Learn Forex: Basic Breakouts for Forex Trends

Forex pairs in this Article » AUD/USD


Article Summary: Trend traders enjoy the luxury of first identifying market direction prior to executing a trading strategy. Once found traders can employ a breakout strategy for entries.

As we discussed in an earlier edition of Trading Tips, there are many advantages of trading directional markets. Below we can see a prime example of a trending market in the AUDUSD. The pair has advanced over 449 pips since its September 2012 low was created at 1.0488. Notice the series of higher highs printed on the daily graph below. With such a strong uptrend in place, this makes the AUDUSD and ideal candidate for buying opportunities.

Today we will continue our discussion on trend trading basics, by identifying potential breakout trading opportunities with the daily trend.

Learn Forex - AUDUSD Daily Uptrend

(Created using FXCM's Marketscope 2.0 charts)

Trading Breakouts

Trading a breakout in an uptrend is a very straightforward process once you have identified the markets current high and low. Our current high resides at 1.0597 on the AUDUSD. This point is currently acting as a price ceiling or an area of resistance for the pair. Breakout traders will wait for price to breach this value, and create a new high before entering into the market. Traders will look to buy with the expectation of price continuing to rise and create a higher high in the market.

One of the most popular ways to trade breakouts is through the use of an entry order. An entry order can be set through the FXCM Trading station and allows you to set an order at a preset price. In the event that the market trades through that price, your order will be executed for you. This method of trading is very popular with traders that don't have the ability to constantly monitor charts. Regardless if you are in front of your charts or not, your trade is scheduled to execute as soon as s breakout occurs!

Learn Forex - AUDUSD Daily Breakout

(Created using FXCM's Marketscope 2.0 charts)

Stops and Limits

After finding a point to enter the market, it is always to manage a trades risk expectations. There are many ways to do this when trading trends, but the easiest way to find order placement is to turn again to our charts previously defined highs and lows. In an uptrend, traders can always turn towards the previous low as a line of support. Stop values can be placed under this value to exit positions in the event of the market turning.

Once a stop is set, traders can then manage their profit targets by using a positive risk: reward ratio of their choosing. Traders may also opt to lock in profit using a trailing stop or other methodology of their choosing.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker's e-mail distribution list, send an email with the subject line "Distribution List" to WEngland@FXCM.com .

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Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

9 Tricks Of The Successful Forex Trader

For all of its numbers, charts and ratios, trading is more art than science. Just as in artistic endeavors, there is talent involved, but talent will only take you so far. The best traders hone their skills through practice and discipline. They perform self analysis to see what drives their trades and learn how to keep fear and greed out of the equation. In this article we'll look at nine steps a novice trader can use to perfect his or her craft; for the experts out there, you might just find some tips that will help you make smarter, more profitable trades, too.

TUTORIAL: Beginner's Guide To MetaTrader 4

Step 1. Define your goals and then choose a style of trading that is compatible with those goals. Be sure your personality is a match for the style of trading you choose.

Before you set out on any journey, it is imperative that you have some idea of where your destination is and how you will get there. Consequently, it is imperative that you have clear goals in mind as to what you would like to achieve; you then have to be sure that your trading method is capable of achieving these goals. Each type of trading style requires a different approach and each style has a different risk profile, which requires a different attitude and approach to trade successfully. For example, if you cannot stomach going to sleep with an open position in the market then you might consider day trading. On the other hand, if you have funds that you think will benefit from the appreciation of a trade over a period of some months, then a position trader is what you want to consider becoming. But no matter what style of trading you choose, be sure that your personality fits the style of trading you undertake. A personality mismatch will lead to stress and certain losses. (For more, see Invest With A Thesis.)

Step 2. Choose a broker with whom you feel comfortable but also one who offers a trading platform that is appropriate for your style of trading.

