What are Pips ?

To understand pips on the forex market you must understand how the market works. If you are new to forex trading there are many worthwhile, free offers and software online to help you learn and practise before risking your money.

Forex is an abbreviation of foreign exchange, the buying and selling of one foreign currency for another. As one currency strengthens so another weakens and knowing when to buy and sell is how money is made on the Forex markets. The Forex market is similar to the buying and selling of stocks but in many ways it is much more difficult. On the stock market you may spot a company that has potential, buy shares and hopefully make a profit, but on the money market there may be long term trends where a currency strengthens and weakens, but much of the trading is based upon daily fluctuations that change by the minute.

A pip is the smallest unit of price that is traded for a currency. Most currencies are traded to four decimal points, so that a pip is 0.0001 or 1/100 of a cent. This may seem a minuscule amount until you realise that on a standard trade of $100,000 that is $10. The exception to the four decimal points is the Japanese yen which is normally traded to two decimal points.

Obviously if you are buying a currency you must also be selling another and therefore prices are always quoted in pairs, the USD/EUR being the most active. The more active a pair the narrower the difference between the bid/ask price is likely to be, with a possible spread of just two pips for the most actively traded.
Unlike the stock market there are no broker fees to pay, but as each trade involves both selling one currency and buying another, the difference in the spread is the cost of the transaction and must be taken into account when calculating profit. Therefore, as a buyer, the pip spread is very important to you. When you buy you have to accept an immediate loss. The value of the currency you have bought must rise by the extent of the pip spread before you break even and the value rise again to make a profit. The lower the spread the easier it is to make a profit.
Active markets tend to have a lower pip spread, for example 2-3 pips. Currencies that are bought and sold less frequently may have a far higher spread. However, before you go to a broker offering a very narrow spread, do check that they are reputable. You should also remember that pip spreads are not guaranteed, they can change if the market fluctuates widely. It is wise to check a broker's spread policy before trading.

Reading Quotes

One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in currency pair trades.

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the quote would look like this:

USD/JPY = 105.25

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, 1 USD), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 105.25 Japanese yen. In other words, US$1 can buy 105.25 Japanese yen.

Direct Quote vs. Indirect Quote
There are two ways to quote a currency pair, either directly or indirectly. A direct quote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.

For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.

In the Forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.

However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The Euro, which is relatively new, is quoted the same way as well. This is why the EUR/USD quote is given as 1.55, for example, because it means that one euro is the equivalent of 1.55 U.S. dollars.

Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.

Bid and Ask

As with most trading in the financial markets, when you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.

The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:

USD/CAD = 1.1915/1.1920
BID = 1.1915
ASK = 1.1920

If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.1920 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.1915 Canadian dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.

Avoiding/lowering risk when trading Forex

Trade like a technical analyst. Understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point to the same direction, you have a good chance to have a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracement and reversal days. Be disciplined. Create a position and understand your reasons for having that position, and establish stop loss and profit taking levels. Discipline includes hitting your stops and not following the temptation to stay with a losing position that has gone through your stop/loss level. When you buy, buy high. When you sell, sell higher. Similarly, when you sell, sell low. When you buy, buy lower. Rule of thumb: In a bull market, be long or neutral - in a bear market, be short or neutral. If you forget this rule and trade against the trend, you will usually cause yourself to suffer psychological worries, and frequently, losses. And never add to a losing position.

Market Participants in Forex Market

Banks

The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis. Some of this trading activity is undertaken on behalf of customers, but a large amount of trading is also conducted by proprietary desks, where dealers trade to make the bank profits.


The interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as the equity guys are back in charge again. A large part of the interbank trading takes place on electronic broking systems that have negatively affected the traditional foreign exchange brokers.





