Forex Strategy: Trading with Stochastics

Stochastics are amongst the most
popular technical indicators when it comes to Forex Trading. Unfortunately most
traders use them incorrectly. In this article we will review the correct way to
use this popular technical indicator.

George Lane developed this indicator
in the late 1950s. Stochastics measure the current close relative to the range
(high/low) over a set of periods.

Stochastics consist of two lines:

%K – Is the main line and is usually
displayed as a solid line

%D – Is simply a moving average of
the %K and is usually displayed as a dotted line

There are three types of Stochastics:
Full, fast and slow stochastics. Slow stochastics are simply a smother version
of the fast stochastics, and full stochastics are even a smother version of the
slow stochastics.

Interpretation:

Buy when %K falls below the oversold
level (below 20) and rises back above the same level.

Sell when %K rises above de
overbought level (above 80) and falls back below the same level.

The interpretation above is how most
traders and investors use them; however, it only works when the market is
trendless or ranging. When the market is trending, a reading above the
overbought territory isn't necessary a bearish signal, while a reading below de
oversold territory isn't necessary bullish signal.

Trending market

When the market is trending is
necessary to adapt the oscillator to the same conditions: When the market is
trending up, then the signals with the higher probability of success are those
in direction of the trend “Buy signals”, on the other hand when the market is
trending down, selling signals offer the lowest risk opportunities.

Thus when the market is trending up,
we will only look for oversold conditions (when the stochastics fall below the
oversold level [below 20] and rises back above the same level) to get ready to
trade, and in the same way, when the market is trending down we will only look
for overbought conditions (when the stochastics rise above de overbought level
[above 80] and falls back below the same level.

Taking all overbought/oversold
signals during a trending market will lead us to many whipsaws. If you are not
comfortable with the number of signals given, try expanding your trading to
other currency pairs.

Trend-less market

During a ranging market we could use
the interpretation explained above to trade off stochastics.

Divergence

Divergence trades are amongst the
most reliable trading signals in the Forex market. A divergence occurs either
when the indicator reaches new highs/lows and the market fails to do it or the
market reaches new highs/lows and the indicator fails to do it. Both conditions
mean that the market isn't as strong as it used to be giving us opportunities
to profit from the market.

Stochastics can also be used to
trade off divergences.

Price behavior

A price behavior can be incorporated
into any kind of system or Forex strategy. When using divergences or
overbought/oversold condition with a price behavior approach, the probability
of success of our signals increases enormously. Why? Because price dictates at
the end, how all indicators will behave, it also gives us a lot of information
about the probable direction it will take in the future.

Forex Trading Guide - Fast Market Policy

The spot foreign exchange market, at
times, exhibits extreme price volatility, a condition known as a "fast
market". Fast market conditions may be caused by various factors
including, but not limited to, news releases such as non-farm payroll numbers,
order imbalances-significantly greater orders of one type (e.g.,
"buys") than another type (e.g., "sells").

During the extreme price volatility
in fast markets, currency pair prices will "gap" and spreads widen. A
price gap occurs when the price of a currency pair either jumps or plummets
from its last bid/offer quote to a new quote, without ever trading at prices in
between those quotes. As an example, the Euro/US Dollar currency pair may move
from a bid/offer of 1.1891 – 1.1894 and begin trading at 1.1941 – 1.1944,
without ever trading at the prices between those quotes.

The standard industry practice for
currency dealers, including dealers on the interbank market, during fast market
conditions and price gaps, is to set market levels and execute orders manually
without the use of automated systems or services. The process during fast
markets is typically:

• Initially, major money center banks and other online
  price providers halt all direct dealing and their pricing engines are
  suspended,
• Currency dealers analyze event and determine the
  correct price,
• Prices enter market 20-30 pips wide or more,
• Spreads in market narrow as more currency dealers enter
  the market.

In such an event, there may be a
delay in trade execution, which may be significant, while rates are
cross-referenced to ensure valid execution. Further, stops placed close to a
market that has traded through the stop price are re-priced on the next best
tradable price. Thereby, a specified rate order does not provide a fixed-price
guarantee to the counterparty.

Gain Scope, like all currency
dealers, is a "request for quote" dealer, and follows industry
standards for fast market conditions. Gain Scope’ clients that elect to trade
during fast market conditions are responsible for losses incurred by their
account because of such trading, as clients are responsible during normal
trading conditions. These responsibilities are the same responsibilities that
Gain Scope has with its interbank counterparties during normal and fast market
conditions. Gain Scope will not be held liable for any losses due to fast or
volatile markets, electronic disruption in service, service delays, incorrect
information received from service vendors (i.e., quotations, news services)
and/or customers (i.e., client profile data, updated data).

