Trade balance data Another widely watched economic indicator is the trade balance data. Trade balance measures the difference between the value of imports and exports of goods and services of a country. If a country exports more than it imports, it has a trade surplus. For example, if the US imports an increased amount of goods and services from Europe, US dollars will have to be sold in exchange to buy euros to pay for those imports. The resulting outflow of US dollars from the United States could potentially cause a depreciation of the US dollar against the euro or other currencies, and that can affect market sentiment surrounding the USD.
The opposite scenario is true for a country that is experiencing a trade surplus. Global geopolitical uncertainties such as terrorism, transitional change of government or nuclear threats can cause investors to lose faith in some particular currencies, and they may prefer to shift their assets into a safe haven currency when these circumstances arise.
Market sentiment is very sensitive to such geopolitical developments, and can cause a strong bias towards a particular currency. For example, during periods of high tension in the Middle East in , the market formed a very bullish sentiment towards the US dollar, which became the preferred currency to hold in such turbulent times, replacing the traditional status of the Swiss franc as the safe haven currency.
Forex traders should be keenly aware of the current geopolitical environment in order to keep track of any potential change in market sentiment, which could impact currency prices. But how can you get an idea of the overall sentiment of the market? You can do so by reading reports by analysts and financial journalists in news wires or by visiting online trading forums to see what other traders are discussing.
However, these ways of getting a feel of the current market sentiment are not too accurate; you may think that other traders are in a buying or selling mood, but that may not be what is really happening in reality. Here are some of the more effective ways of gauging market sentiment: 1. The COT report provides traders with detailed positioning information about the futures market, and is, in my opinion, one of the most underrated tools that forex traders can make use of to enhance their trading performance.
There are basically two types of reports available: the futures-only COT report and the futures-and-options-combined COT report. I usually just access the futuresonly report for a glimpse of what has happened in the futures dimension of the forex market. In order to get through to the currency futures data, you have to wade past other commodities like milk, feeder cattle and so on, so a little patience is required.
Even though the data arrives three days late, the information nonetheless can be helpful since many traders spend their weekend analyzing the COT report. The time lag between reporting and release is the main handicap of the COT data, but despite this limitation, you can still use it as a sentiment tool.
Figure 5. You can see the long and short positions held by traders in each of the three main categories defined by the CFTC, as explained below. Some notes to the figure above. For example, a German car-maker, who exports to the US, expects to receive 10 million euros worth of sales within the next quarter. To hedge against the possibility of a US dollar decline which would affect the amount of euros it would receive once converted, the German car-maker would short 10 million in Euro FX futures.
On the other hand, if a US car manufacturer exports 10 million US dollars worth of cars within the next quarter, it would long the equivalent in Euro FX futures contracts. Non-commercial This group consists of large speculators such as hedge funds, banks and so on who use currency futures just for speculation. Non-reportable This group consists of small speculators like retail traders. The COT report tells you the long and short positions undertaken by participants from each category.
When it comes to analyzing information pertaining to currency futures in the COT report, it is generally more relevant for traders to focus on the noncommercial participants rather than on the commercial participants. The reason behind this is that these large speculators trade the futures contracts mainly for profits, and do not have the intention to take delivery of the underlying asset, which in this case would be cash. On the other hand, commercial participants tend to maintain and roll over the same amount of contracts from month to month for hedging purposes 91 7 Winning Strategies For Trading Forex even though these positions could be in losses.
Large speculators, however, will usually close their losing positions instead of rolling them over to the next month. Why use The COT? The COT report allows you to gauge market sentiment in the currency futures market, which also influences the spot forex market. Currency futures are basically spot prices which are adjusted by the forwards derived by interest rate differentials to arrive at a future delivery price.
Unlike spot forex which does not have a centralised exchange at the time of writing, currency futures are cleared at the Chicago Mercantile Exchange. Price quotation One of the many differences between spot forex and currency futures lies in their quoting convention.
In the currency futures market, currency futures are mostly quoted as the foreign currency directly against the US dollar. That said, spot forex and currency futures do have one similarity: the spot and futures prices of a currency tend to move in tandem. When either the spot or futures price of a currency rises, the other also tends to rise, and when either falls, the other also tends to fall.
