Why Now Is a Good Time to Start Trading Forex
There have never been so many reasons to start trading in the foreign exchange market. Chief Currency Analyst, Raghee Horner, shows you why now is the perfect time to start trading forex.
It was May 6th, 2010 I remember this day well because it was the day that my stock and futures trading friends were calling my office, non-stop. The “flash crash” as it has since become known had shaken many traders to the core and yet in the foreign exchange community there was a different sense of the move. The U.S. Dollar/Japanese Yen and the Euro/Japanese Yen - both forex pairs that are widely traded - had already begun to sell-off three hours in front of the flash crash. In the foreign exchange these pairs are commonly known as the risk barometer; pairs that offer insight into the risk appetite or risk aversion in the market. Consider that if traders and investors worldwide view that there is reason to take on risk in hopes of higher yielding returns that they will often sell or borrow Japanese Yen and this will be reflected in the way that it trades against the U.S. Dollar and the euro.
I wasn’t always a forex trader. In fact my first foray into the markets began with mutual funds. I then began to learn about commodity futures, started daytrading stocks in the mid 90’s, added futures index trading in 1999 and only then did a friend of mine introduce me to what was then the forex market. Frankly I had avoided it because it was known as the “Wild West” back then. It was largely unregulated and not well-known by retail traders in the U.S. Abroad however, my trading friends in London and Mumbai and Sydney had always told me that I was missing out, that the foreign exchange was the market to be in and that with my skill set I would excel. I replied often that I trade currencies through the futures market and their reply was always, well, “that’s fine, but not the same” that I was missing out on a truly global, 24-hour market with “more liquidity than almost all other markets combined”. In late 1999, early 2000, as the stock markets began to meltdown in the wake of the Internet bubble burst, I began to learn more about foreign exchange. Realize however, trading forex wasn’t about turning my back on the decade that I had spent stock and futures trading. I added a market to my overall trading approach that would change the way I trade and analyze price movement forever.
Recently the U.S. Dollar, gold, and crude oil markets have been the talk of traders and investors worldwide. There are of course multiple ways to trade these markets whether by ETFs, futures contracts, or options. I have done all three…but alongside these trades have been the Euro/U.S. Dollar, the Australian Dollar/U.S. Dollar, the U.S. Dollar/Canadian Dollar and the U.S. Dollar /Swiss Franc. These forex pairs offer me more leverage (400:1 available only outside the U.S.), true 24-hour access to the market (open Sunday afternoon to Friday evening), and the most liquidity of any market place. No market trades in a bubble. My approach has always embodied a “one mind, many markets” philosophy. I teach and live it every trading day. If I better understand the interrelations and correlations of the market, I can seek out better trading opportunities and control my risk when the relationships do not appear to be in harmony. It’s not all about simply more trading entries but also about managing risk; a lesson learned on May 5, 2010 by many stocks and futures traders who didn’t know or didn’t understand the moves in the U.S. Dollar/Japanese Yen and the Euro/Japanese Yen.
So much has changed in execution technology. I recall when the internet was first being used as a “trade execution tool” and I was trading currency futures. Essentially it was an email sent to my broker who then relayed my order to a runner who then took it to the pit to be executed by a pit trader at the “next best available price”. The foreign exchange has always been an electronic network run by a network of connected banks and institutions and corporations whether the network be phones or internet, there was no “floor”, no one central location where bids and offers (buyers and sellers) were matched up. It was, in fact, everywhere in many ways. Without the limitations, the marketplace was bigger and not controlled by opening and closing hours. Consider now what a forex execution looks like today. Great brokers today are more focused in many ways in being a great technology company. Traders today require proprietary back-end systems that connect a single trader to a global network of banks and financial institutions. The non-dealing desk broker movement - of which the Interbank FX Group was at the forefront - connects a trade entry to the best financial institutions as fast as possible. How fast you ask? The results are posted at the IBFX.com.au website so you can see for yourself. Spreads, Execution Rates, and Execution Times are all made available right from the site. And how is this for reactions times: The average execution time was 2.253 milliseconds (July 1-19, 2011) with 99.91% of trades accepted. Bottom line, as a trader, I know that my order will be accepted and executed at a speed my mind can hardly comprehend and in a way I can trust. This is my chosen profession, and I cannot accept anything less.
But technology is not limited to trading execution rates and reliability. There are other tools that individual traders can benefit from today; tools that simply were not available to the retail trader until now.
