WHAT YOU MAY NOT KNOW ABOUT LEVERAGE

Leverage is using a small amount of money to trade with a large amount of money. Many brokers or market makers offer leverage to Forex traders. For a small deposit one is able to trade with a large amount of money. Brokers offer many types of leverage packages like 100:1, 200:1, 300:1 or 400:1. This means that for every 1 dollar you deposit you will be giving 100, 200, 300 or 400 dollars to trade. Leverage makes trading very profitable for many traders. But there is a major disadvantage to trading with leverage.

DISADVANTAGE OF LEVERAGE

Using leverage to trade is like using a knife that allows you to cut your vegetables but at the same time if you don’t cut properly you may cut off your hand. Leverage has the ability to increase profit and while also increasing loss.

For example one may make a trade using a 100, 000K Standard lot with a 1,000 dollars deposit and make a profit on a currency pair lets say EUR/USD, lets do some calculations:

Let’s say the exchange rate of EUR/USD is 1. 2940.

And pip value is 0.0001.

Lot is 100,000 = leverage

Profit is 30 pips 

Calculation:    (0.0001 * 1.2940) * 100,000 = $ 12.94

          Profit:    12.94 * 30 pips = $ 388.2

BUT if it is a loss and not a gain than it would be a $ 388.2 loss and, since there was only a 1,000 dollars deposit, the present amount left will be:

1,000 – 388.2 = $ 611.8

That’s almost a 40% loss at a time on the used margin.

The above is not a real example, but with it one could understand how with leverage a person could loss a large portion of his or her trading money easily.

 Certainly, trading leverage may be very profitable if used properly but an uninformed use of leverage could result in a loss.

Thank you for reading

2 SIMPLE MONEY MANAGEMENT TIPS

Every Forex trader needs simple effective money management to trade properly. This is because, if one is not able to use his or her trading money properly, one may loss it, which may would not be good. Before I give the money management tips, what is money management?

 WHAT IS MONEY MANAGEMENT? Money management involves determining risk to profit maximization on potential trade positions. It sounds technical but, that’s how I understand what money management is.

 Tip one: Read Money Management Books:
 Reading trading money management books is the best way to manage your trading money. This books contain the thoughts and techniques of experienced  traders which will be very helpful to you. Tip two: Be Realistic:

Been realistic about how to manage your trading money is also very important. Being realistic involves not expecting to win big in the market with an under-capitalized trading account, may be trying to use leverage with a small amount of money, with hopes that with just one miraculous turn of events that your trading money will triple. Although it does happen, but lighten striking in one spot twice is more frequent, than that happening. The best option is to build your account slowly being realistic about your trading capital and ignoring the people who are out for quick wealth. No such thing.

 Been realistic also involves using common sense, using your two eyes to analyze how your spending your money, avoid opening trading positions based on impulse, may be trying to get the market back for stopping you out on a trading position. More  money management later. 

 Thanks for reading.

2 VERY IMPORTANT TECHNICAL ANALYSIS INDICATORS- LAGGING AND LEADING INDICATORS

LAGGING INDICATORS

Lagging indicators are indicators that are used to predict future price movement based on passed price activities. Lagging indicators are also called momentum indicators. One very important feature of lagging indicators is that it can be used to spot trends in the Forex market once the trends have been established but with one disadvantage. Lagging indicators only show how the market was not how it is presently, so there could be possible delay of entry. In simple terms lagging indicators follow the market, and only showing any data after the market moves.

TYPES OF LAGGING INDICATORS

       ·Simple Moving Average (SMA)

       ·Exponential Moving Average (EMA)

       ·Moving Average Convergence Divergence (MACD) 

There are other lagging or momentum indicators but for now I will discuss this.

Simple Moving Average (SMA)

Simple moving averages is basically used to forecast future currency prices, this is done by adding up the last “x” periods closing prices and than dividing the number by “x”. for example if I was plotting a 20 period simple moving averages on an  hour chart, I would add up the closing prices for the last 20 hours and divide that number by 20.

 Moving averages smooth out price action, if the moving average lines are very smooth it will be slower to react to price movement, whereas, if the moving average line is very ruff or choppy it will react to price movement quickly.

The simple moving average gives me an overall sentiment of the  market at a point in time and not the current price of the market.

Exponential Moving Average (EMA)

Exponential moving averages is an indicator that gets close to what the current price of the Forex market is and it shows what other traders are doing presently. Although, exponential moving average is a lagging indicator, it gives more current information than the simple moving average, which may be showing what traders did last week, last month or even last year, this data though important, may not be accurate compared, to what is happening in the market now, which is shown by the EMA.

