Understanding Currency Spreads

What is a spread?
A spread has got two definitions to it. First, it represents the difference between the buying price and selling price of a currency pair in pips. Whenever one exchanges currency he or she is selling his or her own currency and buying the foreign currency. The difference in these asking and purchasing prices becomes the spread. Wider spreads bring about higher asking prices and lower bid price, thus make you pay less when you exchange your money. The reverse also applies in the Forex market.
The second definition of a spread refers to the means by which brokers earn their money. In any financial transaction involving the exchange of currency, a broker connects the trader to the global currency market. Wider spreads show that less of a trader’s money is being exchanged and transferred. The difference that is offered by the broker and the spread that he or she pays in the Forex market is what translates to the fee that they earn from exchanging and transferring a trader’s money.

Are Spreads important?
Spreads are important as they greatly affect ones transfer costs. Most global transfers in the industry offer great spreads, thus the need to ascertain what services are offered by each Forex firm before making transactions in order that one fully benefits from these spreads. Though the spreads (pips) may sometimes seem small if moved in the right direction can translate to many hundreds of dollars of gains or losses.

Do brokers benefit from the spreads?
Spread policies also differ from broker to broker. Exchange rates are given daily by most brokers and they remain constant the whole day. These daily rates have wide spreads and brokers most times loose very little even if they suggest that they are negotiating to lower bids. The wide spreads placed on these bids help in cushioning against rate fluctuation all through the day and act as a way of ensuring the brokers get profits on the transactions.

Are there any bodies regulating the exchange rates?
Exchange rates are however dictated by the Forex interbank market. At this place the rates fluctuate all through the day all the through the week. Some brokers may try to salvage the situation by offering daily rates but one should be wary of this. One is able to make an informed situation after he or she has studied how the spreads determine the exchange rates and consequently affect the cost of one’s transfer. If you are equipped with thorough information of the dealings of Forex matters you will be able to choose the right broker to handle your money.

What action should I take?
For a beginning trader, it does not hurt to try your hand in forex trading, you have so much to gain and very little losses to make. Choose a broker that offers better spread policy in order that you may save most of your money. Carry out research to realize which broker offers the best spreads in the market.

Pros and Cons of Leverage Trading

In forex trading, one of the most important things to work with is leverage. What it does is allow you to trade positions much higher or greater than the cash you have. There are pros and cons to it, even though it sounds exciting.

Profit making potential

With leverage trading there is huge potential to make great profits. This will mean though that the leverage used is high and that you make winning calls all the time. It is very risky however and not as easy as it sounds. Any volatility, even in the short term can lead to huge loses.

Is it a trick?

Many people consider leverage a trick. They cannot imagine trading with other people’s cash. However, this is normal and can be equated to taking out a mortgage to buy your home. In forex trading, the mortgage is leverage. In this case though, you are required to manage risk.

Guaranteeing leverage

Leverage must be guaranteed just as a mortgage is guaranteed. In the real estate market, a mortgage is guaranteed by the house itself. However in the forex market the leverage is guaranteed by the amount of funds deposited in the trading account.

How it works

Basically a broker will provide credit for you to trade with based on how much money you deposit in the trading account. This can be at a leverage ratio of 1:100 such that with $1000 you can trade $100,000 in forex. This allows you to open much larger positions than you could before and make a much higher profit.

Managing risk

You have to be keen to manage risk when it comes to leverage trading or you can lose big time. This can be done in one of two ways. First you can use stop-loss options when working with short term systems of trade. Secondly, you can consider a safe value in case the price moves in the opposite direction.

Is Leverage necessary?

If you are just beginning and do not have much money with which to trade, leverage is a necessity. If you want to make your profit margins high, you will need to trade bigger lots to make it.

Trade with the margin

To be a professional trader, you will need to use the margin that is available to you so that you can be able to handle the price oscillations that are so common in the market. Leverages should be done within reasonable ratios. If the leverage is greater than 1:20 may be detrimental and can wipe you out if the market oscillates the wrong way.

Brokers

Brokers are really the ones who make money using leverage. They lure you in with great leverage deals such as 1:400 meaning that if you invest a trade capital of One thousand dollars you can get even $400,000 to work with. However, if you are wiped out they will profit from the deal.

Hedging Technique in Forex Trading

Introduction

Hedging in forex trading is a strategy through which traders get to reduce some of the risk that comes with trading. Contrary to popular belief, hedging is not buying an insurance policy for the currency position. However, the functioning of hedging is almost the same. It makes use of instruments known as derivatives to cover their trades.