Interbank Brokers

Until recently, foreign exchange brokers were doing large amounts of business, facilitating interbank trading and matching anonymous counterparts for comparatively small fees. Today, however, a lot of this business is moving onto more efficient electronic systems which function as a closed circuit for banks only. Still, the broker box providing the opportunity to listen in on the ongoing interbank trading is seen in most trading rooms, but turnover is noticeably smaller than just a year or two ago.

Risk Managment in Forex Market.

Plenty of questions have been passed around recently about position sizing and money management. If you ever hear me use the words "play defensively" this is what I am referring to. Properly sizing your bets and how you manage your money is the key ingredient to being a successful trader. Allow me to elaborate.

Successful trading is not always winning or losing. It is how you distribute your capital, withstand emotional decision making (psychology), and staying disciplined to your rules and financial goals. Money management is a defensive concept and keeps you alive to trade another day. Lets go over a few of the specifics in order to effectively plan your betting (position) size. Keep in mind if your ideas here are to be told exactly what YOU should do, close this window now. As usual, I try to promote original thought, and the reasons behind concepts, but since you and I are different people, what works well for one of us, might not be in the best interest of another (disclaimer).

Risk

Risk is the likelihood of a loss. At the moment we take a trade we are at risk of a loss. Positions are constantly fluctuating in value and there are many variables that influence risk. In order to account for this risk you have to consider these variables. Assuming we are talking about options... stock conditions, news, fundamental conditions, volatility, and time. Having done this research you need to quantify a likely risk (how much the stock could move) and a comfortable level of risk (what you are comfortable losing on this trade). Not just with the individual trade but as a portfolio as well (stop & bet size).

Technical Analysis

One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the Forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools, such as trends, charts and indicators.
It is important to note that, in general, the interpretation of technical analysis remains the same regardless of the asset being monitored. There are literally hundreds of books dedicated to this field of study, but in this tutorial we will only touch on the basics of why technical analysis is such a popular tool in the Forex market.

Fundamental Analysis


In the equities market, fundamental analysis looks to measure a company's true value and to base investments upon this type of calculation. To some extent, the same is done in the Forex, where fundamental traders evaluate currencies, and their countries, like companies and use economic data to gain an idea of the currency’s true value.

All of the new reports, economic data and political events that come out about a country are similar to news that comes out about a stock in that it is used by investors to gain an idea of value. This value changes over time due to many factors, including economic growth and financial strength. Fundamental traders look at all of this information to evaluate a country's currency.

Given that there are practically unlimited fundamental trading strategies based on fundamental data, one could write a book on this subject. To give you a better idea of a tangible trading opportunity, let’s go over one of the most well-known situations, the carry trade.

Technical Analysis

One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the Forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools, such as trends, charts and indicators.
It is important to note that, in general, the interpretation of technical analysis remains the same regardless of the asset being monitored. There are literally hundreds of books dedicated to this field of study, but in this tutorial we will only touch on the basics of why technical analysis is such a popular tool in the Forex market.

How to read Forex Charts.

Learning the basic skills in forex
, such as how to read forex charts, is really important.

This is because once you have this vital skill under your belt, it will be a lot easier and quicker when the time comes for you to learn and practice an actual forex trading system.

By the time you finish this article, you'll learn how to read forex charts, as well as know the pitfalls that can occur when reading them, especially if you haven't traded forex before.

Firstly, let's revise the basics of a forex trading as this relates directly to how to reade forex charts.

Each currency pair is always quoted in the same way. For example, the EURUSD currency pair is always as EURUSD, with the EUR being the base currency, and the USD being the terms currency, not the other way round with the USD first. Therefore if the chart of the EURUSD shows that the current price is fluctuating around 1.2155, this means that 1 EURO will buy around 1.2155 US dollars.


And your trade size (face value) is the amount of base currency that you're trading. In this example, if you want to buy 100 000 EURUSD, you're buying 100 000 EUROs.

Now let's have a look at the 5 important steps on how to read a forex chart:

1. If you buy the currency pair, that is, you're long the position, realise that you're looking for the chart of that currency pair to go up, to make a profit on the trade. That is, you want the base currency to strengthen against the terms currency.

