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Tuesday, July 7, 2009

Five Ways that Technical Analysis Can Fail

Technical Analysis is truly remarkable. At a glance, the trader can view an incredible amount of information on the price movement of any given currency. Moving average lines can show trending or range-bound currencies. Candlesticks report the relationship between the opening and closing prices. Bollinger Bands give price targets and show the currency pair’s level of volatility. Oscillators like the MACD signal entry and exit points for profitable trades. All this information is provided instantaneously. It’s the best invention since the Blackberry, right? Not necessarily. 

Below are five ways in which technical analysis shows its imperfections. These unpredictable events can cause currencies to move in unpredictable ways for a few hours, an entire day, or even a month or longer. The currency could move just long enough to hit the trader’s stop-loss order, thus closing a trade. Or it could cause a complete trend reversal, lasting for weeks or months. 

Sometimes, these events will cause currencies to move in your favor; sometimes not. The important point is that currencies can move contrary to what the indicators predicted -- and every trader has to be prepared for these events.

How Can Technical Analysis Fail? 


Below are the five ways that technical analysis can fail. 
Geopolitical events. 

Any geopolitical event can move currencies. News that Iran intensified its nuclear program fueled the fall of the USD last April, 2007. On October 9, 2006, North Korea tested its first nuclear weapon, which moved the yen to triple-pip gains for a day. Elections, OPEC decisions, and G7 statements can also move currencies. 
Economic data 

Any economic news can cause currencies to move. Some of the most market-moving economic reports are the employment figures, Fed announcements (or even speeches made by central bank members), GDP report, and the manufacturing survey . 
Natural disasters 

Earthquakes in Japan, drought in Australia (affecting wheat production), tsunamis in the Asia-Pacific region, or any natural occurrence that affects commodity supply can move currencies contrary to the technical forecast. Commodity-linked currencies like the Australian Dollar (AUD) are particularly sensitive to natural disasters. 
Acts of terrorism 

Any act of terrorism can affect currencies. The Sept 11, 2001 attacks pushed the USD quite dramatically downward. The terrorist attacks in London in July, 2005 also moved the European currencies, particularly the Pound (GBP). 
Internal Conflict or war 

Any conflict can affect currencies, particularly in countries with commodities linked to oil or gold. Internal conflicts flaring up in oil-rich Nigeria can move currencies like the Canadian Dollar (CAD) and the US Dollar (USD). 

Is Technical Analysis Useful in Currency Trading? 

Absolutely. In fact, a trader must have at least a basic understanding of technical analysis to trade currencies effectively. This basic knowledge includes understanding simple moving averages, Bollinger Bands, and oscillators. With these three tools, a currency trader has the best possible tools available for profitable trading.


A more studious approach to technical analysis will improve your trading ability and manage your risk more effectively.
(Source: forextrading.about.com)

A Basic Guide to Technical Analysis

Technical Analysis

Technical analysis is the study of charts and indicators to determine the past and future price movement of a currency pair. Unlike fundamental analysis , technical analysis relies on the use of charts and mathematical techniques to examine various aspects of a currency pair’s price movement. With the growth of the Internet, technical indicators that were once available only to brokers and professional traders are now available to any trader with a computer. 

What Do Charts Tell Me? 

Charts can provide a lot of information about the price movement of a currency pair. Many traders say that a chart tells a story about the currency pair. With more than 50 types of technical indicators , a trader can receive a wealth of information about how a currency pair is moving. From this historical information, the trader can deduce the future movement of a currency pair. 

Support and Resistance

Most traders are looking for support and resistance lines to tell them where and how the currency price is likely to move. A support line lies below the currency pair price. A resistance line lies above the currency pair price. Depending on the strength of these lines, prices tend to trade between the support and resistance levels, bouncing off one and heading towards the other. Support and resistance lines are basic types of trend lines that can be determined by the moving average lines or by more complex technical methods. 

Trends

Many traders will also be looking for a trend line. A trend line shows how a currency pair price is moving (or trending) – up, down, or sideways. Finding a trend can be very helpful in determining future price movement. The saying that “the trend is your friend” is quite true and many traders rely on the existence of a trend to predict price movements. 