Forex hedging for beginners
Forex hedging can be a valuable tool for beginners in the forex market. Once you learn how to utilize this tool, it will make that you do not undergo huge losses in your early stages of making investments. While you speculate, it is also important to remember to hedge; do not get carried away when placing pips and forget to safeguard your investment.

When to hedge
Hedging is a way to insure your investment against potential risk. Therefore, it is advisable that every trader, no matter how many pips they are placing to first understand what hedging is and then employ risk protection to their investments.

Hedging strategies
In the forex market, hedging makes use of derivatives to cover against potential risks. Future and options are the two common types of derivatives. If these two tools are used properly, incurring a loss in one investment may be offset by a gain in a derivative.

How does hedging work?
Hedging in the forex market is achieved when one trades in one instrument and then hedges in a correlated manner with another instrument. In other words, it is opening a trade with two pairs that move in a similar line most of the time.

Its aim
The aim of hedging is not to make a large profit but to serve as an insurance to protect you from losing large portions of your investments. It can be a valuable tool especially when there is a probability of incurring heavy losses. .

Hedging is useful just not all the time
Even though it is a good way to reduce the amount of risk to your investment, many experienced traders do not always use hedging all the time. This is mainly because experienced traders are aware of the fact that fluctuations may be short-term in which case hedging is rendered useless. The risk however lies in figuring out whether the fluctuation is long term or short term.

Because hedging is not meant as a tool to make a profit, most experienced traders will only apply it when they absolutely feel that the market is going against them. This strategy can however prove to be very costly. The important thing however is that the general risk of trading is substantially reduced. The trick is to ensure that you hedge at a reasonable price that will adequately cover any loss that you may incur.

Hedging in high volatility
Hedging can be very important when the market is highly volatile; it can substantially reduce the risk levels. The practice of hedging is more applicable in day trading. Hedging can also be used for options, forwards and futures.

Forex Trading Moving Average Indicators

A moving average is simply a technique that allows chart-makers and analysts to filter out a lot of the ‘noise’ crated by short term price swings. This makes the analysis of the foreign exchange market uncomplicated in a way that even the untrained person can participate actively in foreign exchange markets. They tell the average price in a given point of time over a defined period of time and get their name from the fact that they reflect the latest average, while adhering to the same time measure.
Moving averages have a weakness in that they lag the market and therefore thy do not necessarily signal a change in trends. This problem can be solved by using a shorter period, such as 5 or 10 day moving average compared to moving averages over longer periods of time.

The alternative is to combine two averages of distinct time frames. In this case, when the shorter-term average crosses above the longer-term average, it is your signal to buy since the price is likely to go up and when the shorter average falls below the longer one, it is your signal to sell since the price is likely to go down.
When analyzing the foreign exchange market using moving averages, one option is to use moving average convergence divergence or MACD. This will give you an early signal and when the MACD turns positive and makes higher lows as prices are still tanking, this is your signal to buy. When the MACD makes lower highs as prices are making new highs, this is your sell signal.

The moving average envelopes are the most common application used in analysis involving moving averages. It is basically a trading band made up of two moving averages and it attempts to determine the range of market should be trading in. When using envelopes, you will choose your own period of moving averages and form the upper line and the lower line.

When using envelopes, most of the data should be close to the moving average lines. When the price hits the boundary of the envelopes, it is usually a sign of reversal. However, not every signal is valid. When the trend is strong enough, it can raise or fall along the envelope boundary, resulting in many false signals.
When doing the analysis, look at the far right and left of the chart. You will be able to tell the trend by considering if it is going up overall, down overall or just sideways. The other way to tell the trend is to use a 20 and 200 SMA or simple moving averages on your chart. By looking at the slope of the line and the direction that it is headed in, you will be able to see the direction of the trend.

You should note that the best time to do your trades is when the short and long-term trends are running in the same direction. You can use these averages on any timeframe and the moving average will always tell you what direction the pair is heading.

Forex Trading Common Chart Indicators

Common chart indicators are very helpful in foreign currency trading, or forex. These are tools to help evaluate the market and their other purpose is to minimize trading risks. Several common charts are available and they include Relative Strength Index, Bollinger Bands, Parabolic SAR, MACD and Stochastics.

So, how do you figure out whether to use oscillators, or trend following chart indicators, or both since it is a fact that they don’t always work in tandem? This is the most important question that has to be answered before the technical analysis. Choosing the right common chart indicator means that you will get the right results and vice versa. This is not an easy task, but it is a skill you will slowly improve upon as your experience in foreign exchange grows.

