Forex Trading Systems

Forex Trading Systems

Discretionary v/s Mechanical Trading Systems:

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Are mechanical Forex trading systems really any better? Can Automated Forex systems outperform discretionary Forex systems?  Let’s find out.

Some people prefer mechanical Forex trading systems while others prefer a more discretionary approach. My personal approach lies somewhere in between. Let’s look at each of them closely:

By definition, a mechanical or manual Forex trading system provides well defined entry and exit criteria and clearly describes trade setups and execution.  Such trading systems can be quite easily transformed into automated trading systems which can aid back testing, research and analysis.

The merit of such Forex systems lies in the fact that the guesswork is taken out of equation and trader only needs to follow clearly defined set of rules.  It helps to avoid emotions coming into the way of trading and with little discipline such systems can be easily be followed. Not only that but it also helps in reducing stress factor which is a bonus.

On the negative side of mechanical Forex trading systems we got problems with changing market conditions. No set of rules can cover all market conditions and there will be times when such systems would fail miserably.  Situation could become worse if the market conditions do not change for a sustained period of time. Automated Forex systems written based on such trading methods will be unable to cope with unpredictable market conditions.

These Forex systems bring out the artistic characteristics of traders. This is where the logic gets fuzzy and experience becomes paramount in making trading decisions.  A typical discretionary Forex trading system would use chart patterns and trend lines, which by a means are not determined by exact set of rules.

Adaptability and customization are two big advantages of any discretionary trading system.  Such Forex system can easily adapt to changing market conditions and rules can easily be changed to accommodate any unforeseen market scenarios. Experience and intuition are the cornerstones of any discretionary Forex trading systems and they can never be programmed into an Automated trading system.

On the flip side, such trading systems are hard to back-test and have unstable trade results caused mainly by emotions and stress level.  Such systems require much more trading experience and higher degree of discipline.In my opinion, anyone new to Forex trading should start off with mechanical trading systems, it helps to develop discipline and gain experience. It takes time to develop feel of the market and it then becomes easier to move towards more discretionary trading systems. My current method has clear set of rules that identify potential trades, I them use my experience to narrow down and chose the ones that I see fit for the current market conditions. With more work and analysis I hope to improve over time.

What should you know about Forex Signals ?

The 15 Questions you should ask your Broker

The 15 Questions you should ask your Broker.

There are many Forex Brokers, but not all were created equal. When it comes to your money, you want to be certain that your Broker meets your expectations. It is your right to ask as many questions as you need to feel comfortable about your venture and if you don’t get the answers your want, you should consider finding another Broker.

Why Size Does Matter

Size matters. Because the Forex market is an over-the-counter market with no centralized exchange, not everyone receives access to the same prices or quality of execution. Institutions with the largest trade volume and the most solid financials have access to better prices and execution. The bigger the broker, the better they are able to pass on the benefits of size, better prices, and better execution to you.

Who Executes Your Orders?

Not all Forex Brokers quote rates the same way. Below are two possible options:

1. Dealing Desk means that your Forex Broker creates the pricing and executes your orders. The spread is usually fixed, which means that traditionally, the spreads are higher than average variable spreads. Check for restrictions on placing orders during news or economic events; for many traders, this is a key time to trade.
2. No Dealing Desk usually means that multiple banks stream competing prices through your Forex Broker, so your orders are executed by the banks themselves. This means that there are usually no restrictions on trading news or economic events, but you should check with your broker.

Spreads

Fractional Pip Pricing

Most major currency pairs are quoted to four decimal places, so a pip would typically equal .0001 or one basis point. Forex Brokers generally round the price up or down to the nearest pip; but some now offer Fractional Pip-Pricing. It ads an additional decimal place, so spreads are usually tighter and more accurate.

Scalping the Market

Many traders favor short-term scalping strategies, which involves placing orders inside the spread. For scalping to be profitable for the client, the market maker must lose, so some Forex Brokers disallow the strategy. This strategy involves a high level of risk.

Rollover

Rollover is interest earned or paid on Forex positions held overnight. It varies depending on the difference in interest rates between a currency pair and fluctuates day to day with the movement of prices. A Negative Roll is when you sell a currency that pays higher interest rate, so you pay interest. A Positive Roll is when you buy a currency that pays higher interest rate, so you can earn interest. Negative Rolls are routine, but not all Forex Brokers offer positive rolls.

The "Carry Trade" is a popular Forex strategy which benefits from Positive Rolls and the high leverage available in the Forex market. For example, if you buy the USD/JPY, you can earn a positive roll. You are essentially borrowing the Japanese yen at a low interest rate cost to buy the US dollar with a high interest rate earning. Remember that leverage can dramatically amplify your losses, so beware of this technique, as it carries a high level of risk.

Hedging

Hedging lets you simultaneously hold BUY and SELL positions in the same currency pair. The most effective way to trade a market if you are uncertain about its direction is to find concrete support and resistance levels. This allows you to pinpoint levels where significant price action will take place.

