Best Market Hours to Trade

Thursday, August 21, 2008
If you want to be profitable in Forex it’s vital to know how to trade. But knowing when to trade is also a very important condition to succeed in Forex. The market behaves differently depending on the time of the day and the day of week. It’s well known fact to the experienced Forex traders that it’s better to trade when the market is busy and it moves in the large and predictable waves. But when the trading is slow and the volatility decreases, the market itself becomes unpredictable and it’s easy to lose your money. If you want to trade when the market is the most active then learn these three simple rules:
  1. There are several major regional Forex trading sessions — Tokyo (0:00-9:00 GMT), London (8:00-17:00 GMT) and U.S (13:00-22:00 GMT).
  2. The market becomes more active when those sessions overlap: Tokyo and London (8:00-9:00 GMT) and London and U.S. (13:00-17:00 GMT).
  3. The trading is more active in the middle of the week — particularly Tuesday and Wednesday. Friday is the worst day to trade.
So, to trade with the best market conditions available you just need to trade on Tuesday and Wednesday from 8 to 9 AM GMT and from 1 to 5 PM GMT. Of course, not everybody can trade during these time periods. In this case, I’d recommend setting up stop and limit orders to catch the most juicy price movements.

Technical Parameters of the Forex Market

Monday, August 18, 2008
The technical indicators of the Forex market don’t take information from the air; they are all based on some of the market’s parameters and the appropriate calculation methods. Each indicator is calculated according to its own rules and there is no need to describe them all. In this article I’ll try to describe only the actual Forex market parameters that can fully describe the technical side of the Forex trading.
  1. Trend — a direction of the price movement. Forex market can be in some kind of trend or go sideways. The trend itself can be measured by its direction, starting/ending point, ranges and the inner volatility.
  2. Volatility — a statistical measure of the number of the price changes over a certain period of time.
  3. Momentum — a measure of price movement strength in a term of pips per tick.
  4. Cyclicality — it’s hard to be measured, but it still exists on the financial markets (and on Forex too) and describes the cyclical nature of some price movement.
  5. Volume — the number of the transactions (price changes for Forex) in a given amount of time.
  6. Support and resistance levels — they can be hard to spot, but Forex market generally bounces off of them or breaks them with a significant price action.
  7. Traders’ expectations — they can’t be seen from charts, but they are the part of the technical picture of the market. Stop and limit orders are the important parameters of the market that should be taken seriously.
Some technical indicators use only one or two of these parameters; very few of the standard MetaTrader 4 indicators use more than two technical parameters. And I don’t know any indicators that are based on cyclicality or trader’s positions.

Forex Leverage and Trading with Margin

Thursday, August 14, 2008
What is leverage in Forex trading? Every on-line Forex broker offers trading with certain leverage, which usually varies from 1:2 to 1:500 with the most popular being 1:100. Leveraged trading is also called margin trading, because you only need to have a margin to back your position while the rest is offered by your broker. Margin trading is considered to be more risky, but it also offers high-yielding opportunity which is sought by many Forex traders. If you trade on Forex without leverage you have to spend a big deposit to open a position — you’d have to deposit $100,000 to open a position of 1 standard lot. When you trade with a leverage you can use just a fraction of that money to open the same positions — the rest of the money is «borrowed» from the Forex broker. That means that with just $1000 and 1:100 leverage you can open $100,000 positions and gain $10 from each pip of difference you gain. Of course, you’ll also lose $10 for each pip if the price goes against you. Remember that your margin goes for margin requirement and is held by the broker for the whole period of time while your position is opened. That means that your available margin on account declines usually by 100% of the margin required for holding the position — e.g. $1,000 for $100,000 position on 1:100 leverage. Don’t forget that your position opens with a little floating loss caused by the broker’s bid/ask spread. That means that if you had only that $1,000 in account your position would be immediately closed out by margin call. So, always remember to keep enough available margin to cover your losses, because your broker won’t be losing its own money, it will close your positions instead, if the free margin level falls critically low.

Examples:
  1. With 1:500 leverage and $1,500 in your trading account you can open a position of 5 standard lots and still have $500 left for loss toleration. But with each pip of loss costing you $50 your position will be automatically closed when its loss reaches 10 pips. After that you have $1,000 remaining in your account.
  2. With 1:50 leverage and $10,000 in your account you open 1 standard lot position and $2,000 from your account goes for margin. $8,000 left is enough to hold 800 pips of loss.
  3. With 1:2 leverage and $100,000 in your trading account you can open 1 standard lot position with $50,000 secured as margin and $50,000 left to tolerate up to 5000 pips of loss prior to margin call.

