Category Archives: Trade

Moving Averages

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A moving average is a technical measurement that tries to identify when a price change is about to occur. The graph for a moving average attempts to make a currency’s price change move more smoothly over a period of time. These are represented as a single line drawn over a currency’s price chart.

Basically, moving averages take the closing price for the last “X” amount of days, and turns it into a line chart. The “X” can be any number that the chart maker wishes; a couple popular numbers are 18 and 30 days. Because this smooths out the sometimes choppy price charts, the moving average can be easily used to spot when trends are taking place. This makes predicting future price changes a much more feasible task when applying the Elemental Trader. A very smooth moving average means that price changes occur more slowly than a choppier moving average would indicate.

Exponential moving averages try to more accurately track price changes as they are a bit more slow to react to price changes. This means that their chart line will more accurately reflect the currency’s true price. Comparing simple moving averages to EMAs can help you determine divergences in price. EMAs weigh recent changes more heavily than older changes, thus giving them a higher degree of accuracy. If an EMA seems to break away from a simple moving average, you can probably guess that this means changes are occurring at a more recent level. Depending upon the currency’s action, buying or selling at this point might be a good idea.

Currency Cross Pairs

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A currency cross pair can be defined as any two currencies that are exchanged that do not involve the currency of your home nation. For U.S. citizens, this would be any two currencies that were not the dollar. Before the option of trading cross currencies was around, if you held Japanese yen and wanted to exchange them for the UK’s pound, you would have to first buy dollars with your yen, and then buy the pound. This was a roundabout way of trading, and incurred higher service charges because of the additional step involved.

Cross pairs are generally not listed on your trading site, but it is relatively easy to figure out what the price will be for the pairs you wish to trade. To get an answer, you simply must do a little math. In exchanging the yen for the pound, you would start with the given information on the site. If the USD/JPY rate is 83.9610, and the GBP/USD is 1.5625, you would simply multiply the yen’s price by the pound’s price. This would give you 131.1891 yen for each pound.

This, of course, is before any commission or service fees that your broker might charge you. But because of the readily available influx of currencies that most brokers see, you are able to purchase cross pairs much more easily and cheaper than you could in the days before the internet revolution.

Carry Trading

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A carry trade is a method of making a profit when a currency’s price stays level or unchanged. This complicated process involves borrowing a currency at a low interest rate, and then using it to purchase a financial instrument at a higher interest rate. Any profit obtained would be because of the difference in the interest rates of the two financial products involved. The low interest rate is paid by you, while you are in turn collecting the higher interest rate. The difference then, is your profit.

This is not a Forex trading strategy for individuals with little trading capital. Carry trades are generally conducted by large financial organizations so that they may make a profit in stagnant economic conditions. Still, this is a process that you should be aware of in the off chance that you ever spot an opportunity to make money this way. Any two products with a large interest rate differential can be used to carry trade with. Opportunities for smaller traders can and do arise; knowing how to capitalize off of these discrepancies will give you just one more money making weapon to consider using.

There is quite a bit of risk associated with carry trades. Still, the savvy trader can limit this risk by placing protective measures just as he or she would with a regular transaction. So while risk is high in this type of trading, it can be severely limited and give you peace of mind if you are trading correctly.

Futures Contracts

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Forex Futures ChartA futures contract consists of the settlement date and a strike price. In terms of the forex market, this creates an obligation to buy or sell a currency on a certain date (settlement date) at a certain exchange rate (strike price). Futures were originally used in commodities markets to protect prices for farmers, but the process has since expanded to include all markets, including the foreign exchange market.

There are two different positions you can take with a futures contract: the long or the short side. Long positions are said to exist when the trader agrees to purchase a currency at a given exchange rate. Short positions exist when the trader agrees to selling, and eventually delivering a currency. Both sides can be valuable if approached correctly. If you take a long position, you are anticipating the currency to rise in value after you purchase it; this is the traditional method of trading when it comes to the stock market. But within the Forex world, a short position is just as popular. This involves selling a currency in anticipation of it declining in value afterward. In other words, you are long if you are buying, short if you are selling. With each trade in the Forex futures market, both sides exist, depending on what your base currency is.

Futures contracts are fairly strict; they involve the actual delivery of the currency in question on the given date. This type of contract involves a bit more risk than its cousin: the option. While an option can be exercised at any time before the end of the contract date, futures must be executed on precisely the contract settlement date.

When to Trade

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Knowing when to trade is just as important as knowing what to trade. The forex market is open twenty-four hours per day thanks to the different time zones, but the market is not always volatile during those hours. When the market is not moving, you cannot make money, so it is important to know at what times to be your most active. There are overlaps in the four major trading zones that lead to an increase in trading volume. The most important of these occurs between 8:00 am and 12:00 pm EST when both the London and New York markets are open for business. This period of four hours accounts for the most traffic in currency trading and will be your busiest time of the day.

The London session is the busiest session in the world when it comes to trading currency, with the U.S. dollar / Great Britain pound being the most heavily traded pair of currencies. This pair is even more heavily traded than the Euro / dollar combination. Because this is such a popular trading platform, there are some things to be aware of. For one, trends may reverse themselves at the end of the trading session as European traders attempt to lock in a profit and begin exiting trades. Another thing to be aware of is the fact that the beginning and ending of each session is the most volatile, with the middle hours of the session being the least volatile. With these bits of knowledge you should be better prepared to trade in the London market.