It is important to choose a broker who offers a trading platform that will allow you to do the analysis you require. Choosing a reputable broker is of paramount importance and spending time researching the differences between brokers will be very helpful. You must know each broker's policies and how he or she goes about making a market. For example, trading in the over-the-counter market or spot market is different from trading the exchange-driven markets. In choosing a broker, it is important to read the broker documentation. Know your broker's policies. Also make sure that your broker's trading platform is suitable for the analysis you want to do. For example, if you like to trade off of Fibonacci numbers, be sure the broker's platform can draw Fibonacci lines. A good broker with a poor platform, or a good platform with a poor broker, can be a problem. Make sure you get the best of both. (For related reading, see How To Pay Your Forex Broker.)

Step 3. Choose a methodology and then be consistent in its application.

Before you enter any market as a trader, you need to have some idea of how you will make decisions to execute your trades. You must know what information you will need in order to make the appropriate decision about whether to enter or exit a trade. Some people choose to look at the underlying fundamentals of the company or economy, and then use a chart to determine the best time to execute the trade. Others use technical analysis; as a result they will only use charts to time a trade. Remember that fundamentals drive the trend in the long term, whereas chart patterns may offer trading opportunities in the short term. Whichever methodology you choose, remember to be consistent. And be sure your methodology is adaptive. Your system should keep up with the changing dynamics of a market. (For related reading, see What is the difference between fundamental and technical analysis and Blending Technical And Fundamental Analysis.)

Step 4. Choose a longer time frame for direction analysis and a shorter time frame to time entry or exit.

Many traders get confused because of conflicting information that occurs when looking at charts in different time frames. What shows up as a buying opportunity on a weekly chart could, in fact, show up as a sell signal on an intraday chart. Therefore, if you are taking your basic trading direction from a weekly chart and using a daily chart to time entry, be sure to synchronize the two. In other words, if the weekly chart is giving you a buy signal, wait until the daily chart also confirms a buy signal. Keep your timing in sync.

Step 5. Calculate your expectancy.

Expectancy is the formula you use to determine how reliable your system is. You should go back in time and measure all your trades that were winners versus all your trades that were losers. Then determine how profitable your winning trades were versus how much your losing trades lost.

Take a look at your last 10 trades. If you haven't made actual trades yet, go back on your chart to where your system would have indicated that you should enter and exit a trade. Determine if you would have made a profit or a loss. Write these results down. Total all your winning trades and divide the answer by the number of winning trades you made. Here is the formula:

E= [1+ (W/L)] x P – 1

where:

W = Average Winning Trade

L = Average Losing Trade

P = Percentage Win Ratio

Example:

If you made 10 trades and six of them were winning trades and four were losing trades, your percentage win ratio would be 6/10 or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400. If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get; E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%. A positive 40% expectancy means that your system will return you 40 cents per dollar over the long term.

Step 6. Focus on your trades and learn to love small losses.

Once you have funded your account, the most important thing to remember is that your money is at risk. Therefore, your money should not be needed for living or to pay bills etc. Consider your trading money as if it were vacation money. Once the vacation is over your money is spent. Have the same attitude toward trading. This will psychologically prepare you to accept small losses, which is key to managing your risk. By focusing on your trades and accepting small losses rather than constantly counting your equity, you will be much more successful.

Get Trend Analysis

Secondly, only leverage your trades to a maximum risk of 2% of your total funds. In other words, if you have $10,000 in your trading account, never let any trade lose more than 2% of the account value, or $200. If your stops are farther away than 2% of your account, trade shorter time frames or decrease the leverage. (For further reading, see Leverage's Double-Edged Sword Need Not Cut Deep.)

Step 7. Build positive feedback loops.

A positive feedback loop is created as a result of a well-executed trade in accordance with your plan. When you plan a trade and then execute it well, you form a positive feedback pattern. Success breeds success, which in turn breeds confidence - especially if the trade is profitable. Even if you take a small loss but do so in accordance with a planned trade, then you will be building a positive feedback loop.

Step 8. Perform weekend analysis.