On the other hand if you sell the currency pair to short the position, then you're looking for the chart of that currency pair to go down, to make a profit. That is, you want the base currency to weaken against the terms currency.

Pretty simple so far.


2. Always check the time frame displayed. Many trading systems will use multiple time frames to determine the entry of a trade. For example, a system may use a 4 hour and a 30 minute chart to determine the overall trend of the currency pair by using indicators such as MACD, momentum, or support and resistance lines, and then a 5 minute chart to look for a rise from a temporary dip to determine the actual entry.

So ensure that the chart you're looking at has the correct time frame for your analysis. The best way to do this is to set up your charts with the correct time frames and indicators on them for the system you're trading, and to save and reuse this layout.

3. On most forex charts, it is the BID price rather than the ask price that's displayed on the chart. Remember that a price is always quoted with a bid and an ask (or offer). For example, the current price of EURUSD may be 1.2055 bid and 1.2058 ask (or offer). When you buy, you buy at the ask, which is the higher of the 2 prices in the spread, and when you sell, you sell at the bid, which is the lower of the two prices.

If you use the chart price to determine an entry or exit, realise that when you place an order to sell when the chart price is say 1.330, then this is the price that you'll sell at assuming no slippage.

If on the other hand, you place an order to buy when the chart price is the same price, then you'll actually buy at 1.3333. A forex system will often determine whether your orders will be placed simply according to the chart price or whether you need to add a buffer when buying or selling.

Also note that on many platforms, when you're placing stop orders (to buy if the price rises above a certain price, or sell when the price falls below a certain price) you can select either "stop if bid" or "stop if offered".

4. Realise that the times shown on the bottom of forex charts are set to the particular time zone that the forex provider's charts are set to, be it GMT, New York time, or other time zones.

It's handy to have a world clock available on your computer desktop in order to convert the different time zones. This is important when you're trading major economic announcements.

You'll need to convert the time of an announcement to your local time, and the chart time, so you'll know when the announcement is going to happen, and therefore when you need to trade.

5. Finally, check whether the times on your forex charts corresponds to when the candle opens or when the candle closes. Your charting software may be different to someone else's in this way.

The reason I mention this, is that if you need to trade major economic announcements, either by entering a trade based on the movements that happen after the announcement, or to exit a trade before the announcement in avoid getting stopped out during it, then you need to be precise (to the minute!) as these trades are performed according to what happens at the 1 minute immediately after the announcement, not the candle afterwards!

So there you have it.

Fundamental Versus Technical Analysis

While technical analysis concentrates on the study of market action, fundamental analysis focuses on the economic forces which cause prices to move higher, or lower, or stay the same. The fundamental approach examines all of the relevant factors affecting the exchange-rate between two currencies to determine the intrinsic value of each currency.



The intrinsic value is what the fundamentals indicate one currency is actually worth against another currency. If this intrinsic value is under the current market price, then the currency is overpriced and should be sold. If market price is below the intrinsic value, then the market is undervalued and should be bought. Both of these approaches to market forecasting attempt to solve the same problem, that is, to determine the direction prices are likely to move. They just approach the problem from different directions.



A "fundamentalist" studies the cause of market movement, while a technician studies the effect. Most market traders classify themselves as either technicians or fundamentalists. In reality, there is a lot of overlap. Most fundamentalists have a working knowledge of the basic tenets of chart analysis. At the same time, most technicians have at least a passing awareness of the fundamentals.



The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most. Usually they come back into sync at some point, but often too late for the trader to act. One explanation for these seeming discrepancies is that market price tends to lead the known fundamentals.



Stated another way, market price acts as a leading indicator of the fundamentals or the conventional wisdom of the moment. While the known fundamentals have already been discounted and are already "in the market," prices are now reacting to the unknown fundamentals. Some of the most dramatic market movements in history have begun with little or no perceived change in the fundamentals. By the time those changes became known, the new trend was well underway.

