Forex Strategies

FXCM and DailyFX are happy to announce the winners of Julys $10,000 Monthly Challenge! July’s $10,000 contest wrapped up with K.I. from Kapolei Hawaii taking first prize with an astounding 865% return. Second place was awarded to D.L, from California, produced a monthly return of 431% Rounding out our monthly winners, third place was S.G, (348%). B.B. in fourth. (341%) and finally K.V. came in 5th with a 334% return. Congratulations to all of last month’s challenge winners!

July’s trading contest was an exciting event, with our ultimate winner beating out tens of thousands of competitors with a decisive finish. As well, we had a close race for third place, with just 14% points separating our 3rd and 5th place finishers. So what exactly happened in the month of July? To help get a better insight into last month’s contest, I was able to interview our 2nd place winner D.L.



First off, D.L. is a part time trader who enjoys his full time job as a retail sales trader. He has been trading now for 10 years, and now strictly focuses on the Forex market. He enjoys trading Forex because it allows him to taking advantage of the 24 Hour market conditions. D.L mentioned that he likes to places his traders early in the morning and then monitor his trades throughout the day using the FXCM mobile app!


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The EUR/USD is beginning to pair losses after closing lower for 3 consecutive sessions and declining as much as 219 pips for the week. The current daily low for the EUR/SUD resides at 1.0985, but technical traders will continue to monitor the psychological 1.1000 level going into tomorrow’s University of Michigan’s Confidence figures and Janet Yellen’s speech at the Boston Fed conference. Both of these events are marked as high importance events, with both having the ability to shift the direction of the EUR/USD.

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Gold prices continue to fall this afternoon, ahead of today’s U.S presidential election. From yesterday’s high of $1,304.20, the metal has now declined as much as $31.16 over the fits two trading sessions of the week. This move should be seen as significant as Gold prices had previously advanced for 6 consecutive trading days. With this abrupt change in direction, traders should continue to monitor the price of Gold as election results poor in and present event risk for the metal.

Technically, Gold is currently trading near an important long term value of support. This point is denoted in the graph below as 200 day SMA (simple moving average) and is found at a price of $1,278.62. This point is interesting graphically, as a move below this point may suggest a turn in Gold’s 2016 trend. So far for the 2016 trading year gold has advanced as much as $313.33, hover this trend has been slowly waning with prices declining over the last 4 months.

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Some forex traders use the same trading strategy for all currencies, while others use entirely different strategies depending on the currency pairs being traded. Or, traders may use multiple strategies with multiple forex pairs, in order to perhaps increase profits while reducing the risk of drawdown resulting from over-concentration on a single strategy.

Expert advisors (EA) make it possible to optimize the input parameters, yet they don’t necessarily make it easier to put separate strategies together into a single system. And, testing may show increased risk from overlapping or correlated drawdowns when disparate forex strategies are merged together.

Using algorithms, a trading system can check currency pairs and perform specific operations according to input parameters. A multicurrency, multi-system EA can be crafted in order to assess all trading strategies side-by-side. This may be helpful in case only a single EA is permitted to access a given account.

It can be challenging to develop a forex trading system that works well across different currency pairs under a variety of conditions. Most of the widely-known systems for multicurrency trading are based on trend-following strategies, such as Donchian-channel breakouts, and are designed to profit from very long-term trends. Yet, a multicurrency strategy must clearly show a winning “edge” over the typical time horizons for forex traders.

For example, in order for a system to work well with both EUR/USD and USD/JPY the signals must have a high likelihood of success in spite of volatility and potential correlation between the two pairs. And, trades must become winners during fairly short time periods. If not, then trading correlated pairs may create a risk of over-concentration and excessive drawdown.

There are many profitable opportunities in trading the four major currency pairs — EUR/USD, GBP/USD, USD/JPY and USD/CHF. I’ve been enjoying good success by using a strategy based on Mathematical Expectation (ME). I use ME to analyze data and spot comprehensive trading opportunities and calculate entry/exit points for trading the four major currency pairs.

Mathematical expectation predicts the likelihood that a forex trade will win

A well-programmed EA can use ME tools to help build systems that work across multiple currency pairs. I’ve helped developed a couple of systems that work in real-time and show long-term profitability through back-testing.

Recently, traders have become more aware of the drawbacks that arise when using data-mining techniques to back-test and fine-tune strategies for forex trading systems. Alternative system-development methods like System Parameter Permutation (SPP) are now available and can help traders avoid the issue of data-mining bias.

If done carefully, SPP or data mining will help build a set of good-quality indicators to generate signals across the four major currency pairs. Then, the expert advisor calculates Mathematical Expectation to see whether the trade is likely to be profitable or not.

Finally, it’s a matter of specifying filters and testing to find precise strategies that consistently result in winning, profitable signals. Entry and exit points are calculated by the mechanical trading system using mathematical expectation adjusted for current volatility.

Read more here...MATHEMATICAL EXPECTATION IN TRADING

Gold Prices have dipped as the US Dollar gains strength ahead of this morning’s USD ISM Manufacturing data. Expectations for today’s event are set at 56.2, and as a high importance event its release is expected to directly affect US Dollar priced assets including Gold.

