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This is a discussion on Forex Articles within the General Discussion forums, part of the Trading Forum category; The stochastic oscillator measures the closing price of a candlestick against the average closing price of a certain amount of ...

          
   
  1. #141
    Senior Member ArticleMan's Avatar
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    Using the Stochastic Oscillator in Trading

    The stochastic oscillator measures the closing price of a candlestick against the average closing price of a certain amount of candlesticks before it. For example, it shows whether this candlestick is overbought or oversold as far as the overall range of the market is concerned. This momentum indicator is not to be used in a trending market, but rather a market that has been going sideways. While there are strategies that use them with trends, that is less normal than looking at this as an opportunity to confirm or ignore support or resistance.

    Forex Articles-stoch2.png


    The stochastic oscillator is shown in a window at the bottom of the chart, separate from price. It has two lines which act like moving averages, the crisscross the panel. The standard situation is to see the 20 and the 80 level marked as both the overbought and oversold condition.

    Occasionally the indicator will crisscross the lines above the 80, which of course is the overbought condition, or below the 20, which is the oversold condition. This is how most people will use stochastic oscillators, as a sign that perhaps it’s time to buy and sell based upon a resumption of what we seen over the last several candles. However, in a trend this reliability tends to disappear. It is because of this that you will often see stochastics offer more reliability when you include support and resistance.

    Sometimes, people will use the stochastic oscillator for finding divergence. Divergence is when the momentum of an asset isn’t matching the price. For example, we could be seeing “lower highs” in the stochastic oscillator, but “higher highs” in the price window. This shows that perhaps the underlying momentum is starting to slow down. Looking at the chart below, you can see that the Euro has been rallying against the Polish zloty over the last several candlesticks, but at the same time the “highs” in the stochastic oscillator are getting lower. This suggests that perhaps the momentum is slowing down and it could lead to a selloff. This isn’t reason enough to start shorting the market, but it does give you a bit of a “heads up” as to what could happen.


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  2. #142
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    Low Risk Forex Trading

    One of the things that attracts many people to Forex trading is the potential for significant profits in a relatively small amount of time due to the use of leverage. However, with the potential for gains comes a significant potential for losses that must not be overlooked. To protect your account, it's a good idea to look at the bigger picture, which means not just eying the potential profits, but looking for ways to trade in a way that has lower risk. Your rewards may be lower in the short term, but with a low risk Forex trading strategy you will hopefully see more success in the long term.

    Think of it this way: there is no business that you can get into that doesn’t have a certain amount of risk. For example, if you decided to open up a convenience store, there is also the possibility that you could not make enough money to keep the doors open. However, if you do the right research and make the right business decisions, you increase your likelihood of building a successful business. In this sense, your trading business is very similar. You must do proper market research in order to make solid trading decisions. You'll still have some risk when you trade, but the risk will be reduced by your own understanding of the markets and how they move.

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  3. #143
    Senior Member Taylor Woods's Avatar
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    I am happy that you guys are sharing your experiences with us. Traders will require adequate trading understanding to ensure rational decision making process. Again, a forex trader must try to attain sufficient trading knowledge with the help of various learning tolls. And in the present time, forex forums are being established as an educational tool for the traders where expert traders are sharing their reviews and suggestions to the beginners.

  4. #144
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    How Falling Stock Markets Affect the Forex Market

    Many Forex traders focus too narrowly on the currency pair or pairs they are trading. While it is important to be focused on a short-term chart if you are trading something on a short-term time horizon, it can help your profitability a lot if you look at the market in a broader way, as part of your process of deciding which currency pair to trade, and in which direction. Although it is possible to do OK by only looking at the Forex market, you could do better by considering what is going on in stock and commodity markets too when you analyze the Forex market. One reason why would be if there were a statistical correlation between the movement of the stock market and certain currencies or commodities. Furthermore, if such correlations can be found, it might be that they become even stronger or weaker under particular market conditions. This should be useful information for Forex traders as it can be used to move the odds in their favor.

