Archive for the ‘Trading’ Category

Trading tactics

Thursday, January 20th, 2011

When analyzing the market a trader should decide whether he wants to trade up or down. Besides, the amount of money invested in the deal should be defined. Finally a trader should choose between buying and selling of a contract.
Importance of determining the precise moment to enter or exit the market makes this part of margin trading the most complicated. The decision on the moment of market entry must be based on the combination of technical factors, money management and order type.
The process of determining the moment for entry or exit is characterized by short term and measured not by weeks and months, but by hours and even minutes. But in all cases the same technical tools are used. Major principles of such analysis are listed below.
1. Tactics based on Price Breaks.
There are three ways of trading with the help of price breaks:
closing the position in advance;
opening a position when the break is in progress;
waiting for a rollback after break.
Each approach has many advantages and disadvantages; therefore sometimes a combined approach is used. When working with several lots, a trader can open one position at each of the three stages. Besides, a trader might open a small position before the estimated break, and then open additional positions at an insignificant price decline during correction that follows the break.
2. Trendline Cross
This signal allows a trader to enter the market or to leave it soon enough, especially when a significant and reliable trendline has been crossed. Of course, other technical factors should be also taken into consideration.
3. Support/Resistance Levels
A break of the support level can be a signal to open a long position. The stop loss signal can be placed below the nearest support level or below the break level directly, which will perform a supporting function in this case.
Price decline to the support level during an uptrend and advance to the resistance level during a downtrend can be used to open new positions and add lots to already opened profitable ones. When setting stop loss signal, it is important to take support/resistance levels into account.
4. Gaps
Price gaps formed on bar charts can also be used to choose the proper moment to open or close positions. The stop loss can be placed below the gap. During downtrend a short position should be opened when prices reach the lower border of the gap. The stop signal must be placed above the gap in this case.

5. Averaging
Averaging is a trading strategy employed when a trader has made a mistake or opened a trade and the price has moved against him/her. In this case a trader performs a new operation of the same type but at a more profitable price. However, averaging has a drawback – no one knows beforehand to what price the market will go against the trader. And the averaging demands to each time invest a double amount of the money invested before.
6. Scalping
Another trading strategy, scalping, is usually employed by trader working with very short terms – one minute or five minutes. If the price goes up the trader buys, in case of the reversal he/she sells. As a rule, the trader performs about 15-20 deals a day.
The drawback of this tactics is that the trader should always watch the market and cannot divert his/her attention from the charts.
We have described the most popular and well-known trading tactics, but the choice is always up to the trader. Maybe you will choose a strategy and switch to a more suitable later on.

Added by Alexandr Petryanin,
InstaForex Clients’ relationship manager

How to develop a trading system

Wednesday, January 5th, 2011

Trading system structure

When developing a trading system a trader should focus on market behavior and market movement in particular. For this purpose we need to understand inner organization and life cycle of trend. Trader’s behavior and, as a result, price movement should be taken into consideration. Based on this, we can make a conclusion that markets consist of three trends. The first trend, the most continuous one, can last for several months and should be used to determine market direction for opening positions. The second trend is correction lasting for several days and determined by more sensitive indicators. The third market movement looks like a sideways trend between correction and main trend extension. This is the shortest trend continuing for one or two days. However, in this case the main trend will not be followed by correction, but by a new opposite trend. When looking for a point of entrance to the market, two or three trend indicators should give a sign to open a position. As to closing the position, an oscillator and a trend indicator should be used.

How to open a position

First, the system uses a less sensitive indicator with larger order to determine the major market direction. After the direction of the market in medium term is defined, the next target is to find a medium-term indicator giving signals within a long-term trend. Such signals usually appear after the correction of the major trend is over. Another series of signals will be required because the first intermediate signal of the medium-term trend will appear before the long-term indicator will allow the system to trade in this direction. In this case a trader should mind strict sequence of signals from indicators of various sensitivity. According to this sequence signals should appear in the following order: short-term, medium-term and long-term. As soon as the trend is defined, first intermediate and short-term signals will have already appeared, and receiving of repeated intermediate and short-term signals for several times within a long-term trend will be prior for the system.

There are lots of intermediate indicators including single and double moving averages, channel breakouts etc. The system usually does not allow for each of them, but rather uses them in the aggregate. As a result, the system is based on a combination of indicators, which can contradict with each other at worst. In such situation a trader should choose an indicator most suitable for him/her.

A position is opened by a market process activation followed by an intermediate signal. There is also certain choice of starting mechanism.

How to close a position

After determining the rules of opening a position it is essential to learn how to close it. However, this is an open question for most traders. The main trader’s target is to clearly define the end of the major trend or the beginning of the correction. Besides, a trader should gain control over him/herself when getting small profit or loss.

It is important to remember positions opened with the help of a signal are not always profitable since trend indicators can be mistaken. For this purpose a trades needs a stop signal that will determine the moment for the system to close a position. Stop signals are used to prevent a trader from money loss. Each experienced trader uses stop signals; those traders disregarding stop loss are condemned to failure, which is only a matter of time.

When trading goes in the estimated direction a trader should choose between getting quick but sure profit and further trading with hopes of larger profit. What should one do in this situation? One option supposes using trailing stop signals, another one suggests taking advantage of oscillators capable of predicting corrections and reversals of the trend.

How to use stop signals.

There are five types of the most popular stop signals:

1. Max stop loss. This signal is executed when the appointed share of initial funds or a fixed amount in an open position is lost.

