Currency strength

Image via Wikipedia
Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power,[1] while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance or interest rates.[2] It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the U.S. Dollar Index. The current trend in currency strength indicators is to combine more currency indexes in order to make forex movements easily visible. For the calculation of these kind of indexes, major currencies are usually used because they represent up to 90% of the whole forex market volume.[3]
Contents [hide]
1 Currency strength based trading indicators
1.1 Examples
2 See also
3 References
4 External links
[edit]Currency strength based trading indicators

Currency strength is calculated from the U.S. Dollar Index, which is used as a reference for other currency indexes.[4]
The basic idea behind indicators is "to buy strong currency and to sell weak currency".
If is X/Y currency pair is up trend, you are able to determine whether this happens due to X's strength or Y's weakness.[5]
With these kind of indicators one is able to choose the most valuable pair to trade; see the reactions of each currency on moves in correlated instruments (for example CAD/OIL or AUD/GOLD); look for a strong trend in one currency; and observe most of the forex market in one chart.
[edit]Examples
Typical examples of indicators based on currency strength are relative currency strength and absolute currency strength. Their combination is called the "Forex Flow indicator", because you are able to see the whole currency flow across the forex market.

Forex Swing Trading Strategy Explained

Forex swing trading is one of my favourite trading method as it happens so frequently which gives all traders a lot of opportunity to trade it.

However there are times where the swings are more vigorous and this is when you can make more money from. Typically the forex market moves in waves and these waves are what is known as swings. You may be thinking that there are so many swings in a chart and is it possible to trade them all.

The answer is NO. If you take a close look at the swings, you will find that most of them do not move by a lot of pips. Therefore today I will be revealing to you the time that I often trade forex swing and it is also the time where there are bigger movement in price which makes it more profitable to trade.

small swing

big swing

First of all, let me go through the definition of swings for those of you who are new in this field. Basically a swing is made up of a V or N shape and it is actually formed by a reversal or retracement in price movement.

V-Shaped Swing

N-Shaped Swing

The best time to trade forex swing is during London Open and New York Open as these are the times that have the most violent swing.

Forex Indicators Required To Trade Forex Swing:

• MACD (Moving Average Convergence Divergence)
• Oscillator: Stochastic/RSI
• Parabolic SAR

Here are How You Can Trade Forex Swing:

1) Time To Do Technical Analysis: As the swing often occurs at London Open or New York Open, you should be doing your technical analysis 1 hour before the opening time. This can gives you ample time to analyze the time and figure out all the major supports and resistances.

2) Trend Line: To trade forex swing, you should be waiting for a trend line break to confirm the reversal or retracement of the price which makes up the swing. Take note that you should never enter your trade before a trend line break occur as you may be stopped out of your position if the price did not break the line but end up being repel by it.

3) Verify The Break: There are times where you will experience the price breaking through the trend line and move back in within the next candle and this is what traders call “Fake out” and this can usually be minimised with the help of MACD.

All you have to do when you see the price breaking out of the trend line, you should than check the MACD histogram to see if it flips to the other side. If it did not, there is a high chance that you are seeing a fake out in action.

4) Check Your Oscillator: This is the last step to check before you enter your trade. If you are looking to go LONG, you should check the oscillator to see if there are oversold and if you are looking to go SHORT, you should see if the oscillator is overbought. This can gives you additional chance of having a winning trade.

Real Swing

The above are how I trade forex swing and you can try them out to see if it works for you as well.

You can check out my other posts that show you how I trade forex breakout strategy as well as my forex scalping system.

In case you are interested to learn more about the forex swing strategy, this is one place you can learn how to trade the swing strategy effectively. In fact, I have purchased the course before and find it very effective.Click here to find out more

Developing Your Own Trading Plan

Now that you're about half way through college, here's one piece of advice you should always remember.

Be your own trader.

Don't follow someone else's trading advice blindly. Just because someone may be doing well with their method, it doesn't mean it will work for you. We all have different market views, thought processes, risk tolerance levels, and market experience.

Have your own personalized trading plan and update it as you learn from the market.



With rock solid discipline, your trading could look like this.

Developing a Trading Plan and sticking to it are the two main ingredients of trading discipline.

But trading discipline isn't enough.

Even solid trading discipline isn't enough.

It has to be rock solid discipline.

We repeat: rock solid. Like Jacob Black's abs.

Plastic solid discipline won't do. Nor will discipline made from straws and sticks.

We don't want to be little piggies. We want to be successful traders!

And having rock solid trading discipline is the most important characteristic of successful traders.

A trading plan defines what is supposed to be done, why, when, and how. It covers your trader personality, personal expectations, risk management rules, and trading system(s).