Investing and Trading

Investing and Trading are not the same thing. The returns you seek, the length of time it takes to achieve those returns, the amount of risk one is prepared to take, and the commitment one can make to monitor the investments dictate the strategy of whether to invest or trade.



Investing

Investing is holding an asset for a longer term, expecting it to increase in value. The most common example is investing in equity mutual funds through a retirement plan. Many of these funds are held for years and are expected to show a substantial appreciation over the long term.



You can also invest in individual stocks and hold them for 6 to 18 months or longer, sometimes much longer. This is referred to as the "buy and hold" strategy.

Real estate would be another example of investing, unless the property is purchased for quick flipping.



Jewelry, art, stamps, and collectibles are still other examples of investing where they are kept for a long time in the hope their value appreciates.



Trading

Trading is also investing but the time frame for a return on that investment is a much shorter period, usually a matter of a few days or weeks.



The most obvious example would be day trading where a trader is in and out of a market the same day.



Still other trading takes place over a period from a few days to a few weeks.



Most trading takes place with individual stocks and commodities, with commodity markets being the most predominant vehicle.

Forex Signals Systems

A set of analyses that a forex trader uses to determine whether to buy or sell a currency pair at any given time. Forex signal systems could be based on technical analysis charting tools or news-based events. The day trader's currency trading system is usually made up of a multitude of signals that work together to create a buy or sell decision. Forex trading signals are available for free, for a fee or are developed by the traders themselves.
Forex signal systems can create executions that are either manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. An automated trading system involves the trader "teaching" the software what signals to look for and how to interpret them. It is thought that automated trading removes the psychological element that is detrimental to a lot of traders.

Both automated and manual day trading signals are available for purchase on the internet. However, it is important to note that there is no such thing as the "holy grail" of trading signals. If the system was a perfect money maker, the seller would not want to share it. This is why big financial firms keep their "black box" trading programs under lock and key.

Forex Platforms

A trading platform is a piece of software that acts as a conduit for information between a trader and a broker. A trading platform provides information such as quotes and charts, and includes an interface for entering orders to be executed by the broker. Trading platform software can be locally based, meaning it is installed on the trader's computer and can be used with Windows, Mac and Linux systems - different brokers offer different options in this respect. Alternatively, some brokers offer software that is web based. These platforms often run using Java, a dynamic web language. The advantage of web-based trading platforms is that they can be used by almost any computer with internet access. Trading platforms are often available free-of-charge, but some brokers allow traders to purchase platforms that have a higher functionality for a fee. Other brokers provide platforms with different levels of functionality for traders who are more active.

What are Forex Indicators

Simple Moving Average (SMA) - The average price of a given time period, (5 minutes, 10 minutes, 1 day, etc.) where each of the chosen periods carries the same weight for the average. Example using the closing prices of the USD/JPY currency pair: Day 1 close = 124.00, Day 2 close = 126.00, Day 3 close = 124.00, Day 4 close = 126.00; The 4-day SMA is 125.00 (the average of the prior four closes).



Exponential Moving Average (EMA) - Here, the averages are calculated with the recent forex rates carrying more weight in the overall average; for example: In a 10-day exponential moving average, the last 5 days will have more effect on the average than the first 5 days. The idea is to use the most recent data as a better indication of trend direction.


Bollinger Bands - The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower bands. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme currency price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of low volatility, the bands narrow to contain currency prices. The bands are plotted two standard deviations above and below a simple moving average. They indicate a "sell" when above the moving average (or close to the upper band) and a "buy" when below it (or close to the lower band). The bands are used by some forex traders in conjunction with other analyses, including RSI, MACD, CCI, and Rate of Change.