    Forex Articles-ge.usweekly.png


    What is a Correlation?

    Correlation is simply the measurement of how much the prices of two different things have moved in the same direction over the same time. For example, if the prices of A and B always go up or down by the same percentage every day, completely in sync, then A and B would have a correlation coefficient of 1 (perfect positive correlation). If they always move in precisely the opposite directions by the same amount, they would have a correlation coefficient of -1 (perfect negative correlation). If there is no statistical relationship between the price movements of A and B at all, they will have a correlation coefficient of 0 (perfectly uncorrelated). I won't detail the full formula of how the correlation coefficient between two variables is calculated here: it is enough to note that when such a statistical relationship can be proven over a long time period, we may be able to say that this relationship is likely to continue for some time in the future. However, it is important to understand that there are times when market correlations seem to break down entirely, so it is probably best to use correlation as a filtering tool for trades and not as the basis of an entire trading strategy.

    Currency / Stock Market Correlations

    We can best illustrate the concept of using correlation between a stock market and currencies by taking the major U.S. stock market index, the S&P 500, which measures the valuation of the 500 largest publicly quoted U.S. companies by market capitalization and checking its statistical correlation with some Forex currency pairs which are priced in USD. That way, we can easily see the simple correlation between the non-USD currency and the stock market as measured by this index. As an additional step, we can also see whether the correlations were different during bear market periods, which are defined as the periods during which the market falls by at least 20% in value. Bull markets are defined as the periods during which the market rises by at least 20% in value. I used the time period from 2001 to the end of November 2019, a period more than 18 years long. The correlation coefficients between the S&P 500 Index and certain currencies and the precious metal, gold, are shown in the table below.



    Historic Correlation Data


    So, what does this data tell us? Starting with the leftmost column which shows the correlation over the entire period of almost 19 years, we can see that the strongest correlation between the U.S. stock market and major currencies is a negative correlation with the Japanese Yen, with a correlation coefficient of -0.31. This is a strong negative correlation, and suggests that when the stock market rises, the Yen tends to fall, and vice versa. Now let’s look at the rightmost column, which is the average of the correlation coefficients measured during the four bear markets which have occurred since 2001. Interestingly, the negative correlation is even stronger here, at -0.42. This suggests that when the U.S. stock market is selling off, the Japanese Yen is even more likely to rise in value than it is to fall when stocks are rising. This suggests that the Japanese Yen has tended to act as a “safe-haven”, i.e. something money flows into when stock markets are riled up and selling off, which often occurs during episodes of crisis.

    In addition to the Japanese Yen, I also included two other assets typically seen as safe-havens: the Swiss Franc, and Gold. The Swiss Franc has a very slight negative correlation overall with the S&P 500 Index of -0.07, which gets just a little stronger during bear markets. This suggests that the Swiss Franc is maybe not as much of a safe-haven as its often thought to be yet is still has a (small) negative correlation with stocks. Turning to Gold, the case gets stronger: overall, it is perfectly uncorrelated with the S&P 500 Index, but in each of the four bear markets analyzed, there was a significantly stronger negative correlation. Finally, I threw in the Euro just for variety, and it seems to go up when stocks go up, and down when stocks go down, so it doesn’t look like much of a safe-haven over the full period.

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    Trading With Small Account

    The advantages

    Let’s start with the advantages of trading a small account. The most obvious benefit to trading a small account is that you do not need to worry about moving the market against yourself if you jump in and out of it. If you are trying to close out a 10,000 unit position, you are going to have much trouble doing so at just about any price. However, if you are trying to trade 100 million unit position, it’s an entirely different situation. In this sense, the small trader has much more flexibility when it comes to putting a position on or off.