When followed to, a trading plan will help limit trading mistakes and minimize your losses. After all, "if you fail to plan, then you've already planned to fail."

Market Sentiment

How's Mr. Market Feeling?

Every trader will always have an opinion about the market.

"It's a bear market, everything is going to hell!"

"Things are looking bright. I'm pretty bullish on the markets right now."



Each and every trader will have their own personal explanation as to why the market is moving a certain way.

When trading, traders express this view in whatever trade he takes. But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing.

A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That's right... EVERYONE.

This combined feeling that market participants have is what we call market sentiment.

It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.

How to Develop a Sentiment-Based Approach

As a trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can't tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.

Note that using the market sentiment approach doesn't give a precise entry and exit for each trade. But don't despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not. Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.

In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.

Multiple Time Frame Analysis

Image via Wikipedia
What the heck is multiple time frame analysis?

Multi-time frame ana... WHAT?! Chill out young padawan, it ain't as complicated as it sounds! You're almost done with high school - now's not the time to get senioritis, although you probably got that way back in Grade 12. Ha!

Multiple time frame analysis is simply the process of looking at the same pair and the same price, but on different time frames.

Remember, a pair exists on several time frames - the daily, the hourly, the 15-minute, heck, even the 1-minute!

This means that different traders can have their different opinions on how a pair is trading and both can be completely correct.

Phoebe may see that EUR/USD is on a downtrend on the 4-hour chart. However, Sam trades on the 5-minute chart and sees that the pair just ranging up and down. And they could both be correct!

As you can see, this poses a problem. Trades sometimes get confused when they look at the 4-hour, see that a sell signal, then they hop on the 1-hour and see price slowly moving up.

What are you supposed to do?

Stick with one time frame, take the signal and completely ignore the other time frame?

Flip a coin to decide whether you should buy or sell?




Luckily for you, we here at BabyPips.com aren't about to let you graduate without knowing how to use multiple time frame analysis to your advantage.

First, we'll try to help you determine which time frame you should focus on. Each trader should trade a specific time frame that fits his or her own personality (more on this later).

Secondly, we'll also teach you how to look at different time frames of the same currency pair to help you make better, more educated trading decisions

Trading Breakouts and Fakeouts

What are breakouts and how can I take advantage of them?


Unlike the breakouts you might have had as a teenager, a breakout in the trading world is a little different!

A breakout occurs when the price "breaks out" (get it?) of some kind of consolidation or trading range.

A breakout can also occur when a specific price level is breached such as support and resistance levels, pivot points, Fibonacci levels, etc.

With breakout trades, the goal is to enter the market right when the price makes a breakout and then continue to ride the trade until volatility dies down.

Volatility, Not Volume



You'll notice that unlike trading stocks or futures, there is no way for you to see the volume of trades made in the forex market.

With stock or future trades, volume is essential for making good breakout trades so not having this data available in the forex leaves us at a disadvantage.

Because of this disadvantage, we have to rely not only on good risk management, but also on certain criteria in order to position ourselves for a good potential breakout.

If there is large price movement within a short amount of time then volatility would be considered high.

On the other hand, if there is relatively little movement in a short period of time then volatility would be considered low.




While it's tempting to get in the market when it is moving faster than a speeding bullet, you will often find yourself more stressed and anxious; making bad decisions as your money goes in and then goes right back out.

This high volatility is what attracts a lot of traders, but it's this same volatility that kills a lot of them as well.

The goal here is to use volatility to your advantage.

Rather than following the herd and trying to jump in when the market is super volatile, it would be better to look currency pairs with volatility that is very low.

This way, you can position yourself and be ready for when a breakout occurs and volatility flies out the roof!

Market Environment

When two people go to war, the foolish man always rushes blindly into battle without a plan, much like a starving man at his favorite buffet spot.

The wise man, on the other hand, will always get a situation report first to know the surrounding conditions that could affect how the battle plays out.



Like in warfare, we must also get a situation report on the market we are trading. This means we need to know what kind of market environment we are actually in. Some traders cry saying that their system sucks.

Sometimes the system does in fact, suck. Other times, the system is potentially profitable, but it is being utilized in the wrong environment.

Seasoned traders try to figure out the appropriate strategy for the current market environment they are trading in.

Is it time to bust out those Fibs and look for retracements? Or are ranges holding?

Just as the coach comes up with different plays for particular situations or opponents, you should also be able to decide which strategy to use depending on market environment.

By knowing what market environment we are trading in, we can choose a trend-based strategy in a trending market or a range-bound strategy in a ranging market.