Managed Forex Account

Monday, August 11, 2008
At some point of the trading experience traders that don’t reach a very successful level with their own skills start to think about using a managed Forex account. Of course, exceptional traders can earn themselves after just a little practice and learning, but for the majority of the beginning Forex participants the frustration of the losses and the inability to learn over a certain period of time leads to the conclusion that they should use Forex account management services. There is nothing wrong with that, but there is something these Forex investors should know:
  1. Earnings may still fluctuate and become losses. When you rely on a managed Forex account the mechanics of your earnings isn’t much different from that when you trade yourself. The traders that manage your account can still experience losses and you may find that your earning is actually negative during some months.
  2. There are many scam-shops in the managed Forex account industry nowadays. With the rising popularity of the on-line Forex trading, the number of the scams in the managed account industry grows exponentially. Try to avoid shady managing companies and sites. It’s always preferable to use the account in the reputable broker with a trading access for the managing side.
  3. The performance of the managed account can be too conservative. Managed Forex trading accounts can turn out to be not as profitable as you might expect. The majority of the account managers use the conservative strategies that tend to protect your assets more than gain profit. So, don’t expect 100% yield in one month or even a year.
  4. Don’t forget about management commission, transfer fees and withdrawal delays and limitations. When you trade with your own money you can do almost everything you want with them at any given moment. When your account is under the management you’ll have to wait before you can withdraw some money or change the management. You tie up your own money with the manager. The management fees can be costly — don’t forget to find out the real amount of money you will give away as a commission to your managing company.
One shouldn’t forget that it’s possible to trade yourself and at the same moment have investments in several of the managed Forex accounts. Diversification is always great and even highly successful traders don’t miss the opportunity to invest into the well-managed Forex accounts.

Pitfalls of the Fundamental Analysis in Forex

Friday, August 8, 2008
Fundamental analysis is widely used in trading for thousands years. In stock trading fundamental analysis of the companies prevails over the technical analysis in the long-term investing. But in Forex technical analysis is more popular, because of the volatile and short-term nature of the foreign exchange market. Nevertheless, fundamental analysis has its fans and many professionals use it to earn profit. What are the common pitfalls that can wipe the Forex trader’s account if he relies on the fundamental analysis?

Relying on a news effect. You can’t rely on the specific news effect that will be caused on a specific currency pairs. For instance, good news on the U.S. economy not always make dollar go up, while bad news not always make it go down. Additionally there might be a very high volatility period after such releases that would make all your fundamental assumptions fails. Although, this is generally true for the U.S. related fundamental indicators, sometimes the same happens with the other currencies and countries.

Intraday fundamental trading. Intraday use of the fundamental analysis is probably something unique to Forex market, but I know a lot of traders that are fond of it. Nevertheless, majority of them fail greatly, because fundamental analysis usually doesn’t work that way. Fundamental indicators set long-term trends and the short-term change they are causing is volatile and unstable, which may lead to the big losses.

Confusing good for currency and good for economy. More than often economic indicators that are good for the currency of the particular country are hurting its economy and vice versa. This happens because weak currency is often a boon the country’s exporting companies, while a strong currency usually hurt the trade balance and the manufacturing industries. So, remember that not all «good» indicator releases are good for the currency you buy

I use fundamental analysis in my Forex trading, but I am aware of its possible problems. If you want to trade using mainly fundamental analysis — then fine, just don’t forget to be careful with this tool.

When Technical Analysis is Your Enemy

Monday, August 4, 2008
Technical analysis is the powerful tool to forecast the price action in Forex market. It’s more popular than fundamental analysis in currency trading and is used both by beginning traders and experienced professionals equally. But is it that cool and omnipotent? There some situation when good old technical analysis can ruin your trading.

News of high importance. When very important news are released with the unexpected outcome that greatly exceeds any forecasts, even the most certain technical patterns get ruined. It’s a real trading suicide to rely on technical analysis in the chaos that rules after such releases. Disaster/terrorism news also tend to affect Forex market in a similar way.

Holidays market. Trading during big holidays (such as New Year and Christmas) isn’t advisable at all. Technical analysis fails there because the volume of trading is extremely low and the market becomes highly unbalanced with large spike movements possible in each direction. Big speculators can forge the market to their own liking during such periods.

Bubble rallies and bursts. When some market gets a hype, it’s hardly obeying common rules of technical analysis. In Forex when some currency goes up like a bubble (recent carry trade hype is a good example) another currency from the pair goes down at the same extent. Trading on sharp rallies can be very profitable, but don’t expect your support and resistance levels to work there.

Remember the situations when playing by technical analysis is dangerous and you’ll be able to apply it only in a friendly environment, where your strategy won’t be hurt by any «force majeure». In Forex technical analysis can be your best friend, so don’t let some circumstances turn it in your worst enemy.