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Techniques

Technical Analysis

Technical analysis is the study of price and volume data with the goal of anticipating changes in the direction of price. Each price bar on the chart is the culmination of the opinions of millions of market participants and the resulting supply and demand. Market participants will buy if they think the price will go up. They will sell if they think the price will go down. They are undecided if the price is likely to go sideways or nowhere. Technical analysis is best suited for short-term trading.

Technical analysis is not a crystal ball. Forget predictions! A line charts tells you nothing without more about what the market will do. Also need to understand is how should use this information. Look at a chart and see what it is telling you about what the market is doing right now. Look back and see what the market has done.

Chart reading is a skill like any other skills. Only with knowledge of get rich quick -trading systems you are dangerous to yourself, because you are armed with a false sense of competence. The truth is that trading is easy to learn, but applying it is extremely difficult. It takes time and practice to become a master.

Technical Indicators

Moving Average
Relative Strength Index
Average Directional Movement Index
Envelopes
Bollinger Bands
Fractals
Williams Percent Range
Commodity Channel Index
Standard Deviation
Momentum
Stochastic Oscillator
Ichimoku Kinko Hyo

Risk Management

The reason many traders lose money in forex is not lack of experience. It is poor risk and money management.

TIPS: Educate yourself about forex. Do not risk more than you can afford to lose. Have a forex trading plan. Trade with a stop loss, if you do not follow trading all time. Use take profits. Limit your use of leverage. Diversify your forex portfolio. Have realistic profit expectations. Manage your emotions. Prepare for the worst.

Recommended lot size? First you have to calculate lot size for your order(s). Calculate Lot Size = ((Margin * Percentage) ÷ Pip Amount) ÷ 100k. Check out more the systems of risk and money management.

The basic terms for forex trader need to know: Lot size, Leverage, Margin, Spread, Equity, Pip, Exchange rate, Bid Price, Ask Price, Quote, Long Position, Short Position, Support, Resistance, Take Profit (TP) and Stop Loss (SL).


Statistical Measures:
Volatility and Correlation

You must understand sensitivity to market to be an effective trader. This is particularly so when trading forex. Because currencies are priced in pairs. Volatility is important, and correlation is a good measure also.

Correlation

Correlation is the statistical measure of the relationship between two currencies. The correlation coefficient ranges between -1 and +1. A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

For example, EUR/USD and GBP/USD have usually a very strong positive correlation of 0.95. This implies that when the EUR/USD rallies, the GBP/USD has also rallied 95% of the time. Sometimes correlation can be only 0.66.

By contrast, the EUR/USD and USD/CHF have a near-perfect negative correlation of -1.00. This implies that 100% of the time, when the EUR/USD rallied, USD/CHF sold off. This relationship holds relatively stable.

The correlations have not always remain stable. Take USD/CAD and USD/CHF, with a coefficient of 0.95. They had a strong positive correlation over the past year, but the relationship deteriorated significantly in February 2010 for a number of reasons, including the rally in oil prices and the hawkishness of the Bank of Canada.

Sentiment and global economic factors are very dynamic and can even change on a daily basis. Strong correlations today might not be in line with the longer-term correlation between two currency pairs. That is why taking a look at the six-month trailing correlation is also very important. This provides a clearer perspective on the average six-month relationship between the two currency pairs, which tends to be more accurate.

The correlations change for a variety of reasons, the most common of which include diverging monetary policies, a certain currency pairs sensitivity to commodity prices, as well as unique economic and political factors. It is necessary to update your correlations numbers almost every day.

EUR/USD and USD/CHF move in opposite directions nearly 100% of time. EUR/USD and AUD/USD or NZD/USD double up on the same position since the correlations are strong. EUR/USD and AUD/USD correlation is traditionally not 100% positive.

The best stable negative correrations have USD/CHF with EUR/USD and GBP/USD with USD/CAD for the hedge traders.


Volatility

Correlation



EUR/USD


USD/CHF

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