It is always good to prepare in advance. On the weekend, when the markets are closed, study weekly charts to look for patterns or news that could affect your trade. Perhaps a pattern is making a double top and the pundits and the news are suggesting a market reversal. This is a kind of reflexivity where the pattern could be prompting the pundits while the pundits are reinforcing the pattern. Or the pundits may be telling you that the market is about to explode. Perhaps these are pundits hoping to lure you into the market so that they can sell their positions on increased liquidity. These are the kinds of actions to look for to help you formulate your upcoming trading week. In the cool light of objectivity, you will make your best plans. Wait for your setups and learn to be patient. (For information on determining what the market's telling you, read Listen To The Market, Not Its Pundits.)

If the market does not reach your point of entry, learn to sit on your hands. You might have to wait for the opportunity longer than you anticipated. If you miss a trade, remember that there will always be another. If you have patience and discipline you can become a good trader. (To learn more, see Patience Is A Trader's Virtue.)

Step 9. Keep a printed record.

Keeping a printed record is one of the best learning tools a trader can have. Print out a chart and list all the reasons for the trade, including the fundamentals that sway your decisions. Mark the chart with your entry and your exit points. Make any relevant comments on the chart. File this record so you can refer to it over and over again. Note the emotional reasons for taking action. Did you panic? Were you too greedy? Were you full of anxiety? Note all these feelings on your record. It is only when you can objectify your trades that you will develop the mental control and discipline to execute according to your system instead of your habits.

Bottom Line

The steps above will lead you to a structured approach to trading and in return should help you become a more refined trader. Trading is an art and the only way to become increasingly proficient is through consistent and disciplined practice. Remember the expression: the harder you practice the luckier you'll get.

by Selwyn Gishen


Selwyn Gishen is a trader with more than 15 years of experience trading forex and equities for a private equity fund. For the past 35 years, he has also been a student of metaphysics, and has written a book called "Mind: How Changing Your Mind Can Change Your Life!" (2007). Gishen is the founder of FXNewsandViews.Com and the author of a forex trading guide entitled "Trading the Forex Markets: A Foundation Course for Online Traders". The course is designed to provide the trader with all the aspects of Gishen's Fusion Trading Model.

Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

Currency Exchange: Floating Rate Vs. Fixed Rate

Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, more than $3 trillion is traded in the currency markets on a daily basis, as of 2009. This article is certainly not a primer for currency trading, but it will help you understand exchange rates and fluctuation.

What Is an Exchange Rate?
An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.

Fixed Exchange Rates
There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.

SEE: What Are Central Banks? and Get To Know The Major Central Banks

If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Floating Exchange Rates
Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.

In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency reflects its true value against its pegged currency, a "black market” (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.

In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.

The World Once Pegged
Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade. However, with the start of World War I, the gold standard was abandoned.

SEE: The Gold Standard Revisited

At the end of World War II, the conference at Bretton Woods, an effort to generate global economic stability and increase global trade, established the basic rules and regulations governing international exchange. As such, an international monetary system, embodied in the International Monetary Fund (IMF), was established to promote foreign trade and to maintain the monetary stability of countries and therefore, that of the global economy.

SEE: What Is The International Monetary Fund?

It was agreed that currencies would once again be fixed, or pegged, but this time to the U.S. dollar, which in turn was pegged to gold at US$35 per ounce. What this meant, was that the value of a currency was directly linked with the value of the U.S. dollar. So, if you needed to buy Japanese yen, the value of the yen would be expressed in U.S. dollars, whose value in turn was determined in the value of gold. If a country needed to readjust the value of its currency, it could approach the IMF to adjust the pegged value of its currency. The peg was maintained until 1971, when the U.S. dollar could no longer hold the value of the pegged rate of US$35 per ounce of gold.

From then on, major governments adopted a floating system, and all attempts to move back to a global peg were eventually abandoned in 1985. Since then, no major economies have gone back to a peg, and the use of gold as a peg has been completely abandoned.

Why Peg?
The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg, the investor will always know what his or her investment's value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency.

