Is Trading Forex Like Trading Stocks?

Is Trading Forex Like Trading Stocks?

The quick and simple answer is “no.”

Trading Forex is different from trading stocks in many respects. In fact, it is different in almost every respect.

First of all, when trading Forex, you are trading “pairs,” rather than a single item. You can “pair trade” certain stocks and futures, as well. For example, you can trade corn vs. wheat, BMW vs. Mercedes, gold vs. silver, and many other pairs. But the only way you can trade Forex is in pairs.

The second big difference between trading Forex and stocks is that stocks tend to reverse directions fairly frequently, while Forex pairs tend to trend longer. A currency can be thought of as the economic strength of an entire country distilled into one trading entity. Thus, when you trade the USDCHF, you are considering the economic strength of the USA vs. that of Switzerland. The economy of a country doesn’t generally turn quickly, and neither does Forex. During most trading days, popular Forex pairs will remain within a fixed range. The EURUSD, for example, trades in a range of about 100 pips each day.

A third difference is the margin requirements. In Forex, the margin is typically 50:1. Stocks usually have a maximum margin of 4:1. This difference can be both useful and dangerous – useful because you can control more currency with fewer dollars; and dangerous because you can lose a lot of money very quickly.

There are other important differences, and we’ll discuss them in detail in the course.

Impact of EU's Credit Rating Downgrade

On Friday, Standard & Poor’s (S&P) downgraded the credit rating of the European Union by one notch, from AAA (its highest rating) to AA+. The S&P believes that the EU’s overall creditworthiness has started to decline as tensions rise during budget negotiations between 28 member states. Credit ratings measure confidence in the group's ability to repay its debt. When S&P lowers its ratings, it means the agency believes it has become harder for a group to repay its debt. This, in turn, can affect a country’s ability to borrow money. Essentially, a lower credit rating translates into a higher interest rate which means its cost more to borrow money!


This is not the only negative news for the eurozone. Growth is expected at 1.1% and the unemployment rate at 12.2% for 2014. Despite the news, price action in the Euro has remained relatively muted. EUR/USD saw a small decline on the weekly chart. A reversal of EUR/USD could be in store if budget negotiations continue to stall.  

Chase That Trade

Trading with your emotions in check is an absolute fundamental when you are involved in the markets.  Sometimes though, it is easy to get caught up in the whole "rush" with everyone else and look to trade even though necessary "precautions" have not yet been established.

The term "chasing the trade" essentially describes a trader who sees a price action accelerate higher and higher at which point he or she, ignoring risk and indicators saying otherwise, decides to buy into this "great" deal hoping that their trade makes profit, because everyone else is profiting from this trade too right?  So why can't you?

Chasing any trade is dangerous for that matter as usually, if you've "missed out" on the first big price move it is questionable if you will actually take a profit in the long run.  The higher the price level goes, the closer it usually gets to overbought levels.  Overbought levels must be looked at in great detail, of course unexpected moves can jolt the price higher, however the more overbought a trade becomes, the more likely a violent drop and price correction will happen, something that you may not be ready for, especially if you get in on a "late" trade still thinking you'll make a gain.

Is it wise to enter a trade late when the price has already risen fairly rapidly and it is in danger of being overbought?  Or is it better to hold back and be more risk averse?
These questions may be answered depending on what strategy you use and your investment goals you've established for yourself though adding technical indicators such as the Relative Strength Index (RSI), the True Strength Index (TSI), and even the Moving Average Convergence/Divergence indicator (MACD) to your existing strategy would definitely be a solid addition especially to counteract any trade chasing you may feel tempted to partake in.

Just remember, the higher and more dramatically a price rockets upward, more likely than not its being overbought and a pullback i.e. price correction, is just waiting to happen.

If the Grinch Takes a Stock Rally, Can Santa Rally FX?

As the Federal Reserve started their end of the year meeting on Tuesday, the stock market produced a slight drop due to speculative fears of a taper of QE3.  The long awaited news of a potential taper will be announced today, concluding the Fed's meeting.

