Java Indo Forex

Thursday, May 1, 2008

Psychology of Trading Strategy (Psycho-Strategy)

What’s the Psychology of Trading Strategy (Psycho-Strategy)?

I’m sure you understand that the Psycho-strategy is a mere metaphor, however we are going to use the same Forex terminology to describe our hypothetical strategy.

The Psycho-strategy is the mind frame you have to set your mind to if you want to make constantly profit in the world of Forex. It’s the way you have to think and feel in the three stages of the trade; before opening a trade, while the trade is running and after closing the trade.

The first thing I have to advice you before reading this article is that you have to to believe that using the Psycho-strategy is not less important than using your technical and fundamental strategies if not important! if you can’t totally believe that I recommend you to skip this article and continue with your favorite technical and fundamental venerable strategies.

The Psychology of Trading Strategy (Psycho-strategy) setup:

The the Psycho-strategy uses three indicators: Discipline indicator, Greedy oscillator and Fear oscillator.We use these indicators not to tell us when to enter the market (there are much better techniques to enter the marker where the Psycho-strategy can help) but we are using them to refine our overall trading practice hence our success in the Forex world.

Let’s start with the most important indicator; the Discipline indicator:

Discipline indicator:

It is unquestionable that nobody could achieve a goal if he have not already set this goal. Give the best archer the best tools and tell him to shot aimless target! what do you think he will do?
In the Forex (and in live un general) you have to define your goal and keep it obvious if you want to achieve it. For example you have to determine how many pips you want to gain daily, weekly and monthly from your trading.

Your goal have to be realistic, attainable and measurable: realistic goal means you have to set a goal that is not impossible for you and anybody to achieve, for example you can be a millionaire from trading Forex for few weeks or months. attainable goal means you can easily achieve the goal for example gaining 100 pips daily is not impossible in Forex trading so it’s a realistic goal but 25 pips per day is more attainable goal, get it?

The goal you have set have to be measurable which means you can easily say I’ve achieved my goal of today or this month. Goals like “I want to be a millionaire or I want to get the maximum pips the market could offer” are not measurable goals.

The first line in the Discipline indicator is the Goal line, the second line in the Discipline indicator is the Rules line.

Any successful person has his set of rules which he extremely bind himself to it, you too have to set you trading rules and obey them to the end, for example one of successful traders rules “Set stop loss before trade”.

You have to discover your trading rules and more important to obey them to the end, of course you can change this rules occasionally (i.e. every six months you have to review your trading rules) but once you have set them you can’t change them “Rules couldn’t’ be changed while playing the game”.

The Discipline indicator now has two lines: Goal line and Rules line; these lines have to be unbreakable, untouchable, you have to limit you trade between these lines and don’ let Greedy or Fear indicators to breaks your Goal and Rules lines.

Fear and Greedy oscillators:

The fear making of loss and Greedy of making more profits are very like bulls and bears that imagined fighting each others and move the market accordingly. Both of the fear and greedy trying to break your Discipline indicators lines.

Fear of losing maybe advising you to ignore setting stop loss for you trade and break one of your trade rules. Fear maybe asking you to close a profitable trade once the market start to move against you for awhile.

Greedy acts the same trying to break your rules but inversely of fear; Greedy will tell you to continue in a profitable trade although you Goal has been achieved seeking more pips. Greedy will advice you to remove your trailing stop hoping o make the maximum of he market.

As long as Fear indicator and Greedy indicator oscillate between the Discipline upper line - Goal line - and lower line - Rules line - you will constantly make profits with the Psycho-strategy!

Monday, April 28, 2008

What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

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Technical Analysis by Currency Traders

Technical analysis is a method used by currency traders to predict price movements and future market trends by studying what has occurred in the past using charts. Technical analysis is concerned with what has actually happened in the market, rather than what should happen, and takes into account the price of instruments and the volume of trading, and creates charts from that data as a primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles :

Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it. Some of these factors are : fundamentals (inflation, interest rates, etc.), supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. There are also recognized patterns that repeat themselves on a consistent basis.
History repeats itself. Forex chart patterns have been recognized and categorized for over 100 years, and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time. Since patterns have worked well in the past, it is assumed that they will continue to work well into the future.

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Fundamental Analysis: What Is It?

In this section we are going to review the basics of fundamental analysis, examine how it can be broken down into quantitative and qualitative factors, introduce the subject of intrinsic value and conclude with some of the downfalls of using this technique.