Bollinger Bands
These are the most common charts and are used to measure the volatility of the foreign exchange market. Bollinger bands are used to measure a market’s volatility. This basically means that the tool tells us whether the market is ‘loud’ or whether it is ‘quiet.’ The band expands when the market is loud and contracts when it is quiet, just like a band in real life.

When applying Bollinger bands, you should note that price tends to return to the middle of the bands and this is the idea behind the Bollinger bounce. When you look at a chart, it is always clear where the price might go next, just by observing the band, and this is how the Bollinger band is used in analysis – the price always bounces back to the middle.

Bollinger squeeze is also used for analysis and when the bands ‘squeeze’ together, it usually means that break out is going to occur sooner rather than later. If the ‘candles’ start to break out above the upper band, then the move will usually continue to go up and vice versa. Bollinger bands are designed for you to catch a move as early as possible, but setups like these are not a daily occurrence.
Parabolic stop and reversal or SAR

Another common chart indicator that spots trend reversals as the name indicates. It is probably the easiest common chart indicator to interpret since it only gives signals that are bearish or bullish. Just like in Bollinger bands, candlestick charts are used. When the dots are above the candle, it is your signal to sell the currency and when they are below the candle, it is your signal to buy the currency under analysis.

MACD
The moving average convergence divergence – MACD is a popular leading chart indicator. It is used to catch trends early on and can also help traders to spot trend reversals, just like Parabolic SAR. The downside with this chart indicator is that there is a lag involved since it uses many moving averages.

Stochastics
Stochastic indicate oversold and overbought conditions in forex analysis. Its application is that when the moving average lines go above seventy, it is your signal to sell and when the lines are below thirty, it is the signal to buy.

Facts on Pivot Point Forex Trading Technique

It is every forex trader’s dream – both the novice and the experienced – to have a system that can assist them in predicting the market.
While there are many leading / predictive indicators which are inbuilt in modern day online trading platforms, many of those tend to be at best inaccurate when used on their own.

What this means is that a trader has to learn how to make use of different indicators to be able to get an idea on which direction the market is likely to be heading. This usually requires time and depends on an individuals trading style.

Short Term Data
Other than the obvious fact that these indicators are highly inconsistent and depend on the combination in which there are used, they only use data generated over the short term period – only a few hours back.

Pivot Point Trading
Pivot point trading entails working out various support and resistance level by use of a mathematical formula.
The support and resistance levels are plotted on a chart and used to stop losses or to take profits depending on which direction the market is heading.

7 Points
Given that forex trades can either be long traders or short trades, traders apply basic arithmetic to calculate some 7 points. These points are then plotted on a forex chart corresponding to the currency pair been observed.
Resistance and Support Points

Out of the 7 points calculated, 3 are known as resistance levels – R1, R2, R3 - , 3 are known as support levels – S1, S2 and S3 while the 7th point is the pivot point.
As mentioned earlier, these points are calculated using the previous day’s numbers. These figures are the previous day’s high, low and close figures.

Formula and Calculators
There are a good number of pivot point calculators which have been developed. To calculate the pivot point using these calculator’s one only needs to enter the previous day’s high, low and close figures.

While the forex market is assumed to run for 24 hours a day, major markets - London, Tokyo, US - use 5pm EST as their open and closing time.

The calculator works out the resistance, pivot and support levels which are then plotted on a graph.

For traders wishing to work out the points on their own, the following formula is used:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

The 5 minute chart above indicates the 7 points plotted using the formula provided and the 3 previous day’s figures – high, low and close.
The green line represents the pivot point. The red lines – S1, S2 and S3 are the support points while the blue lines – R1, R2 and R3 are the points of resistance.

Trading Scenarios – Long or Short Trades

There are several trading options presented by the chart above all revolving the pivot point. One such option is what is commonly referred to as the break out trade.
The market opened below the pivot point giving favor to short trades. The break out trade involves looking for suitable entry points where the channel breaks. In the above scenario a suitable entry point would have been above S1 with S1 as the profit target.

Pull Back Trade

Another suitable option would have been the pull back trade. Pull back pivot point trading involves entering the market below the support level – recent lows before the market changed direction – with a stop placed at the highest peak when the market started heading north with S2 as the target.

Breakout of Resistance

The third method is a classic example of text book trading. As the market started heading north, one can enter at the point immediately after the direction change with a stops loss placed below the lower channel line. Positions are relinquished at each point.

Conclusion
While pivot point trading might sound like the mythical crystal ball which enables the trader to have a glimpse of the future, the truth is it is not. It only offers traders a good guess on the direction the market is likely to head for the day. As a result, it is important to make use of stop loss when making use of this trading technique.