Personally I’ve benefited from what would be considered simple tools of analysis by today’s standards. As a trader who began her career using a newspaper, phone, and hand-drawn charts on graph paper, I would have to calculate my own indicators and seek out prices via the phone as I required them. My analysis has changed dramatically since those days of pen, paper, a calculator, and a ruler.
Two of my personally developed trading tools are available on the IBFX Meta Trader 4 platform, which not only offers charting, data and order execution directly within the platform, but now has smaller programs running on the individual charts that automate classic chart analysis like candlestick patterns, chart patterns, price movement ranges, daily pivots, as well as my 34EMA Wave (my trend identification tool) and my GRaB candles (my sentiment and momentum gauge). This is but a small sample of literally the thousands of Custom Indicators that can be applied to charts on the IBFX platform. For traders who want even more automation in their trading, there are Expert Advisors that can not only analyze the market for potential trading opportunities but execute these trades, automatically. Personally I am embracing this specific technology in two ways. I am currently developing a trend following Expert Advisor (known as an “EA”) based upon my 34EMA Wave and GRaB candles. The other way I am benefiting from the trading technology provided on IBFX.com.au is their free VPS service.
A VPS, or Virtual Private Server, is a must-have for EA traders.
Expert Advisors are one of the main reasons for the popularity of the IBFX Meta Trader 4 platform. This is because EAs are convenient in that they take a strategy that is developed by a trader (as I am doing) and can take that strategy and execute it around the clock. But don’t worry if you don’t know how to program or don’t have a strategy! There are EAs that are offered by IBFX.com.au and other sites that you can use and/or purchase. The offerings are endless. By the way, my personal EA will be available to IBFX.com.au clients in the Fall of 2011.
One of the challenges that traders face is having a steady connection to the internet and having their computer constantly analyze the markets, while also executing the trades found by the EA. This requires a stable and always-on connection. The Interbank FX Group VPS service is a secure connection to a server with a 99.95 uptime, one gig of dedicated RAM, and 16 gigs of dedicated hard drive space. This means the concern over internet disconnects and power outages (something I personally have to worry about each year during the hurricane season in South Florida) is no longer a problem. I began to incorporate this service as soon as it was available because if I lose access to the markets, then I lose the ability to enter and manage trades. For me VPS is a risk control tool and very necessary. For traders who prefer Apple mobile devices (iPhone, iPad) the VPS service is an alternate way to access the IBFX platform without needing to run Microsoft Windows. For traders who travel, the VPS offers a reliable connection while away from home. For me, mobility is a must. I travel and teach throughout the world, with less frequency than I used to, but it’s still part of my life. I also travel with my iPad and I can access my VPS anywhere that I can get Wi-Fi or my 3G connection. So this service is not limited to traders who want to use an EA to trade.
The tools of the trade are provided but that’s not all that a trader needs, is it? Having access to research, education and trade ideas is also part of what helps a novice trader gain confidence in the market. As I mentioned earlier: I wasn’t always a forex trader. I spent most days analyzing and trading stocks, gold, the U.S. Dollar index, crude oil, S&P 500 and Dow Jones futures, as well a handful of other markets. My analysis focused on price action, price patterns and about three to four specific indicators I would watch to confirm market sentiment and momentum. You could call me a technician but I prefer “chartologist”. I study charts. I respect fundamentals as well, but still use price action to confirm market opinion. These are all lessons and experience I share - from two decades of trading - daily at the DailyForexTradngEdge.com and weekly in my live webinars. My goal however is not simply to teach you what I do so you can copy it - although of course that’s fine with me and many traders worldwide use my indicators and strategies - but I want to help you become the best trader you can be and offer support along the way. In fact, Interbank FX Group has a large section on IBFX.com.au dedicated to Forex Education. Everything from understanding leverage and margin to technical analysis and the economic effect of individual currencies like the Euro and Pound Sterling are discussed.
Speaking of discussion, let’s examine price movement using some of the popular IBFX Meta Trader 4 custom indicators on the XAU/USD chart.
Using the 34EMA Wave and GRaB candles to analyze the XAU/USD, I’ll start with determining the Directional Bias of the market using the daily time frame.
Starting all my analysis with the daily chart is a key aspect to my trading. The daily is the touchstone from which I will determine the psychology in the market. This time frame will not only dictate what my eventual entry strategy will be but also which time frames are valid for it. The daily is also the chart I use to determine what I call the Directional Bias of the market, regardless of whether I am setting up a forex, futures, or stock trade.
