1st Forex Trading

We’ve been forex trading and trying to figure out when to close trades with most of our dignity—not to mention our account—intact. However, we’d been remiss in our use of fundamental indicators for a truly discretionary approach up until a month ago. All of the major sources of forex news had been telling us that the dollar’s rally could be trumped only by the yen, despite the fact that Japan’s economy is now officially in recession. But the world’s number two economy has also been very strong the past few decades. With that in mind, we opened a series of short positions on the USD/JPY whether the Bollinger Bands and RSI gave a clear sell signal or not, set tight stops, and held our breath. Call it luck, but almost every trade netted a tidy profit. One short swing trade even fell from 97.475 to 95.028 on Nov. 12 for +$1,287.52 in our account. Since we were trading at only half volume, most other profits weren’t overwhelming but positive for this strategy, nonetheless. Moral of the story: in online forex trading, a technical signal that the market is oversold doesn’t mean you should buy without first cross-referencing the signal with other indicators, both technical and fundamental.

We can’t speak for all traders, but we certainly haven’t been calling on our forex broker very often as of late. Between conflicting reports about the severity of the economic downturn and volatility surrounding our main currency pairs, the EUR/USD and USD/JPY, we’ve been mostly watching our indicators from the sidelines.

The forex news on these pairs is that as investors unwind carry trades and engage in a mostly unilateral flight to quality, the dollar has posted gains against the EUR but lost its edge against the JPY, neither of which spell long-term strength for the greenback. Thus, we’ve been cautious. Having started trading just prior to all of the current financial market turmoil, we’re trying to learn forex dynamics in a rare, unpredictable setting.

Last time, we reported on Relative Strength Index (RSI) as an alternative to Parabolic SAR. What we need to keep our eye on is that RSI, because it is a momentum indicator, is susceptible to large price swings that will cause it to create false buy and sell signals. We’ve read that it’s best to trade off of daily charts rather than hourly charts to avoid this, as the increased data used to calculate daily readings mitigates the susceptibilities of the RSI formula. Experts also advise using RSI in a range-bound market. However, the EUR/USD market has been anything but range bound.

According to Investopedia, the trick to making RSI really work is to wait for a reversal candle to confirm overbought or oversold conditions. Ah-ha! We’re going to apply this rule in our next few trades and see if it enhances our profitability. So far, we like RSI and want to continue using it, even in this market, in combination with Bollinger Bands.

Last time, we touched on the trouble with contradictory indicators/timeframes when trying to learn forex. While we’re still feeling comfortable with Bollinger Bands, we found Parabolic SAR difficult to implement, particularly in today’s volatile market. And since long rallies or downturns are likely to be scarce for some time, we want to watch for signals what will help us leverage any mini-trends that do form.

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We’ve replaced Parabolic SAR with Relative Strength Index (RSI), an oscillator that should help us read the market better. As you can see, we set our parameters at 20 and 80. A reading below 20 tells us to go long because the market is oversold; a reading above 80 tells us to go short because the market is overbought. RSI can also be used in online trading to suggest trend formation. A reading above or below 50 could signal an uptrend or a downtrend. While we can’t comment on the indicator’s effectiveness just yet, we’re going to play around with RSI and report back next time.

We extolled the virtues of Bollinger Bands last time, and so far the honeymoon phase is still in full swing. Not to say that every forex trade has been profitable, but the bands have been reasonably accurate thus far, and so we’re happy. However, as you will notice in this chart from mid-October, candlesticks don’t always stay within the confines of the bands, especially in irregular markets such as those of late.  

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So we decided to investigate the parabolic stop and reversal (SAR) indicator provided by our forex broker, FxPro. Parabolic SAR sounds more pretentious than it is. Basically, when the dots are below the candles, we go long. When the dots are above the candles, we go short. (Plus, the red, white, green, and yellow are so pretty together! Like Christmas! Awww….)

Not only do the dots give us a more defined entry signal, they also give us an exit signal. Which is all well and good, except that when we cross-reference different timeframes, the dots sometimes contradict each other. On a daily chart such as the one shown above, the dots told us to buy, yet on a 15-minute chart from that same day, the dots clearly said sell. What gives? We suppose this is what experts mean by the importance of discretionary trading. Just as we can’t base our trades solely on forex news, we can’t base our trades solely on technical indicators either because sometimes they give us mixed messages. Online forex trading is a thinking person’s game. If all we had to do was line up our indicators and place trades like automatons, we’d always make a profit. Sigh. And thus, the hunt continues… 

In successive posts, we’re going to change our focus slightly and concentrate on developing our trading system. We’ll still refer you to forex educational tools, but our main concern will be assessing different indicators, discovering which we feel comfortable with, and putting together a system of forex news and indicators that will prove to be profitable. With any luck, this will become a helpful paradigm for our readers as they plan their own systems.

