking for someone who could teach me. From what I now know about gurus -vs- teachers, I am very lucky that I got involved with a money manager-trader who taught me a tremendous amount, but I still couldn’t get profitable, in part because there was also ’pressure’ to learn how to trade using real money. As well, any discussions or thoughts about trading psychology and the issues involved, especially to beginning traders, was non-existent.

    Now what - learning but losing - I stopped trading. Learning to trading using real money, and ’scoffing’ at trading psychology as simply individual weakness, really was something that I now regard as misinformation. I always mention this as I now feel that this cost me as much as a year of time, and was very close to costing me my trading future, as stopped trading was VERY close to quitting trading. How can’t trading psychology be real to a beginner, when you consider that you are risking losing money at a very fast pace as a day trader, and when you further consider that you are also doing this when you really don’t know what you are doing - this is NOT by definition being weak. And if trading psychology is real, how are you going to learn to make ’good’ trading habits with real money while you are fighting the implications?

    Now what - not trading and not ready [quite] to quit - still studying and searching.

    Probably the single most important ’thing’ that got me to a next step in learning how to trade, was the concept of a trading setup, and that a setup and a signal were not the same. This was extremely meaningful to me, as it also led to an understanding of how to better use trading indicators for the information that they can provide, but not to use them as trading signals - in essence I began learning about trading method where discretion could be consistently applied -vs- trading system that was mechanical and arithmetic rules.

    Traders who are indicator only traders, are also what I refer to right side only traders, that is they are always looking at the right side of their charts for an indicator signal. BUT what about the left side of the chart, what about price and patterns, what about market conditions - WHAT about the relevant ’things’ that are ’moving’ price, instead of indicators only as an arithmetic derivative of price, and thus, one that is dependant on the time frame that you have chosen to trade from? These ’thoughts’, along with the concept of trade setup, became instrumental in the development of a trading method, and how I came to turning my trading around.

    When I think about the steps in my learning progression - I would list them as follows:

    2/95 - 6/96 indicators only teaching service that included signals learning to trading with real money and trading psychology issues stop trading

    6/96 - 3/97 understanding of trading psychology issues learning about trading setups concept trading method -vs- trading system trade setup - trade trigger are not the same method development understand the importance of the left side of the chart and what is happening ’across’ the chart related trading setups and how/when they triggered indicators + pattern indicators + pattern + price indicators + pattern + price + market conditions

    3/97 - 11/97 able to paper trade profitably able to real money trade profitably able to trade for a living

    Indicator Only Day Trader - Setup Including Indicators Method Day Trader

    I have attempted to discuss the way I started day trading, and the way I think many-most traders typically begin. Along with this, I have pointed various issues and problems that I had - those regarding how to learn to trade, and then progressing into a profitable trader. My experiences have been both personal, as well as those of many traders that I have worked with over the last 8-9 years through Tactical Trading - that a very large number of these problems are due to day trading only with indicators, the specific indicators used, along with trying to turn these indicators into a mechanical trading system. This is not to say that this can’t be done - I simply couldn’t do it. However, I would strongly suggest that anyone who is in the early stages of day trading, or struggling with their day trading, consider these things that have been discussed.

    This discussion, along with chart examples of various trading indicators and trade setups, is continued at
    http://www.tacticaltradingmethod.com/indicator-trading.html
    Copyright © 2006 Tactical Trading, LLC. All rights reserved.
    Reproduction in whole or in part without permission is prohibited.




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