What is of concern to us is whether the non-commercials are net long or short in that currency futures. In order to determine the volume of contracts that these large speculators are holding net long or short positions of for that particular currency futures, you just need to calculate the difference between the longs and shorts, that is, subtract the number of short contracts from the number of long contracts. A positive figure shows the number of net long contracts, while a negative figure shows the number of net short contracts.
As you can see in Figure 5. The non-commercials are long 98, contracts and short 12, contracts. Therefore, they are overall net long 85, contracts - Usually, when a particular currency is trending up against the US dollar, the noncommercials tend to register a net long position since these large speculators tend to ride on the existing trend.
The opposite situation is true too: the non-commercials tend to register a net short position when a particular currency is trending down against the US dollar. Knowing whether this category has been net long or short a few days ago only indicates to us the positioning in retrospect; this information is only useful if you compare the latest net positioning with the positioning figures from the past few weeks or months.
By comparing the latest net positioning with that of the past few weeks or months, you can tell if the latest net long or net short positioning is skewing towards an extreme reading. My observation of the financial markets is that dramatic price moves, usually at major turning points, tend to occur when the majority of the market is positioned incorrectly.
And since the large speculators are more inclined to close their losing positions than the commercial hedgers, it is beneficial for us to keep an eye on their net directional positioning as well as their net contract volume in the currency futures market. If these large non-commercials are positioned on the wrong side of the market, you can expect liquidation of these positions, with the extent of liquidation depending on the total volume of contracts traded in the wrong direction.
For example, if these large funds are holding large extreme net long GBP positions, but GBP is declining against the US dollar due to some external catalysts like news, they will eventually have to close their longs when their stops are 93 7 Winning Strategies For Trading Forex triggered, or decide to close their longs before getting stopped out and switch to shorting GBP on the way down. Such mass unwinding of positions tends to bring about a powerful price move in the opposite direction which could last for a few days, and it is this turning point that you could detect with the COT data before the reversal scene actually plays out.
In this case, all those who had the intention to go long on GBP had already done so. X-axis displays the dates for every three weeks even though the data for every week is shown on the chart. Y-axis displays the net number of speculative contracts. Positive numbers indicate net long positioning, while negative numbers indicate net short positioning.
The presence of an extreme reading allows you to be prepared for a possible trend reversal which could occur when large speculators liquidate their positions. A mere increase or decrease of contracts for a particular currency futures does not indicate anything which could be of predictive value, as it simply shows you what has happened, but not what could possibly happen in a high-probability scenario. COT data is a diamond in the rough What deters many traders from using the COT report is its raw organisation of data, but that is not good enough an excuse to completely neglect this little treasure trove.
The information from the COT report can be transferred into a spreadsheet so that further analysis can be conducted in a more suitable format. Analysis of the COT report does not always throw up trading opportunities in the spot forex market, but when it does, you will be better prepared for a potential turn of tide, and be more confident in your trades.
Even though entries and exits cannot be timed solely based on the COT data, it can be an extremely useful tool to have in your toolbox to gauge the overall market sentiment. The forex market is very efficient at discounting future expectations by incorporating them into current prices. Very often, when news comes out better than is expected by economists and analysts, the currency of that country is more likely to soar against another currency. When the news is worse than expected, that currency is more likely to fall against another currency.
However, if the news or data turn out to be worse than expected and still the currency price soars, that is, the market reacts in a very bullish way to worse than expected data, a bright red flag should be waving at you. The opposite situation also applies: if price action remains very bearish to much better than expected news, it signals a highly suspect price move. In short, you should look out for a contrarian market reaction to better or worse than expected news.
Under these circumstances, it is better to assume that the price move is hardly supported by substance, and could reverse sometime soon. A bullish price move that is not accompanied by evidence will soon be due for a reality check, just like a bearish price move that is not accompanied by evidence is very likely to be corrected very soon. For example, if a piece of news turns out to be worse than expected, and assuming that there are no pre-release rumours or leaks of the news, and the currency pair rallies to break above a significant resistance level, you have reasons to suspect that the breakout move is likely to be false and unsustainable.
