3 Ways to Trade Forex News

Capital markets, in general, are unique from other markets for goods and services. While I do believe the Forex is driven by supply and demand for the respective currencies at play, often what really moves the markets is anticipation of future supply and demand rather than actual supply and demand. That realization comes to most traders at some point in their career. This concept leads to the biggest question in the Forex: where do these estimates of supply and demand come from?

Surely a comprehensive survey of every user of every currency is impossible. However, there are ways to aggregate and access some information in one place. This is the purpose of news and announcements. News comes from a variety of sources--both commercial and governmental. In the Forex, an emphasis is placed on the value of information or news from government sources. This is fine and is certainly a location on which I place a lot of my own attention, but commercial sources and general investor commentary can do a lot to improve your trading as well.

The purpose of this article is to provide some basic step-by-step methods you can employ today to take advantage of forex news in the market. I have some experiences that I will share to show how you can find some great trades and how you can identify the duds before they become real bombs in your portfolio. The examples I am using in this article are not the only possible trades available. There are a variety of events each month that can be used to time a good trade. It is useful to watch ongoing news stories that are currently dominating the headlines and minds of investors to identify trading opportunities. The significance of one piece of news over another will change over time. An easy gauge to tell what is important and what can be minimized is the news coverage itself. If one piece of information or speculation about that information is dominating the scene, then it is clearly something you need to be aware of.

As we proceed through this article, I will share some rules that I have used in the past to profit from news events. However, I think it is somewhat foolhardy to rely completely on a set of rules established in the past. Adjusting your price targets and stops to market volatility and your own risk tolerance is very important. Similarly, while I consider myself a swing trader--willing to hold a position for between 2-3 days and 2-3 weeks--there is a lot of room for good day- or shorter-term traders and long-term traders as well. I will periodically take some very short-term trades around a specific announcement, and I will share those circumstances with you in this article. Understanding the news is very important for every trader, especially those looking at the long-term play. In my book, Profiting with Forex, I spend a great deal of time illustrating the long-term effects of fundamental changes on the Forex.

Before we begin diving into specific strategies, it is important to accumulate our arsenal of trading weapons. Two of the strategies I will be discussing rely on the use of an outright long or short position. You could take this position in either the spot Forex market, which most of you are probably using, or in the exchange-listed currency futures market on the CME. The third strategy begins diving into the world of options. For those of you familiar with equity options, currency-futures and some spot Forex dealers offer similar instruments for trading. Recently exotic, single-payment and binary options have also become popular. I will refrain from going into too much detail here and instead just pick one type as an example. Check them out on your own, and see how they work for you.

Example #1

The first technique I have to share comes with a couple of tips. First, I have found that news that involves the U.S. dollar usually has the biggest impact on the market as a whole. I am sure most traders are already aware of this, but with very few exceptions they tend to be the most closely watched by the greatest number of participants. Each month there are some ï'hotï' news announcements, one of which is the unemployment report, which is released on the first Friday of each month. The trick with this, however, is that the largest moves are usually made when the numbers miss or beat expectations. But be careful. The correction usually happens very quickly. I use an easy technique to get me into the market before the move occurs with a generous stop and limit order on the other two sides of the trade.


Source: Prophet.net

The chart above shows a graph of the EUR/USD pair during the labor announcement of August 4, 2006. The numbers released showed that a substantially lower number of new jobs had been created in the U.S. than had been anticipated. In this case, the consensus estimate was around 150,000 new jobs and the actual number came in around 113,000. That means that the U.S. economy was weaker than expected, or at least the labor side of the economy was. This is not good news for the U.S. dollar, and therefore we saw a move up in this pair. Another tip I can share from my personal experience is that I have had the best success trading U.S. economic news and announcements with the EUR/USD than any other pair. I feel that it is a good proxy for the U.S. economy in general or at least in very short time spans.

If we were to break this chart down into minutes or seconds following the announcement, you would see how quickly it moved. Therefore, I would have had to have lightning fingers on my buy button or a buddy on the dealing desk to have taken advantage of the announcement once it was issued. I unfortunately have neither. I did profit from this announcement, however, by anticipating the marketï's movement.

I want to emphasize, though, that I am willing to do this when the conditions of a couple of rules have been met. First, I will only trade the direction that the market has been trending on the daily charts previous to the announcement. Second, I will only enter the order if just prior to the announcement the market has been in a fairly tight range.

In the chart above you can see that the market had been trading in a fairly tight range until 30 minutes prior to the announcement. Because the volatility in that last 30 minutes was really concentrated in the last 5 minutes before the announcement I had already placed my order and was not concerned. Call me paranoid, but if I am seeing large moves the night or several hours before an announcement, I get too nervous to take the trade. I suspect that either word has leaked (unlikely) or that I will get whipsawed by wound-up traders just following the actual news. That means that there are plenty of occasions that I have spent a lot of time preparing for a trade that I cancel prior to launch. The risk that I worry about the most is when the market is too volatile and whips me out before I even have a chance to prove if I am right or not.

