Interactive Trader

Technical Analysis: Using the RSI

There are so many technical indicators available to the trader today and for some, choosing between them is a nightmare. When you are considering using the RSI as your momentum indicator, for long trades, you would want the indicator to be above 50 on all time frames, and for short trades, you would want it to be below 50 on all time frames. Momentum indicators are best when your strategy involves following the trend.

How does the RSI work?

The RSI measures how many of the set amount of candles close up, or down, and then give you a score between 0 and 100. If for instance, set period is 5 candles and all 5 the previous candles closed higher than they opened, the RSI would give you a score close to 100, when they closed lower than they opened, a score close to zero, and if the market ranged in the same position a score of 50.

The RSI is a momentum oscillator and simply tells who is in control, the bears or the bulls.

There are 3 parts of the RSI you should be aware of:

  1. Above 70 – Overbought
  2. Crossing 50 – Indication that momentum is changing
  3. Below 30 – Oversold

This simply means, when the RSI is above 70 you would generally expect it to fall when it breaks below 70, this would be confirmation the market is changing down.

The same applies to the 30 line, below it, the market is oversold, and you would expect it to rise, when it breaks through 30 you will have confirmation the market is changing up.

When the market crosses the 50 line, it is an indication the momentum is beginning to change in the direction of the break.

Although all of this sounds pretty easy, many rookie traders have blown their accounts using this indicator without understanding it properly.

How to trade with the RSI

When developing a trading strategy you have a couple of options:

  • Following the trend
  • Fading the trend
  • Range Trading

When following the trend:

When the RSI crossed from below 50 to above this is a signal that a bullish trend may be starting.

When the RSI crossed from above 50 to below 50 it is a signal a bearish trend may be starting.

When Fading the trend

When the RSI crosses from above 70 to below 70, it indicates the bulls are losing control of the market and the bears are ready to step in.

When the RSI crosses from below 30 to above, it indicates the bears are losing control of the market and the bulls are ready to step in.

Always look for a confluence of factors

As a trader, you should know there is no way to predict the future. The best we can do is looks for setups with the highest probability of success. Trends can go on for years, and even these strong trend can come to an end in an instant. Use the RSI in conjunction with other indicators such as the MA 200, support and resistance or other analysis methods to develop a high probability strategy and always backtest your strategy before trading it.

Social Trading: The Pro’s and Con’s

Basics of Social Trading

Social trading is a fast growing fad that is sweeping the trading world. Many new traders find themselves faced with the decision whether or not they should go this route.

What is Social Trading?

Social trading is based on a network of both professional and those who follow them. In social trading, we have traders link their accounts with those they have decided to follow. This means that any trade entered by the professional is automatically copied by those who follow said trader.

The Pro’s

  • As a beginner, you can copy the trades of professionals.
  • You can trade, even when you don’t know a thing about trading or don’t have the time for it.
  • You have access to the trading history of successful traders
  • No stress about your open positions, someone else is managing your trades on your behalf.
  • The effect of trading psychology is minimised, you don’t get negative after losing trades and don’t get over excited after the wins either.

The Con’s

  • Some traders require huge account balances to allow you to copy their trades.
  • A trader’s past performance is not an indication of his future success.
  • No trader has a 100% success rate, losses will happen.
  • Just because a trader is successful, doesn’t mean his trading strategy or style agrees with your appetite for risk.

Other considerations

  • Not all traders use the same broker, not all traders have the same amount of leverage which will affect your margin. Ensure your margin is sufficient to copy the trader you want to copy.
  • Just because the trader has a 100% success rate, does not make him successful. I’ve come across traders with the most impressive stats, however, when looking at his trading history you will find he only closed the successful trades and left the losers open. Always check the open trades.
  • Your account may not be the same size as the professional whose traders you want to copy, decide how much you are willing to risk, and adjust your position size accordingly. The professional may afford a position size of 10 lots, can you?

Should you do it?

The most negative aspect of social trading that I have found, is that “Social Trading” cultivates the idea that personal research isn’t necessary. It’s easy to recognise trends and capitalise on them. When this happens many new traders either forget or do not bother to learn or to do research. This leads to a lack of understanding that both gains and losses occur. When this situation arises, most new traders don’t know how to deal with the emotional rollercoaster that trading can inspire. Doing adequate research on all aspects of trading is a must for all traders. No matter how they decide to trade with their hard earned money.