    The disadvantages

    There are a multitude of disadvantages for a small account. The most obvious one is that it’s going to be difficult to make the rewards worth your time. For somebody who makes $100,000 a year, it’s not going to be exciting to gain $100 at the end of the same year through trading. This comes down to patience, and whether or not you have any. Most people I know don’t. This is why most small traders have major issues, as the lack of significant reward makes it difficult to stay focused. This leads to over trading, or over leveraging your position.

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  6. #146
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    What is a Pending Order in Forex

    When we first start trading Forex, we most often play what is known as a “market order” to get involved. You simply click the button to buy or sell and get involved. The market order tells the broker that you want to get involved to the best price possible, or what is known as the “market price.” There is no guarantee that you will get the price that you see on the chart or order window, but as Forex is extraordinarily liquid, most of the time it works out.

    Pending orders

    Pending orders in Forex, or any other market for that matter are a set of instructions that you give your broker on entering or exiting a position. Sometimes with more complex platforms, you can have multiple actions in the same order. At its most basic level, you are looking at a scenario where you are telling the market you wish to get in or out of a position at a specific price. If the market does not reach that price, then nothing happens. There are multiple types of orders but will take a look at the most basic ones that you are most likely to find.



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  7. #147
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    What is Slippage in Forex

    When you begin to trade Forex, you are inundated with a whole host of new terms. One of the ones that you will most certainly run into is what is known as ďslippage.Ē Simply put, slippage is a difference between the price you see and the price that you pay. For example, you may find yourself looking at the EUR/USD pair with an ask price of 1.1267 as you press the button. However, you notice that you got filled at 1.1269. This is what would be slippage, by two pips.

    Itís not necessarily nefarious

    The fact that you got slipped on the trade isnít necessarily a nefarious thing. Unfortunately, in the past there were several Forex brokers that would take liberties with their clients. This was long before currency trading became much more common, and perhaps regulated in larger countries. After all, even places like the United States were a bit behind it when it came to investor protections in the Forex markets, because it was a sudden explosion of interest that caught many regulators off guard. Beyond that, itís a noncentralized market, so itís very easy to see how difficult it was for regulators to get their hands around the entire situation.

    Fast-forward to present day, and most Forex brokers are heavily regulated. (In fact, if you are working with a Forex broker that is not regulated, you should withdraw your money immediately and place your money in a more reputable broker.) While one could make an argument that itís awfully tempting to slip your customers every time, they try to place a trade, the reality is that most accounts arenít large enough for that to make the risk acceptable to a broker even if they were less than honest. The fines that some of the regulatory bodies have laid out on brokers over the last several years had been massive, and it has cleaned up the industry drastically. With the average retail account being roughly $2000 in the United States, a few cents here and there simply will be worth the millions of dollars that a brokerage would face. Research shows that accounts around the world are roughly the same size on average as well. The math simply doesnít work out.

    Most of the time, there is a perfectly easy explanation

    Iíd be willing to bet that over 95% of the time that I read some type of negative review online about slippage at a brokerage firm, it has something to do with trading the news. Trading the news is a suckerís game, and although you can get very lucky occasionally, you need to understand that liquidity is a major issue. What this means is that there arenít as many orders. So for example, if you are looking to buy the Swiss franc, there needs to be somebody willing to sell it. When you put in a market order, you are telling the broker that you want to buy the Swiss franc at the best price available. What do you think that means if that best price is three pips away? Exactly. You just bought the Swiss franc three pips away from the price you are looking at. This has nothing to do with the broker, they are simply there to match orders. If thereís nobody there to sell you the Swiss franc at the quantity you want, they are simply facilitating the order that you gave them.

    During normal trading, slippage is almost unheard of, because the Forex markets of course are some of the most liquid in the world. There are some rather thin pairs that tend to slip more than others. For example, if you are trading something like the NOK/JPY pair, it will more than likely not have the volume of one of the major pairs like the USD/CAD pair. (This is exactly why the spread is higher in these pairs.)

