Top 5 Forex Questions Answered

1, What’s different about the forex market?

Currency trading does not take place on a regulated exchange, nor does a governing body control it. Instead, members trade based on credit agreements, essentially relying on nothing more than a metaphorical handshake. And because FX participants must compete and cooperate with each other, self-regulation provides effective control.

2, What is a pip?

Pip stands for Percentage In Point. FX prices are quoted to the fourth decimal point. For example, if a bar of soap cost $1.20, it would be quoted in the FX market at 1.2000. One pip change would be 1.2001. A pip is the smallest increment in FX trading.

3, What are you really selling or buying in the currency market?

Nothing. The FX market is purely speculative, meaning all trades exist as computer entries. Profits and losses are calculated in dollars and recorded on the trader’s account.

4, Which currencies are traded in the forex markets?

The four major currency pairs are the euro/U.S dollar, the dollar/Japanese yen, the British pound/dollar, and the dollar/Swiss franc. The three major commodity pairs are the Australian dollar/U.S. dollar, the U.S. dollar/Canadian dollar, and New Zealand dollar/U.S. dollar.

5, What is a currency carry trade?

A trader buys one currency that has a high interest rate with another currency that has a lower interest rate. It’s the most popular trade on the currency market, but its declines can be rapid and severe when a majority of speculators decide a carry trade has poor potential and they try all at once to exit their positions.

 

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The Six Best Hours to Trade the Euro

The euro (EUR) ranks second behind the U.S. dollar (USD) in terms of global liquidity, trailed by the Japanese yen (JPY) and British pound (GBP). Forex traders speculate on EUR strength and weakness through currency pairs that establish comparative value in real-time. Although brokers offer dozens of related crosses, most clients focus their attention on the six most popular pairs:

U.S. dollar (USD) – EUR/USD
Swiss franc (CHF) – EUR/CHF
Japanese yen (JPY) – EUR//JPY
British pound (GBP) – EUR/GBP
Australian dollar (AUD) – EUR/AUD
Canadian dollar (CAD) – EUR/CAD
EUR trades continuously from Sunday evening to Friday afternoon in the United States, offering significant opportunities for profit. However, volume and volatility can fluctuate greatly in each 24-hour cycle, with bid/ask spreads in the less popular pairs widening during quiet periods and narrowing during active periods. While the ability to open and close positions at any time marks a key benefit of forex, the majority of trading strategies unfold during active periods.
Many forex traders focus their full attention on the EUR/USD cross, the most popular and liquid currency market in the world. The cross maintains a tight spread throughout the 24-hour cycle, while multiple intraday catalysts ensure that price actions will set up tradable trends in both directions and along all time frames. Long- and short-term swings also work extremely well with classic range-bound strategies, including swing trading and trading channels.

Euro Price Catalysts
The best time to trade the euro coincides with the release of economic data, as well as the open hours at equity, options and futures exchanges. Planning ahead for these data releases requires two-sided research because local (eurozone) catalysts can move popular pairs with the same intensity as catalysts in each of the cross venues. Moreover, U.S. economic data can have the greatest impact on all currencies, due to the overriding importance of the EUR/USD pair.

In addition, EUR crosses are vulnerable to economic and political macro events that trigger highly correlated price actions across equities, currencies and bond markets around the world. China’s devaluation of the yuan in August 2015 offers a perfect illustration. Even natural disasters have the power to generate this type of coordinated response, as evidenced by the 2011 Japanese tsunami.

Economic Releases
Eurozone monthly economic data is generally released at 2 a.m. Eastern Time (ET) in the United States. The time segment from 30 to 60 minutes prior to these releases and one to three hours afterwards highlights an enormously popular period to trade EUR pairs because the news will impact at least three of the five most popular crosses. It also overlaps the run-up into the U.S. trading day, drawing in significant volume from both sides of the Atlantic.