Even if the currency pair manages to make new highs later on, you should be prepared for a possible trend reversal very soon. The relative significance of news will vary from time to time. Summary As you have seen, market sentiment can be used, and should be used, to time your trade and identify profitable trading conditions.
The Market Sentiment Strategy has to be applied in conjunction with other strategies as it does not have precise entry and exit signals. Once you get a sense of the current market sentiment, you can then decide whether it is best to trade with or against the sentiment, taking into account all other factors. While it may be sensible to trade in the direction of the current sentiment, sometimes, trading against the sentiment can also be a profitable strategy, provided that you have valid reasons to do so.
For example, when the COT report indicates extreme positioning of the market, or when the market seems to be feeding off false euphoria on worse than expected news, it may be better to trade against the overall sentiment. You should, however, wait for a more precise signal that the current sentiment is wearing off before going against it, as sometimes false euphoria can last for quite some time before resulting in a reversal.
This signal could be a failed breakout of some sort or some other pattern failure. Always keep in mind that currency prices are, after all, the expressed perceptions of traders and market sentiment is really the blood that drives the market on the whole.
Being able to ride on a trend is akin to making full use of the wind direction to steer your ship towards your destination. For a ship to go against the wind requires a tremendous amount of effort — one has to fight the stubborn resistance from the opposing wind. Indeed, for most of the time, it pays more to be on the side of the current trend than to go against it. In the forex market, trend riders can capture any trend regardless of whether it is rising or falling in an attempt to generate trading profits.
Forex tends to have quite trending markets, regardless of which time frame you are looking at — trends are often formed on hourly, daily or weekly charts. With trends possibly having a long lifespan stretching to months, or even years, it is no wonder that many traders and fund managers exalt the strategy of hitching onto trends, with the glorious aim of capturing enormous profits from start to finish. Trend riding is one of my favourite trading approaches, and I often ride the uptrend or downtrend after the trend has been established, rather than anticipating the move before it happens.
I would say that even though the trend is your friend most of the times, one has to use a variety of methods to distinguish between a continuation of the trend and a possible trend reversal. But before you can ride on trends, you first need to identify what the current trend is, and to determine the time frame of the trend.
Some traders are not aware that different trends exist in different time frames. The question of what kind of trend is in place cannot be separated from the time frame that a trend is in. Trends are, after all, used to determine the relative direction of prices in a market over different time periods. There are mainly three types of trends in terms of time measurement: 1.
These are discussed in further detail below. Primary trend A primary trend lasts the longest period of time, and its lifespan may range between eight months and two years. This is the major trend that can be spotted easily on longer term charts such as the daily, weekly or monthly charts.
Long-term traders who trade according to the primary trend are the most concerned about the fundamental picture of the currency pairs that they are trading, since fundamental factors will provide these traders with an idea of supply and demand on a bigger scale. Intermediate trend Within a primary trend, there will be counter-cyclical trends, and such price movements form the intermediate trend. This type of trend could last from a month to as long as eight months. Knowing what the intermediate trend is of great importance to the position trader who tends to hold positions for several weeks or months at one go.
Short-term trend A short-term trend can last for a few days to as long as a month. It appears during the course of the intermediate trend due to global capital flows reacting to daily economic news and political situations. Day traders are concerned with spotting and identifying short-term trends and as such short-term price movements are aplenty in the currency market, and can provide significant profit opportunities within a very short period of time.
You can easily gauge the direction of a trend by looking at the price chart of a currency pair. A trend can be defined as a series of higher lows and higher highs in an uptrend, and a series of lower highs and lower lows in a downtrend. In reality, prices do not always go higher in an uptrend, but still tend to bounce off areas of support, just like prices do not always make lower lows in a downtrend, but still tend to bounce off areas of resistance.
There are three trend directions a currency pair could take: 1. Uptrend In an uptrend, the base currency which is the first currency symbol in a pair appreciates in value. An uptrend is characterised by a series of higher highs and higher lows. However in real life, sometimes the currency does not make higher highs, but still makes higher lows.