Are you worried about not getting to use your beastly range-bound strategy? How about your Bring-Home-Da-Bacon trend-based system?




Have no fear!

The forex market provides many trending and ranging opportunities across different time frames wherein these strategies can be implemented.

By knowing which strategies are appropriate, you will find it easier to figure out which indicators to pull out from your toolbox.

For instance, Fibs and trend lines are useful in trending markets while pivot points, support and resistance levels are helpful when the market is ranging.

Before spotting those opportunities, you have to be able to determine the market environment. The state of the market can be classified into three

Trading Divergences

What if there was a low risk way to sell near the top or buy near the bottom of a trend?

What if you were already in a long position and you could know ahead of time the perfect place to exit instead of watching your unrealized gains, a.k.a your potential Aston Martin down payment, vanish before your eyes because your trade reverses direction?

What if you believe a currency pair will continue to fall but would like to short at a better price or a less risky entry?

Well guess what? There is a way! It's called divergence trading.

In a nutshell, divergence can be seen by comparing price action and the movement of an indicator. It doesn't really matter what indicator you use. You can use RSI, MACD, the stochastic, CCI, etc.

The great thing about divergences is that you can use them as a leading indicator, and after some practice it's not too difficult to spot.

When traded properly, you can be consistently profitable with divergences. The best thing about divergences is that you're usually buying near the bottom or selling near the top. This makes the risk on your trades are very small relative to your potential reward.

Cha-ching!

Higher Highs and Lower Lows

Just think "higher highs" and "lower lows".

Price and momentum normally move hand in hand like Hansel and Gretel, Batman and Robin, Serena and Venus Williams, salt and pepper...You get the point.



If price is making higher highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows.

If they are NOT, that means price and the oscillator are diverging from each other. And that's why it's called "divergence."

Bollinger Bands

Image via Wikipedia
ongratulations on making it to the 5th grade! Each time you make it to the next grade you continue to add more and more tools to your trader's toolbox.

"What's a trader's toolbox?" you ask.

Simple!

Let's compare trading to building a house. You wouldn't use a hammer on a screw, right? Nor would you use a buzz saw to drive in nails. There's a proper tool for each situation.

Just like in trading, some trading tools and indicators are best used in particular environments or situations. So, the more tools you have, the better you can adapt to the ever changing market environment.

Or if you want to focus on a few specific trading environments or tools, that's cool too. It's good to have a specialist when installing your electricity or plumbing in a house, just like it's cool to be a Bollinger band or Moving Average expert.

There are a million different ways to grab some pips!

For this lesson, as you learn about these indicators, think of each as a new tool that you can add to that toolbox of yours.

You might not necessarily use all of these tools, but it's always nice to have plenty of options, right? You might even find one that you understand and comfortable enough to master on its own. Now, enough about tools already!

Let's get started!

Bollinger Bands

Bollinger bands are used to measure a market's volatility.

Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract and when the market is LOUD, the bands expand.

Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart.



That's all there is to it. Yes, we could go on and bore you by going into the history of the Bollinger band, how it is calculated, the mathematical formulas behind it, and so on and so forth, but we really didn't feel like typing it all out.

In all honesty, you don't need to know any of that junk. We think it's more important that we show you some ways you can apply the Bollinger bands to your trading.

Note: If you really want to learn about the calculations of a Bollinger band, then you can go to www.bollingerbands.com.

The Bollinger Bounce

One thing you should know about Bollinger bands is that price tends to return to the middle of the bands. That is the whole idea behind the Bollinger bounce. By looking at the chart below, can you tell us where the price might go next?



If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands.



What you just saw was a classic Bollinger bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels.

The longer the time frame you are in, the stronger these bands tend to be. Many traders have developed systems that thrive on these bounces and this strategy is best used when the market is ranging and there is no clear trend.

Now let's look at a way to use Bollinger bands when the market does trend.

Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Let's take a look at the basics first.



Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Plotting Support and Resistance

One thing to remember is that support and resistance levels are not exact numbers.

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.



Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was "breaking" support. In hindsight we can see that the market was merely testing that level.




So how do we truly know if support and resistance was broken?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.

Let's take our same example from above and see what happened when the price actually closed past the 1.4700 support level.



In this case, price had closed below the 1.4700 support level but ended up rising back up above it.

If you had believed that this was a real breakout and sold this pair, you would've been seriously hurtin'!

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.

To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.

These highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, he or she simply replies, "Sorry, it's just a reflex."

When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.

Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.



Other interesting tidbits about support and resistance:

When the price passes through resistance, that resistance could potentially become support.
The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.



With a little practice, you'll be able to spot potential support and resistance areas easily. In the next lesson, we'll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.