Social trading can be very profitable, but it can also lead to immense losses. All those who are considering social trading should never assume what other traders are telling them to be true. Avoid those who seem to give the impression that they can tell the future. Always do your own research and get your facts straight before you trust anybody with your money.

SmartTrader: Reinventing the Way We Trade

With so many different Forex trading software packages out there it is becoming hard to choose which one you should use. SmartTrader is one of the more  being used today and more than that still the number one choice for many a Forex trader.

Using SmartTrader to Leverage Trades

  • Unlike many of the trading platforms available, when it comes to SmartTrader, usability and a user-friendly interface is one of its key advantages. This platform is easy to use and easy to understand, from initial setup to testing strategies using the built-in strategy tester.
  • Another aspect of the trading platform is its charting capabilities. SmartTrader once again simplifies things for you as the trader, in the sense that it allows you to do your technical analysis on the chart and then open and monitor your trades on the same chart.
  • The platform includes more than 50 built-in indicators, however, one that it lacks is the Pivot Points, but don’t worry you can get them from the built in market.
  • As far as brokers are concerned SmartTrader is extremely flexible in the sense that the majority of brokers allow you to use SmartTrader as your trading platform.
  • Meta Trader has an amazing market place where you can buy an array of scripts, custom indicators, trading signals and Expert Advisors, but not all of these are for sale, some of them are free.
  • Available on various operating systems including iOS and mobile trading.
  • Some of the other features includes but is not limited to you being able to trade almost any currency pair your broker offers, commodities and indices.

SmartTrader is considered to be one of the best Forex trading software available and is being used by millions of traders around the globe. You can also interact with some of the other users in the MQL4 community.

Before I go off and highlight the weaknesses, did I mention it is free?

When I said to highlight the weaknesses, there isn’t much you can criticize SmartTrader on, the look is getting a little old now, but one of the more pressing concerns is: Will Meta Trader be able to keep up with some of the newer trading platforms out there? If you don’t mind the Windows 98 look of the GUI, I am pretty convinced that this ultra customizable platform will in-fact still be one of the favorites and one of the best and most versatile platforms 10 years down the line.

The #1 Danger Sign that Investors are Doing Forex Trading Wrong

Forex Trading Mistakes

There are many, many ways to do the wrong thing when you are trading the Forex market (as more than a few traders have discovered).  Studies have shown that traders are right more than 50% of the time, but they still lose more money on their losing trades than they ever win on their winning trades.

So, what is the “Danger Sign” that investors are missing that makes their trading so wrong?

It comes down to “Risk/Reward”

Simply put, Forex traders should always use stops and limits to ensure a risk/reward ration of 1:1 or higher. Now, this seems very easy to follow when you aren’t in the middle of your trading, but you should close out your trades when your trades go against you before your loss gets too big. When you’re a Forex trader, you’re going to lose — the trick is to lose as little money as possible.  Similarly, when your trade is going well, it is often a great idea to let it continue going in the right direction for a few more profits.

Don’t Let Your Emotions Get the Best of You

Unfortunately, humans — with their emotions — can’t easily do this.  When things are going bad, we want to wait for things to turn around and get better, and when trades are going well, we want to cash out and start spending our money!  Emotion almost always favors the “risk” side of the “Risk/Reward” equation, and while we want to prove ourselves right with our trades (“If I just hang on, this 98% reduction in value is going to go the other way…”), we need to focus on what makes us profitable, whether we’re right or not.

The way to avoid the danger sign is to follow one rule:  make sure your reward is bigger than any possible loss. This is your “Risk/Reward ratio,” and it is the most important factor in your trades.  Let’s say you are in a trade where you could gain 50 pips, and you could lose 50 pips.  Your risk/reward ratio here would be 1-to-1 (or 1:1).  This is good, but you know what is better? A trade where you could gain 100 pips while leaving yourself at risk to lose 50 pips.  This would be a risk/reward ratio of 1 (the 50 pips you could lose) to 2 (the 2×50 pips you could win). 