Downtrend On the other hand, in a downtrend, the base currency depreciates in value. A downtrend is characterised by a series of lower highs and lower lows, but similarly, the currency does not always make lower lows, but still tends to make lower highs. Sideways trend If a currency pair does not go much higher or much lower, we can say that it is going sideways. When this happens the prices are moving within a narrow range, and are neither appreciating nor depreciating much in value.
For the Trend Riding Strategy, I shall focus only on the uptrend and the downtrend. The stages of a trend are not clearcut, and that includes the starting and ending stages; and each stage can vary in length of time. Nascent trend 2. Fully charged trend 4. End of trend Figure 6. As you can see, Stage 1 of the uptrend started when the currency pair first emerged from the down trendline.
Later, a double top formation hinted that the uptrend was at Stage 3 when the trend was beginning to show signs of weariness. Stage 1: Nascent trend Right after a reversal, the embryonic trend emerges into the new territory with the greatest amount of uncertainty, as traders have the least amount of confidence in the direction of the nascent trend.
Price moves are often sharp, and may even retest the price levels seen before the entry into the new territory as bulls and bears wrestle for power. This characterises Stage 1 of a trend, and it is where aggressive traders get into the currency market, hoping to be right about the new direction of the trend and reap potentially the most profits by getting in early. Since this stage of the trend has the greatest level of uncertainty, it is also where the risk of trend failure is greatest.
Stage 2: Fully charged trend By the time the trend reaches Stage 2, it is fully charged. Either the bulls or the bears have won the battle over the other by now, and are persistently pushing the currency prices higher during an uptrend, or lower during a downtrend. The highly confident behaviour of the bulls in the uptrend and of the bears in the downtrend gives little room for uncertainty about the trend direction.
This stage is ideally the best time for the risk-averse trader to join in the prevailing trend, after getting confirmation from the technical picture and market sentiment. Stage 3: Aging trend As with human beings, a trend gets old and tired eventually.
Aging of a trend typically occurs in Stage 3, and it is at this stage that you can witness the fallacies of man. Overly eager traders, especially those who have missed out on the initial stages of the trend, are now realising their tardiness, and are hopping onto the trend bandwagon, hoping to still be able to get a piece of the action.
The more experienced traders are more than happy to pass on the closing legs of their transactions over to these inexperienced traders as they try to take their profits while the trend is near the peak of an uptrend, or near the bottom of a downtrend. Seasoned traders begin to lose their confidence in the strength of the trend, whereas inexperienced traders who are still hoping to gain more profits remain optimistic about the trend. So there is a mix of waning confidence and overconfidence in the trend at this stage.
Stage 4: End of trend The last stage is when the trend begins to crumble and lose its staying power. In an uptrend, shortage of bullish newcomers halts the advance of higher prices, and some begin to take their profits, pushing the prices lower and lower. In a downtrend, a lack of new bears coming into the market stops the currency prices from going lower, and when they start to take profits, prices start going up. The crumbling and ending of a trend can come fast and furiously, without much warning to traders, or it can be a more prolonged process as power changes hands between the bulls and bears.
Usually a trend reversal is brought about by a major change in the underlying sentiment about a currency. Jumping onto this stage of a trend in order to ride the underlying trend can be very risky as the trend is close to ending, and there is a high chance of the trade getting stopped out. The most profitable entry points into a trend are at Stages 1 and 2, where the potential for the trend to grow and continue is great. Profit potential at Stage 3 may be limited as the trend has matured, and it is where most profit-taking takes place.
When it comes to riding a trend, potential for loss becomes huge when getting in at Stage 4. Tagging along on the coattails of a trend is only fun if you are able to join in near the beginning or in the middle of it, not when the trend is starting to melt away.
This ensures that you are able to capture the maximum profit possible from the trending movement of the currency pair, and not the meagre scraps or even possible losses found near the end of the trend. Identifying the trend of a currency pair is achieved through the use of price charts. By using the information that you can gather from the chart alone, you can gain a better understanding of what is happening in the market.
For this strategy, I will show you how to make use of several technical tools that can help you identify which trend is in place, and to help maximise your trading profits. I shall start with the basic drawing tool of trendlines. Trendlines Trendline analysis is one of the most simple, yet effective, ways for forex traders to establish the direction of a trend, and to establish support and resistance levels on currency price charts.