In the chart below, you can see the daily trend of the EUR/USD before the announcement on the 4th. Clearly, the market was discounting the dollar and already had a bullish bias on this pair before the trade. Thus my two setup rules were satisfied, qualifying this as a legitimate opportunity.


Source: Prophet.net

Of course, there is more detail behind how I set these trades up. This is pretty simple and is open to customization depending on the situation and your personal preferences. I have placed another chart illustrating the setup with my trade barriers in place below. There are some components of the potential trade that are already in place before the announcement. I know that I am planning to trade long based on the previous trend, and I am targeting 100 pips as upside potential based on the average movement I have seen on this pair during previous months. I like to maintain a pretty aggressive stop-loss-to-profit-target ratio in my trading so a stop 25 pips below my entry is sufficient. Entering the trade 30 minutes before the announcement gives me plenty of room before the pair breaks out of its range.


Source: Prophet.net

As you can imagine, the market does not always hit my limit just because I think it should. If momentum begins to cool off and the market falls back into a smaller channel again, I will elect to close the trade early. A few other news announcements I recommend for this strategy include inflation data, FOMC meeting announcements and trade numbers.

Example #2

International trade is another announcement that I like to trade. I like it because it has growth and economic strength implications for the U.S., and it is a very important metric for trade-centric economies, like that of Japan. In fact, I generally concentrate on the USD/JPY pair when this announcement is due since the reaction can be quite dramatic. It is possible to trade other currencies that are trade dependent for economic health, but I prefer the USD/JPY because of its liquidity.

To understand how this trade works, it is important to understand the implications of trade balance. When an economy such as that of the U.S. is importing more from exporting currencies, those goods must ultimately be paid for in the local currency. In the example I am using here, that means Japanese goods must be paid for in Japanese yen. If the U.S. is doing the importing, then U.S. dollars must be sold to purchase Japanese yen. This shifts the supply and demand balance toward a stronger Japanese yen and a weaker U.S. dollar. In this case, that means that the USD/JPY exchange rate would decline in value. Conversely, if the U.S. trade deficit narrows, that means demand for Japanese yen could be declining and its value should drop relative to the U.S. dollar. If that is the case, the USD/JPY exchange rate will rise toward a weaker Japanese yen.

Like most U.S.-based economic announcements, trade is released an hour before the equity markets open at 8:30 a.m. eastern. Like the labor announcement, I need to set up my trade just prior to the announcement. I like to see the market in a tight range or channel. I have pulled a trade example from August 10, 2006. As you can see in the chart below, although the pair was declining in the hours prior to the announcement, the range was pretty tight without a lot of volatility whipping the market back and forth. This looks like a good setup and you can see the spike in the market after the announcement that the deficit was tightening occurred.


Source: Prophet.net

The fact that I setup my trade as a long position just prior to the announcement was determined by the trend in the daily chart. The market had basically been in an uptrend since May, and the most recent days during the week before also had a bullish bias. This is not an exact science, but it helps immensely to put the odds in your favor by using the tools you have at your disposal. You can also see from the daily chart of the USD/JPY that its daily range was fairly tight. This means that my target is a little smaller than it was on the EUR/USD in the previous example.


Source: Prophet.net

In this case I used a 50-pip limit, or profit target, against a 15-pip stop loss. This still maintains a nice risk-to-reward ratio while allowing enough room for the market to shake out a little if needed.

As you can imagine, it is not uncommon to be wrong more times than you are right with any trading technique. It is therefore necessary to make sure that it is possible to be more right when you are right than wrong when you are wrong. I know many traders who talk about systems that are right 80 percent or more of the time, but the one time they are wrong, they wind up wiping out yearsï' worth of profits. If you ask me, I think it is healthier for my portfolio and my stress levels to take trades that have more balance between what I have at risk versus what I stand to gain if I am a winner.


Source: Prophet.net

Example #3

In this last example I have prepared, I need to introduce you to a special kind of option called a barrier option. This type of trading instrument is also known as a binary option, and is part of a group of options known as single-payment options. In order to use a barrier option, you have to decide on three things. The first is how far the currency pair is expected to go one direction or the other. The second is to know how long it will take to get there. And the third question you must answer is whether the currency will stay at or beyond your target for a certain length of time. That sounds complex, so letï's look at an example before we go on to a specific trade strategy.

I have an image of the EUR/USD exchange rate from the last half of July 2006 to the beginning of August 2006 below. If I thought that the market was likely to move a lot and I wanted to speculate to the downside, I could buy a barrier option that said that the market will close below 1.2500 at the end of seven days. If the rate does close below that level, I will be paid a certain amount. I will have to pay for the option, but I will stand to gain a lot more than I paid if I am right. If I am wrong, I will lose the total amount I invested in the option. Every time I explain this to new traders, they invariably say that it sounds like gambling. That would be true if the expected return was less than zero. But how many of us willingly trade for a negative expected return? In this real-life example, the option would cost me $1,500 for a potential payoff of $10,000.