Fixed regimes, however, can often lead to severe financial crises, since a peg is difficult to maintain in the long run. This was seen in the Mexican (1995), Asian (1997) and Russian (1997) financial crises: an attempt to maintain a high value of the local currency to the peg resulted in the currencies eventually becoming overvalued. This meant that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors scrambled to get their money out and convert it into foreign currency before the local currency was devalued against the peg; foreign reserve supplies eventually became depleted. In Mexico's case, the government was forced to devalue the peso by 30%. In Thailand, the government eventually had to allow the currency to float, and by the end of 1997, the Thai bhat had lost 50% of its value as the market's demand and supply readjusted the value of the local currency.

SEE: What Causes A Currency Crisis?

Countries with pegs are often associated with having unsophisticated capital markets and weak regulating institutions. The peg is there to help create stability in such an environment. It takes a stronger system as well as a mature market to maintain a float. When a country is forced to devalue its currency, it is also required to proceed with some form of economic reform, like implementing greater transparency, in an effort to strengthen its financial institutions.

Some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly. Usually, this causes devaluation, but it is controlled to avoid market panic. This method is often used in the transition from a peg to a floating regime, and it allows the government to "save face" by not being forced to devalue in an uncontrollable crisis.

The Bottom Line
Although the peg has worked in creating global trade and monetary stability, it was used only at a time when all the major economies were a part of it. While a floating regime is not without its flaws, it has proven to be a more efficient means of determining the long-term value of a currency and creating equilibrium in the international market.

by Reem Heakal

Source :http://www.investopedia.com/
Read more:
http://www.investopedia.com/articles/03/020603.asp?partner=fxweekly3#ixzz1pXk8a5QV

Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

The 6 Most-Traded Currencies And Why They're So Popular

The forex market is the world's largest and most liquid market, with trillions of dollars traded on any given day between millions of parties. For those just getting started in the forex market, one of the first steps is to gain familiarity with some of the more commonly traded currencies and their popular uses in not only the forex market but in general as well. Let's take a look at several popular currencies that all forex observers should be acquainted with and some of the underlying traits and characteristics of each. (Learn about the forex market and some beginner trading strategies to get started. For more, see Forex Trading: A Beginner's Guide.)
TUTORIAL: Introduction to Currency Trading

1. The U.S. Dollar

First and foremost is the U.S. dollar, which is easily the most traded currency on the planet. The USD can be found in a pair with all the other major currencies and often acts as the intermediary in triangular currency transactions. This is all because the USD acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world. (For more, see Profiting From A Weak Dollar.)

In addition, due to the U.S. dollar's global acceptance, it is used by some countries as an official currency, as opposed to a local currency, a practice known as dollarization. As well, the U.S. dollar may be widely accepted in other nations, acting as an informal alternative form of payment, while those nations maintain their official local currency.

The dollar is also an important factor in the foreign exchange rate market for other currencies, where it may act as a benchmark or target rate for countries that choose to fix or peg their currencies to the USD's value. For instance, as of 2011, China has its currency, the renminbi, still pegged to the dollar, much to the disagreement of many economists and central bankers. Quite often countries will fix their exchange rates to the USD to stabilize their exchange rate, rather than allowing the free (forex) markets to fluctuate its relative value. (For more, see The Pros And Cons Of A Pegged Exchange Rate.)

One other feature of the USD that is important for novices in forex to understand is that the dollar is used as the standard currency for most commodities, such as crude oil and precious metals. So what's important to understand is that these commodities are subject to not only fluctuations in value due to the basic economic principals of supply and demand but also the relative value of the U.S. dollar, with prices highly sensitive to inflation and U.S. interest rates, which directly affect the dollar's value.

2. The Euro

Although relatively new to the world stage, the euro has quickly become the second most traded currency behind only the U.S. dollar. As well, the euro is the world's second largest reserve currency. The official currency of the majority of the nations within the eurozone, the euro was introduced to the world markets on January 1, 1999, with banknotes and coinage entering circulation three years later.

Along with being the official currency for most eurozone nations, many nations within Europe and Africa peg their currencies to the euro, for much the same reason that currencies are pegged to the USD- to stabilize the exchange rate..

