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Spread-To-Pip Potential: Which Pairs Are Worth Day Trading

Spreads play a significant factor in profitable forex trading. When we compare to the average spread to the average daily movement many interesting issues arise. Namely, some pairs are more advantageous to trade than others. Secondly, retail spreads are much harder to overcome in short-term trading than some may anticipate. Third, a "larger" spread does not necessarily mean the pair is not as good for day trading when compared to some lower spread alternatives. Same goes for a "smaller" spread - it does not mean it is better to trade than a larger spread alternative.

Establishing a Base Line
To understand what we are dealing with, and which pairs are more suited to day trading, a base line is needed. For this the spread is converted to a percentage of the daily range. This allows us to compare spreads versus what the maximum pip potential is for a day trade in that particular pair. While the numbers below reflect the values in existence at a particular period of time, the test can be applied at any time to see which currency pair is offering the best value in terms of its spread to daily pip potential. The test can also be used to cover longer or shorter periods of time.

These are the daily values and approximate spreads (will vary from broker to broker) as of April 7, 2010. As daily average movements change so will the percentage that the spread represents of the daily movement. A change in the spread will also affect the percentage. Please note that in the percentage calculation the spread has been deducted from the daily average range. This is to reflect that retail customers cannot buy at the lowest bid price of the day shown on their charts.
  • EUR/USD
    Daily Average Range (12):105
    Spread: 3
    Spread as a percentage of maximum pip potential: 3/102= 2.94%

  • USD/JPY
    Daily Average Range (12):80
    Spread: 3
    Spread as a percentage of maximum pip potential: 3/77= 3.90%

  • GBP/USD
    Daily Average Range (12):128
    Spread: 4
    Spread as a percentage of maximum pip potential: 4/124= 3.23%

  • EUR/JPY
    Daily Average Range (12):121
    Spread: 4
    Spread as a percentage of maximum pip potential: 4/117= 3.42%

  • USD/CAD
    Daily Average Range (12):66
    Spread: 4
    Spread as a percentage of maximum pip potential: 4/62= 6.45%

  • USD/CHF
    Daily Average Range (12):98
    Spread: 4
    Spread as a percentage of maximum pip potential: 4/94= 4.26%

  • GBP/JPY
    Daily Average Range (12):151
    Spread: 6
    Spread as a percentage of maximum pip potential: 6/145= 4.14%

Which Pairs to Trade
When the spread is placed into percentage terms of the daily average move, it can be seen that the spread can be quite significant and have a large impact on day-trading strategies. This is often overlooked by traders who feel they are trading for free since there is no commission.

If a trader is actively day trading and focusing on a certain pair, making trades each day, it is most likely they will trade pairs that have the lowest spread as a percentage of maximum pip potential. The EUR/USD and GBP/USD exhibit the best ratio from the pairs analyzed above. The EUR/JPY also ranks high among the pairs examined. It should be noted that even though the GBP/USD and EUR/JPY have a four-pip spread they out rank the USD/JPY which commonly has a three pip spread.

In the case of the USD/CAD, which also has a four-pip spread, it was one of the worst pairs to day trade with the spread accounting for a significant portion of the daily average range. Pairs such as these are better suited to longer term moves, where the spread becomes less significant the further the pair moves.

Adding Some Realism
The above calculations assumed that the daily range is capturable, and this is highly unlikely. Based simply on chance and based on the average daily range of the EUR/USD, there is far less than a 1% chance of picking the high and low. Despite what people may think of their trading abilities, even a seasoned day trader won't fair much better in being able to capture an entire day's range - and they don't have to.

Therefore, some realism needs to be added to our calculation, accounting for the fact that picking the exact high and low is extremely unlikely. Assuming that a trader is unlikely to exit/enter in the top 10% of the average daily range, and is unlikely to exit /enter in the bottom 10% of the average daily range, this means that trader has 80% of the available range available to them. Entering and exiting within this area is more realistic than being able to enter right in the area of a daily high or low.

Using 80% of the average daily range in the calculation provides the following values for the currency pairs. These numbers paint a portrait that the spread is very significant.

  • EUR/USD
    Spread as a percentage of possible (80%) pip potential: 3/81.6= 3.68%

  • USD/JPY
    Spread as a percentage of maximum pip potential: 3/61.6= 4.87%

  • GBP/USD
    Spread as a percentage of possible (80%) pip potential: 4/99.2= 4.03%

  • EUR/JPY
    Spread as a percentage of possible (80%) pip potential: 4/93.6= 4.27%

  • USD/CAD
    Spread as a percentage of possible (80%) pip potential: 4/49.6= 8.06%

  • USD/CHF
    Spread as a percentage of possible (80%) pip potential: 4/75.2= 5.32%

  • GBP/JPY
    Spread as a percentage of possible (80%) pip potential: 6/116= 5.17%

With the exception of the EUR/USD, which is just under, 4%+ of the daily range is eaten up by the spread. In some pairs the spread is a significant portion of the daily range when factoring for the likely possibly that the trader will not be able to accurately pick entries/exits within 10% of the high and low which establish the daily range.