What to expect from the taper?
We can expect to see risk-on-risk-off trading. Investors will start to liquidate riskier assets such as equities and risk driven currencies causing them to depreciate. Investors will want gravitate towards lower risk investments and currencies such as the US Dollar. The result is a bearish correction in the equities market, with a surge of demand towards safe-haven assets and currencies such as the US Dollar.

Looking at the daily chart below we can see how the US Dollar began appreciating due to mentions of a taper in mid October.

US Dollar Index
Daily Chart

Forex Outlook
If we analyze the current and future monetary policies of both the United States and Japan, we will see that the policies are taking two opposite directions. The Federal Reserve is looking to cut down on it's stimulus package, decreasing the purchases of mortgage securities and treasury bonds, while the Bank of Japan is try to boost growth through increasing their stimulus buyback programs.
After looking at the different directions the policies are taking, we can now conclude that the currencies shall react in a similar manner. As our Federal Reserve cuts down on money flow into the economy, the US Dollar will be higher in demand, therefore increase in value. As more of the Japanese Yen flows into their economy, the demand for the currency shall decrease, therefore depreciating the currency.

Below we can see how the two differing policies affecting the currency pair price. The most recent rally began in October with just talks of a taper. If the Fed decides on implementing a taper we can expect a continuation of this rally.

USD/JPY
Daily Chart

Write Out Your Trading Strategy!

Do you ever find yourself altering your trading strategy so that you can enter a trade? If so, ask yourself the following question: Is my strategy written out? Many traders begin live trading in the Forex market without writing out their trading strategy.

Before you begin trading you should comprehensively write out your trading strategy. Any trader should be able to pick up your strategy and easily follow it. When writing out your strategy remember to consider the following things: Time frame trading? Type of market? Win expectancy? Best pairs to trade? Anything pertinent to your strategy.

Writing out your trading strategy will allow you to consistently follow it! Happy Trading!

Range of the Day

Forex pairs tend to trade within a range during a 24-hour day. Here’s an example of how to use this knowledge.  

Here’s a 10-minute chart of the EURUSD beginning about midnight of December 11, 2013. It covers slightly more than one day. The lowest price on the chart is about 1.3740. The highest is 1.3810. The last bar on the chart is about 1.3800. The latest time on the chart is about midnight, 12/12/13.

Questions:

Is this a good place to buy, or short, or neither?

If you buy, what is your profit target? How far up do you expect the price to go?

If you short, what is your profit target? How far down do expect the price to go?

My analysis: Based on the chart above, I’d expect the price to go a bit higher and then reverse. I would expect it to pause or even bounce off 1.3765. And I would expect it to reach the vicinity of 1.3740 within a day.

Here’s the same chart about 2:00 AM on December 12, 2013. As I expected, the price went a bit higher, and then headed down. It is now at 1.3763 (about where I said). I said it could pause or bounce from there, and eventually go to the vicinity of 1.3740. Let’s see what happens.

The price did bounce off the 1.3763 level and popped up to about 1.3790. Then it resumed the downward plunge, and sure enough, it reached 1.3740, about 11:00 AM.

What’s next? At this point, we can ask the same questions as at the beginning?

Buy, short, or do nothing?

If you buy or short, where are your targets?

Your analysis???

Here’s the chart as I write this. The price has moved up from the 1.3740 bottom, and we’ll see where it goes from here.

Struggling Trading Forex? Form A Trading Group!

Most beginning traders in Forex wipe out their account only to never trade again! So how can you avoid this? Start a Forex trading group!  There are four core reasons to start a group:

• To Stay Active in the Market: You can get depressed after a couple of trades that do not work out your way. Meeting with a group will remind you how awesome trading is. You will be able to feed of others success! 
• Improve Your Trading: You will be able to share your trading problems with others who may have overcome the same problem. 
• Focus Your Thinking: Do you ever find yourself getting stopped out of trades only to ask why you got in the trade in the first place? Be accountable to others by explaining your reasoning for getting in a specific trade. 
• Sharing is Caring:  Share strategies with others so that people can give your fresh perspectives on how to improve a strategy. Two heads are better than one. 