Hedged positions do not necessarily limit risk as traders can find themselves losing on both sides of the trade. While this strategy tends to work temporarily in range markets, it does not work well in trending markets. Placing stop-loss orders on your positions to mitigate your risk is strongly recommended.

The National Futures Association, a self-regulatory organization in the US, adopted a new Compliance Rule 2-43 in 2009 that prohibits customers of Forex Dealer Members to open a "hedged" position in the same account. This rule may not apply to Forex Dealers outside of the US.

Customer Support

Forex trading works 24 hours a day. Does your Forex Broker? When you ask them questions, do they answer them clearly and honestly or do they give you the run-around? If your Forex Broker can’t answer the 15 questions below, you may want to look for one who can.

15 Questions You Should Ask Your Forex Broker

The following 15 questions are based on the above information and relate to basic information that your Forex Broker should answer without hesitation.

1. How long have you been a Forex Broker?
2. In what financial condition is your company? Will you show me your balance sheet?
3. Do you have good relationships with reputable banks?
4. Who is quoting the rates, my broker, a bank, or multiple banks?
5. Are the spreads fixed of variable?
6. How tight are the spreads?
7. Do you offer Fractional Pip Pricing?
8. Are there any trading restrictions?
9. Can I place orders inside the Spread?
10. Can I earn interest on positive rolls?
11. Can I earn positive rolls at all margin levels?
12. Are rollover rates displayed prominently? Where?
13. Does the trading platform allow me to hedge?
14. Can I lose more money than I put into my account?
15. What is the quality and availability of customer service?

Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Source: http://www.xe.com/currencytrading/questions.php

What should you know about Forex Signals ?

Forex Technical Analysis

Forex Technical Analysis: 

Technical analysis is a method widely used in stock markets and other traditional markets. They use price history and a series of algorithms in their attempt to predict future prices. You can find on the market different methods and algorithms for predicting the market’s price, but in the end they will always base their methods on past price movements. Technical analysis, however, is a bit different.

The first method used by technical analysis is using the technical indicators. Usually a technical indicator is nothing more than a graphical representation display somewhere on the screen. Usually, the price is represented. The most notorious example is the MACD indicator.

Other methods can use measure resistance and support or trend lines. These methods are based on analyzing the chart and observing the recent history. The method is trying to find a pattern for price movements. Usually the price either follows a certain pattern or it oscillates between a minimum and a maximum. If the price follows a pattern, you can predict where it will go by using trend lines. If it bounces forth and back between a minimum and a maximum then using resistance and support lines you can predict when it will change its direction.

Technical analysis can be very helpful but its predictions are not flawless. Only you can decide if to trust a technical analysis and make a trade or wait for another opportunity. On the market you can find a wide variety of indicators and technical tools. Since most traders have access to them, the slightest difference in interpretation can make a huge difference on transactions. If some traders want similar price range and they all try to buy at that point then the price can bounce quite drastically in a short period of time.


Technical analysis is different from one trader to another. Each individual has its own desires, needs and interpretations. Every trader has its own goals too, so they have different ideas about how these goals can be reached and how to set up their indicators. All these differences make the individual’s trading system. Take any number of traders and you will see that, even if they use similar tools, the results will never be the same. The current market still works only due to all these differences.

For forex trading technical analysis is quite useful. It will only show a small part of the market but you can learn a lot about trading from it. Understanding technical data will help you read the charts better and you will develop certain skills and thus you will see faster when a price movements appears.

Technical Analysis

Technical analysis refers to the study of indicators and charts in order to determine the future price movement based on the past price variation. The technical analysis is quite different from fundamental analysis, since technical analysis uses mathematical techniques and charts to examine different aspects of price movement. Due to the development of Internet, all these indicators and charts are widely available to every user connected to the Internet, and not just for professional traders and brokers, like was in the past.

Charts will give you plenty of information about any price movement regarding a certain currency, if you know how to read them. Most traders consider that a chart tells the story of the currency it represents. Since there are more than 50 technical indicators you, as a trader, can get access to a huge amount of information about currency movement. From any historical analysis you can predict the future movement of that currency.

A good trader will certainly search a trend line. Trend lines always show the price movement of a certain currency (down or up). If you can find a trend, then you can determine quite accurate the price movement. A trend is always a good friend in this type of business, and all traders rely on them for future price predictions.

Technical indicators are used to study some particular aspects of a certain currency. These indicators are quite similar with the well known economic reports since they study the movement and health of a currency in comparison with economic reports that study the growth and health of a certain economy.

Source: http://www.tradingforex.net/lesson-6-forex-technical-analysis

What should you know about Forex Signals ?

Six steps to improve your currency trading: Sixth Step

step 6: Beware of Psychological Pitfalls

Many traders take shopping more seriously than trading. Few people would spend $500 without carefully researching and examining a product. But many traders take positions that cost them well over $500 based on little more than a hunch.

This cannot be stressed enough. Most traders fail because they lack discipline. Be sure that you have a plan in place before you start to trade. Your analysis should include the potential downside as well as the expected upside. So for every position you take, you should place both a Limit Order and a Stop/Loss Order.