U.S. economic releases tend to be released between 8:30 a.m. and 10 a.m. ET and generate extraordinary EUR trading volume as well, with high odds for strongly trending price movement in the most popular pairs. Japanese data releases get less attention because they tend to come out at 4:30 p.m. and 10 p.m. ET, when the eurozone is in the middle of their sleep cycle. Even so, trading volume with the EUR/JPY and EUR/USD pairs can spike sharply around these time zones.

Euro and Equity Exchange Hours
The schedules for many EUR traders roughly follow exchange hours, centering their activity when the Frankfurt and New York equity markets and Chicago futures and options markets are open for business. This localization generates an increase in trading volume around midnight on the U.S. East Coast, continuing through the night and into the American lunch hour, when forex trading activity can drop sharply.

However, central bank agendas shift this activity cycle, with forex traders around the world staying at their desks when the Federal Reserve (FOMC) is scheduled to release a 2 p.m. ET interest rate decision or the minutes of the prior meeting. The Bank of England (BOE) issues its rate decisions at 7 a.m. ET, while the European Central Bank (ECB) follows at 7:45 a.m. ET, with both releases taking place in the center of high volume EUR activity.

The Bottom Line
Six popular currency pairs offer euro traders a wide variety of short- and long-term opportunities. The best times to trade these instruments coincide with key economic releases at 1:30 a.m., 2 a.m., 8:30 a.m. and 10 a.m. U.S. Eastern Time, as well as between midnight and noon, when European and American exchanges keep all cross markets active and liquid.

 

Using Elliott Wave To Trade Forex Markets

Using Elliott Wave To Trade Forex Markets
By Anthony Jerdine

In terms of the total value of all transactions, the forex market has become the largest market in the world. As the economies of countries across the globe become more and more intertwined, the relationship between the currencies of various countries grows in importance. It is this development that continues to drive interest in the forex markets. This article will examine a method to trade forex markets using the Elliott Wave Theory.

The Elliott Wave Theory
The Elliott Wave Theory is a method of analysis developed by Ralph Nelson Elliott (1871-1948) that is based on the theory that, in nature, many things happen in a five-wave pattern. As applied to the financial markets, the assumption is that a given market will advance in a pattern of five waves – three up waves, numbered 1, 3 and 5 – which are separated by two down waves, number 2 and number 4. The theory further holds that each five-wave up-move will be followed by a down-move also consisting of five waves – this time, three down waves, numbered 1, 3 and 5, separated by two up waves numbered two and four.

In addition, the theory holds that each of the countertrend waves – i.e., wave number 2 and number 4 – will unfold in an ABC pattern. In other words, during waves 2 and 4 of a five-wave uptrend, the security in question will retrace part of the wave 1 advance in a pattern consisting of two smaller down waves (labeled A and C) separated by one up wave (labeled B). Likewise, during waves 2 and 4 of a five-wave down-trend, the security in question will retrace part of the wave one decline in a pattern consisting of two smaller up-waves (labeled A and C) separated by one down-wave (labeled B).

In reality, things typically do not unfold in such a neat, clean, and easy to follow five-wave pattern. As a result, many individuals who espouse a belief in Elliott Wave analysis nevertheless end up interpreting the current wave count differently than other adherents. And in fact, it can be argued that the Elliott Wave is as much an art as it is a science, and that various interpretations are to be expected.

As such, one important thing to note is that this article is not so much about how to generate an Elliott Wave count – since so many individuals end up with different interpretations – but rather about how to trade forex markets using the Elliott Wave as the driving force. For the purposes of this article, I will use the Elliott Wave count as generated objectively by ProfitSource source software by Hubb. The software has an automated algorithm for generating and displaying the wave count.

It should be noted that the preferred count can change dramatically from one day to the next based on the built-in algorithm, and that another person or program may arrive at a different interpretation of the wave count and any given point in time. Still the benefit of using this method is that for better or worse, the count is calculated using an objective algorithm and is not open to subjective interpretation.