To quote a Green Day song, “wake me up when September ends” was our mantra last month. The extreme events of Wall Street made us realize that we can’t afford to gamble, which is exactly what we’ve been doing as we’ve demo traded without a system. But we don’t want to overwhelm ourselves with too many indicators. So we’re starting out with Bollinger Bands, which contract when the market is quiet and expand when the market gets loud. We know that the price tends to return to the middle of the bands, so that gives us some idea of how to plan for a currency pair’s movement. We’ve also been keeping an eye out for a squeeze. When the bands get close together, a breakout will most likely occur.

Bollinger Bands are a great tool for online forex activity because they’re simple enough to understand. But one of the drawbacks is that they don’t provide us with a concrete exit strategy in case the price moves against us. So in the future, we’ll be testing indicators that tell us when to get the heck out of Dodge.

The National Futures Association (NFA) regulates the commodities and futures industry and protects against fraudulent activity. For a forex broker, membership in the NFA is mandatory. What better instruction, then, to help a new trader learn forex than the regulatory agency?

The Investor Learning Center includes an online learning program with a glossary of terms and six modules that make a decent primer, covering the principles of exchange rates, spreads, P&L, leverage, and the risks associated with this type of trading. If you’re researching brokers, you can also take advantage of the NFA’s web-based information center to look up an organization’s stats. Finally, you can file an investor complaint electronically or look into the NFA’s arbitration and mediation programs for resolving disputes.

Although today they are best known for their popularity in currency trading, Japanese candlesticks date back hundreds of years to a form of technical analysis used for trading rice. The easily readable price patterns caught on with a guy named Steve Nison, who in turn introduced candlestick charts to the West. Now a good number of traders use candlesticks to identify trends, patterns, market strength, and market structure with accuracy.

There are about 40 candlestick patterns that can provide trading signals, though only the 12 that appear most frequently are used by the majority of traders. Still, it can be helpful to learn forex candlestick patterns in their entirety to identify reversals before they take place. A great place to brush up on your candlesticks is on the main candlestick page of Forex Realm. Here you’ll find accessible information on all types of basic, reversal, continuation, and single candle patterns with names like doji, marubozu, evening star, and three black crows. The site also contains a wealth of information about other technical and fundamental indicators for newbies and seasoned traders alike.

Most forex demo accounts include some kind of charting software package, but depending on the trading strategy that you develop, the indicators or the periodicity may be unsuitable for you. The online forex charts at www.freeforexcharts.com can be helpful for beginners who are just learning how to read different charts. Since we’re discovering different types of fundamental and technical indicators, having no-risk, no-investment chart options can help you determine what you feel comfortable with, whether
you end up being a scalper, a day trader, a swing trader, or a position trader and whether you trade off of technical indicators, fundamental indicators, or some combination of both.  Each listing contains reviews of the charts, a list of features, a preview, and tips and tricks. Once you familiarize yourself with different types of charts, you can look at purchasing charting software at cost from the site.

Last month we began to cover sources of information about forex trading. A number of online trading services, such as FxPro.com, will let you open a practice account for free. This is a good idea to give you some idea about pips, spreads, leverage, etc. before you put real money on the table. However, not all of those services also provide education about the vast, varied market.

If you need to find out more, toddle on over to the forex school at www.babypips.com. This is the place where you can “learn forex,” as the site says simply. The design and structure (pre-school through college courses) is somewhat cutesy, but the information is hardcore forex, written in an uncomplicated yet grounded and humorous style.

Welcome to www.1st-forex-trading.com! In this inaugural post, we want to extend a hearty welcome to all forex newbies. If you’ve just begun your entry into the world of forex trading, this blog can serve as your first stop for the latest tools, information, and education on this complicated subject.

Experts say that the best way to learn a foreign language is to immerse yourself in it. Visit a country where it’s spoken as the native tongue. With that in mind, what better way to begin learning online forex trading than by jumping right in?

You’re thinking, “Sure, if I only had a few extra thousand dollars lying around…” Especially for newbies, the risk associated with the forex market is inevitably intimidating. Fear not, however. The good ‘ol World Wide Web is chock full of helpful resources, one of which can be found at FxPro.com.  This website offers practice accounts for beginners to help them learn forex. Once you open a free account, you’re given unlimited access to live quotes, real-time charts, news, and analytics—just as you would with a real account. In this risk-free environment, you can gain real-world knowledge of the online forex market.  Check it out here.

Visit us next month for more information for forex newbies! Until then, happy trading…