Factors Which Influence The Forex

The forex market is the largest trading market in the world today and it continues to grow as more and more people invest in it. It is very promising but extremely volatile as well. It is crucial that you understand some of the factors that influence forex trading before taking the plunge. This will help you when it comes to deciding whether or not you should sell or buy.

Economic Conditions

One of the main factors influencing forex trade is economic factors. These include current economic conditions of the country and the country’s economic policy put forward by the government. This information is gathered from the economic reports released by the government or other bodies.

Economic Policy

This is inclusive of the fiscal policy of the government in power and comprises of their spending habits as well as budget. Another policy to look at is the monetary policy in place. This means that you will need to understand how the central bank of the country influences the cost and supply of money. This can be seen in the interest rates presented.

Economic Conditions

This includes the levels of inflation. If inflation is high or is expected to rise, the currency loses value. The reason for this is that purchasing power of the currency is reduces and the demand for it as well.

Economic health and growth

This will include looking at employment levels, utilization of capacity, retail sales as well as the country’s gross domestic product. These are the major indicators of the health and growth of the economy. If the economy is robust then the currency will be in high demand.

Government budget surplus and deficit

If the government’s deficits are widening, then the currency will lose value, whereas if they deficits narrow the currency will do well.

Balance of trends and trade levels

You want to keep an eye on the flow of trade between countries. If there is a demand of goods and services then the currency of that trade is in high demand meaning that the currency will perform well. Trade deficits in a countries economy means that they are not doing too well and their currency will not either.

Market Psychology

This affects the foreign exchange market in several ways:

Flight to Quality

If there are international events that are unsettling, the traders will look for another currency to trade in. The stronger currencies will be pursued and the weaker ones neglected.

Long Term Trends

Look at long term cycles that will indicate trends in forex trading. These may be due to political or economic trends of certain countries.

Economic Numbers

The numbers presented on the economic reports tend to influence people psychologically. This therefore affects the market. Keep an eye on economic reports and numbers.

Political Atmosphere

If there is political instability of upheaval within the country, region or even internationally, the effects can be felt in the forex market. This negatively affects the economy of a country and with that, the country’s currency. If the government that comes in power is perceived to be fiscally responsible, then the impact can be positive.

Choosing a Forex broker

The practice of forex trading is gaining popularity by the minute and the number of forex brokers is also increasing exponentially. Therefore, one should be very careful when choosing a forex broker. There are a few components that every good forex broker should have.

Initial deposit
The first thing that you should look for is a forex broker that does not charge a high initial deposit. It does not make sense for the broker to charge you a large amount of money just to open a trading account. If the broker is charging too much money, then he is probably a scammer. The ideal amount of initial deposit is anywhere between $300 and $500.

The broker should be regulated
Even though the forex market is an unregulated market, forex brokers are regulated. Therefore, it is only safe to open an account with a broker who is not registered as a Futures Commission Merchant (FCM) in the US. The broker’s status can be verified by the National Futures Association (NFA). Look for a broker that has a clear record.

Customer service
Trading in currencies is a 24hour business depending on what currency you are trading. For this reason, you want to find a broker that runs a 24 hour operation. You do not want to run the risk of incurring losses because your trader is asleep. You should be able to have any questions answered by your broker whenever they arise.

Currency pairs
Ideally, you want to find a trader that deals with the currency pairs that you are most interested in. s/he should also have a wide selection to choose from because currency pairs have different breathing patterns.

Software
Your broker should provide you with software that is easy to use and understand. In forex trading, it is important to have a professional trading platform. The last thing you want to be doing is to be struggling with the features of the software while at the same time trying to make a trade. A good broker will offer you a demo account where you can make trades and test it out to find out how easy it would be for you to use it. Demo accounts function in the same way as the live trading platform and should be a valuable indicator.

Reputation
The last thing you want to do is to get into business with a broker with a bad reputation. Therefore, your first order of business should be to check out the reputations of brokers that you have an interest in. one way to do this is to Google search the broker under the heading of complaints and you will find all the information that you may require. Checking out the forex message boards is also another way to find out which brokers have a good reputation and which ones don’t.

The three steps to undertake when choosing a broker are to conduct thorough research on all brokers before settling on one, to compare the different brokers that are offering the services that you require and lastly to ask as many questions as there are and to make sure that they are answered to your satisfaction.