Coaching Tip Of The Week: Keep Trading Simple

Do you find yourself moving from strategy to strategy? If so, then maybe you are caught in the cycle of doom that so many traders are caught in. Many traders who are beginners in Forex constantly try new things that they read on the internet, books, Youtube, and magazines. There are searching for that “new thing” that will give them an edge on the market. Many of these traders believe that the more complex a strategy is the more pips they will be able to gain. However, in actual practice, successful Forex trading is relatively simple.

Trading is as much about money management as it is about a particular strategy or set of rules you follow. Bottom line:  A strategy is only as good as its trader.

In order to consistently win, you need to know your system, but more importantly – know yourself. The simpler your strategy is, the more likely you will be to make money with it. Your strategy should have detailed and definite rules for entry and exit. It should also include what pair(s) you will trade, what time of day you will trade, and what profit and draw down you expect.

What is the Taper, and How Does it Effect my Trading?

Fears of high volatility and price corrections in the Forex, equities, and bond markets are due to the recent "Taper" speculation set in by Fed Chairman Ben Bernanke. You ask, what is "Tapering" and why is it important? Tapering refers to the method used by the Fed to gradually decrease their monthly purchases in their recent stimulus buyback program, better known as quantitative easing (QE3). QE3 started back in the Fall of 2012, allowing the Fed to purchase $85 billion in Treasury Bonds and Mortgage Backed Securities. The purpose of this stimulus package is to promote growth in the economy by lowering interests rates.

Looking at the markets performance over the past year we can see how QE3 effected the equities.

With the Fed pumping US Dollars into the economy, the market became more comfortable with risk in equities causing this bullish uptrend and high returns. However with a possible "Tapering" ahead, we can assume that a significant correction to the downside may come. As the Fed gradually decreases the supply of US Dollars, investors will want to hold more dollars, causing an increase in demand for US Dollars with a decrease in demand in the equities market. For the Forex market, the USD will play a pivotal role in the speculation. Theoretically we can expect a spike in the USD due to speculation of decrease the supply of US Dollars in the economy (tapering).

Speculators are predicting for tapering to start in the Q1 of 2014. Therefore expect prices to correct themselves now for the events expected to happen later. 

Trading the USD/JPY this past month.

If you went long USD/JPY last month this is probably how you feel.

Happy Holidays and get out there and do some trading!

-From your friends at FXC

A Strong Foundation is Key

Many new traders to the markets make the mistake thinking that since they read a few articles on trading and now how to read the prices on a chart that it's time to start trading. It may sound crazy, but the mistake happens more than you may think. This one of the contributing factors to why 90% of people who start trading fail. They think that everything is a get rich quick deal, and they end up forgetting how important it is to EDUCATE yourself in the markets. As an up and coming trader it is important that you develop a strong foundation in education for trading and how to analyze the markets.
The two basic types of analysis for understand and predicting price movements are:

• Fundamental Analysis: In Forex, this type of analysis is used to measure the different contributing factors to supply and demand of these currencies. With stocks you look at the measurements of the company, but in Forex you look at the economic reports of different countries. A few may include GDP, inflation, trade balance, political events and more. Events you may see on the evening news can help you to earn money in the Forex Markets. .
• Technical Analysis: Every chart tells a story, and like many believe that history repeats itself. The technical side of trading involves analyzing price patterns and using charting techniques to create profit opportunities. 

It is important to not only educate yourself, but apply what you learn in sync with a demo account that allows you to trade with "play money." By doing this you will be able to realize how the markets work and at the same time continuing your education. 

Example of Technical Analysis

Dollar Weaker Than Expected Due To Slow Start To US Holiday Season

The amount of of shoppers over the Black Friday weekend saw record highs, however, the amount of spending showed the first decline since 2009. American consumer spending has dropped almost 2.9% this season. What does this mean for the dollar? It does not have the strength that many think it does. This can be seen in the futures prices for the USD. It is in a down trend since the initial spike after Black Friday weekend!

Learn with FXConnection. Coming Soon!

