Picking The Right Forex Broker
Picking the right forex broker is often the most important decision any new trader will make. In the past few years, there has been a virtual explosion in the number of forex brokers doing business. To the trader, this is great, as the number of brokers has helped lower the cost of trading and to provide better services and trading tools that were not available before.
Find Forex Signal Services
Forex signal services offer investors the ability to trade the foreign-exchange market without their own analysis. Instead, investors can rely on professional advice from a currency trader. It is important to remember that forex signal services are not the same as managed accounts; managed accounts are traded by an active manager whereas forex signals are traded by the subscriber.
Forex Stop Loss and Take Profit
Arguably, the stop loss and take profit orders are the two most important order types for foreign exchange traders. The two orders are essentially orders on top of another order. The stop loss allows you to determine at what price you want to cut your losing trades and the take profit allows you to enter what price you’d like to close a position for a profit.
Types of Forex Market Orders: Market and Limit
Now that we know what goes into a trade, we need to also know how to enter the trade to a broker. There are two main types of orders to buy currency, the first of which is a market order, the second is a limit order.
The Spread, A Forex Brokers Profit
In our example from the previous article, we actually alluded to a few things. The first, is that there were a few costs in our example trade of 1 lot of GBP/USD. The hidden cost is the “spread” or the commission the broker earns for completing our trade.
How Money is Made With Forex
So, you know how the forex market works, now its time to find out how investors make money with forex. The premise of the foreign exchange market is simple, to exchange one currency for another currency which you believe will go up in value. The basics are much like the stock market, so anyone with any financial experience should pick up the foreign exchange market rather quickly.
Forex Market Trading Times
The foreign exchange market is the only market in the world that is open 24/7. Investors are able to place trades every single day of the week, however, most pairs will move very little on the weekends as very few investors stick around to trade.
The Basics of The Forex Market
The foreign-exchange market, or forex, is the largest market in the world by volume. That is, more money exchanges hands on the foreign exchange than in any market in the world. Some $1.5 Trillion is exchanged daily compared to $25 billion on the New York Stock Exchange.
Forex Glossary
A
Appreciation – Currencies appreciate when traders and investors on the foreign exchange market push up a currency’s value. Appreciation is marked by a rise in value against one currency, or against a basket of world currencies.
Williams %R – Williams Percent Range
The Williams’ Percent Range is similar to the Stochastic Oscillator. Known also as the William’s %R, this technical tool allows traders to gauge raw momentum in the market.
Stochastic Oscillator
The Stochastic Oscillator is a technical indicator which shows relative highs and lows based on high-low calculations from previous periods. Stochastic indicators place less emphasis on price, instead focusing on speed and momentum of price movements to determine highs and lows.
Standard Deviation Indicator
Standard deviation is a fundamental concept in modern statistics, but it plays a role in technical analysis too. The standard deviation indicator available in forex trading platforms provides a way to complement other technical indicators for a broad market analysis.
Relative Vigor Index
Breathe a big sigh of relief. There is simply no indicator that is as simple to understand as the Relative Vigor Index. The RVI as it appears in your platform is constructed of two lines. The fast line represents the vigor of recent movements. The slow line represents a longer-term view of momentum created by major market participants.
Percentage Price Oscillator
The Percentage Price Oscillator is built around the same foundation as the Moving Average Convergence Divergence, which is also an oscillator for technical analysis.
The Percentage Price Oscillator is even used with the same default settings. If you were to use the PPO as it were intended, you’d use 12, 26, and 9-period settings.
Parabolic SAR
The Parabolic SAR indicator is a technical indicator created by none other than Welles Wilder, the man who created other top-notch indicators like the Relative Strength Index. Known by its full name as the Parabolic Time/Price System, the shorter name, Parabolic SAR, stands for Parabolic “Stop and Reversal” indicator.
Moving Average of Oscillator
Metatrader 4 lists this indicator as the Moving Average of Oscillator in their list of technical indicators. In forex trading circles, the Moving Average of Oscillator is also referred to as the OsMa, the initials of the longer form, Oscillator of Moving Average.
Market Facilitation Index
All technical indicators have an inventor. One of technical analysis’ biggest contributors was Bill Williams, who invented the Market Facilitation Index, among other indicators like the RSI.
Gator Oscillator
The Gator Oscillator is a technical indicator based on the Alligator Indicator. The Gator Oscillator allows traders to quickly reference the spread between the Alligator Indicator’s charted lines.
Gann Fan
W.D. Gann, an early trader and market enthusiast created several technical indicators. Among the most popular was the Gann Fan, a market indicator which created support and resistance lines based on the slope market movements.
Force Index
We say repeatedly on this site that the foreign exchange market trends 70% of the time. But when the market isn’t trending, it moves with force. Luckily, the Force Index exists to tell us how weak or strong the force is with each trend.
Fractals in Forex
Fractals are a mathematical vocabulary term, but they’ve been turned into technical trading tools, as well. In forex, trading platforms like Metatrader 4 and TradeStation keep traders from having to explore fully the mathematics of the indicator. Rather, traders simply need to know how fractals work, and how they can be used in profitable forex strategies.
Commodity Channel Index
The Commodity Channel Index measures the relationship of a security’s current price to its statistical average. Though the CCI appeared first in Commodity trading circles—the indicator was published first in Futures Magazine—the Commodity Channel Index is equally powerful for predicting stock, bond and currency movements as it is commodities.