SOURCE: INVESTOPEDIA


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The Ichimoku Kinko Hyo or equilibrium chart isolates higher probability trades in the forex market. It is new to the mainstream, but has been rising incrementally in popularity among novice and experienced traders. More known for its applications in the futures and equities forums, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision. Learn how the Ichimoku works and how to add it to your own trading routine.

Getting to Know Ichimoku
Before a trader can trade effectively on the chart, a basic understanding of the components that make up the equilibrium chart need to be established. Created and revealed in 1968, the Ichimoku was developed in a manner unlike most other technical indicators and chart applications. Usually formulated by statisticians or mathematicians in the industry, the indicator was constructed by a Tokyo newspaper writer named Goichi Hosoda and a handful of assistants running multiple calculations.What they came up with is now used by many Japanese trading rooms because it offers multiple tests on the price action, creating higher probability trades. Although many traders are intimidated by the abundance of lines drawn when the chart is actually applied, the components can be easily translated into more commonly accepted indicators.

Essentially made up of four major components, the application offers the trader key insight into FX market price action. First, we'll take a look at both the Tenkan and Kijun Sens. Used as a moving average crossover, both lines are simple translations of the 20- and 50-day moving averages, although with slightly different time frames.

1. The Tenkan Sen - Calculated as the sum of the highest high and the lowest low divided by two. The Tenkan is calculated over the previous seven to eight time periods.

2. The Kijun Sen - Calculated as the sum of the highest high and the lowest low divided by two. Although the calculation is similar, the Kijun takes the past 22 time periods into account.

Now let's take a look at the most important component, the Ichimoku "cloud", which represents current and historical price action. It behaves in much the same way as simple support and resistance by creating formative barriers. The last two components of the Ichimoku application are:

3. Senkou Span A - The sum of the Tenkan Sen and the Kijun Sen divided by two. The calculation is then plotted 26 time periods ahead of the current price action.

4. Senkou Span B - The sum of the highest high and the lowest low divided by two. This calculation is taken over the past 44 time periods and is plotted 22 periods ahead.

Once plotted on the chart, the area between the two lines is referred to as the Kumo, or cloud. Comparatively thicker than your run-of-the-mill support and resistance lines, the cloud offers the trader a thorough filter. Instead of giving the trader a visually thin price level for support and resistance, the thicker cloud will tend to take the volatility of the currency markets into account. A break through the cloud and a subsequent move above or below it will suggest a better and more probable trade. Let's take a look Figure 2's comparison.

To Recap:

1. Refer To The Kijun / Tenkan Cross - The potential crossover in both lines will act in similar fashion to the more recognized moving average crossover. This technical occurrence is great for isolating moves in the price action.

2. Confirm Down / Uptrend With Chikou - Confirming that the market sentiment is in line with the crossover will increase the probability of the trade as it acts in similar fashion with a momentum oscillator.

3. Price Action Should Break Through The Cloud - The impending down/uptrend should make a clear break through of the cloud of resistance/support. This decision will increase the probability of the trade working in the trader's favor.

4. Follow Money Management When Placing Entries - By adhering to strict money management rules, the trader will be able to balance risk/reward ratios and control the position.

The Round Up
This indicator is intimidating at first, but once the Ichimoku chart is broken down, every trader from novice to advanced will find the application helpful. Not only does it mesh three indicators into one, but it also offers a more filtered approach to the price action for the currency trader. Additionally, this approach will not only increase the probability of the trade in the FX markets, but will assist in isolating only the true momentum plays. This is opposed to riskier trades where the position has a chance of trading back former profits.

Read More - Investopedia

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Weekend Analysis: A Path To Forex Profits

There are three basic reasons for doing a weekend analysis. The first reason is that you want to establish a "big picture" view of a particular market in which you are interested. Doing this analysis over the weekend, when the markets are closed, is helpful because such an analysis can be made when the markets are not in dynamic flux and, therefore, you don't need to react to situations as they are unfolding.

Secondly, the analysis will help you to set up your trading plans for the coming week, which in turn will help you to decide what trading plans you might want to implement. Remember, shooting from the hip can leave a hole in your pocket! Weekend analysis should be more akin to an architect preparing a blue print from which he will take the steps, based on his blue print, to construct the different aspects of the building he's designed.

Finally, the reason for undertaking a weekend analysis is to build a routine preparation method that will help to build a trading plan in the area in which you are focusing so you can establish the necessary mindset for the upcoming week. A good analysis is how you can "psych" yourself up for the oncoming trading activity.

Preparing for the Week
Since this is a forex article, the emphasis is on the necessary preparation for trading forex during the coming week. But the preparatory steps can also be used and are helpful if you trade stocks, bonds or commodities. It's important to remember that none of the markets are actually separate, or trade in a vacuum. All the markets are interdependent, so that in a global economy the purchase of bonds, equities, goods and services all have an effect on the levels of supply and demand for currencies. Therefore, the price levels of the various currencies will vary when money flows around the world as investment searches for the highest and safest yields.