Parabolic SAR - The Parabolic SAR (stop-and-reversal) is a time/price trend following system used to set trailing price stops. The Parabolic SAR provides excellent exit points. Forex traders using this technical indicator should close long positions when the price falls below the SAR and close short positions when the price rises above the SAR. If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that currency rates move.
Rate of Change - The oldest closing price divided into the most recent one.
RSI (Relative Strength Index) - The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the currency price is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal in the price of the currency.

Stochastics - Stochastic studies are based on the premise that as prices rise, closing prices tend to be near the high value. Conversely, as prices fall, closing prices are near the low for the period. Stochastic studies are made of two lines, %D and %K, that move between a scale of 0 and 100. The %D line is the moving average over a specified period of time of the %K line. The %K line measures where the closing price of a currency is compared to the price range for a given number of periods.


Momentum - Designed to measure the rate of price change, not the actual price level. Consists of the net difference between the current closing price and the oldest closing price from a predetermined period. The Momentum indicator can be used as either a trend-following oscillator similar to the MACD or as a leading indicator.


MACD - Moving Average Convergence/Divergence - Consists of two exponential moving averages that are plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. The MACD is calculated by subtracting a 26-day moving average of a currency's price from a 12-day moving average of its price. The result is an indicator that oscillates above and below zero. When the MACD is above zero, it means the 12-day moving average is higher than the 26-day moving average. This is bullish as it shows that current expectations (i.e., the 12-day moving average) are more bullish than previous expectations (i.e., the 26-day average). This implies a bullish, or upward, shift in the forex rate. When the MACD falls below zero, it means that the 12-day moving average is less than the 26-day moving average, implying a bearish shift in the currency.


ADX - Measures the strength of a prevailing currency trend and whether or not there is direction in the currency market. Plotted from zero on up, usually a reading above 25 can be considered directional.


William's %R - A momentum indicator that measures overbought/oversold levels in the price of a currency. The interpretation of Williams' %R is very similar to that of the Stochastic Oscillator, except that %R is plotted upside-down and the Stochastic Oscillator has internal smoothing. Readings in the range of 80 to 100% indicate oversold, while readings in the 0 to 20% range suggest overbought.


Volatility - Measures the overall volatility of a currency in a given time period.

Currency Pairs

All forex trades involve the simultaneous buying of one currency and selling of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quote currency. The bid (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.

For example, if the USD/EUR currency pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you purchase (receive) US$1. If you sold the currency pair, you would receive 1.5 euros for every US$1 you sell. The inverse of the currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that US$0.667 would buy 1 euro.

Reading Quotes

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:

USD/JPY = 119.50

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen. The forex quote includes the currency abbreviations for the currencies in question.

Forex Indicator Definition

Simple Moving Average (SMA) - The average price of a given time period, (5 minutes, 10 minutes, 1 day, etc.) where each of the chosen periods carries the same weight for the average. Example using the closing prices of the USD/JPY currency pair: Day 1 close = 124.00, Day 2 close = 126.00, Day 3 close = 124.00, Day 4 close = 126.00; The 4-day SMA is 125.00 (the average of the prior four closes).



Exponential Moving Average (EMA) - Here, the averages are calculated with the recent forex rates carrying more weight in the overall average; for example: In a 10-day exponential moving average, the last 5 days will have more effect on the average than the first 5 days. The idea is to use the most recent data as a better indication of trend direction.


Bollinger Bands - The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower bands. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme currency price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of low volatility, the bands narrow to contain currency prices. The bands are plotted two standard deviations above and below a simple moving average. They indicate a "sell" when above the moving average (or close to the upper band) and a "buy" when below it (or close to the lower band). The bands are used by some forex traders in conjunction with other analyses, including RSI, MACD, CCI, and Rate of Change.


Parabolic SAR - The Parabolic SAR (stop-and-reversal) is a time/price trend following system used to set trailing price stops. The Parabolic SAR provides excellent exit points. Forex traders using this technical indicator should close long positions when the price falls below the SAR and close short positions when the price rises above the SAR. If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that currency rates move.
Rate of Change - The oldest closing price divided into the most recent one.
RSI (Relative Strength Index) - The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the currency price is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal in the price of the currency.