Set Smart Trade Limits

For each trade, choose a profit target that will let you make good money on the position without being unachievable. Choose a loss limit that is large enough to accommodate normal market fluctuations, but smaller than your profit target. Lock these in using Limit Orders and Stop/Loss Orders.

This simple concept is one of the most difficult to follow. Many traders abandon their predetermined plans on a whim, closing winning positions before their profit targets are reached because they grow nervous that the market will turn against them. But those same traders will hang on to losing positions well past their loss limits, hoping to somehow recover their losses.

Sometimes traders see their loss limits hit a few times, only to see the market go back in their favor once they are out. This can lead to mistaken belief that this will always keep happening, and that loss limits are counterproductive. Nothing could be further from the truth! Stop/Loss Orders are there to limit your losses.

No trader makes money on every trade. If you can get 5 trades out of 10 to be profitable, then you are doing well. How then do you make money with only half of your positions being winners? By setting smart trade limits. When you lose less on your losers than you make on your winners, you are profitable.

Don't Marry Your Trades

People are emotional. It is easy to do objective analysis before taking a position. It is much harder when you've got money invested. Traders holding positions tend to analyze the market differently in the hope that it will move in a favorable direction, ignoring changing factors that may have turned against their original analysis. This is especially true when losses are being taken on a position. Traders tend to 'marry' a losing position, disregarding signs that point towards continued losses.

Don't Bet the Farm

Do not over trade. A common mistake made by new traders is over-leveraging an account. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it were, everyone would be a millionaire!).

Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Source: http://www.xe.com/currencytrading/improve.php

What should you know about Forex Signals ?

Six steps to improve your currency trading: Fifth Step

step 5: Be In The Know with Fundamental Analysis

What influences prices in the currencies market?

Traders use fundamental analysis to try to forecast the effect that economic, social, and political events will have on currency prices. Prices in the currency market are affected by macroeconomic factors such as inflation, unemployment and industrial production. Based on the analysis of economic data, traders will take positions on the market with the objective of making a profit.

Finding information about economic data is relatively easy.XE Forex News, for example, provides streaming news and market commentary and is available for free.

Traders should focus on three main macroeconomic factors when analyzing foreign exchange rates:

Interest Rates

Each currency has an overnight lending rate determined by that country's central bank. If inflation is deemed too high, a central bank may raise the interest rate to cool down the economy. Conversely, if economic activity is sluggish, a central bank may reduce interest rates to stimulate growth. Lower interest rates usually depreciate the value of a currency – in part, because it attracts carry-trades. A carry-trade is a strategy in which a trader sells a currency with a low interest rate and buys a currency with a high interest.

Employment

The unemployment rate is a key indicator of economic strength. If a country has a high unemployment rate, it means that the economy is not strong enough to provide people with jobs. This leads to a decline in the currency value.

Geopolitical Events

These key international political events affect the foreign exchange market, as well as all other markets.

Example

In May of 2005, there was growing anticipation that France would vote against accepting the European Union Constitution. Since France was vital to Europe's economic health (and the value of the Euro), traders sold the Euro and bought the dollar; this pushed the Euro down so far that many traders thought it couldn't go any lower.

But, they were wrong. When France actually voted against the constitution, the EUR/USD currency pair fell by more than 400 pips in three days. Traders who bought the Euro lost thousands. On the other hand, traders selling the Euro made thousands.

Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Source: http://www.xe.com/currencytrading/improve.php

What should you know about Forex Signals ?

What is Currency Trading?

What is currency Trading? Is it same as Forex Trading?

Currency trading can have a couple of meanings. If you want to learn about how to save time and money on currency transfers, visit XE Trade Money Transfers. These articles discuss currency trading as buying and selling currency on the foreign exchange (or "Forex") market with the intent to make money.

How Forex Works

The currency exchange rate is the rate at which one currency can be exchanged for another. It is always quoted in pairs like the EUR/USD (the Euro and the US Dollar). Exchange rates fluctuate based on economic factors like inflation, industrial production and geopolitical events. These factors will influence whether you buy or sell a currency pair.

Example of a Forex Trade:

The EUR/USD rate represents the number of US Dollars one Euro can purchase. If you believe that the Euro will increase in value against the US Dollar, you will buy Euros with US Dollars. If the exchange rate rises, you will sell the Euros back, making a profit. Please keep in mind that forex trading involves a high risk of loss.

Why Trade Currencies?

Forex is the world's largest market, with about 3.2 trillion US dollars in daily volume and 24-hour market action. Some key differences between Forex and Equities markets are:

1. Many firms don't charge commissions – you pay only the bid/ask spreads.
2. There's 24 hour trading – you dictate when to trade and how to trade.
3. You can trade on leverage, but this can magnify potential gains and losses.
4. You can focus on picking from a few currencies rather than from 5000 stocks.
5. Forex is accessible – you don’t need a lot of money to get started.

Why Currency Trading Is Not For Everyone

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor.

Source: http://www.xe.com/currencytrading

What should you know about Forex Signals ?