Understand the Drivers
The art of successful trading is partly due to an understanding of the current relationships between markets and the reasons that these relationships exist. It is important to understand the causative factors that are in play at the moment. Remember, though, that these relationships can and do change over time. Once you have a grasp on the existing relationships, then a study of price charts and the statements of the pundits, insiders, brokers and news services can be either reinforcing or ignored depending on your particular reading of the circumstances.

For example, a stock market recovery could be explained by investors who are anticipating an economic recovery. These investors believe that companies will have improved earnings and, therefore, greater valuations in the future. Hence they believe that now is a good time to buy! Or it can be that speculation, based on a flood of liquidity, is fueling momentum and that good old greed is pushing prices higher and higher until all players are on board so that the selling can begin.

A weekend analysis should be a basis for an understanding of the circumstances currently in play. These are the true fundamentals. Therefore the first question to ask is, why? Why are these things happening? What are the drivers behind the market actions?

Technical Drivers
Many technical analysts believe that patterns or certain price levels on charts can also be the drivers of trader behavior. They believe that so many traders are watching for these patterns that they become self-fulfilling prophecies. There has long been a debate, for example, whether a Fibonacci level is a number that is a measurement of some natural force or whether it is valid just because so many people watch for the number to occur and then trade accordingly. Whatever the reason, there are certain patterns and levels that will trigger trader action.

The News
The news also fuels actions. Traders wait for the news releases to confirm or deny their hypotheses and then enter or exit their trades. If these news releases occur at certain technical levels then they attract even more trader activity and can increase the odds of a successful trade. Not every news release is always valid for timing a trade. Those releases that occur at specific chart confluences can have a more dramatic effect on the volatility of the market and will provide better trading opportunities.

Setting Up a Trading Plan
By doing a weekend analysis, a trader can prepare for the coming week and, depending on the type of trading he or she likes to do, such as scalping the news, or trading the five minute charts or waiting for a swing trade setup, he or she will have a blueprint to guide his trading. The old adage of "plan your trade – and trade your plan," is sage advice.

Source - Investopedia

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Is Your Forex Broker A Scam?

If you do an internet search on forex broker scams, the number of results returned is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business. Fortunately, they eventually get weaned out.

However, when you're looking to trade forex, it's important to know which brokers are reliable and viable, and to avoid the ones that aren't. In order to sort out the strong brokers from the weak, and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker. Trading is hard enough in itself, but when a broker is implementing practices that work against the trader, making a profit can be nearly impossible.

Separating Fact from Fiction
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.

In many cases, it may seem to a trader that a broker was intentionally trying to cause a loss. Complaints such as: "As soon as I placed the trade, the direction of the market reversed;" "The broker stop hunted my positions;" or "I always had slippage on my orders, and never in my favor" are not uncommon. These types of experiences are common to all traders, and it is quite possible that the broker is not at fault.

New forex traders often fail to trade with a tested strategy or trading plan. Instead, they make trades when psychology dictates they should. If a trader feels the market has to move in one direction or the other, there is a 50% chance he or she will be correct. When the rookie trader enters a position, often he or she is entering right at a time when their emotions are waning; experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market - or their brokers - are out to get them and take their individual profits. Most of the time this is not the case, it is simply a failure by the trader to understand market dynamics.

On occasion, losses are the broker's fault. This can occur when a broker attempts to rack up trading commissions at the client's expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers' rates have not gone to that price. Luckily for traders, this is not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus sustain capital or make a profit.

The slippage issue can often be attributed to a psychological phenomenon. It is common practice for inexperienced traders to panic; they fear missing a move, so they hit their buy key; or they fear losing more and so they hit the sell key. In volatile exchange rate environments, the broker cannot ensure that an order will be executed at the desired price. This results in sharp movements and often slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not. Even in more transparent markets, slippage occurs, markets move and we don't always get the price we want.

Therefore, often what is perceived as a scam is just the trader not understanding the market he or she is trading.

The Real Problem
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader's questions, these are red flags that a broker may not be looking out for the client's best interest.

Any arising issues should be resolved and explained to the trader and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader in this case is the trader's inability to withdraw money from a trading account.

Protecting Yourself
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:

  • Do an online search for reviews of the broker. Take what is said and filter it based on what was said in the first section; could this be just a disgruntled trader? In the same search, find if there are outstanding legal actions against the broker.

  • Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.

  • Read through all the fine print of the documents when opening an account. Incentives to open account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say he or she cannot withdraw because the bonus cannot be withdrawn. Read the fine print and make sure to understand all contingencies in regards to withdrawals and whether incentives impact withdrawals.

  • If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more and then attempt a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.
More information here - INVESTOPEDIA

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