Stochastics - Stochastic studies are based on the premise that as prices rise, closing prices tend to be near the high value. Conversely, as prices fall, closing prices are near the low for the period. Stochastic studies are made of two lines, %D and %K, that move between a scale of 0 and 100. The %D line is the moving average over a specified period of time of the %K line. The %K line measures where the closing price of a currency is compared to the price range for a given number of periods.


Momentum - Designed to measure the rate of price change, not the actual price level. Consists of the net difference between the current closing price and the oldest closing price from a predetermined period. The Momentum indicator can be used as either a trend-following oscillator similar to the MACD or as a leading indicator.


MACD - Moving Average Convergence/Divergence - Consists of two exponential moving averages that are plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. The MACD is calculated by subtracting a 26-day moving average of a currency's price from a 12-day moving average of its price. The result is an indicator that oscillates above and below zero. When the MACD is above zero, it means the 12-day moving average is higher than the 26-day moving average. This is bullish as it shows that current expectations (i.e., the 12-day moving average) are more bullish than previous expectations (i.e., the 26-day average). This implies a bullish, or upward, shift in the forex rate. When the MACD falls below zero, it means that the 12-day moving average is less than the 26-day moving average, implying a bearish shift in the currency.


ADX - Measures the strength of a prevailing currency trend and whether or not there is direction in the currency market. Plotted from zero on up, usually a reading above 25 can be considered directional.


William's %R - A momentum indicator that measures overbought/oversold levels in the price of a currency. The interpretation of Williams' %R is very similar to that of the Stochastic Oscillator, except that %R is plotted upside-down and the Stochastic Oscillator has internal smoothing. Readings in the range of 80 to 100% indicate oversold, while readings in the 0 to 20% range suggest overbought.


Volatility - Measures the overall volatility of a currency in a given time period.

Forex Signals

Forex signal systems can create executions that are either manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. An automated trading system involves the trader "teaching" the software what signals to look for and how to interpret them. It is thought that automated trading removes the psychological element that is detrimental to a lot of traders.

Both automated and manual day trading signals are available for purchase on the internet. However, it is important to note that there is no such thing as the "holy grail" of trading signals. If the system was a perfect money maker, the seller would not want to share it. This is why big financial firms keep their "black box" trading programs under lock and key.

Can I set pending orders in the WSB trading platform?

Yes you can. The WSB MT4 software accepts the following pending order types:
Limit orders:
- A SELL Limit Order may be set when a client wants to open a sell trade at a price that is 15 pips or more above the current market price. The order is executed when the BID price rises to the level set in the Sell Limit Order.
- BUY Limit Order may be set when a client wants to open a buy trade at a price that is 15 pips or more below the current market price. The order is executed when the ASK price falls to the level set in the Buy Limit Order.
Stop Orders:
- A Buy Stop Order may be set when a client wants to open a buy trade at a price that is 15 pips or more above the current market price. The order is executed when the ASK price rises to the level set in the Buy Stop Order.
- A Sell Stop Order may be set when a client wants to open a sell trade at a price that is 15 pips or more belowe the current market price.. The order is executed when the BID price drops to the level set in the SELL Stop Order.
Stop Loss Orders:
A Stop Loss order is an important feature which can be used to either cut out of a losing trade without risking the entire account and to minimize the loss, or to lock in profit on a profitable trade.
Take Profit Orders:
The Take Profit order is used to automatically exit a trade at a profitable level of your choosing.
Trailing Stop:
The Trailing Stop is a useful and advanced feature of the MT4 platform. It is useful to automatically lock in profits as the market moves. As a practical example, you have a BUY trade on GBP/USD at 1.6000 open and it is in profit. You may set the Trailing Stop to automatically adjust your stop loss level as the market moves in your favor. For example, you may have your trailing stop level set at 25 pips. Once your trade is +25 pips in profit, the trailing stop will automatically move your stop loss level to 1.6000 or break even. This means in that trade, it is impossible to lose! Further, if the market continues to move in your favor, the trailing stop will continue to adjust the stop loss to lock in profits. If for example the trade is now +26, your stop loss will be set at +1, at +27 your stop loss will be set at +2 thus "trailing" the market. Why is this useful? Well, in this example, the market moved +27 pips in your favor, and your 25 pip trailing stop had locked in a profit of 2 pips by automatically setting the stop loss order. If the market then reversed against your buy position, you would still be guaranteed a profit of 2 pips instead of loss. To activate the Trailing Stop loss on a position, go to 'Trade' in the 'Terminal' at the bottom of the trading platform, right-click and choose Trailing Stops. Please note that you have to be making a profit of minimum 15 pips before you can activate it.