Source: Prophet.net

One of the benefits of options is that I donï't have to use a stop loss because no matter how high this rate rises, I have already invested as much as I can lose. Another benefit is that I donï't have to worry about timing my exit. As long as the exchange rate closes below my barrier, I will be paid at the end of the contract. One final benefit is that it is possible, using options, to straddle (or strangle) the market by placing a barrier option on the upside and the downside. That means that you donï't have to be right about the direction of the market, you just have to be right about the potential for a big move. That makes this trade pretty simple and ideal for a news event. One helpful hint for new options traders is that you may have to plan a little farther in advance of this trade than you do on the others.

Recently I wrote an article about rising oil prices and its effects on Forex crosses involving oil-producing and oil-consuming countries. The example I used was the AUD/JPY. In this case, I was confident that the market would rise from support near 87.50 toward 89.00 or 90.00 within the short term. A purchase of an option on August 1, 2006 with a barrier at 89.00 and expiration at 10:00 am on August 14, 2006 cost $3,200 for a potential $10,000 payout. The benefit of not having to maintain a stop loss more than made up for the cost of the option and the lower risk-to-reward ratio.


Source: Prophet.net

In this example, I was speculating on an ongoing bit of news, rising oil prices, instead of a specific announcement. I used similar rules in that I traded with the trend. But because I was not pinned to a specific time and date, I could be a little more flexible with my entry timing. I liked the fact that this pair was at support and was still within a very strong uptrend.

Conclusion

Trading the news is important as an effective method for finding new trading opportunities and to become more aware of the fundamental forces at work in your portfolio. The opportunities presented are some of my favorite trades, but they are not the only reason to be aware of your surroundings. I am convinced that the Forex favors the well informed, and these methods can add a few more solid trades to your arsenal every month.

John Jagerson is a Forex writer and active trader. His book, Profiting With Forex, published by McGraw Hill, is available nationwide. This author also develops Forex education courses for INVESTools.com.

You can find more how-to and educational articles to improve your investing and trading each day on TradingMarkets.com.

Do you trade FAS, FAZ, SSO, SDS, TZA or TNA? Introducing Leveraged ETF PowerRatings, a simple but powerful rating system for Leveraged ETFs. Click here to see today's ratings.

Read more ...

How to Find the Best MetaTrader EA - Part 1

There are hundreds of trading robots out there, many of which claim to make very large profits on a consistent basis. It can be very difficult to weed through the noise and actually find an expert advisor that will provide you with stability and hopefully positive returns. Throughout this article I will show you a multitude of statistical ways to search for the best performing Metatrader EA.

As you know, when making any educated decision it is important to be able to rate based upon different forms of criterion. When searching for the right trading robot there are tons of measures and values that we can analyze. I've chosen to highlight some of the statistics that I find to be very important when selecting an EA.

In my opinion, when focusing on quantitative statistics, the primary focus should be on both performance and risk. Keep in mind when considering these factors; it's extremely important that you keep your own risk tolerance in mind.

Measuring Profitability:

First off, it is quite obvious that you should not look for an EA that has not produced historically positive returns. It must be mentioned here that historical trading performance is not indicative of future performance, yet a Metatrader EA without historically positive performance should be immediately eliminated.

However, simply selecting a profitable trading robot without delving into other measurements can lead to detrimental results. Profitability needs to be quantified in order for you to compare it with other historically profitable EAs. The equation that I've found to be most useful is known as the profit factor, which can be calculated as: (profit-commission)/(max drawdown+commission). An expert advisor with a profit factor that is less than one should be eliminated, as the returns do not justify the amount of risk taken on. Take a look at the table below for the stats of three hypothetical trading robots:

Although I've provided limited information here, it's already possible to eliminate EA3, as its profit factor is less than 1. Taking a closer look at EA3 will show you that it actually did generate positive returns, but the returns did not outweigh the amount of risk taken on. This risk can be associated with Max Drawdown, which is a very critical statistic.

An Explanation of Drawdown:

One of the most important risk indicators to view when analyzing an EA is the drawdown. Essentially the percentage that an EA loses from its last high to its next low is known as the drawdown. The expert advisor's drawdown gives you an overview of the volatility to expect when running this robot, and gives you an idea of what you might expect to see as far as potential drops in account value.

Initially it's wise to take a look at the equity curve. A historically choppy equity curve represents a Metatrader EA that is volatile, while a smoother curve represents a historically more stable EA. When comparing trading robots it's beneficial to further quantify this drawdown measure, starting with the Max Drawdown. Max drawdown gives you a feel for a worst case scenario. Now, imagine if this worst case scenario occurred on the very first trade. Would you feel comfortable taking on this amount of risk? If not, then it would be sensible to eliminate this EA.

A second drawdown measure is known as the average drawdown. This calculation is found by summing up each individual drawdown percentage and dividing by the total amount of drawdowns encountered. You can imagine, this can be quite tedious, but most EA vendors will be able to provide you with this statistic. After you have attained the average drawdown you'll gain an idea of the average peak to trough cycle that is likely to occur, and whether this meets your risk parameters.

The third component of drawdown is the analysis of drawdown recovery. This is simply the average time it takes for your EA to come out of the negative territory. An EA with less volatility will often take longer to recover from a drawdown, while more volatile EAs may recover quicker. Although a short recovery period may seem desirable, keep in mind that this may be due to frequent and severe drawdowns.