With the euro being a widely used and trusted currency, it is very prevalent in the forex market, and adds liquidity to any currency pair it trades within. The euro is commonly traded by speculators as a play on the general health of the eurozone and its member nations. Political events within the eurozone can often lead to large trading volumes for the euro, especially in relation to nations that saw their local interest rates fall dramatically at the time of the euro's inception, notably Italy, Greece, Spain and Portugal. The euro may be the most "politicized" currency actively traded in the forex market. (For more, see Top 7 Questions About Currency Trading Answered.)

3. The Japanese Yen

The Japanese yen is easily the most traded currency out of Asia and viewed by many as a proxy for the underlying strength of Japan's manufacturing-export economy. As Japan's economy goes, so goes the yen (in some respects). Many use the yen to gauge the overall health of the Pan-Pacific region as well, taking economies such as South Korea, Singapore and Thailand into consideration, as those currencies are traded far less in the global forex markets.

The yen is also well known in forex circles for its role in the carry trade. With Japan having basically a zero interest rate policy for much of the the 1990s and 2000s, traders have borrowed the yen at next to no cost and used it to invest in other higher yielding currencies around the world, pocketing the rate differentials in the process. With the carry trade being such a large part of yen's presence on the international stage, the constant borrowing of the Japanese currency has made appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the greenback and the euro is a large determinant of the yen's value. (For more, see The U.S. Dollar And The Yen: An Interesting Partnership.)

4. The Great British Pound

The Great British pound, also known as the pound sterling is the fourth most traded currency in the forex market,. It also acts as a large reserve currency due to its relative value compared to other global currencies. Although the U.K. is an official member of the European Union, it chooses not to adopt the euro as its official currency for a variety of reasons, namely historic pride in the pound and maintaining control of domestic interest rates. For this reason, the pound can be viewed as a pure play on the United Kingdom. Forex traders will often base its value on the overall strength of the British economy and political stability of its government. Due to its high value relative to its peers, the pound is also an important currency benchmark for many nations and acts as a very liquid component in the forex market. (For more, see The Greatest Currency Trades Ever Made.)

5. The Swiss Franc

The Swiss franc, much like Switzerland, is viewed by many as a "neutral" currency. More correctly, the Swiss franc is considered a safe haven within the forex market, primarily due to the fact that the franc tends to move in a negative correlation to more volatile commodity currencies such as the Canadian and Australian dollars, along with U.S. Treasury yields. The Swiss National Bank has actually been known to be quite active in the forex market to ensure that the franc trades with a relatively-tight range, to reduce volatility and keep interest rates in line. (This is the relationship between the euro and the Swiss franc currency pairs. For more, see Forex: Making Sense Of The Euro/Swiss Franc Relationship.)

6. The Canadian Dollar

Last on our list we take a look at the Canadian dollar, also known as the loonie. The loonie is probably the world's foremost commodity currency, meaning that it moves in step with the commodities markets, notably crude oil, precious metals and minerals. With Canada being such a large exporter of such commodities the loonie is very volatile to movements in their underlying prices, especially crude oil. Traders often trade the Canadian dollar to speculate on the movements of these commodities or as a hedge to their holdings of those underlying contracts.

Additionally, being located in such close proximity to the world's largest consumer base, the United States, the Canadian economy, and subsequently the Canadian dollar is highly correlated to the strength of the U.S. economy and movements in the U.S. dollar as well. (For more, see Canada's Commodity Currency: Oil And The Loonie.)

The Bottom Line

As we have seen, every currency has specific features that affect its underlying value and price movements relative to other currencies in the forex market. Understanding what moves a currency and why is a pivotal step in becoming a successful participant in the forex market. (For more, see Using Pivot Points In Forex Trading.)

by Investopedia Staff

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

Read more: http://www.investopedia.com/articles/forex/11/popular-currencies-and-why-theyre-traded.asp?partner=fxweekly1#ixzz1l8WjSym0

Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.