Education

Education & Guidance

Learn from our expert analyses and pool of resources to become a better trader.

ANALYSIS METHODS

TRADE IDEAS

Fundamental analysis refers to the method of analysing economic, social, and political forces to determine how currency prices will be affected in the forex market
The key idea behind is that a country’s currency should strengthen if their current or future economic outlook is good, and vice versa
Specifically, it is more likely that foreign businesses and investors will invest in countries whose economies are in better shape
In order to do so, investors will require more of that specific country’s currency
This increases the demand for that currency, which in turn, increases its value relative to other currencies

Case study

In the scenario that the US economy is improving, and the US dollar is gaining strength, the US Federal Reserve may begin raising interest rates to control the subsequent growth and inflation of its currency. Higher interest rates mean higher returns for investors, which makes US financial assets more attractive to them. This then increases demand for the US dollar and increases its value relative to other currencies. Having fundamental knowledge like this can help to inform your strategies as a currency trader.

Technical analysis involves the study of historical price movements to identify similar and familiar patterns, which are then used to determine probabilities of the future direction of price
It is important to note that the focus lies in trying to determine the probabilities of price movements to allows traders to choose their optimum trading strategy
This works on the assumption that there is a high probability that the same price movements occur
It does not make any guaranteed prediction of future price movements

Keywords to take note of:

Moving Average

A calculated price line that smoothes out the average prices of open, high, low , close and/or combination of them, leading to a graph line that indicates the direction of the long-term trend.

MACD Oscillator

A calculated histogram involving the subtraction of the 26-period moving average from the 12-period moving average to produce indication on price momentum in contrast to the fastest moving 9-period moving average. When they converge into a crossover and diverge away from each other, a trend may follow, providing traders with clues to buy into a potential uptrend or sell into a potential downtrend.

Bollinger Bands

A technical tool that measures volatility based on contraction and expansion of 2 price bands. When the price bands compress, price undergoes consolidation. The longer the price band stays narrow, the stronger its potential expansion. Traders may anticipate for price congestions, using the top band to buy into bullish breakouts or sell into an anticipated downwards price reversal to the mean, and bottom band to sell into bearish breakouts or buy into an anticipated upwards price reversal to the mean.

Candlesticks

Candlesticks are graphs that give a summary of a currency’s price movement over a certain period of time. Specifically, it provides information on the currency’s opening, closing, highest and lowest price within that time period. Studying candlestick patterns and movements can give a trader some idea of which way the market is moving.

Sentimental analysis is the approach of understanding and gauging the overall sentiments of other traders when it comes to specific currency pairs
Different traders will have different expectations of how the open market interest will shift at any given moment
These expectations, when aggregated, can start to push the market in specific directions
For example, if most traders are feeling bullish about a certain currency, they would start to buy more of that currency
This increase in demand eventually increases the value of that currency, fulfilling the bullish prediction
Being able to read the general trend of how most other traders are feeling can allow you to predict which way the market will move and will allow you to capitalise on it
As a retail trader, you alone will not have any influence on the market
Therefore, your best option sometimes is to go with sentimental analysis to predict which way the market may move
You may refer to Commitment of Traders Report (CoT) published on 4.30am of every Friday by the Commodity Futures Trading Commission (CFTC) for reliable reference to factual bullishness or bearishness of your traded markets.
Under ‘Current Legacy Reports’, look for ‘Chicago Mercantile Exchange’ > ‘Short Format’. Look for your traded product to assess open market interest.

Commitment of Traders Report Figures

Example of US Dollar/Japanese Yen open market interest

Here are some of the key points:

1
Non-Commercial
refers to collective population of hedge funds, private and individual traders and financial institutions that deal with speculative trading.
2
Commercial
refers to large scale businesses, banks and money changers that engage in currency futures for businesses, primarily in hedging activities.
3
Total
refers to overall interests in long and short positions of Commercial and Non-Commercial positions.
4
Non-Reportable Positions
refers to open interest positions that do not meet the basic requirements to be considered as genuine positions, such as trades and yet-to-fill orders from the retail market.
5
Reportable Positions
refers to number of future positions that are reportable according to CFTC standards.
6
Long
refers to total number of buy contracts according to their category.
7
Short
refers to total number of short contracts according to their category.
8
Open Interest
refers to total number of contracts available in market that is not yet exercised of delivered.

Trend Trading and Mean Reversion are 2 contrasting strategies that are commonly employed by traders. Here’s a quick rundown of what each of them entails:

Dos

1
Before starting a trade, keep up to date with the current situation of the market, make a note of the win/loss ratio and then come with a trading plan based on a strong understanding of the forex market and its trade lifecycle
2
If you are a new trader, it is advisable for you to begin trading only when the market is progressively trending up or down
3
Read up on and understand the Fibonacci Analysis well, as it helps you foresee market fluctuations and collective risk appetites so you can plan your market entries or exits more effectively
4
Once you have gained enough technical knowledge, consider conducting a more technical study of the current trading patterns to better understand the market of interest
5
Make use of tools like Robo-trading (after understanding its rules of operation) as they can help lower the trading cost and provide you with more optimised strategies if you are unsure about the direction you wish to take

Don’ts

1
Trade emotionally or hastily, especially if it is based on unfounded rumours or solely for the purpose of making up for a loss
2
Look for slight payoffs at the expense of much higher risk
3
Expect to make a profit on every single trade or a large amount of money in a short period of time
4
Make use of too much leverage (borrowed funds) in your forex trades
5
Constantly change your trading strategy whenever the market shifts slightly