Margin Call in the Forex Market

Many new Forex traders all of sudden receive a margin call. Maybe they did not educate themselves properly about forex trading and started trading. Have you ever received the dreaded forex margin call? Whatever, you must be very clear about what is a forex margin call. But contrary to the popular opinion that a margin call represents that worst case scenario for the currency trader, this is far from the truth. The risk that is assumed when trading aggressively the currency markets often results in receiving a margin call. The worst case could be far worse.


If there would have been no margin call, the possibility of owing additional funds to your broker in case of a loss could not be ruled out. To owe additional funds to the broker is actually the worse case scenario. A margin call protects a trader from losing 100% or even more of the money in the trading account. A margin call is in fact a safeguard. The uncomfortable position of owing additional funds to the forex broker is largely avoided because of the existence of the margin call.

If you have been trading stocks you might have actually received a call or a text message from your stock broker that you need to add more funds to your trading account. So in stock trading, you will receive an actual call from your stock broker to add more funds to your margin account when equity is running low in your stock trading account. A margin call is not actually a physical call from your broker in forex trading unlike the world of stock trading.

In forex trading when the trader no longer has enough equity in the trading account to keep the open positions viable, the trading platform software automatically closes out all the open positions and immediately realizes all losses at the prevailing market rates.

Prices can move extremely fast in forex markets and because of the high leverage used, every price move is magnified. There are good reasons for automated margin calls in forex trading, although this may seem a bit cold hearted.

The trading account can become depleted very quickly with not enough time to call for more funds when the traders equity runs low in forex trading. The forex margin call closes all open positions to help ensure that the trader does not lose the entire account or worse as a safeguard measure.

Lets make it clear with an example. Suppose you have $1500 in your trading account. So exactly when is a margin call triggered? This depends exactly on the number and the size of the lots being traded, the leverage chosen and the equity in the account. Suppose you use a leverage of 100:1 to trade in standard lots of $100,000.

You want to trade one lot of EUR/USD. Since your account is in US Dollars, you need to convert it into Euros. Suppose the EUR/USD exchange rate is 1.3465. So you need $1346 to trade standard lot Euros 100,000 of EUR/USD. This is because Euros 1000 are needed to control Euros 100,000.

Suppose you are a new forex trader. You dont know much about forex trading. However you have read that it is a great opportunity to make money. Naturally you are very enthusiastic about trading forex as quickly as possible. So you dont know that stop losses are used to minimize downside risk in trading. You start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346. Each pip is exactly equal to $10 in this case.

There are no stop losses in place. The chances are you are going to receive a margin call soon. When can you expect to receive a margin call? You will receive a margin call when your equity drops below $1346. You have $1500 equity in your trading account. Your open position will be automatically closed when you receive a margin call. That means once you lose the excess equity in your account above the margin required to trade a standard lot that is $1500-$1346= $154. Assuming that there are no spreads involved. This is equal to just 15.4 pips loss. This example will make it clear the fast moving nature of the forex market and how using high leverage can suddenly result in getting a margin call.