The Very Basics

When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements. Fundamental analysis serves to answer questions, such as :

Is the company’s revenue growing?
Is it actually making a profit?
Is it in a strong-enough position to beat out its competitors in the future?
Is it able to repay its debts?
Is management trying to "cook the books"?

Of course, these are very involved questions, and there are literally hundreds of others you might have about a company. It all really boils down to one question: Is the company’s stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question. Note: The term fundamental analysis is used most often in the context of stocks, but you can perform fundamental analysis on any security, from a bond to a derivative. As long as you look at the economic fundamentals, you are doing fundamental analysis. For the purpose of this tutorial, fundamental analysis always is referred to in the context of stocks.

Fundamentals: Quantitative and Qualitative

You could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell you a whole lot unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company’s market share to the quality of its management. The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t all that different from their regular definitions. Here is how the MSN Encarta dictionary defines the terms :

Quantitative – capable of being measured or expressed in numerical terms.
Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics about a business. It’s easy to see how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and more with great precision. Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as the quality of a company’s board members and key executives, its brand-name recognition, patents or proprietary technology.

Quantitative Meets Qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the Coca-Cola Company, for example. When examining its stock, an analyst might look at the stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative factors. However, no analysis of Coca-Cola would be complete without taking into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies on earth are recognized by billions of people. It’s tough to put your finger on exactly what the Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the company’s ongoing success.

The Concept of Intrinsic Value

Before we get any further, we have to address the subject of intrinsic value. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s “real” value. After all, why would you be doing price analysis if the stock market were always correct? In financial jargon, this true value is known as the intrinsic value. For example, let’s say that a company’s stock was trading at $20. After doing extensive homework on the company, you determine that it really is worth $25. In other words, you determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long “the long run” really is. It could be days or years. This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well, the investment will pay off over time as the market catches up to the fundamentals.

The big unknowns are :

You don’t know if your estimate of intrinsic value is correct; and
You don’t know how long it will take for the intrinsic value to be reflected in the marketplace.

Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the “efficient market hypothesis”. Technical analysis is the other major form of security analysis. We’re not going to get into too much detail on the subject.

Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now! Put simply, technical analysts base their investments (or, more precisely, their trades) solely on the price and volume movements of securities. Using charts and a number of other tools, they trade on momentum, not caring about the fundamentals. While it is possible to use both techniques in combination, one of the basic tenets of technical analysis is that the market discounts everything. Accordingly, all news about a company already is priced into a stock, and therefore a stock’s price movements give more insight than the underlying fundamental factors of the business itself. Followers of the efficient market hypothesis, however, are usually in disagreement with both fundamental and technical analysts. The efficient market hypothesis contends that it is essentially impossible to produce market-beating returns in the long run, through either fundamental or technical analysis. The rationale for this argument is that, since the market efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived from fundamental (or technical) analysis would be almost immediately whittled away by the market’s many participants, making it impossible for anyone to meaningfully outperform the market over the long term.

By Cory Janssen, Co-Founder, Investopedia.com; Ben McClure, Contributor - Investopedia Advisor and Investopedia Staff, (Investopedia.com)

Forex Calculating Profit & Order Type

As we have specified in earlier page, in order to calculate the pip value or how much is one pip, you have to know some additional information such as: trading size (how many lots), leverage used, and the actual rate of the pair for which you want to calculate the pip value.

Calculation Formula for currencies with USD as quote currency (or X/USD such as EUR/USD, GBP/USD, and AUD/USD)

(Selling Price - Buying Price) x lot size x number of lots = Profit / Loss

Example :

Buy 3 standard lots EUR/USD at 1.2000
Sell (liquid) 3 lots EUR/USD at 1.2010
Profit = (1.2010 - 1.2000) x 100.000 x 3 = $300
Sell 1 standard lot GBP/USD at 2.0001
Buy (liquid) 1 lot GBP/USD at 2.0000
Profit = (1.2001 - 1.2000) x 100.000 x 1 = $10

Simple method :
As you can see from example number 1 and 2, for every standard lot (100K) the profit is $10/pip.

How to calculate profit per pip ? Profit/pip = total profit / total pips

Example number 1 : $300/3 = $10/pip
Example number 2 : $10/1 = $10/pip

Conclusion : (applies for x/USD Pair only !)