By combining these three drawdown measures you can gain an encompassing idea of the inherent risks associated with the EA. When further combined with performance measures you will get a good idea of what to expect with a particular EA.

Accuracy and the Win/Loss

Accuracy is a straightforward measure, calculated as the total number of winning trades divided by the total number of trades. Although accuracy is a vital part of assessing the performance of an EA, it can often be very deceptive. Two common problems with accuracy are the underlying scope and the assumption that a high accuracy leads to profitability. First off, when calculating accuracy, you should have a minimum scope of 50 trades, but it's often smart to gain access to a larger trade base. EAs often go on winning or losing streaks, so it's important to analyze as many trades as possible considering that EAs often revert to their mean accuracy.

To mitigate the risk of the second misconception (that a high accuracy equates to profits) you can calculate the average win % and average loss %. These are simply the percentage of winning trades versus the percentage of losing trades.

Expectancy of Performance

By combining the two measures I mentioned before, accuracy and the average win/loss, you are able to calculate a measure that will help to forecast future performance. This measure is known as expectancy. Again, historical results are not indicative of future performance. Expectancy can be calculated as: (Accuracy * Average Win)/((1-Accuracy)*Average Loss). Expectancy shows you a projected average return for each trade over the life of your EA. Expectancy less than one shows that the EA historically loses more often, and is a surefire way to eliminate the robot. Each trade will of course vary on a trade by trade basis, but over the long run the expectancy is what you might be able to anticipate. Keep in mind the amount of trades taken into account when analyzing expectancy. For example, an EA with an expectancy of 4.3 may seem better than an EA with a 1.1, but if the EA with a 1.1 value made ten times more trades, it would be considered a more successful trading robot.

Although I've covered what I believe to be some of the most important backtesting statistics, remember that there are many tools at your disposal. The benefits of quantitative analysis are very important; yet qualitative analysis also plays an important part in the selection of your EA. Qualitatively rating an EA is often grossly overlooked, and I will bring this subject to light in my next article!

Alex Nekritin has a been a professional trader for over 10 years and is the Founder and President of TradersChoiceFX.com. TradersChoiceFX is a Metatrader Forex Brokerage firm that is able to enhance their clients FX trading success through their through their Forex bonus program. TradersChoiceFX also strives to set clients up with the ideal environment for their Forex strategy. You can download a free Metatrader Practice Account from TradersChoiceFX and get instant access to a special report that will teach you how to use a Forex bonus program to improve your success as an FX trader.

Read more ...

Using Trend Channels to Find Trade Entries

When I trade I always go channel surfing. Not the cable channels, but the chart channels. I surf through my charts looking for channels to watch. Channels are a key element to my trading strategy.

What I call channel surfing is looking for a trend in the market, and just like TV channels, market channels are all different. Chart channels can provide you with great trading opportunities.

In order to have a channel you need boundaries. The market provides support and resistance as those boundaries. Many traders believe that support and resistance are the fundamental elements of all technical trading. These support and resistance lines can help determine future price movements of a currency pair from past movement. I must mention here that historical performance is in no way an indicator of future results. Let's look at the horizontal lines of support and resistance.

In this chart below you see the blue lines which represent the horizontal support and resistance lines. The pink circles show where the price interacts with the horizontal lines. This is where the GBP/JPY's price movement upwards hits resistance. There is an equal reaction at the same price level of 140.70 in the last circle. In the blue circle it is acting as support, keeping the pair up above the horizontal line. Horizontals can act as both support and resistance as you can see.

In the picture the pair is now trading between 148.44 - 140.70. This is what is referred to as range bound trading. The pair is stuck in that range. I have a slightly different approach here. I believe the pair is always in a range, even if this range is at an angle.

More often than not, these horizontal lines are prices that the banks themselves like to trade at and are somewhat hardwired in the system. Now diagonal lines of support and resistance act differently, but are still support and resistance. Let's look a little closer at the support line of a channel in the chart below.

The GBP/JPY's price is being supported at an upward diagonal. The price is being supported, but not at a standing price like the horizontal S&R lines. The currency pair is being supported as it goes up. The blue circles show where the price and the support line intersect. If you notice there are large reversal moves as the support intersects with the price. The pair was temporarily falling until it hit the support and then quickly reversed upward as seen below.

The support of the diagonal lines move with the pair, taking it up or down; in this case upward. Let's look at the resistance line of our channel in the chart below.

The resistant part of this channel is crucial as well. The GBP/JPY's price is being resisted at these pink circle levels. The resistance price isn't stationary it moves upward along with the pair as well.

At these price levels the pair reacts with a strong reversal. In a nutshell the resistance line in a channel contains the trend movement. The resistance keeps the pair from going, in this case, straight up.

These are the basic tools in finding your channel! Your channel will look like the chart below, after you have found your support and resistance.

In this particular channel many traders believe it gives you several BUY and SELL signals, "Buy on support and Sell on resistance." The red dots are sells and the blue dots are buys. The channel tends to work until it is broken. I use this strategy as a basis to my overall trading strategy. You've probably heard the words support and resistance a thousand times, but I hope this gives you a clear understanding and more trading opportunities.