Technically, gold prices have declined substantially after trading to yearly highs earlier in the week at $1,264.06. Now, prices are trading back below their 10 day EMA (exponential moving average), which is found at $1,244.54. A daily close below this average should be considered as a bearish turn in the market, and traders should note that gold prices have not closed below this line since January 30th of this year. If prices decline further, on continued US Dollar strength, gold traders may begin looking for support near the February 21st low of $1,226.23.

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The USD/CAD is trading higher this morning as the US Dollar strengthens ahead of tomorrow’s FOMC rate decision. Expectations are set to see key rates to rise to 0.75%, and traders will also be looking to Fed Chair Janet Yellen’s conference to provide further direction for US Dollar based pairs.

Technically, the USD/CAD is currently trading below the standing 2017 high at 1.3535. Despite the markets retracement, the pair remains supported in a short term uptrend by its 10 day EMA (exponential moving average), which is found at 1.3438. In the event that tomorrows event is US Dollar bullish, traders will look for the USD/CAD to bounce and trade back towards yearly highs. Alternatively, in the event of a selloff, the pair will first need to breach the 10 day EMA before trading towards new lower lows.


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Support and resistance is key for setting stops. For the trader that wants to buy, they likely don’t want to sit in the trade as prices are driving down to fresh lows. And on the other side, the trader looking to sell probably doesn’t want to sit in a short position while prices are ripping in their face. Support and resistance can help to eliminate those scenarios, as traders looking to buy can wait for support to show, place a stop on the other side so that they remain in the trade as long as support remains respected.

Psychological Levels

We’re going to start off with one of the more simple support and resistance mechanisms, and that’s ‘psychological levels’. Psychological levels, often also referred to as ‘whole number support and resistance’ are simply rounded prices that may elicit a behavioral change within a market. Think the level of parity on EUR/USD. If EUR/USD was trading below parity, even if by only a single pip, that price would seem significantly cheaper than if it were trading above by a single pip. Most human beings will perceive a price of 1.0001 as significantly more expensive than the 2 pips away from .9999. This isn’t necessarily an automatic reaction, where prices above parity will be promptly sold simply because prices are above 1.0000, but this is the type of relationship that will have a tendency to play out with future price action. As drivers continue to show on both sides of the Euro, the bar will be higher for a continued bullish movement, as this psychological resistance can act as a hindrance to price’s further movement. This is the same reason many retail outlets will employ prices that end in .99; it allows them to capture as much profit as possible without the product ‘seeming’ or ‘appearing’ more expensive.

Are All Whole Numbers Equally Important?

The ‘more rounded’ the level, the more likely it is to elicit support or resistance. But as is normally the case in markets, exceptions are aplenty. In many cases, the level of 1.1000 will be more interesting as a potential support or resistance area than a price of 1.1100 or 1.0900. This can change, and each situation is unique, but if there is ‘confluence’ between a psychological level and another form of support or resistance, whether that comes from a Fibonacci retracement or a pivot point or any other mechanism of identifying levels, then the less-rounded level may elicit more interest from market participants.

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Successful investors understand the importance of creating a well-thought out long-term financial plan. A pilot would not fly an airplane without having a well-thought out flight plan about how they will execute their next flight and contingencies that may arise.

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In the U.S., market participants focus the majority of their attention on three indices – S&P 500, Dow Jones Industrial Average, and Nasdaq 100. These indices are of course highly correlated to one another as they track companies impacted by the same business cycle and other important macroeconomic factors.

Additionally, there is some cross-over in the stocks that are included in the ‘big three’. For example, the technology giant Apple Inc. (AAPL) is a constituent included in all three. However, there are big differences between the Dow and Nasdaq and S&P 500 - such as the number and type of stocks included in each index and how index values are calculated.

How is the Dow Jones, Nasdaq, and S&P 500 Calculated?

The S&P 500, created by Standard & Poor’s in 1962, represents the broadest measure of the U.S. economy among the three major indices. The index value is calculated by weighting each company according to its market capitalization and then a divisor, which is set by S&P, is applied to produce the final value. The simple calculation is as such: sum of the market cap of all stocks included divided by the divisor, or total market cap / divisor.

The Dow Jones Industrial Average, often referred to in short as the ‘Dow’, is the oldest index, dating back to 1896 and is the most globally well known. The Dow represents 30 large cap stocks as determined by the Wall Street Journal. Unlike the S&P 500 and the Nasdaq 100, the weighting for each component in the Dow Jones Industrial Average is ranked by share price, and then a divisor applied to create the final value.
The Nasdaq 100 is the youngest of the three indices having begun trading in 1985. It represents the largest non-financial companies listed on the Nasdaq exchange and is generally regarded as a technology index given the heavy weighting given to tech-based companies. The Nasdaq 100 is based on the market capitalization of its components.

Trading Differences Between Dow Jones, S&P 500 and Nasdaq

Despite the tight correlation between the major U.S. indices, they each have their own ‘personalities’ in how they trade due to the differing make-up for each index and importance of certain companies and groups of companies (sectors). The S&P 500 is the least impacted from day-to-day by any single one stock given it is comprised of so many names. With that said, there are a handful of sectors which have the most importance on the index.

Major Differences between Dow, Nasdaq and S&P 500: Breakdown of weightings



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