A 1:2 risk/reward ratio is twice as good as 1:1, but you can do even better if you try.  When you’re using lower probability trades (like trend trading) you’ll want to aim for a risk/reward of at least 1:2, and 1:3 or 1:4 would be preferred.

No matter what Forex trading strategy you use, you should always use a minimum 1:1 ratio, because if you’re right only 50% of the time, you’ll still be able to at least break even with your trades.

How do you stay on track once you’ve set your risk/reward ratio? That part is a little easier. All you have to do is make your plan and stick to it.  Resist the temptation to take tiny profits or stretch out your losses. Instead, take your emotions out of the equation entirely by using stop-loss and limit orders from the very beginning of your trades.  These will help you set the correct risk/reward ratio of 1:1 from the very start — and after you’ve put your strategies into action, keep your hands off of them.

When you do resist the urge to play around with your trades while the market is still moving, you put yourself in the best position to make money no matter whether your predictions were right or not. Successful Forex traders profit even when they are wrong about the market’s direction (which no one can predict accurately all the time!), and they do this by setting the proper risk/reward ratio, let profits run when they happen and cut losses quickly using stop-loss and limit orders.

And here’s another tip: When you place your trades, use a stop-loss order and make sure your profit target is at least as far away from your entry as your stop-loss is.  Aim for a 1:2 risk/reward ratio or higher if you can, and then no matter which way the market goes you’ll be in a place where you can make money.

3 Insider Forex Trading Facts Everyone Needs to Know

Despite the fact that the Forex market is the biggest investor market in the world — in which $5.3 trillion is traded every day — too many people don’t understand the huge opportunity it provides. It’s best to begin with a few basic facts about the Forex market before seeking the training and tools it takes to become a successful investor.

Here are 3 of the most important things every trader needs to know about the Forex market:

#1 – It all begins with a PIP. The smallest increment of trade in the Forex market is called a “pip,” which stands for “percentage in point.” Basically, the prices of currency pairs are quoted to the fourth decimal point in the Forex market. For another way to look at it, if you bought a cup of coffee at Starbucks for $4.30 (hey, it’s Starbucks!), in the Forex market that cup of coffee would be listed for 4.3000. Now, as prices go up or down, any change in that fourth decimal point (the ten-thousandths place) is called a pip, and is usually equivalent to 1/100th of 1% (note: the Japanese Yen does not follow this convention, and a quote including the Japanese Yen is taken out to just two places — that is, to 1/100th of the yen itself, instead of 1/1000th like other currencies).

#2 – Here’s what’s traded in the Forex market. The Forex market includes currencies from countries all over the world, but only twenty of the top currencies are used in about 93% of all trading. The more exotic currencies (such as the Czech koruna) have nowhere near the trading volume of the so-called “Majors,” which include these currency pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD.

The next most popular trading pairs are known as the commodity pairs, and they include AUD/USD, USD/CAD and NZD/USD. These seven pairs, along with other combinations such as GBP/JPY and EUR/CAD make up more than 95% of all Forex trading. Only 18 pairs and their crosses (pairs which do not include the USD) are actively traded by the majority of traders, which means the Forex market is much more compact for traders than the thousands of listings in the stock market.

Wondering about these abbreviations? Currency quotations like EUR/USD use the abbreviations for currencies that are prescribed by the International Organization for Standardization (ISO). Using this convention, the abbreviations for the major currencies include the US Dollar (USD), the Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and the Swiss Franc (CHF).

#3 – Here’s what’s actually being sold in the Forex market. In a way, you could say that nothing is really being bought or sold in the Forex market, because currencies never actually change hands. The trades that Forex traders place are merely ones and zeroes in a computer, with the market price determining profits and losses.

The Forex market was needed by big companies with locations around the world to allow consistent exchange of currency to easily pay for goods and services from foreign vendors, pay workers in the currencies they use and make corporate mergers and acquisitions easier to transact. These days, there is much more speculative trading in the Forex market, with 80% of all Forex trades coming from investors looking to profit. These speculative investors include hedge funds, large banks and, of course, individual investors who appreciate the tremendous opportunity offered by Forex trading.