It is my number one favourite and fuss-free way of telling the trend direction of any currency pair. What a trendline does is to show you the price movements of the past, where people have bought or sold, and to give you an indication of where the market action could go next. While some may dismiss or underestimate the power of trendline analysis as being retrospective and overly subjective in nature, trendlines can be very useful in helping you gauge the crowd in action, and which price levels were of concern to traders, and could be of concern in the future.
Most important of all, it represents the underlying trend, and cuts out the noise of the market. Other than telling you the direction of the current trend, the trendlines also serve as areas where you could buy during an uptrend, or sell during a downtrend. It can even indicate points where you could buy and sell when prices oscillate in a trendline channel, where one trendline connects the highs of market action on one side, and another connects the lows on the other side.
A trendline is a dynamic line of support during an uptrend and a dynamic line of resistance during a downtrend. It slopes with the passing of time as buyers and sellers transact currencies at different prices. By using a trendline, you can tell which direction the currency prices are heading. If it is sloping upward, then the trend is up. If it is sloping downward, then a downtrend is in place. Trendlines can be horizontal in a trading range, or ascending in an uptrend, or descending in a downtrend.
See Figure 6. Drawing trendlines Trendlines do not just appear out of nowhere; you actually have to draw them into existence. For an up trendline, you draw a line connecting a series of lows, which get gradually higher. Your line need not necessarily connect all the bottoms of the uptrend, as long as it connects a minimum of two preferably three bottom points.
This becomes your up trendline, with the trendline acting as support. When drawing a down trendline, you draw a line connecting a series of highs, which get lower with time and, again, your line may not necessarily touch all the tops of the downtrend, as long as it connects a minimum of two preferably three rally points. This forms your down trendline, with the trendline acting as resistance.
You should track the low points of an uptrend, and the high points of a downtrend as these are areas where a predictable price response has taken place. One thing about trendlines is that they tend to start from either an extreme low for an uptrend, or an extreme high for a downtrend and you can only determine these points in retrospect. While there is no doubt that applying trendlines to price charts can be quite subjective, it does not render them useless, in fact they are very practical technical tools.
To use high, low, or close? When it comes to drawing trendlines, you may find yourself pondering whether to connect highs, lows or closing prices. Based on my own experience, I find it more useful to connect the highs or lows, rather than to construct trendlines using closing prices.
Besides that, there are also other reasons to support why connecting highs or lows is better. Since the global currency market operates for 24 hours a day, for 7 Winning Strategies For Trading Forex five and a half days a week, it can be quite inaccurate to track the opening and closing currency prices of the day as the day begins and ends at different times according to each time-zone.
For example, the Asian session opens and closes before the US market is open, so if you are to track the closing price, which closing price are you going to use? The Asian close or the US close? Another reason why it is better to use high or low prices is due to the fact that these are extreme price points of a day, and these points are where there is the most resistance or support of the day, hence reflecting the market psychology better.
Measuring trend strength As mentioned earlier, there are generally four stages of a trend: starting with the uncertainty of a new trend, then progressing into a fully charged trend, then slowing down its speed as it matures and, finally, the crumbling and ending of a trend. Adopting a high probability Trend Riding Strategy requires you to enter a trend at an appropriate timing, which will usually occur during a pull-back or a temporary pause in the trend before it resumes again.
Preferably, you will want to join the trend somewhere between Stages 2 and 3, where there is still room for more price movement in the prevailing trend direction for your profit capture. Your entry into a trend must not be near its end as that will lower the probability of success of the trade.
Before you jump hastily onto a trend, it is best to first assess its strength at the given time. There are several ways of measuring the strength of a trend, and they are through the study of price action and through signals given by various indicators and oscillators. Price action There are some ways to gauge the strength of a trend according to the price chart: 1.
These are examined in more detail below. Trendline gradient One obvious tell-tale visual sign of the strength of a trend lies in the gradient of a trendline. A steep trendline in an uptrend, for example, indicates the extreme enthusiasm of buyers as they bid up prices in a big magnitude move, and there are often no clear support levels on the charts. The Python community is well served, with at least six open source backtesting frameworks available. They are however, in various stages of development and documentation.