FXConnection offers products & services that allow everyday people to learn how to trade, improve their trading, and stay connected in the Forex Markets through:

• Online Courses
• Coaching Services (1on1 and Group) 
• Social Profiles
• Social Analysis of the Markets
• and more!

 Learn the right way and Stay Connected  to the markets with FXC! Here is just a small part of what is to come. FXConnection coming soon 2014!

Where is the Market?

Are the markets all that randomized?  Some would argue that the markets move cyclically and oscillate essentially between different levels whereas others would argue that the market is based a lot off random movements, some by perception, other movements by different factors indirectly or directly affecting the economy.

The whole idea behind the fundamental and technical analysis is simple: take human emotions out of the equation and there shouldn't be any economic crises.  Sure, markets can get "unpredictable" and theories such as the Random Walk Hypothesis developed by Burton Malkiel at Princeton.  Essentially, he argues that the market is just as predictable in trending as the flipping of a coin.  Heads, well it looks like the market is up today; tails, we're down.  

There are many individuals that believe this theory, as I am sure, part of it is to be believed though are markets truly just all randomized movements?  Try arguing the Random Walk Hypothesis to Ralph Elliot, the creator of the Elliot Wave.

This strategy he developed, a strategy, is based on social behavior and places movements in the market based on this behavior.  It is a very simple strategy, impulse and corrective wave patterns.  Depending on the sequence and the occurrence of these waves, this tells the trader where the market may be residing at during one of the many stages or levels.  Its almost trying to predict the general location of the market, like Heisenburg's uncertainty principle, except for the market since the trader never fully knows where the exact placement of the market is in relation to the waves and when he does seem to know the market movement he doesn't know where it resides on the exact Elliot wave.

Needless to say, the Elliot Wave and similar strategies have been successful numerous times yet still the market has that twinge of uncertainty about it, whether it be the ECB announcing dovish policies for the Euro or the Fed's whole "To taper or not, that is the question."  The market has a certain level of plain, old-fashioned unpredictability to it and especially in highly-volatile, highly-liquid markets there is a larger element of risk that anyone should be aware of.

The markets are completely unpredictable as some would say, yet others would argue right back that not only are the markets sometimes predictable, but during those levels of predictability, profits can be made.  And those that do find accurate predictions, make a nice profit.

One must take risks to earn rewards...

The markets are always full of risk, but doesn't mean you shouldn't take risk. Remember to use proper risk management techniques to minimize magnitude of losses and multiply gains. Don't be like this guy and miss out on trade opportunities...

The Pros of Trading Currencies vs Stocks

When the everyday person comes across the topic of investing or trading in the markets, the first thing that comes to mind is the Stock Market. Why? Because it is the mainstream asset we see in commercials, movies, advertising, and what most people talk about. Therefore its normal to have a bias towards starting in this market since it is what you have been exposed to the most. If you are someone who is or looking to start trading and investing yourself (a "Retail Trader"), I'm here to tell you that the stock market is not the way to go unless you are looking for long term plays.
I have been on wall street and seen how large banks and hedge funds make it extremely difficult for the Retail Traders (us) to turn a profit. I have also experienced it myself. Large banks compete each day, buying and selling different stocks in the with hundreds of thousands of dollars per trade. They do this to be the largest holders of these specified stocks to help make the stock liquid to route to hedge funds. Because of these constant high end purchases, high price swings occur, creating higher volatility and risk for the retail trader in the short term (intraday, weekly). The Forex Market allows retail traders to avoid this manipulation of prices.
The foreign exchange market, commonly known as the Forex Market, is the largest financial market in the world. The Forex market has an average daily trading volume of over $5 trillion compared to the largest stock exchange in the world, the New York Stock Exchange (NYSE), which has a daily trading volume of $60 billion. The Forex Market offers many advantages that other markets don't, or may not on a consistent basis:


1) No Commissions  
2) Trade in any direction of the market without special capital requirements
3) 24 Hour Market
4) Leverage
5) High Liquidity 
6) Globally Connected
7) Low Capital requirements to open an account. 

To the right you can see a comparison of the some of the differences in trading Stocks vs. Forex.