So, even when the market is trending it's still in a range. The range is just at an angle.

Just keep in mind that these channels are built on areas of support and resistance. There is no exact in any of the support and resistances lines, but they are often considered reliable. It is very common for the pairs to temporarily break through these levels before their reversal. The GBP/JPY has had a tendency to break through the support and resistance levels by more than 100 pips before reversing.

Also, a rule of thumb; the larger the time frame the more dependable the channel - meaning a channel that has been going for three months (Daily Chart) tends to be a lot stronger than one that's been going for three hours (30-min Chart).

Joseph Hopkins is a professional trader and is currently a columnist for TradersChoiceFX.com . You can find many more of his articles on the TradersChoiceFX Forex Blog . You can download a free Metatrader Practice Account from TradersChoiceFX and get instant access to a special report that will teach you how to use a Forex bonus program to improve your success as an FX trader.

Read more ...

2 Ways to Find Reversals Off Support and Resistance

Utilizing Fibonacci Retracements with Gann Fans

A common question traders have is, what are some good tools for finding support and resistance levels? Nowadays, even the most basic retail charting platforms come loaded with tools used to find these key areas. Unfortunately, many traders are not sure how to use these tools correctly and more importantly; how to implement and combine these powerful tools. Using these tools on your own will help you identify areas of support and resistance. Using these tools together drastically increases the probability of a confirmed breakout and a big move. We will look at 2 of these tools in this article, Gann Fans and Fibonacci retracements. We will also look at volume as a confirming factor.

1. Gann Fans

William Delbert Gann was born outside of Lufkin, Texas in 1878. Gann was a financial genius, he started trading at the age of 24 and accumulated a fortune worth over $50 million. Gann developed many trading philosophies using a variety of methodologies. His works have been published for nearly 100 years and are still very much relevant. Gann's most well known contribution to the trading world is the Gann Fan. The Gann fan is made of a series of angles drawn from a pivot high or a pivot low. The most important of these angles is the 1x1 angle. The 1x1 angle is a 45 degree angle in an uptrend and 315 degrees in a down trend. Below is an example of a Gann Fans.

As you can see, the price trends up to the 1x1 angle very closely and when it breaks the trend line we have a nice move. The other angles of the fan are important however the key angle is the 45 degree 1x1 angle. Using a Gann fan is a good way to find support, however using only a Gann fan can lead to false breakouts and head fakes. Gann fans should be used in conjunction with other drawing tools to find the areas with the highest probability of predictable price movement.

2. Fibonacci Retracements

Leonardo Fibonacci was an Italian mathematician who is most famous for his work with number sequences. The Fibonacci sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55... The sequence adds the two previous numbers together to get the next number and so on and so on. By dividing the last two numbers of the sequence, i.e. 34/55=61.8 we get the 61.8% ratio. Often referred to as the "golden" ratio, many prominent scientists and mathematicians have spent decades examining the ratio and how it applies to nearly everything from the swirls on a Conch shell to the distance between stars. As the numbers in the Fibonacci sequence increase, dividing the last two numbers in the sequence gets closer and closer to 61.8%. The other ratios are found by dividing alternative numbers of the ratio, i.e. 21/55=38.2. This is a very popular tool for finding key support and resistance. Drawn from a swing high to a swing low, the Fibonacci ratios give 2 key areas of support and resistance; the 61.8% retracement and the 32.8% however most Fibonacci tools will have the 50% ratio as well even though it is not derived from the Fibonacci sequence. Below is an example of Fibonacci and Gann used together to spot key areas of support and resistance. These areas are used to confirm breakouts and also should be used to place stop loss and take profit levels.

Volume

Another important tool for identifying meaningful breakouts is volume. Volume is important because many times a move on weak volume will appear to be a breakout, and not follow through. Using any of these tools alone will give you some idea of where moves will happen. Using these tools together will give a much higher probability of confirmed breakouts and meaningful gains. On this chart there is a head fake move up on light volume, followed by the breakout down on rising volume. As you can see, using any one tool on its own may have lead to taking the trade too early and getting stopped out. But when we put all three of these tools together we have a much higher probability of finding good breakouts and more importantly avoiding head fakes.

In the above example, there are many things going on. The first move is the 50% retracement that also coincides with the 1x1 Gann line for an area of strong resistance. As the price begins to retest the first retracement it breaks the 1x1 Gann line on declining volume. The result is a failure to break through the 38.2% retracement. As the price falls on rising volume it breaks through the original support but the 1x1 Gann line serves as new support and the price does not break it.

Summary

Traders should be aware of these key levels for several reasons. The theory of technical analysis is based on the idea that many people looking at the same information will come to similar conclusions, basically the only reason it works is because enough people believe it does. Using these technical levels can give you a better chance of spotting the meaningful breakouts that lead to nice gains. These tools are not limited to any one financial market and can be applied to futures, forex, equities etc... There are many more tools for finding support and resistance however these are two of the more popular ones and therefore should be understood and considered. Volume is also very important to confirm the Gann and Fibonacci levels because light volume moves tend to reverse quickly stopping traders out before the big move. Using these tools together will help you identify the areas for big moves and help to set yourself up for success.