Technical Indicators

A technical indicator studies a particular aspect of a currency pair. Technical indicators are very similar to economic reports in that they study the health and movement of a currency pair while economic reports study the health and growth of an economy. Some technical indicators are basic such as the moving average line . Other indicators are complex calculations like Bollinger Bands or the MACD . 

Number of Indicators

Traders can use many different kinds of indicators or they can focus on a few. Most experienced traders will focus their efforts on using only a few types of technical indicators to provide them with the information needed to trade. 

Why Use Technical Analysis? 

Technical analysis provides information on the best entry and exit points for a trade. On a chart, the trader can see where momentum is rising, a trend is forming, a price is dipping or other events are developing that show the best entry point and time for the most profitable trade. With the constant movement of various currencies against each other in the Forex market, most traders will focus on using technical indicators to find and place their trades.

Is Technical Analysis Difficult? 

Technical analysis is not difficult, but it requires studying different types of charts such as the hourly or daily charts, knowing which technical indicators to use and how to use them. Computers and the Internet have made this process much easier. Most brokers provide basic charts and technical indicators for free or at a very low cost. One way to avoid getting frustrated by all the lines, colors, and graphics is to focus on using only a few indicators that will provide you with the information needed. Try not to clutter your chart with too much information. 

Remember that the chart is telling a story.

(Source: forextrading.about.com)

Chart Timeframes

When using charts to make trading decisions, you can choose between different spans of time when it comes to your chart.

Charting systems can offer timeframes ranging from tick by tick to monthly bars. Monitoring multiple timeframes can give you a greater perspective on the personality of a currency pair.

The smaller timeframes such as 5 minute and 15 minute are best suited for daytraders looking to scalp for quick pips. They are also good for swing traders looking for an opportune moment to make an entry. 

The 1hr chart is for swing traders and long term traders looking for the momentary trend. The 1hr chart is well known for it’s reliability on short term changes in momentum. 

The 4hr chart is for long term traders. The 4hr chart is most useful for traders wishing to trade the daily chart that want to make a carefully timed entry.

The daily chart is best used for setting up long term positions on a currency pair. 

Each of the different timeframes can give you clues to the personality of a trading pair. You can find out whether the pair tends to move steady during it’s trends, or if it tends to stall often. You can find out if it’s volatile during daily sessions, but steady over the week.

Viewing a currency pair in multiple timeframes can help you find good entry and exit points, depending on the strategy that you want to use. Daytrading a currency can make a lot of sense for traders looking to take maximum advantage of daily volatility, but keeping the daily trend in mind can help daytraders focus on the bigger picture.
The Bottom Line

Forex trading attracts many different types of traders with many different types of systems. If you want to trade a currency pair, it’s best to become as familiar with it as possible. Viewing the currency pair in multiple timeframes is part of the process of learning it’s personality. Understanding the currency pair’s personality can help you in your success with trading it.

(Source: forextrading.about.com)

Forex Charts

Chart Basics

Learning how to read a forex chart is considered to be somewhat of a science. They look complicated at first glance. Forex charts can look drastically different depending on what options you want to use. Charts usually have settings for the display style of the price and the time frame that you want to view. Time frames can be anywhere from 1 second to 10 years, depending on the charting system. Price can usually be displayed as a candlestick, a line, or bar.

Chart Types

Charts have typically have several different display modes for displaying the price. One method that price can be displayed is called Japanese candlesticks. Candlestick charts are the most commonly used display method for showing the price on a forex chart. There are theories about using candlestick patterns to predict the price. 

Price can also be displayed as a line. Line charts are a good way to simplify the display of the price. The line chart will show you the closing price for each period.

Another way to display the price is by using a bar chart. The bar chart is similar to the candlestick chart. A bar chart will show you where the price opened, the high and low, and where the price closed.

Technical Analysis

One of the best reasons to learn how to read a chart properly is so you can apply technical analysis. Not every trader believes in using technical analysis, but it can be useful, even if it is not your primary method of trading. Technical analysis relies on the price that is on the chart you are using. Most charting systems will allow you to add technical analysis tools as overlays on your chart.
(Source: forextrading.about.com)

Why Trade Forex

Although the Forex market is by far the largest and most liquid in the world, day traders have up to now focused on seeking profits in mainly stock and futures markets. This is mainly due to the restrictive nature of bank-offered Forex trading services.