    The solution

    If you donít want to be slipped while trading, you can put in a limit order, telling the broker that you are willing to pay this price or better for a currency. If the markets skip your price, you simply are not filled. At least you havenít paid more than you wanted to.

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  8. #148
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    Head and Shoulders Pattern

    Without a doubt, one of the most common patterns is the “head and shoulders pattern.” In fact, there are some traders out there that will trade only this pattern, but there are a couple of things to keep in mind before you use this pattern, just as anything else.

    The first thought that comes to mind is that nothing is 100% guaranteed. However, some of the more obvious patterns, such as the head and shoulders pattern, will attract more flow as everybody else sees the same thing. Think of it this way: if everybody in the market sees a potential buying or selling opportunity, it makes sense that a lot of traders will follow it.

    Defining the pattern


    The first thing that we need to do is to find what the pattern is. The head and shoulders pattern features three parts, the left shoulder, the head, and the right shoulder. It is a pattern where you get a high that forms, a pullback, a higher high, and then a low or high. In other words, the third part of the pattern, the right shoulder, is a lower high from the head.

    Take a look at the GBP/CHF four hour chart just below. It is an example of what a head and shoulders look like. The high labeled “1”, is what is called the left shoulder. The second peak that is labeled “2” is the head. And then finally the third peak labeled “3” is what is known as the right shoulder. What this represents is an uptrend that is running out of momentum.

    Forex Articles-gbpchfhead.png


    I would also point out the red line underneath the three humps that make up the pattern. This is known as the “neck line” and is the trigger to start selling. Once we break down below that level, everybody in the previous three waves higher are now underwater and will have to sell their positions to exit the market. That presents an opportunity as it pushes even more downward pressure into the marketplace.

    Not all head and shoulders patterns need to be negative

    As is the case with many technical patterns, there is an inverse pattern. This is simply a series of three lows, starting with the left hand shoulder being a bounce back to the upside, followed by a break down to form the head, a bounce back to the upside, and then a “higher low” forming the third shoulder. Simply put, it is an “upside down head and shoulders pattern.” This means that the sellers are running out of momentum, and the market could very well rally significantly. Look at the following chart and see how this works in an inverse pattern. You should recognize that it is the exact same thing, only turned upside down.

    Forex Articles-nzdcadinverse.png


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  9. #149
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    What is a PAMM Account in Forex

    You will see that some Forex / CFD brokerages, usually the larger ones, offer a “PAMM Account”. What is this type of account? Simply put, “PAMM” stands for “percentage allocation management module” or “percentage allocation money management”. In other words, a PAMM account is basically a managed account where one trader trades on behalf of others through his or her account. PAMM accounts work by the Forex / CFD brokerage using a software application which allows the brokerage’s clients the ability to assign part or all their account to management by a particular trader. The managing trader then trades his own money but piggybacked onto that is the money of other clients, who each receive a percentage share of the profits or losses made by the trader into their own accounts.

    Example Illustration

    Let’s imagine that you are a retail trader with your own account and other traders with the same broker ask you to manage their accounts. Let’s say that you have $10,000 of your own capital and that Trader B gives you $40,000 to manage and Trader C gives you $50,000 to manage. You are now trading a total of $100,000 with your percentage allocation being 10%. Trader B’s allocation will be 40% and Trader C will be allocated 50% in line with the percentage contributed to the total fund by each trader. You put in an order to buy 1 full lot of EUR/USD. Your broker will allocate the order between the parties for this trade as follows: 0.1 lot to you, 0.4 lots to Trader B, and 0.5 lots to Trader C.

    Advantages of PAMM Account

    A PAMM account allows a trader to manage other people’s money with ease, just by trading normally through his existing platform. The PAMM software makes all the required calculations. There is effectively no limit to the number of “clients” the holder of a PAMM account can manage money for. The account manager can profit from their own trading and take a percentage of the profits from the money he or she manages as well. When the trading goes well and is profitable, it is a win-win all round.