Alligator Indicator
The Alligator Indicator is an excellent technical indicator for forex traders, even if it is one of the most basic. In fact, the popular Alligator Indicator is nothing more than three smoothed moving averages, but the Alligator’s ability to find winning trades is second to none.
How to Trade with Elliot Wave Theory
Elliot Wave Theory is far easier to spot in our diagrams than it is in the markets. Markets don’t always make very perfect patterns. In fact, this is what you might see when looking at an Elliot Wave in action in the foreign exchange market:
Elliot Wave Theory’s Correction Patterns
Elliot was mostly open-ended on the interpretation and application of his wave theory. When it comes to corrections, however, Elliot had very firm guidelines for how these corrective wave patterns would look.
What Is Elliot Wave Theory
The Elliot Wave Theory suggests that market movements can be described with waves. Inside a large up or downtrend are several smaller trends that make up the whole of the market movement.
Reversals, Retracements, and Waves
If you have yet to notice, technical analysis focuses on trends. Remember: the market does trend 70% of the time, and that amount of trending is enough to make serious profits in the market.
Leading and Lagging Indicators
We have explored more than a few indicators in this lesson, some of which you may find practical for use, and some which you may prefer not to use. At the end of the day, technical analysis is all about making informed decisions on the future of the price based on price alone.
How to Use Bollinger Bands
Bollinger Bands may very well be one of the most useful technical indicators. Compared to other trading indicators, you can think of Bollinger Bands as a Swiss army knife—there’s so many uses for them that Bollinger Bands are almost ubiquitous with technical analysis.
Average Directional Index {ADI}
The Average Directional Index, or ADI, is a premier technical analysis indicator that shows investors when markets are trending. We can use the ADI to find key points of entry, and explore when a buy or sell ahead of a trend makes sense.
Relative Strength Index {RSI}
The relative strength index, or RSI, is a commonly-used indicator for spotting new trends in the price of a currency pair. By using the relative strength index, a trader can keep close tabs on the relative strength of a market movement, up or down.
Moving Average Convergence Divergence[MACD]
Previously, we explained how exponential moving averages were just modified simple moving averages. Now we’re going to explain the Moving Average Convergence Divergence, often known as simply “the MACD.”
Technical Analysis Indicators
By now you’ve become accustomed to the forex markets. You understand how they work, why they work, and basic methods for evaluating the markets for successful trades. Now we’re going to explore technical analysis to its fullest with indicators that forex traders use to make sense of the markets.
Moving Average Crosses
Moving average crosses are one of the best ways to use moving averages. Using a moving average cross strategy requires that you use two moving averages, one fast, and one slow.
Simple vs. Exponential: A Comparison
In looking at the two types of moving averages, you can come to a very simple conclusion: use what works best for you. Each can be used to produce successful trades, and some traders even use both!
Exponential Moving Average
The exponential average is a variant of the moving average. In an exponential moving average, the price action in the most recent trading periods has more weight in the calculation.
Simple Moving Averages
The simple moving average is one of the most primitive trading tools investors have at their disposal. Used for many decades in regulating the price of every financial instrument over time, the simple moving average is used to show how the current price of a currency relates to the average price during the previous X periods.
Moving Averages
Moving averages lay the basis for our study in technical analysis indicators. Moving averages are the most simplistic form of an indicator as they use the past prices of a currency pair to help traders see the future direction of a currency pair.
Three Candlestick Patterns
Three candlestick patterns are some of the most respected patterns in all of technical analysis. When patterns made up of three important candlesticks appear (a rare event compared to single-candlestick patterns) you should be ready to play an upcoming trend, breakout, or reversal in the current currency prices.
Double Candlestick Patterns
In making use of candlestick charts, traders should familiarize themselves with double candlestick patterns for better analysis. Here are a few you should know:
Single Candlestick Analysis
Single candlesticks are the easiest candlesticks to analyze because we have to look for only one candlestick in a chart. Below, we’ll name the several different types of single candlestick indicators, and how you can analyze them for trading success.
Spinning Tops
Making Use of Candlesticks in Forex Trading
In our primer on candlestick charts we showed you how to see long-term candlestick charts for what they are. However, to use candlestick analysis techniques in the currency markets, you need to know how to hone in on parts of a candlestick that are easily ignored.
Candlestick Analysis
Previously, we touched on the various types of charts. Candlestick charts were included in this tutorial. The tutorial alluded to candlestick analysis to determine future price action. Now we’re going to fill in the void with a proper tutorial about how to use candlesticks to determine the future direction of a currency pair’s price.
Capital Flows and Forex
Imagine the world as if every country were one 5-gallon bucket, and capital (money) was water. We could pour money from one bucket to another, and some would overflow, while others would dry up.
Central Banks Manage International Trade
You know that it is the job of the central bank to manage an economy. By setting interest rate policy, they can boost an economy, or cool it off.
Balance of Trade
Much like we have the Gross Domestic Product calculation to understand how productive an economy is at any given time, the balance of trade calculation can be used to tell us how well an economy performs in the international markets.
How International Trade affects Currencies
Now that we’ve sprinted through two fundamental analysis concepts for the foreign exchange markets, let’s seek to understand another important concept: international trade.
GDP and Interest Rates: Combining Concepts
You have read all about Gross Domestic Product and interest rates. But now you want to know why it matters, or at least how you can use them to make money, right?
Economic Growth and Currency Values
Economic Growth and Currency Values
The measure of any economy is how fast or slow it is growing or contracting. When economies are growing, they’re said to be…well, growing. But when economies are slowing, they’re said to be in a recession or even worse, a depression.
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