Despite the fact that in the Forex market one Euro is not packaged up and sent to the U.S. in exchange for one US physical dollar, the consequences for investors are the same. Whenever a trader sells one standard lot of EUR/USD (where a standard lot equals 100,000 units), that trader has basically given up euros for US dollars — making the investor short on euros and long on dollars.

Going back to our Starbucks example above, when you pay your $4.30 for your coffee, you are short the $4.30, and long one coffee. Starbucks is long $4.30, and short one coffee (probably a Grande…). This is exactly the same as what investors are doing in the Forex market with pairs of currencies.

There is a great deal to learn about trading the Forex market, and experts in the field are always ready to help you get started trading right. Take time to understand the Forex market before you dive in, and you’ll be in a much better position to profit as you gain experience.

The Top 4 Factors that Influence Forex Rates

forex indicators

The Foreign Exchange rate (better known as the Forex rate) is one of the most important means through which a country’s relative level of economic health is determined. A country’s foreign exchange rate provides a window to its economic stability, which is why it is constantly watched and analyzed. If you are thinking of sending or receiving money from overseas, you need to keep a keen eye on the currency exchange rates.

The exchange rate is defined as “the rate at which one country’s currency may be converted into another.” It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to another. For these reasons; when sending or receiving money internationally, it is important to understand what determines exchange rates.

This article examines some of the leading factors that influence the variations and fluctuations in exchange rates and explains the reasons behind their volatility, helping you learn the factors that influence your Forex trades (and also let you know the best times to send money abroad!).

1. Inflation Rates

Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another’s will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates

2. Interest Rates

Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates

3. Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It consists of total number of transactions including its exports, imports, debt, etc. A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic currency.

4. Government Debt

Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.

Part Two: Learning to Trade

In our last article, we took a look at some of the terminology understood and used by Forex traders, and now we’re going to provide some application of those terms so you can begin your trading the right way.

You may recall what is perhaps the most important term you can learn — “Pip,” which is the smallest price change that a given exchange rate can make, and the way traders track their wins and losses.

We also mentioned that traders can choose a lot size — standard, mini, or micro — and because of the different lot sizes the monetary value of a pip you win or lose can vary according to the size of your trade and the currency you are trading.

Many traders choose the mini lot size, which uses increments of 10,000. A lot size of 10,000 for the EUR/USD is worth $1.00 per lot, so if you chose to trade 3 lots (or 30,000 in total), each pip is worth $3 in profit or loss. A full size lot, or standard lot, is 100,000 where each pip is worth $10, and a micro lot size is 1,000, where each pip is worth $0.10.

Some currency pairs will have different pip values. Be sure to check with your broker, or consult the software you use to plan your trades for information about currencies and their current pip values

A 5 pip spread for EUR/USD is 1.2530/1.2535

One of the nice things about trading currencies is there is no commissions — but how can that be?. If you look at the quote above, you’ll notice a small difference of pips between the two quoted currencies (in the 4th decimal place); the difference in prices here equals 5 pips.

This 5 pip difference in price is known as the spread, and the spread represents the difference between the ASK and BID is called spread. This spread represents brokerage service costs and replaces transactions fees for Forex traders.The spread is how the broker makes his money and works similarly to the bid/ask in stock trading.

Not all spreads are created equal. The spread differs between brokers and sometimes even the time of day can cause volume to be light and the spread to subsequently increase for some brokers. There are several factors that influence the size of the bid-ask spread, with the most important being currency liquidity. Popular currency pairs are traded with the lowest spreads while rare pairs might have as high as a “dozen pip” spread.

The next factor that can influence the bid/ask spread is the amount of a deal. Middle size Forex trading deals are executed on quotations with standard tight spreads, but extreme deals – including ones that are very small along with ones that are very large – are quoted with larger spreads due to the risks taken by brokers.

During volatile market times, bid-ask spreads are wider than during quiet market conditions. Even the status of a trader can influence the spread as the biggest traders can enjoy personal discounts. It is fortunate that you are trading during a time of high broker competition, which means as brokers attempt to attract customers, their spreads are usually at or near their lowest levels.