Disclaimer: FastBrokers' market commentary is provided for information purposes only and under no circumstances should be regarded neither as an investment advice nor as a solicitation or an offer to sell/buy any financial product. FastBrokers assumes no responsibility or liability from gains or losses incurred by the information herein contained.

Risk Disclosure: There is a substantial risk of loss in trading futures and foreign exchange. Please carefully review all risk disclosure documents before opening an account as these financial instruments are not appropriate for all investors.

Jesse Richards is a Series 3 registered Commodities Futures Broker. Before getting his license, Jesse was a full time e-mini and stock options trader. He has spent time with a major U.K hedge fund and currently works for FastBrokers, a California based online Futures and Forex brokerage. For more information about FastBrokers please visit www.fastbrokers.com/index.php?JR750.

Read more ...

Leave Your Emotions Out

It always seems that there are at least two sides to everything; heads and tails, right and wrong, boys and girls, the list goes on and on. For those of us that dabble in, or make it our full time profession in some type of financial market, the apex of these two sides is buying and selling. A few years ago, I was told that the purest form of buying and selling was found in currency exchange, thus began my journey of learning how to trade currency. But with any form of financial market, one key element controls how everyone trades, that is, emotion.

Different forms of trading have been around for many years, yet most individuals have no idea what real trading requires. The definition of trading is exactly how it sounds, the exchange of two different goods or services. In my world, this is some kind of financial market, whether it be stock market or the currency market. I find that trading can be a bit overwhelming for many individuals because they don’t understand it, and by my account most people don’t want to take the time to learn it because they are afraid to fail. You could say that is a legitimate fear as it is widely accepted that only 5% of people make money in trading and the other 95% lose it. My logical choice has always been to be in the 5%; especially as the market that you are in can trade up to 3 trillion dollars a day, 24 hours a day, 5 days a week, but when my emotions get involved. I can easily slide to the 95% without knowing it.

Since everyone reading this now wants to be in the 5%, we can lay down a few ground rules to get started.

1. Learn to crawl before you drive a Ferrari. Trading is a powerful tool and when successful, you can go very fast. But you need to start slow. The main reason why most are not successful is because they jump the gun in fundamental applications in the discipline of trading. That discipline is emotion. By controlling your emotion, you can exercise patience. You don’t put someone who went to school for nursing into a role as a CEO of a multi-billion dollar corporation. In the same respects, be patient with your progress in learning how to trade.
2. Practice. Before you start trading real money, trade fake money. This is crucial to the survival of your pocketbook. This point can also emphasize patience. Open up a demo account somewhere and practice. When you think you are ready to jump in to trading live money, DON’T, just practice some more. This might seem mundane and a no-brainer for some, but I can almost assure you that you will start trading live money before you are ready.
3. When you trade, just trade. Don’t come home from work after a bad day and start trading. If you do, someone will take your money because they are more relaxed and understand the game more. If you have the mentality that you are going to make up the money you just lost by doubling down or increasing your risk, give me a call because you might as well give your money to a stranger, and since I warned you, I believe I am entitled to it.

The above mentioned are some guidelines on how to break into the world of the 5% that make money in some sort of trading. This should be your trading commitment. If you are not willing to commit to this, then you are better off not dipping your toe in the water per say. If you are able to commit to this, then welcome to the wonderful world of trading. Now is the time where we can all focus on the advantages of the markets that makes our serotonin levels skyrocket and get some of us downright giddy.

As I mentioned earlier in my article, some markets trade about 3.5 trillion dollars a day (foreign currency market). Translation- biggest market in the world by a long shot. Most larger banks trade in some type of market. The money that we lend the bank to get our 2%-5% CD’s can be used by the bank to trade in the market. But as of about ten years ago that ability has been opened up to the retail side of things, largely due to the growth and development of the internet. Customers in any trading arena can capitalize by using leverage. The highest leverage is in the currency market, leverage can be between 1:100 and 1:400. If there is anywhere else in the world where you can have $10 represent or trade like $100,000, please share it with me. Trading with this type of leverage can have its downsides, yes. However, if used correctly, leverage is a beautiful thing. If none of this gets you a little bit excited, then you might want to get yourself checked by a physician.

After a little bit of training, it is easy to understand how to trade. Most platforms will walk you through how to set up the platform, and the basics of how to place a trade on the platform. There are several different types of platforms available; the Metatrader 4 platform (as seen above) is the most widely used in the world of currency due to its functionality and ease of use. Each broker, whether stock, currency, commodity, etc. will have a different platform to use. Always take the time to understand how the platform works, and place practice trades if possible.