Unlike others, NorthFinance offers both online and traditional phone Forex trading services to all investors, with minimum account opening values starting at 100 USD.
There are many advantages to trading spot Forex as opposed to trading stocks and futures. 

1. Market is on its own
In the peoples mind there is this opinion that brokerage firms and analysis’s can change the flow of the currency. But in reality, FOREX is an independent international foreign exchange market which can be influenced by many factors but NOT by the wants(wills) of traders and brokerage firms.

2. Trade when you want, make your own trading schedule
Because of its diversity you are able to trade FOREX 5 days a week, 24 hours a day. US, Europe and Asia the major trading sessions enable you to trade on your own schedule and make a quick respond to breaking news from all continents of the world no matter where you are located.

3. Big Potential
Complied benefits from both high leverage and potential profits from both rising and falling market, Forex is very interesting for speculators from every point of view. 

4. More buying power with 1:500 leverage
For example, with $10,000 cash in a standard account that allows 1:100 leverage (1%), you can control up to $1,000,000 in notional value. 

5. Take all your profits with you
NorthFinance charges NO commissions or fees, simply take all your profits with you. Commission-free trading is one of the most attractive features of NF. The dealing spreads are as low as 2 pips(for EUR/USD). Providing a more comfortable environment when trading. Versatility all around 

6. Forex is the largest and most liquidated market in the world
The overall volume of FOREX market is $2 trillion. Almost all the amount of the volume involves trading of the major currency pairs, NorthFinance clients enjoy tight spreads on these pairs.

7. Trade in both bullish and bearish market
NorthFinance clients have the ability to trade in both directions, compared to other equity markets where it is more difficult to make certain trades. This gives an advantage to all our clients.

8. Easy access to your Forex trading
It is simple to open an account, you can do it on-line within 10 minutes. With multiple means of funding/withdrawing you can start trading within one hour. Access your trading account from anywhere in the world. Our company serves clients, from over 150 countries and with a large network of world wide located offices and representatives it makes contact us easy.

Trading Example

Trader Y opened an account of USD 50'000. 
He buys EUR/USD 500'000 @ 1.3500 at the market and places a stop loss order at 1.3460.
This point shows that his maximum risk is USD 2'000 and his margin utilization is 10%, well above the minimum.

During the trading day the Forex market fluctuates and initially moves down to 1.3480.
At this point trader Y has an unrealized loss of USD 1'000 and his margin utilization has fallen to 98% reflecting the effect of the downward move on his margin capacity. 

Later the price moves back up to 1.3600 and trader Y decides to take profit. 
He sells at 1.3600 making a USD 5'000 profit which represents a 10% return on his account value.
Note that trader Y took only a risk of USD 2'000 and made a return of USD 5'000 this equates to a risk/reward ratio of 2.5. A high risk reward ratio is what every trader should be aiming for.
Please note that the example above is a random case and in no way is meant to illustrate that the potential for profit is always greater than the potential for loss in foreign exchange trading.

(Source: www.northfinance.com)

Brief History of Forex Trading

Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. 

Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies. 

Before World War I, most central banks supported their currencies with convertibility to gold. Although paper money could always be exchanged for gold, in reality this did not occur often, fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government. 

At times, the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility. 

In the latter stages of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a new world reserve currency in favour of a system built on the US dollar. Other international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade) were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilising monetary crises which led to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent.

The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits. 

The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values.

But the idea of fixed exchange rates has by no means died. The EEC (European Economic Community) introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93, when pent-up economic pressures forced devaluations of a number of weak European currencies. Nevertheless, the quest for currency stability has continued in Europe with the renewed attempt to not only fix currencies but actually replace many of them with the Euro in 2001.

The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates, in particular in South America, looking very vulnerable. 

But while commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have found a new playground. The size of foreign exchange markets now dwarfs any other investment market by a large factor. It is estimated that more than USD 3,000 billion is traded every day, far more than the world's stock and bond markets combined.

(Source: www.forextrading.com)
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