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Forex Trading - Risk Management Part 3

Utilizing Stop Loss Order

A stop-loss is an order linked to a specific position for the purpose of
closing that position and preventing the position from accruing additional
losses. A stop-loss order placed on a Buy (or Long) position is a stop-loss
order to Sell and close that position. A stop-loss order placed on a Sell (or
Short) position is a stop-loss order to Buy and close that position. A
stop-loss order remains in effect until the position is liquidated or the
client cancels the stop-loss order. As an example, if an investor is Long (Buy)
USD at 120.27, they might wish to put in a stop-loss order to Sell at 119.49,
which would limit the loss on the position to the difference between the two
rates (120.27-119.49) should the dollar depreciate below 119.49. A stop-loss
would not be executed and the position would remain open until the market
trades at the stop-loss level. Stop-loss orders are an essential tool for
controlling your risk in currency trading.

Technorati Tags: forex trading, risk management, utilizing stop loss order, stop loss, buy stop

Forex Trading - Risk Management Part 2

Risk Management

The Forex Market is the largest and most liquid financial market in the world.
Since macroeconomic forces are one of the main drivers of the value of
currencies in the global economy, currencies tend to have the most identifiable
trend patterns. Therefore, the Forex market is a very attractive market for
active traders, and presumably where they should be the most successful.
However, success has been limited mainly for the following reasons:

Many traders come with false
expectations of the profit potential, and lack the discipline required for
trading. Short term trading is not an amateur's game and is not the way most
people will achieve quick riches. Simply because Forex trading may seem exotic
or less familiar then traditional markets (i.e. equities, futures, etc.), it
does not mean that the rules of finance and simple logic are suspended. One
cannot hope to make extraordinary gains without taking extraordinary risks, and
that means suffering inconsistent trading performance that often leads to large
losses. Trading currencies is not easy, and many traders with years of
experience still incur periodic losses. One must realize that trading takes
time to master and there are absolutely no short cuts to this process.

The most enticing aspect of trading
Forex is the high degree of leverage used. Leverage seems very attractive to
those who are expecting to turn small amounts of money into large amounts in a
short period of time. However, leverage is a double-edged sword. Just because one
lot ($10,000) of currency only requires $100 as a minimum margin deposit, it
does not mean that a trader with $1,000 in his account should be easily able to
trade 10 lots. One lot is $10,000 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
(get in with a position that is too big for their portfolio), and as a
consequence, often end up forced to exit a position at the wrong time.

For example, if your account value
is $10,000 and you place a trade for 1 lot, you are in effect, leveraging
yourself 10 to 1, which is a very significant level of leverage. Most
professional money managers will leverage no more then 3 or 4 times. Trading in
small increments with protective stops on your positions will allow one the
opportunity to be successful in Forex trading.

Technorati Tags: forex trading, risk management

Forex Trading - Know The Risk Management Part 1

Risk Warning

Trading foreign currencies is a
challenging and potentially profitable opportunity for educated and experienced
investors. However, before deciding to participate in the Forex market, you
should carefully consider your investment objectives, level of experience and
risk appetite. Most importantly, do not invest money you cannot afford to lose.

There is considerable exposure to
risk in any foreign exchange transaction. Any transaction involving currencies
involves risks including, but not limited to, the potential for changing
political and/or economic conditions that may substantially affect the price or
liquidity of a currency. Moreover, the leveraged nature of FX trading means
that any market movement will have an effect on your deposited funds
proportionally equal to the leverage factor. This may work against you as well
as for you. The possibility exists that you could sustain a total loss of
initial margin funds and be required to deposit additional funds to maintain
your position. If you fail to meet any margin call within the time prescribed,
your position will be liquidated and you will be responsible for any resulting
losses. Investors may lower their exposure to risk by employing risk-reducing
strategies such as 'stop-loss' or 'limit' orders.

There are also risks associated with
utilizing an internet-based deal execution software application including, but
not limited, to the failure of hardware and software and communications difficulties.

Technorati Tags: risk management, forex trading

Trading Strategies and Tips :

Trading Strategies and Tips :

1. Try to read the News, because News is very important than
other indicator.
Resources Link:
http://www.forexfactory.com

2. Don't trade without some analysis

3. Don't use a trick of Buy Stop and Sell Stop to trap the
Big News, Your order would not hit at your request price and
You will get a slippage or sustain a loss because of the
jumping price or Gap on that volatile market (hectic).
"Don't use a trapping technique when a big news happens !"

4. Don't be greedy

5. You must control your risk (risk and money management)

6. Don't trade without a Stop Loss (ideal SL = 40 pips)

7. Try to learn in Demo before you try the Real Account

8. If you use a Robot Trading (EA), you must control it,
because there is No Robot that can always profit.
Don't trust someone that can promise you that his Robot is
always profit ! "Robot or EA is only a TOOLS."

9. The trend is your friend, just follow the trend

10. Use second opinion forex signal & analysis

Technorati Tags: trading strategy, forex trading