One of the most appealing features for currency traders is the ability to trade whenever you want to. Since the market is open 24 hours a day, 5 days a week, you can essentially trade any time you have spare time. There are obviously specific times when the market is slower moving than others, as with any market, but having the option to trade before one goes to work, over the noon hour, or something to do instead of watching television is a beautiful thing. Trading stock is a little more limited because the market is only open a certain amount of time per day. Either market allows individuals to get into the market part time and only trade when their time permits. Trading currency is one of the few jobs, part-time or full-time, that tolerates truly working from anywhere, anytime. Given current technology, you can trade in the car, on the subway, at the office, or in the bathtub using a mobile phone with internet access. Regardless of its convenience, one should still exercise patience and persistence, and, if you can leave your emotions at the door, you can enable yourself to be a successful trader.

Trading in the markets has a venue for everyone. If you are willing to exercise discipline and patience, and willing to learn from triumphs and failures; trading can be a very enjoyable and exciting hobby, or possibly even a full time occupation. I encourage those who are new, to step out into the unknown to give trading a try, but above all, have fun and leave your emotions at the door.

Tony Rietema is a founding partner of Holland Global Trading which includes subsidiary companies of Fedora FX (www.fedorafx.com) and Get Forex Alerts (www.getforexalerts.com). Tony has been in the investment business for over 5 years and has made buying and selling forex, stocks, and real estate his livelihood.

Read more ...

Using Gann to Trade the Main Trend

Last month I wrote a broad-based article about Gann Theory. The piece described Gann Theory as the study of pattern, price and time relationships. This month's article covers the concept of pattern.

When writing about pattern under the context of Gann, the Gann Swing chart is the first pattern which comes to mind. The Gann Swing chart is also often referred to as the Gann Trend Indicator. Creating a Gann Swing Chart is an important first step in using Gann analysis because it identifies the trend and the important tops and bottoms from which to draw the Gann angles. In addition, the chart provides valuable information to the trader such as size and duration of the swings. This information helps the trader find price and time targets and to identify when the market is ahead or behind target.

Gann Swing Charts can be created for the minor trend or the main trend. Some analysts prefer the minor, intermediate and main trend outlook. For this article we will use the 2-bar swing chart as our main trend indicator. A 2-bar swing chart measures swings only after the market has made two consecutive higher-highs or two-consecutive lower-lows. A minor or 1-bar swing chart would follow the one day swings of the market.

Before we learn how to construct the 2-bar swing chart let's look at some of the benefits it has over a minor swing chart.

1. Main trend chart opportunities occur less frequently than minor trend opportunities. This keeps the cost of trading to a minimum.

2. Trading less frequently than the minor trend indicator makes the trader less likely to be whipsawed and also makes the possibility of a long series of losses less likely.

3. Main trend trading opportunities develop more slowly and more predictably than minor trend opportunities. This give the trader time to watch the formation and to make adjustments when necessary.

4. Although the same technique is required to create the main trend chart, and the minor trend chart, the amount of time devoted can be less especially if the market is in a steep uptrend or downtrend.

5. The mental exhaustion caused by frequently changing direction, overtrading, and taking a series of losses is not as common for the main trend trader as it is for the minor trend trader.

CONSTRUCTION

The main trend chart can be used to identify the main trend tops and bottoms for any time period. In order to avoid confusion about whether we are speaking exclusively of the monthly, weekly, daily, or intraday charts, we call each trading time period a bar.

The main trend swing chart, or 2-bar chart, follows the 2-bar movements of the market. From a low price each time the market makes a higher-high than the previous bar for two consecutive time periods, a main trend line moves up from the low two bars back to the new high. This action makes the low price from two bars back a main bottom.

Figure 1:

From a high price each time the market makes a lower-low than the previous bar for two consecutive time periods, a main trend line moves down from the high two bars back to the new low. This action makes the high price from two bars back a main top.

Figure 2:

The combination of a main trend line from a main bottom and a main trend line from a main top forms a main swing. This is important information, because when stop placement is discussed, traders will be told to place stops under main swing bottoms, not under lows, and over main swing tops, not over highs. Learn and know the difference between a low and a main swing bottom, and a high and a main swing top.

Once the first main top and bottom is formed, the trader can anticipate a change in the main trend. Starting from the first day of trading, if the main trend line moves up to a new high, this does not mean that the main trend has turned up. Conversely, if the first move is down, this does not mean the main trend is down. The only way for the main trend to turn up is to cross a main top, and the only way for the main trend to turn down is to cross a main bottom.

Figure 3:

In addition, if the main trend is up and the market makes a main swing down that does not take out the previous main swing bottom, this is a correction. If the main trend is down and the market makes a main swing up that does not take out the previous main swing top, this is also a correction. A market is composed of two types of up and down moves. The main swing chart draw attention to these types of moves by identifying trending up moves and correcting up moves, as well as trending down moves and correcting down moves.

In summary, when implementing the main swing chart, the analyst is merely following the two-bar up and down movements of the market. The intersection of an established downtrending line with a new uptrending line is a main swing bottom. The intersection of an established uptrending line with a new downtrending line is a main swing top. The combination of main swing tops and main swing bottoms forms the main trend indicator chart. The crossing of a main swing top changes the main trend to up. The penetration of a main trend bottom changes the main trend to down. The market is composed of main uptrends, main downtrends, and main trend corrections.