Types of Forex brokers

Forex trading involves the services of various Forex brokers. They can be very legitimate forex brokers with legitimate brokerage firms and also very illegitimate forex brokers that only bring losses to traders. Because of this, it is important to choose a forex broker carefully before deciding to invest or place a bet with your money.
However, the illegitimacy of brokerage firms is not the only thing that one should look for in the forex markets. Reliable trading services and a firm’s access to the Forex market are also important factors to consider.

A brokerage firm without quality trading services cannot bring any profits to one’s trade investments. Further, because the Forex market does not have strict operation rules, one can access a wide range of services, thus beginning traders should be particularly keen on the kind of brokerage firm they deal with.
Each Forex broker represents a particular level within the Forex market. Low levels have minimal connection to the Forex market while other levels are quite high and have unlimited access to the Forex market. The different kinds of Forex brokers that exist include:
➢ Institutional brokers: These brokers have unlimited access to the Forex market. This is most times a combination of about 200 banks. It also represents almost half of the Forex trading across the world. A beginning trader can therefore not use this as it is exclusively preserved for bank. This should act as a caution to many would be traders so that if a broker approaches with this kind of offer he or she should immediately know that a fraud is being committed.
➢ Book makers: They are also known as spread betting companies or spread betters. A book maker has very little or no connection to the Forex market. They are illegal in most countries such as the United States. They make profits on the difference between the buy and the sell of the trade (Spread).
➢ Bucket Shops: This broker like the book maker has no connection to the Forex market. They operate largely by the use of currency features and options. They take the opposite side of a trade made by a retailer but do not put them up on any exchange. It bets against the trader. Due to the illegality of this kind of broker beginning brokers should avoid dealing with them.
➢ Institutional Market Maker: These brokers are aligned with the Forex market. They have a direct connection and are very suitable for beginning traders. The only disadvantage they have is that they require huge amounts of money for the direct access to the markets.
➢ Retail Market Maker: These make the majority online Forex brokers. They offer a wide range of services and take a different approach in connecting to the Forex market. Most of them a re directly connected while others need an intermediary to gain access to the Forex market. They are equally good for the beginning traders and are totally legal in most markets.
The best broker to deal with is the Retail Market Maker. They are easily available and very reliable. Of all the five, traders should avoid the Bucket shops and the bucket makers. They are not regulated by the Commodity Futures Trading Commission and can therefore easily engage in fraudulent activities to the detriment of a trader.

Understanding candlestick charts and diagrams

What are candlesticks?

Candlesticks are a means of analysis of trades. They were created by the Japanese and they show market patterns over a certain time. These charts are often used in the technical analysis of currency price and equity. Technical analysis deals mostly with the psychological aspect of trading in stock. Generally, there are only 12 candlestick patterns that you need to keep in mind.

Wicks and the Body
The opening and closing trades are represented in the candlestick patterns by the wick. The body is the candlestick is a representation of whether the stocks in that particular period closed higher or lower than it opened.

Candlestick layout
The candlestick is composed of three components; the body (which is black or white), and then the lower and upper shadow (wick). The wick is an indicator of the lowest and highest trade prices of the security during the given time period. The opening trades and the closing trades are illustrated by the body. The body will be white when the closing price is higher than the opening price. In this case, the opening price will be placed at the bottom of the body while the closing price will be placed at the top of the body.

Lower closing
If the closing price of the security is lower than its opening price, then the body will be black and the opening price will be placed at the top while the closing price will be placed at the bottom of the body. Digitalized candlestick charts do not always use the colors black and white. There are instances when red is used to indicate a lower closing and blue or green is used to indicate a higher pattern.

Candlestick patterns
The white candlestick – this candlestick is a signal of an upward trend movement; the longer the body, the higher the increase in price.

Black candlestick – is a signal of a downward movement in trends; the longer the body the higher the decrease in price

Long lower shadow - is an indicator of a bullish signal; the lower wick should be equal to the size of the body; the signal is more reliable if the lower wick is longer.

Long upper shadow – is an indicator of a bearish signal. The upper wick must be equal to the size of the body; the signal is more reliable if the upper wick is longer

Hammer – this pattern is an indicator of a bullish signal in a downtrend; the lower wick is long and the body is either small or none existent.

Other simple candlestick patterns include the inverted hammer, the spinning top black, the spinning top white, Doji, long-legged Doji, Dragonfly Doji and the Gravestone Doji.

Importance of candlestick charts
Candlesticks are used as a visual aid to help in the decision making process when dealing with stocks, forex and commodity trading. They are used in most trading platforms and it would be a worthwhile investment to try and learn what they symbolize if you hope to become a successful trader.

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