Laying Out the Steps of a Plan
Before embarking on any trading campaign it is essential to have a plan in place. So let’s set up a straightforward plan for using Elliott Wave as a basis for trading forex markets. Here are the steps that we will employ:

Step 1. Select a method for generating an Elliott Wave count.
This may be based on your own analysis, or via some charting or analysis software. As mentioned, we will use the wave count generated by ProfitSource software by HUBB.
Step 2. Wait for a wave 5 to begin.
In ProfitSource this occurs when a wave marked as “3” changes to a wave marked as “4” (this actually indicates the end of wave 4 and the start of wave 5). Waiting for this to occur can be the toughest part, for this step can require a great deal of patience. A given single forex market may experience the setup that we are looking for only a few times a year.
Step 3. Look for confirmation of the trend using another indicator or indicators.
Long Setup Confirmation: Once a wave 3 above the price bar changes to a wave 4 marked below the price bar we will then assess the following indicators to confirm that a long trade should be made:
90-day Commodity Channel Index (CCI) is positive (i.e., greater than zero)
The three-day relative strength index reverses to upside for one day.
These two confirming actions do not have to take place on the day that the wave number changes from 3 to 4. As long as the both occur at some point prior to the wave count being something other than 4, then a confirmation is considered to be in force and we will enter a long trade.

Short Setup Confirmation: Once a wave 3 below the price bar changes to a wave 4 marked above the price bar we will then assess the following indicators to confirm that a short trade should be made:

90-day CCI is negative (i.e., greater than zero)
The three-day RSI reverses to downside for one day
These two confirming actions do not have to take place on the day that the wave number changes from 3 to 4. As long as the both occur at some point prior to the wave count being something other than 4, then a confirmation is considered to be in force and we will enter a short trade.

Step 4. Identify a reasonable stop-loss point.
For a long setup we will subtract three times the three-day average true range from the low established leading up to the trade as our initial stop-loss point. For a short setup we will add three times the three-day average true range to the high established leading up to the trade, and use this as our initial stop-loss point (See example to follow).
Step 5. Enter trade and stop-loss order.
We will assume that a trade is entered at the next day’s open price. The stop-loss order will also be placed. This order is a trailing stop and we be updated each day that the trade is open.
Step 6. Consider taking some profits on first good move and trail a stop for the rest of the position.
Trade Exit Plan
1. If stop-loss order is hit then the entire trade is exited.

2. If the three-day RSI reaches 85 or higher for a long trade, or 15 or lower for a short trade, or if the wave count changes from 4 to 5, we will sell half and adjust our trailing stop as follows:

For a long trade we will use a trailing stop that subtracts one times the three-day average true range from the previous day’s low.
For a short trade we will use a trailing stop that adds one times the three-day average true range to the previous day’s high.
3. If the wave count changes to something other than a wave 5, we will simply exit the trade on the next day.

Example Setup and Trade
In Figure 1 we see the setup for a short trade. On the most recent trading day, the blue number 4 first appeared above the price bar. Prior to the day, a blue number 3 had appeared below each price bar for the past several days. This suggests that a wave 5 decline may be setting up.

Below the bar chart you can see that the three-day RSI ticked lower on the day and that the 90-day CCI is in negative territory. This confirms the setup and constitutes a sell short signal, so we also calculate our stop-loss price by adding three times the average true range over the last three days to the current day’s high price. On the next day the euro/yen cross was sold short at 112.63 and a trailing stop was entered at 117.74.
Figure 1 – A sell short setup for the euro/yen cross is completed.
In Figure 2 you can see that roughly a month later the three-day RSI registered a reading below 15. As a result, on the next day we would have bought back half of our position at 109.50 and also adjusted our trailing stop to only one times (rather than three times) the average true range over the past three days added to the current day’s high, thus generating a much tighter trailing stop (this tighter stop does not appear until Figure 3).
Figure 2 – Three-day RSI signal profit-taking opportunity; half of short position is covered and trailing stop is tightened.
Finally, in Figure 3 you can see that the euro/yen cross worked slightly lower over the next several weeks, but ultimately our trailing stop was hit and the remaining portion of our original short position was closed out at 109.44.
Figure 3 – Trailing top is hit; trade is exited.