For every 1 standard lot, profit (loss) = $10/pip
For every 1 mini lot, profit (loss) = $1/pip
For every 1 micro lot, profit (loss) = $0.1/pip

Calculation Formula for currencies with USD as base currency (or USD/X such as USD/JPY and USD/CHF).

[ (Selling Price - Buying Price) / Closing (liquidating) Price ] x lot size x number of lots = Profit / Loss.

Example :

Buy 1 standard lot USD/JPY at 110.00
Sell (liquid) 1 lot USD/JPY at 110.01
Profit = [ (110.01 - 110.00) / 110.01 ] x 100.000 x 1 = $9.09

Calculation Formula for mixed currencies (such as EUR/JPY) [ (Selling Price - Buying Price) / USD/JPY Closing Price] x lot size x number of lots = Profit / Loss

Example :

Buy 1 standard lot EUR/JPY at 162.70
Sell (liquid) 1 lot EUR/JPY at 162.71 USD/JPY closing price of the previous day is 118.10
Profit = [ (162.71 - 162.70) / 118.10 ] x 100.000 x 1 = $8.47

Please note :

If you open a Buy position (going Long), you will open with offer price, and will have to use bid price while selling it back (liqudating, closing, stop loss, and taking profit)

If you open a Sell position (going Short), you will open with bid price, and will have to use offer price while selling it back (liqudating, closing, stop loss, and taking profit)

Profit Target, Stop Loss, and Trailing Stop

Profit Target is a target point at which you want to liquidate your position in profit automatically, when the market price hits it. This means, you dont have to monitor your open positions all the time, just set a profit target, and once market price hits it, your position will be closed in profit automatically.

Stop Loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses if the market moves against an investor's trade.

If you open a Buy or Long Position, profit target level should be placed Higher than opening price.
If you open a Sell or Short Position, stop loss level should be placed Lower than opening price.

Example :

Buy (Long) EUR/USD 1.2000 (offer price)
Profit Target 1.2050 (50 pips profit target, bid price)
Stop Loss 1.1950 (50 pips stop loss, bid price)
Sell (Short) EUR/USD 1.2000 (bid price)
Profit Target 1.1950 (50 pips profit target, offer price)
Stop Loss 1.2050 (50 pips stop loss, offer price)

Trailing Stop is an kind of stop loss. This function enables you to automatically set stop loss level whenever the profit you got has exceeded the minimum trailing stop level. If the profit has not exceeded minimum trailing stop level, it will not work ! Please keep in mind that trailing stop usually is executed directly from your computer (client software), not your broker's server so it is highly recommended to put a stop loss besides trailing stop.

The objective of trailing stop is to protect your profit if the market moves against your position so the profit will never go anywhere.

If Trailing stop level is set to 10 pips. Right after your position has reached profit more than trailing stop level (more than 10), then the stop loss will be set to 10 pips away from your open position to protect your profit . Lets say you have already got 10 pips profit, then trailing stop will put a stop loss to 0 (10 pips away from open). If your profit is 20, then stop loss will adjust the stop loss to 10 points profit (still 10 pips awa from open).

Example :

Trailing stop = 10 pips, You open a buy position at 1.2000, suddenly price moves to 1.2010, trailing stop set a stop loss at 1.2000 (Break Even). Market keeps moving to 1.2020, trailing stop level will be adjusted to 1.2010 (10 pips profit), and so on.

Basic Forex Order Types

There are 3 basic order types to trade currencies. They are called Market Order, Stop and Limit Pending Orders.

Market Order is an order to go Long (Buy) or short (Sell) at the current market price. You can't edit these rates.

Example :

Your trading software shows a quote for GBP/USD is at 1.9996 (bid)/2.0000 (ask). This means you can order a buy position at 2.0000 or you can order a sell position at 1.9996 at the moment.

But if you are willing to place an order at different price, you need to use Stop or Limit Pending Orders.

Stop Pending Order :

There are 2 benefits of using Stop Pending Orders :

Stop Buy Order is used when you want to Buy above the current market price. Example : Current price is at 1.2000, and you want to Buy only if the market hits 1.2050. You can set a Stop Buy at 1.2050.
Stop Sell Order is used when you want to Sell below the current market price Example : Current price is at 1.2000, and you want to Sell only if the market hits 1.1950. You can set a Stop Sell at 1.1950.