James A. Hyerczyk is a registered Commodity Trading Advisor with the National Futures Association. Mr. Hyerczyk has been actively involved in the futures markets since 1982 and has worked in various capacities from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis.

His published works include articles for Futures Magazine, Trader's World, SFO Magazine, Forex Journal, and Commodity Perspectives (Commodity Research Bureau), and, his book Pattern, Price & Time published by John Wiley & Sons, Inc. in 1998.

Read more ...

How Backtesting Helps Remove Stress

You know that successful traders share the backtesting habit. You know that backtesting separates the wealthy traders from those who lose money. You also know several ways of incorporating backtesting into your trading regimen. And you know of the pitfalls - what to look out for - when you are backtesting, so that you can get the most out of the process. But, what exactly, will you get out of backtesting your trading system?

The answer is - plenty. By backtesting your system, you will become more relaxed in your approach to trading. You will know what to expect in the future, because you have seen your trading system in so many different market environments, and you will remain confident in your ability to make money from the markets. Let's look at these "side effects" of backtesting.

Relaxed

Traders who use backtesting to validate their trading strategies know that success is coming. Traders who do not backtest their trading strategy fall into the "circle of doom."

What is the "circle of doom?" This is simply the place that most traders are stuck in, where the trader trades a system for a while, then after a series of losses, gives up on the trading strategy, finds a new, 'better' trading strategy, trades the new strategy for a while, experiences several losses in a row, then gives up on the trading strategy, searches for a new trading strategy, etc. The trader is doomed because the trader is not committed to a successful trading strategy. Even if the trader does have a successful trading strategy, the trader will not make money because it only takes a series of losses for the trader to give up on the trading strategy.

The trader with backtesting experience approaches trading from a much more relaxed perspective, knowing that, while there are no guarantees that a particular trade will make money, in the long run the trader will make money. This trader has no need to stress and frantically search for a new trading system after experiencing a series of losses. Which way would you rather trade? As a relaxed trader or as a trader in the "circle of doom?"

Anticipate the Future

How can traders anticipate the future? By extensively backtesting their trading systems. Does this mean that the past market behavior will be repeated? Of course not. But a trader who decides to backtest a trading strategy over many years, in various market conditions (uptrending, downtrending, very volatile and very quiet) will collect very important statistics on the trading strategy.

The most important statistics are as follows:

+ The percentage of winning trades - call this W%.

+ The percentage of losing trades - call this L%.

+ The average gain of a winning trade - call this Ave W.

+ The average loss of a losing trade - call this Ave L.

Here's why these statistics are important - with just these four statistics you can find out how good your trading system is, and thus decide if it is worth it to trade the system with real money. With these four statistics you can calculate expectancy of your trading system. The formula is as follows: Expectancy = (W% x Ave W) - (L% x Ave L)

The expectancy number tells you how much money you would expect to win over many trades. Perhaps the easiest way to illustrate expectancy is by an example.

Let's say that trader Jeff has a trading system that he backtests using manual backtesting, over 900 trades, and he gets the following statistics.

W% - 30%

L% - 70%

Ave W - $450

Ave L - $120

Calculating expectancy, Jeff sees that (0.3 x 450) - (0.7 x 120) = $135 - $84 = $51. So, armed with this information, trader Jeff knows that if he takes 100 trades with his system, and the average winning trade is $450, and the average losing trade is $120, even though he is likely to have only 30 winning trades, he will still probably make $5,100. How does Jeff know this? He knows this because he knows that (30 x $450) - (70 x $120) = $13,500 - $8,400 = $5,100

This doesn't mean trader Jeff will make $5,100. This only means that we would expect him to make $5,100 over 100 trades. Of course Jeff's real results could be a little better or a little worse, but they are probably going to be very near $5,100 after 100 trades.

This is what backtesting is all about, learning about your trading system, learning how to trade it, learning how it holds up in various markets, and learning how much money are you expecting to make from this system. Calculating expectancy will go a long way toward helping your confidence as a trader, a very important attribute to have.

Confident

Once you have seen your trading system perform over hundreds of trades, over years, in markets with vastly different characteristics, you begin to trust your trading system. Because if you have seen the trading system make money over hundreds of trades, in volatile markets and in quiet markets, and in everything in between, you know that the probabilities are in your favor.

That is really what trading is all about - probabilities. Once you gain confidence, you begin to see trading for what it really is - a game of probabilities. Each trade is not that important, but the overall sequence of trades is very important. Whether the current trade is a winner or not does not matter too much. But the fact that your trading system has been backtested, and has a positive expectancy, is very important.

This means that you will be able to trade your trading system daily in much the same way a casino operates. The casino has no interest in whether a particular bet makes money or loses money for the casino. The casino only cares that, overall, in the long run, the casino will make money. You as a trader will learn confidence, will learn to trade detached from the outcome of the current trade. You can be more confident in your trading when you know, you really know that over time you will make money.

You have become the casino. Now go out and enjoy it!

Walter Peters, PhD is a professional forex trader and money manager for a private forex fund. In addition, Walter is the co-founder of Fxjake.com, a resource for forex traders. Walter loves to hear from other traders, he can be reached by email at walter@fxjake.com.

Read more ...