If you enjoy working on a team building an open source backtesting framework, check out their Github repos. What asset class es are you trading? While most of the frameworks support US Equities data via YahooFinance, if a strategy incorporates derivatives, ETFs, or EM securities, the data needs to be importable or provided by the framework.
Asset class coverages goes beyond data. What about illiquid markets, how realistic an assumption must be made when executing large orders? What data frequency and detail is your STS built on? What order type s does your STS require? At a minimum, limit, stops and OCO should be supported by the framework.
The early stage frameworks have scant documentation, few have support other than community boards. If the framework requires any STS to be recoded before backtesting, then the framework should support canned functions for the most popular technical indicators to speed STS testing. Users determine how long of a historical period to backtest based on what the framework provides, or what they are capable of importing.
Most all of the frameworks support a decent number of visualization capabilities, including equity curves and deciled-statistics. In the context of strategies developed using technical indicators, system developers attempt to find an optimal set of parameters for each indicator. Most simply, optimization might find that a 6 and 10 day moving average crossover STS accumulated more profit over the historic test data than any other combination of time periods between 1 and In a portfolio context, optimization seeks to find the optimal weighting of every asset in the portfolio, including shorted and leveraged instruments.
One is Stop-Limit, while the other is Limit. Consider Limit as a sale for profit and Stop-limit as an order to reduce losses in the event of a crash. What Are The Advantages? Using OCO helps traders to navigate the volatile crypto market. Select the market first and the crypto trading pair that you prefer. Decide on the price of your Take Profit Trigger, Stop loss Trigger, and the portion you want to spend. You can also enable trailing for both order types that you provide in OCO here.
OCO orders are typically used by traders to trade breakouts and retracements. This is because breakout trading methods often employ the stop order, but reversal trading strategies typically use the limit order. OCO orders can be used by traders who seek to trade breakouts.
At the right price points, traders can then set a buy-stop or sell-stop to enter or exit the market. Conversely, traders who trade retracements typically buy when the price declines and touches the support level and sell when the price rises but rebounds at the resistance level.
Traders have the option to place an OCO transaction with a buy limit or a sell limit in certain circumstances. Bottom Line A limit order and a stop-limit order with the same duration in effect are combined to form an OCO order. It states that the other order will be automatically cancelled if either one is executed. OCO orders assist traders in reducing risk, realising profits, and entering the bitcoin market. This strategy can help strengthen one's trading discipline as well as lessen the effort required to monitor the market.
As the name implies, the OCO Order enables a position to be automatically canceled by an opening position from the opposite order. This is not a simple stop or limit order, because those kinds of orders will not automatically cancel positions from the opposition side. Not only used as a tool to help traders with the mechanism of opening and canceling orders, but the OCO Order can also be utilized as a strategic weapon. How so? To allow a trader to make use of this strategy, one must download the OCO Order's plug-in and install it on the platform.
The plug-in will allow the trader to place an OCO Order. Many experienced traders pick up said add-on from a trustworthy source such as forex brokers' extra trading facilities. MTSE gives the traders a variety of options on trading plug-ins and indicators which were made specifically for advanced trading strategies. OCO Breakout can be used when you think that the price is going to break either upward or downward.
It works as two stop orders placed at the same time. One of them is placed above the current price which will trigger a buy if that threshold is reached. The other one is placed below the current price where it will automatically trigger a sell position if the market trend is confirmed going down.
One situation where it might be useful is when there is an important news release or any other situation where a big movement is about to happen. This strategy is applied when you want to profit from bounce movements. Normally, the price is expected to move back after reaching certain levels like support, resistance, psychological key levels, pivot points, and many others. You can base your analysis on the price movement to predict where the price may head next.
In this discourse, we will delve into the use of a candlestick pattern commonly used in Price Action strategies, namely the Inside Bar. How can it support the use of an OCO Order? Inside Bar Trading is often carried out for its practicality and simplicity, especially by daily traders and scalpers.
This method of trading can be applied to all time frames.
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