2.  Trailing stop. When using this signal the position is closed when an appointed amount of current profit is lost; i.e. the stop signal follows the market and when the profit decreases by a certain amount all positions are closed automatically.

3. Profit target stop. This stop signal closes the position if certain predetermined profit is achieved.

4. Breakeven stop. This signal allows a trader to determine current profit level; when the market exceeds this level the price of opening the position appears a stop signal for exit. This is a way of insuring funds.

5. Inactivity stop. This signal is activated when the market cannot provide certain profit for the open position during a predetermined period of time.

In addition to the type of stop signal a trader should choose the size of the signal. Stop signals are divided into two categories: close and distant. Ideally, a stop loss should be located far enough to barely transcend accidental price movements, and close enough for convenient control over trading risks.

Proper use of oscillators and trend indicators

It is well known that trend indicators follow the market tendency. The very organization of indicators implies that they show past price dynamics; they indicate the beginning of a new trend only after it has already appeared, but do not predict it. This means that some time will be lost and the trend might change during this time, which can move the price in the undesirable direction. If a stop loss was not set, a trader would lose a part of profit.

In this case oscillators following a trend can be helpful. Unlike trend indicators, oscillators can be effectively used when there is no major trend and the market dynamics is limited by a quite narrow horizontal price corridor.

However, identification of market corridor limits is not the only function of oscillators. Combined with the analysis of price graphs while prevalence of a certain tendency, oscillators can predict short critical periods in the market activity called overbought or oversold market.

What requirements should be set when developing a trading system?

One of the major factors that should be taken into consideration is investment of psychological and financial resources. First, the ability of a trader to control his/her behavior and emotions has significant influence on the successfulness of trading and frequency of traded deals. A trading system employed by a trader does not become an independent program after a start; its work can be interrupted anytime at the trader’s will. Thus, the trading system must suit the temper of the trader using it.

Added by Anna Shubina ,
InstaForex Clients’ relationship manager

Factors affecting the dollar rate

Thursday, December 16th, 2010

Each Forex trader should track the dynamics of the US dollar rate and estimate its behavior against other currencies. Successful USD trading can be organized by using graphic models, observing fundamental factors and paying attention to the market sentiment.

When trading the dollar it is necessary to mind the current US economy state. It is natural that a stable economy attracts investments, creates the atmosphere of confidence and safety, and ensures capital inflows, which allows compensating the trade deficit.

The US economy is experiencing a trade deficit caused by the import prevailing over the export. However, advancing economic indicators of the country seem quite attractive for foreign investments, which provides a good opportunity to recoup for the trade deficit.

Let us consider the factors affecting the dollar value:

Demand and supply. According to the indicators, import exceeds export; therefore, the demand for the US currency on the international market is not supposed grow day by day. Then the government and major corporations start to issue bonds. They are bought by foreigners, which results in growing demand for the US dollar and the appreciation of its value. Foreign interest in the dollar has been increasing due to the economic growth and improving incomes of the US companies. Market psychology also influences the dollar value. For instance, rising jobless rate and other negative factors tends to provoke bonds and shares selling. This is how money is taken out of the dollar sphere and converted back to foreign currencies, which determines the decrease of the dollar value.

Besides, technical factors should be taken into account. The most essential of them are news and statistical data related to the economies of the countries. They can help determine short-term and even long-term market trends. Sometimes psychological factors and sentiments can dominate over economic indicators. In this case it would be wise to draw analogies to the market behavior under similar circumstances. Please, keep in mind that a certain situation can always reoccur on the market.

Each trader develops a trading strategy in accordance with his/her psychological type. A trader is guided by his/her personal considerations when making a decision to buy or sell the dollar. The best decision will be the one supported by several different factors. Proper allocation of priorities and adequate estimation of market processes will lead you to the successful trading.

Added by Tatyana Makhina,
InstaForex Clients’ relationship manager

MQL-programming

Wednesday, December 8th, 2010

Using the programming language by a trader brings him to a completely new trading level – autotrading. Today a trader has an opportunity to realize his ideas by means of application program – write an user-specific indicator, script for implementing one-time operations or create an advisor – automatic trading system. The advisor can work 24 hours without any outside interference – monitor all changes of financial instruments price, send e-mail messages, sms-messages to a mobile phone and make many other useful things.
This Forex instrument certainly attracts experienced traders and stimulates their success on Forex market. For the newcomers MQL programming language is some kind of a guide into Forex market, where certain streams are manageable.
The main advantage of applicable programs is an opportunity to carry out trading operations according to the algorithm set by a trader at his own discretion. Any ideas which can be expressed in the algorithm language can be inserted into the program and used in a practical trading afterwards.
Application programs composition for MetaTrader 4 trading terminal requires knowledge of MQL4 language allowing to create advisors, scripts and indicators by yourself bringing your ideas to life – profitable trading algorithms.
Using MQL programming language you can create:
• Scripts – sequences of commands, programs which are implemented only once on your demand. They can replace actions made by you daily during the trading.
• User indicators – technical indicators written as an addition to the indicators inserted in the terminal. They display graphs or any other visual information. In distinct from scripts they perform at each price changing.
• Advisors – mechanical trading systems attached to any financial instrument. Advisors as well as user indicators perform at each price changing.
• Libraries – set of functions for executing specific tasks.
If you want to become familiar with the programming language you have to spend quite much time for this purpose. The better you get wise to the whole received material the easier it will be for you to start trading with an automatic trading system.

Added by Alexandr Petryanin,
InstaForex Clients’ relationship manager