`Moving Average Convergence Divergence (MACD)

This indicator is very interesting and I'm still studying it. The Moving Average Convergence Divergence (MACD)  is an indicator that identify moving averages that show a new trend, this trend could be a bearish or bullish trend.

The MACD indicator on a Forex chart usually shows 3 numbers. The first number is the number of periods that is used to calculate the faster moving average. The second number is the number of periods that is used in calculating the slower moving average. The third is the number of bars that is used to calculate the moving average of the DIFFERENCE between the faster and slower moving averages.

The lines of the MACD, that Is the two lines that are drawn are NOT moving averages of the price. They are the moving average of the DIFFERENCE between two moving averages.

The third line of the MACD is usually a histogram; this histogram plots the difference between the fast and slow moving averages. When the moving averages move separates the histograms expands, this is known as divergence. When moving averages moves towards each other, the histogram becomes small, this is known as convergence.  

LEADING INDICATORS

Leading indicators are indicators that are ahead of the market. Leading indicators are also called oscillators, this indicator main shows two data BUY or SELL; it indicates when the market is over bought or over sold. There are many leading indicators or oscillators but, I will only write on.

       ·Stochastic

<     ·Parabolic SAR
       ·Relative Strength Index

Stochastic: stochastic is a leading indicator that determine where a trend might end, stochastic also determines when the market is over bought or when it’s over sold, stochastic is scaled from 0 to 100, when the stochastic indicator lines are above 70 it means the market is over bought and when the stochastic lines is below 30 it means the market is over sold.

Parabolic SAR: This indicator is a very easy indicator to use; it appears as dots on the trading chart. When this dots are above the candle sticks it signals a possible Short or SELL signal, and when the dots are below the candles sticks it’s a possible long or BUY signal. This indicator works in a Stop and Reversal (SAR) pattern, and it works well in a trending market (up or down trend) it may not give accurate data if there is no trend or if the market is moving side ways.

Relative Strength Index (RSI): this indicator is very similar to stochastic, Relative Strength Index helps to show when the market is over bought or over sold. It could also be used to determine and confirm trend formations. This indicator is scaled 1 to 100, when trading if the RSI lines are above 50 it means there might be a possible up trend forming, and if the RSI lines are below 50 it means there might be a possible down trend forming.

More on lagging and leading indicators later. Thank you for reading article.

3 SIMPLE WAYS TO IMPROVE YOUR SKILL

The forex market is very volatile and without the right  skills you will not succeed. As you know trading is a business and in every business you need the right skill to succeed, as you know skill is important but, more important is continuous improvement of skill. Three simple but not easy ways to improve your  trading will be discussed in this article.

EDUCATION

One way to improve your  skill is to get educated. With  education you can trade the market efficiently, with education you don’t even need a lot of cash to trade, with education you will be more successful than the person with a lot of cash but who knows nothing about the  market. The only thing is that, to get this education requires effort on your part, you may need to attend classes, take courses, read books, listen to audio's etc. In fact, you must be a continuous learner. It may not be easy. It may be stressful but, learning all you can, will really improve your trading skill.

PRACTICE

There is a saying you may have had before, it goes like this “practice makes perfect”. The more you practice what you learn from the books you read,  classes you attend, audio’s you listen too, the more your skill will improve. It could be compared to driving a car. At those early stages learning to drive may have being hard, at those early stages you may have been nervous. But, as you keep on learning and practicing, you slowly understand how to drive and it even gets to a point when driving becomes a knee-jerk reflex, you don’t even need to think before you drive. Same goes for trading and as well as your skill development.

If the motto for buying a house is location, location, location, than the motto for trading is PRACTICE, PRACTICE and PRACTICE. Continuous training and practice is one very important way to improve your skill.

PLANNING

Every good business man will tell you that plans are worthless but planning is priceless.  trading is not a hobby, trading is a business and like every business there must be plans and continuous planning for it to succeed. Planning will help direct your skill in the right direction. Planning will help you to concentrate your effort in the right way and at the right time. In another article more simple ways to improve your  skill will be discussed.

Thank you for reading this article.    

HOW TO TRADE WITH FIBONACCI RATIO

The Fibonacci ration was given by an Italian mathematician named Leonardo Fibonacci. Fibonacci gave a theory which he called the Fibonacci series (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…….) , this series he used to calculate the natural proportion of things in the universe, each number in the series is called a Fibonacci number.