Limit Pending Order :

There are 2 benefits of using Limit Pending Orders :

Limit Buy Order is used when you want to Buy below the current market price.

Example :

Current price is at 1.2000, and you want to Buy only if the market hits 1.1950. You can set a Limit Buy at 1.1950

Limit Sell Order is used when you want to Sell above the current market price

Example :

Current price is at 1.2000, and you want to Sell only if the market hits 1.2050. You can set a Limit Sell at 1.2050

Popular Technical Analysis Tools

Technical Analysis is probably the most common and successful method of making trading decisions and analyzing forex and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell decisions or to predict market direction.

Support and Resistance Levels

One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

Popular Technical Analysis Tools

Moving Averages (MA) : Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar;

Moving Average Convergence Divergence (MACD) : Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold ;

Bollinger Bands : Bands that are placed x moving average standard deviations above and below a simple MA line ;

Fibonacci Retracement Levels : Indicator used to identify potential levels of support and resistance;

Directional Movement Index (DMI) : A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure;

Relative Strength Index (RSI) : Momentum oscillator that is plotted on a vertical scale from 0 to 100;

Stochastics : Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars;

Trendlines : Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance;

Forex Strategy - Creating Profitable Forex Trading Systems

Creating Profitable Forex Trading Systems in Five Easy Steps

One rule of thumb that every aspiring entrepreneur should remember is that to make huge profits, you should know how to do it by yourself—and not rely on other’s efforts. Being independent from other people will help you determine what things are best for your business.

Such rule applies on all types of investments, including foreign currency trading, or mostly known as Forex trading. It cannot be denied that Forex is the largest existing market around the world, which is estimated to have an excess of 2 trillion U.S. dollars worth of foreign currencies are traded each day. It is larger than the magnitude of the New York Stock Exchange, which is approximately 50 billion U.S. dollars. Thus, Forex market exceeds all combined equity markets around the world.

With such huge wealth circulating around the Forex market, one of your financial goals is to grab a major slice of that $2 trillion average daily turnover in the market. How you will be able to get a substantial portion of that average turnover if you do not know how you will handle your Forex business? Although you cannot live in the market alone (you need business partners and/or financial advisers to help you along), only you can determine what the best Forex business there is for you.

To get huge profits out of your Forex trading career, you need to build your own profitable system—a trading system that will bring your not just hundreds but thousands of dollars worth of Forex revenues. Such trading system is available on the market, but as previously mentioned, you need to be independent—and you need to have your own Forex trading system that will help you achieve your financial goals.

For new traders, it is difficult for them to device their own trading system since they do not have too much knowledge about the Forex market. However, even a neophyte trader can device a trading system that will fit on his personal preference and needs—in just five easy steps!

Before we discuss the five easy steps towards a profitable Forex trading system, you need to learn first the three main characteristics of a successful Forex trading system. These are as follows :

A successful Forex trading system is simple. There is no need for a complicated trading system with too many rules. It is a proven truth that simple systems work better than complicated ones, and they have higher chances of success despite of the brutal characteristic of Forex trading.
A successful Forex trading system cuts losses and runs profits. Keep in mind that you need a trading system that gets the huge possible profits and eliminates losses quickly, if not instantly.
A successful Forex trading system follows long-term trends. You will never cover your losses if you are just generating small profits. Keep in mind that the Forex market is worth $2 trillion U.S. dollars, thus there is no point in trading in exchange for just small profits if you have the opportunity to make trades for larger revenues. Focus on long-term trends and you will be able to see better results.

Now, here are the five easy steps in building a profitable Forex trading system :

As previously mentioned, your trading system must be as simple as possible. Integrate few yet essential rules and an extensive investment management system.
Always look for long-term trends (preferably on a weekly basis), then shift to daily charts and to time entry. This will help you analyze market trends efficiently.
The ideal way of trading foreign currencies is through breakout method.
Always watch for any break that you will note on your chart, which is commonly confirmed by stochastic crossed with bearish divergence. This will be your great timing tool whether you will enter a certain deal or not.
You must integrate effective time management within your system. Time is gold and is one of your precious resources. Design a trading system that is time efficient—where you can maximize the potential of your time resources to generate huge profits.

Get away with complicated systems ; it will just ruin your entire Forex trading career. Build a simpler one and see for yourself how profitable it is.