Conclusion
There are many ways to interpret an Elliott Wave count. There are also many methods for entering and exiting trades once a signal is deemed to have occurred. This article serves as an example of just one way to go about performing these tasks. Whatever method one ultimately chooses the keys to successful implementation are to:

Develop some objective way to interpret the current Elliott Wave count. Consider employing some sort of filter or filters to ensure a valid trading signal.
Always have a stop-loss point.
Consider taking profits on the first good move in the expected direction and then letting the rest ride with a trailing stop.

 

Emerging Currency Markets

5 Emerging Markets Currencies to Consider in 2016
By Anthony Jerdine| March 13, 2016

The currencies of the world’s leading emerging economies have been in a tailspin for years. The Chinese renminbi, Indian rupee, Russian ruble and Brazilian real each declined by more than 20% between 2012 and 2015. This is one of the reasons why the U.S. dollar experienced a resurgence in global markets despite the Federal Reserve’s massive quantitative easing programs.

Another result of the Fed’s easy money policy was ultra-low interest rates between 2007 and 2015. Income investors looked away from traditional savings vehicles, such as Treasury bonds and certificates of deposit (CDs), in favor of stocks and high-yield bonds.

There was a time when emerging market debt was considered an attractive investment. Bonds in Indonesia, Brazil and Russia were once considered winners thanks to high nominal returns, but the catastrophic inflation in these countries transformed their bonds into big-time losers. The situation was even worse in Argentina, which is now shut out of bond markets, and Venezuela.

What Makes a Currency Appreciate?
Currencies trade in relative prices in international markets because the world theoretically operates through a floating exchange-rate regime. If the U.S. dollar loses 2% of its purchasing power while the Russian ruble loses 5% of its purchasing power, then the dollar is supposed to appreciate, or strengthen, against the ruble. American investors should try to find emerging market currencies that are not going to lose as much purchasing power as the dollar in 2016.

There are two ways a currency becomes more valuable. The first is a reduction in the currency’s circulation. If fewer yuan are floating around the international system, that means each remaining yuan becomes that much more valuable as the supply shrinks. The second is an increase in the home economy’s labor productivity. For example, Russia is an oil-rich nation, and the ruble should become relatively more valuable if Russian oil exporters become more productive.

Strong currencies raise incomes, help bondholders and make it easier to afford foreign goods. On the other hand, a rising currency means it is probably more difficult to pay off debt or sell in foreign markets. Hold currencies, or assets denominated in currencies, will hold the most value in the long term.

1. Poland: The Złoty
Poland’s economy entered 2016 with as much momentum as any other European nation, with the last quarter expected to be the most robust in nearly five years. The country’s labor market is strong and business confidence is rising. The combination of low inflation, impressive domestic demand and increasing productivity has led to an expectation that the Polish złoty will rise throughout 2016.

2. South Korea: The Won
South Korea has one of the most fundamentally sound and productive economies in the Asia-Pacific region. The Korean won lost nearly 15% against the U.S. dollar since its peak in early 2014. Low debt-to-GDP figures for the South Korean government should alleviate pressures to print lots of new money.

3. Hungary: The Forint
Hungary currently has low interest rate problems, and there are many underlying economic concerns. The Hungarian forint has performed admirably in forex markets since mid-2012 and could experience inflows from investors running from India and Russia.

4. Indonesia: The Rupiah
The Indonesian rupiah is a momentum play and not backed by serious fundamentals, or at least not compared to the forint, won or złoty. It was trading at record lows against the dollar before rebounding significantly at the end of the year. This is a currency to keep an eye on, especially if commodity prices rebound.

5. India: The Rupee
The rupee is a riskier bet than other emerging market currencies because of India’s problems with inflation and uncertain monetary policy. The Indian government is torn between fighting high prices and trying to devalue to promote Keynesian-style growth programs. However, the rupee outperformed virtually every other emerging market currency on a risk-adjusted basis in 2015 due to its high interest rates. The rupee offers a 7.5% deposit rate for 2016.

5 Emerging Markets Currencies to Consider in 2016