In the series if I divide 34 by next number 55 it will be 0.618. And if I divide 34 by the number after 55 in the series, 89 what I will get is, 0.382.

I know I may have lost some people back there, or some people may read this and say I'm lost maybe they know it more than me.

 the numbers above are called the Fibonacci ration and the ratio’s 0.618 and 0.382 are known as golden means.

Fibonacci ratio is divided in two parts

<    1. Fibonacci retracement levels

<    2. Fibonacci extension levels

To fully understand what Fibonacci ratio is I need to show a chart, O well since I don’t that have a chart I will use the next best thing.

Fibonacci retracement levels: to find the retracement level on a plate form I would click on a significant swing low (swing low is a candle stick with at least two higher lows on both the left and right) and drag the cursor to the most recent swing high (swing high is a candle stick with at least two lower highs on both the left and right of itself). These are the numbers I may see 0.236, 0.382, 0.500, 0.618, 0.764.

Retracement levels are very important because one, the forex market usually finds temporary support during an up-trend or resistance during a down trend and two, this may be good trading spots to long or to short on a trade.

Fibonacci extension levels: to find the extension level on a  plate form I would have to use three clicks. First, I will click on a significant swing low, second, drag my cursor and click on the most recent swing high, third, drag my cursor back down and click on the retracement swing low. These are the numbers I may see 0, 0.382, 0.618, 1.000, 1.382, 1.618.

Fibonacci extension levels are very important because the  market usually finds at least temporary resistance at these levels and traders use Fibonacci extension levels as profit taking levels.

Thank you for reading this boring article.       

WHAT ARE TRENDS LINES AND CHANNELS

WHAT ARE TREND LINES?

In an earlier article I talk about the benefit of trading with the trend and not against the trend. Now, trend lines are lines that are used to connect points on a particular price movement of a currency pair. Trend lines drawn on an up-trend, is drawn to connect the bottom of an obvious support area, to the next higher support 

(in an up-trend as you know, the price is ascending). Trend lines drawn on a down-trend  connects the peak of obvious resistance, to the next lower resistance (in a down-trend the price is descending).

Since I have explain what trend lines are let’s talk about channels.

WHAT ARE CHANNELS?

I'm not talking about CNN, BBC, NBC  MTV or any channel. Channels on a forex trading platform is drawing two parallel lines that make (not to make but, at least to have some kind of guiding lines)  the price movement to move in between the parallel lines ( I just hope I explain it well). Plotting a channel on an up-trend is done by drawing a line that connects an obvious lower support to another higher support, while also drawing a parallel line from a lower resistance to a higher resistance. Plotting a channel on a down-trend is done by drawing a line that connects a higher resistance peak to lower resistance peak, while also drawing a parallel line from a higher support point to a lower support point.

May I add that this whole process of drawing trend lines and channels is done to make profit. traders use this trend lines and channels as profit areas and indicators. When the price movement hit the bottom of the channel it means BUY.  When the price hits the top it means SELL.

Thank you for reading.

HOW TO PLOT SUPPORT AND RESISTANCE LEVELS

 WHAT ARE SUPPORT AND RESISTANCE LEVELS?

I believe that a diagram will explain what support and resistance levels are, since no diagram I’ll use the next best thing- writing.

Support and resistance levels can be explained using a bouncing ball, if I bounce a ball, it hits the ground goes up to a certain height returns to the ground than goes up again. The height the ball reached before it returns to the ground could be called the resistance and the ground is the support. On a technical analysis chart, a certain currency pair movement could be going up & down, up & down, bouncing on support and resistance levels, going up & down changing supports levels to resistance levels and vise versa. Support and resistance levels could be very profitable levels but, how do I know which one is a support and resistance level and how do I plot them?  

First, this is how to know a support and resistance level, when the market moves up and pulls back the highest point reached before it pulled back  is the resistance, (remember the bouncing ball). And as the market continues move down the lowest point it reach before it starts to move up is the support, (just like a zig zag thing).

Second, this is how to plot support and resistance levels. The best way to plot support and resistance is to use LINE CHART instead of candle stick charts. This is because, one, support and resistance levels are not real numbers (many trading plate forms show support and resistance as numbers), but they are more like zones. Two when plotting support and resistance levels I want only the closing price and line chart show only the closing on like candlestick that show the closing price as well as the low, high and open price. This other details are not needed when plotting support and resistance levels when Forex trading.

Finally, its better to plot support and resistance levels when I see the currency price movement forming several peaks and valleys.

Thank you for reading.