As a trader, you should always pay attention to spread management, because good trading can only happen when all of the market conditions are considered. It’s important to realize that because spreads may change at any time, your spread management strategy should remain flexible enough to adjust to any market movement.

To help you understand more about pip spreads, here are the types you will routinely see as you trade the Forex market:

  • Fixed spread – difference between ASK and BID is kept constant and does not depend on market conditions. Fixed spreads are set by dealing companies for automatically traded accounts.
  • Fixed spread with an extension – a certain part of a spread is predetermined and another part may be adjusted by a dealer according to market.

Variable spread – fluctuates in correlation with market conditions. Generally variable spread is low during times of market inactivity (approximately 1-2 pips), but during a volatile market can actually widen to as much as 40-50 pips. This type of spread is closer to real market but brings higher uncertainty to trading and makes the creation of an effective strategy more difficult.

Part One: Learning to Trade

If you are looking to become an investor in the foreign exchange market — also known as the Forex market —  there are three types of accounts designed for retail investors: standard lot, mini lots and micro lots. Best of all, beginners can get started with a micro account for as little as $50.

However, before you begin your Forex market, take some time to learn a little more about how foreign currency trading works by reviewing some of the most important terms of the Forex market. If you already have some experience trading stocks or options, you should pick up Forex trading very easily.

Here are some of the most common — and important to know — Forex terms.

BASE CURRENCY: The first currency quoted in a currency pair on Forex. For example, for the currency pair USD/GBP, the U.S. Dollar is the base currency. The base currency is also known as the domestic currency or accounting currency.

CROSS CURRENCY PAIR: A pair of currencies traded in Forex that does not include the U.S. dollar. An example of a cross currency pair would be NZD/GBP (the New Zealand Dollar/Great British Pound). When trading these cross currency pair, one currency is traded for another without having to first exchange the currencies into U.S. dollars.

CURRENCY PAIR: The quotation and pricing structure of the currencies traded in the Forex market, in which the value of a currency is determined by its comparison to another currency. These currency pairs are usually written like this:  AUD/USD. The first currency of a currency pair is called the “base currency” (in our example, the Australian dollar), and the second currency is called the “quote currency” (the U.S. dollar in this example). The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency. (At the time of this article, the AUD/USD = .76, meaning one Australian Dollar is worth 76 U.S. cents.)

PIP: A pip is the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places (that is, .0001), the smallest change is that of the last decimal point. A common exception is for Japanese yen (JPY) pairs which are quoted to the second decimal point (.01).

QUOTE CURRENCY: As seen above, the second currency quoted in a currency pair in Forex is known as the quote currency. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency. This is also known as the “secondary currency” or “counter currency”.

Now that we’ve reviewed basic terminology, let’s look at some of the differences between trading stocks vs. currencies. In currency trading you are always comparing one currency to another so Forex is always quoted in pairs. Whenever you see a trader only talk about one currency — such as saying the euro (EUR) is trading at 1.3224, you may assume that the unsaid currency is the U.S. dollar (USD).

When looking at the quote screen for the first time it may seem confusing at first, however, it’s actually very straightforward. Below is an example of a EUR/USD quote:

EUR/USD = 1.1141

The quote example shows traders how much one euro is worth in US dollars. The “base currency” here is EUR, and the “quote currency” is USD.

When traders buy or sell a currency pair, the action is performed on the base currency.

If a trader is bearish on euros, he could sell EUR/USD. When the pair EUR/USD is sold, the trader is not just selling euros but also buying US dollars simultaneously, which makes up the pair trade.

Let’s say that you sold the EUR/USD at 1.1141. If the EUR/USD falls from that value, we know that the euro is getting weaker and the U.S. dollar is getting stronger. You might have also noticed the quote price has four places to the right of the decimal. Currencies are quoted in pips, where a pip is the unit you use to count your profit or loss. For pairs except for ones including the Japanese Yen (JPY), the fourth spot after the decimal point (at one 100th of a cent) is typically what traders watch to count “pips”.

Every point that place in the quote moves is 1 pip of movement.  For example, if the EUR/USD rises from 1.1141 to 1.1146, the EUR/USD has risen 5 pips.

There’s a lot to learn about Forex trading, and we’ll provide more information for you right here in future articles…