Directional Bias is my way of identifying and interpreting what the overall and dominant psychology of the market is - in other words - whether there is more bullishness, bearishness, or a neutral opinion of the market. I use the daily time frame because of its psychological relevance. Each time frame is important but psychological relevance comes from which time frame is most watched and therefore shapes the opinion of traders by the price action they see on it. Consider that the GBP/USD has recently transitioned to a more bearish Directional Bias. I measure this two ways. First, I look at my GRaB candles which are color-coded according to where the candles close in relation to my 34EMA Wave. If the close is below the 34 period EMA low the candle is shaded red. If the range closes above the 34 period EMA high the candle is shaded green, and if the candle closes in between the high and low then the candle is shaded blue. The GRaB candles are a visual interpretation of sentiment and momentum and at a glance - because of the color-coding - a determination of bullish, bearish, or neutral can be identified. There are two shades of each color. The darker shade of green/red/blue indicates a down close the way a traditional black candlestick would, while the lighter shade of green/red/blue indicates an up close the way a traditional white candlestick would.
The second way, which is actually the main way, I measure the Directional Bias is with my 34EMA Wave. The three exponential moving averages I use are the 34 period EMA high, 34 period EMA close, and the 34 period EMA low and these are shown with the green, red, and blue moving averages on all my charts. The angle at which the trio is traveling is measured by what I call “clock angles”. It was important for me to have a consistent view of the angle of the 34EMA Wave, so the amount of chart data included on each time frame is specific to what I feel is also psychologically relevant. I call this the market memory or look back.
The market memory is the way that I ensure the view I have of each time frame and the angle of the 34EMA Wave remains consistent day to day in my analysis. Since we’re examining the daily time frame in this update, notice that the look back for the daily is approximately twelve months. I get as close to this date as possible although I realize the charting platforms don’t necessarily allow for an exact twelve month look back all the time. Here I have ten months and the angle of the 34EMA Wave is clearly down at what I would call a “four to six o’clock” angle. Now the chart does not have to remain in this look back for the entirety of the analysis but here are the items that should be considered from this view. Of course the angle of the 34EMA Wave, consider highs and lows as well as significant rallies and sell-offs, also try to determine what the overall direction has been over the past year. Again, this is specific to the daily chart. As an example, for the 60-minute chart my look back is two weeks, and I will make all the same decision based upon two weeks of price data.
Now with this information, let’s look at the recent transition in the Directional Bias of the daily XAU/USD using the 34EMA Wave and GRaB candles.
Gold had been moving in a sideways range since making a high on May 1, 2011 at 1576.25 as can be seen on the daily chart of the XAU/USD.
The current view of the XAU/USD daily chart reveals a market in distribution which is characterized by a wide, volatile, sideways range.
Notice the “two to four o’clock” angle of the 34EMA Wave which is somewhat reminiscent of the way in which the daily cable was moving before the downtrend began. Now do not assume that a downtrend is always a result of this market trend, in fact, the prior trend must be considered as well as the fundamentals effecting the market. As a “chartologist” however I do feel that the price action reflects the fundamentals and the degree to which they have been discounted into the market.
The sideways volatility of the daily chart does set up potential fades along the ceiling and floor of the range and therefore I will use my 21, 1, 3 Stochastic to set that trade up on the daily time frames.
The daily chart of the XAU/USD is nearing the ceiling of the range while also nearing the overbought level on the Stochastic (21, 1, 3). This sets up a potential short sell along the ceiling if the Stochastic reaches a reading above 80 because of the “two to four o’clock” angle of the 34EMA Wave.
But what about the intraday time frames? How do you trade a market with no current Directional Bias? There are two choices. One would be to steer clear of any market that does not have a bullish or bearish dominant psychology. Since it is the clarity of the market psychology that makes for better follow-through, a lack of it should be a warning. The alternative would be to focus on short-term time frames like the 5, 15, and 30-minute since the market is uncertain, follow-through will be typically short-lived. Look for ways to capitalize on short-term organization of market psychology. In this case, there is certainly more bullish sentiment behind the current movement in gold, so be cautious of a “fade” (selling into strength along a ceiling or resistance level) since this would be aggressive and because the exhaustion area in a distribution market can be unpredictable.
For traders with a longer time horizon and the tolerance for more price movement, look to the weekly time frame where large weekly corrections have been steadily supported between the 20 period weekly SMA and the 34EMA Wave.
Traders with a continued bullish outlook on gold may be better off focusing on the longer-term weekly time frame which continues to trend higher finding consistent support on pullbacks to the 20 period SMA and 34EMA Wave.
I hope this sheds like on how powerful the analysis of the daily time frame can be when it comes to understanding market psychology, trade selection, and well as time frame selection.
Forex Trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses.
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