    PAMM accounts are policed by the broker, and investors have peace of mind as they know that the money manager has no power to access the actual funds contributed as a withdrawal from the brokerage. Contrast this with a situation where the investor must write a check and hand it over to a money manager, and you’ll instantly see a big advantage of a PAMM account.

    Disadvantages of PAMM Account

    The most obvious disadvantage of the PAMM account is that all the parties involved must be clients of the same Forex / CFD brokerage. Most of the larger brokerages offer PAMM accounts, but there are other solutions available in the market which achieve the same result but can bridge between different brokerages and trading platforms, such as copy trading software, or other brands which offer PAMM-style set-ups but which have bridges so can connect to accounts at most brokerages. However, there is often in practice a small but real technical advantage to having all the parties working through the same brokerage and platform, reducing the risk of latency problems or communication errors.

    How Does it Work?

    Many brokerages offering PAMM accounts maintain a detailed list of their PAMM money managers so that investors can do some research and decide who they want to manage their funds. The lists usually include details of each trader’s historical performances and more information about who they are and what their trading philosophy is. The broker provides a Limited Power of Attorney (LPOA) document which both parties sign which gives the money manager the right to manage the investor’s money under agreed terms and conditions: the investors may of course terminate it at any time and have control of the trading of their funds transferred back to them. Monitoring, review, record keeping, etc. is all facilitated by the brokerage offering the PAMM account.

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  10. #150
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    How to Trade Wedge Chart Patterns

    Looking at the wedge chart pattern, it’s easy to see why it’s so popular with traders. This is because it’s easy to identify, and therefore has a bit “self-fulfilling prophecy” aspect to it. The fact that it also has a simple measuring tool built into it doesn’t hurt either, as it is very simple to use as a tool.

    Forex Articles-dax30-m30-alpari-international.png


    Identifying a wedge


    The first thing that we need to do is identify what a wedge actually is. A wedge is simply two trendlines that converge towards an apex. In other words, price is compressing from both selling and buying pressure. It’s like a triangle but doesn’t converge in a horizontal manner. In other words, you may have an uptrend line as per usual, but at the top of trading during the last several candlesticks, the sellers are becoming a bit more aggressive, compressing the market.

    Forex Articles-usdcad-d1-alpari-international-3.png


    In this example, it’s what is known as a “rising wedge.” A rising wedge shows compression in and uptrend that signals that there could be something wrong. We are losing some of our momentum, and as a result the highs just aren’t as impressive as they once were. The beauty of this pattern is that a break down below the uptrend line signals that we are going to the bottom of the pattern itself, denoted by the blue line. Beyond that, what’s even more important is that at the very least most traders around the world will see that the trend line had been broken. So even if they are trading wedge patterns, almost all traders pay attention to trendlines. When they get broken, the catch is everybody’s attention.

    The stop loss would be placed on the other side of the pattern, and in this case it’s an easy 1:2 risk to reward ratio. By paying attention to the wedge, you are noticing that the market is running out of momentum, and that an eminent reversal may be coming. Wedges can be bullish as well.

    Like almost all chart patterns, there is the opposite as well. In that case, you are talking about the “falling wedge.” As you can see on the chart below, the US dollar had been falling against the Canadian dollar quite sharply, and then drifted a bit lower. Notice that the trajectory of the lows weren’t as strong as previous, and then of course the highs were becoming as aggressive as well.

    As you draw the two trendlines, you can see that a wedge is most certainly forming. Beyond that, we reached the blue line which represents the top of the wedge almost immediately on the breakout. The stop loss would have been on the other side of the wedge, which also would’ve been supported by the hammer that made up the last candle of the wedge before the breakout. If you look forward several days, you can see that the same area offered support on a pullback at least twice.

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    Wedge Pattern - indicator for MetaTrader 4

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