Trend Trading vs Mean Reversion

Trend Trading and Mean Reversion are 2 contrasting strategies that are commonly employed by traders. Here’s a quick rundown of what each of them entails:

Trend trading

Traders who use this method capitalise on periods where the market is trending either up or down
Traders enter the market at the beginning of the trend and hold on to their trades till the end
(a long-term trading strategy)
Usually, traders enter the market when it breaks out of the current trading range, which signifies the possible beginning of a trend movement

Advantages of trend-trading

By entering the market at the during the trend and holding it for the long run, (aka riding the trend), traders can make large profits from their trades over a long period of time
Traders don’t have to be overly precise when they enter the market, as long as they catch the trend
Trading wins usually come with very significant payoffs, which are more than enough to offset some losses due to the higher risk-reward ratio
Since this is a long-term strategy, significant payoffs can continue for years

Disadvantages of trend-trading

The problem of ‘false breaks’, where traders enter the market as they think it is beginning to trend, only for it to revert to the norm
Win-rates can be relatively low, which can be psychologically damaging
This strategy also requires traders to be constantly on the ball, as missing out of a few significant positive trades can mean huge losses due to the low win-rate

Mean Reversion

Traders who use mean reversion trades when the market is fluctuating around an average (mean)
By making use of these short, but common fluctuations, traders can make multiple small trades to earn profits gradually
Mean reversion trading strategies usually involve selling as the market moves up and buying as the market moves down

Advantages of mean reversion

Since the market is usually in a state of fluctuation most of the time, this strategy can be used more often than trend-trading
Short-term trading strategy means that there is less risk involved
Win-rates are generally high as well
This also allows traders to stay psychologically healthy and motivated, as win streaks tend to be longer while periods of losses are shorter

Disadvantages of mean reversion

It is also a short-run strategy as traders only have a short time and price window in which the market is moving in their favorable direction
The lower risk and higher win-rates also mean that payoffs in successful trades are not very large. In fact, payoffs can be overwhelmed by losses stemming from losing positions against possible trends
Need to be more precise in timing of market entry, as markets fluctuate quickly

News releases play a significant role in influencing expectations and moving the market. While there is no one strategy when it comes to trading the news, it generally boils down into 2 main approaches: directional and non-directional bias.

Directional bias

This strategy is based on the expectation or forecast that the market will move in a particular direction due to the news release
You have to understand what effect the news will have on the market, whether it causes the market to move up or down in order to open up trading opportunities in the forex market
It is also crucial to know the consensus and compare it to the actual effect the news release has
The consensus is a forecast that analysts generate before the news release, based on what information they have
Many traders will base their trades on this consensus even before the news release, hence, shifting the market beforehand
It is thus vital to know about the consensus so you can gauge how markets will react when the news is actually released

Non-directional bias

This strategy is more concerned about how significant the shift in the market is as a result of the news release
Which direction the market moves in is irrelevant as traders will have a plan for either direction the market moves towards
Traders also bet on how volatile the market will be (how much it shifts) as a result of the news release
Traders may also adopt longer term trading strategies to stay invested throughout the regular and scheduled news releases, compounding on price movements away from their entry points (towards their profit targets)
Such strategies can sometimes convert a profitable short term news scalp position (minutes to hours) into a longer term investment position (weeks to months), as markets start trending on a fundamental shift of a market’s value

As a new trader, it can be intimidating to get started in the industry with the sheer amount of information that is out there. This can be both an advantage and a disadvantage. On the one hand, this means that there are tons of trading strategies for you to study and adapt. On the other, it also means that it can be especially hard to create one that is unique and truly works for you.

As you begin to form your own strategy and continue experimenting, it helps to keep in mind that wins and losses are part and parcel of every trading journey. Be sure to keep yourself grounded with reasonable expectations and to celebrate your successes along the way. With that said, here are 10 steps that can get you started on creating a trading strategy:

CHOOSE THE MARKET

1
There are a wide range of financial markets and products to trade in, each with their own differing structures and rules
2
Knowing what you want to focus on trading is key as there is a wide range of knowledge to be gained in each market
3
What applies to one market may not apply to another
4
Focus on what the product you want to invest in, and then learn as much as you can about it to form your trading strategy

CHOOSE YOUR TRADING TIMEFRAME

1
The way you trade is extremely different based on the timeframe you choose
2
There are many different timeframes, from intraday trading to daily charts
3
If you are unsure where to start, consider your own circumstances (e.g. how much time you can spare) and choose your timeframe accordingly

COME UP WITH YOUR OWN SIMPLE MARKET IDEOLOGY

1
Read up widely on how the market works and where you think you can take advantage
2
With the knowledge gained, you should be able to formulate a simple ideology that defines how you work the market

USE A PROPER MARKET TOOL TO DETERMINE TRENDS

1
It can be inaccurate or risky to trade based solely on what you visualise and interpret
2
Using proper market tools to quantitatively determine the state of the market is much more accurate
3
There are many options available from price action tools like swing pivots and trend lines to more technical indicators like moving averages and MACD

DEFINE AN ENTRY TRIGGER

1
When you enter the market is crucial to your trading success
2
Again, it can be inaccurate or risky to enter based on a gut feel
3
There are proper quantitative indications that you can select for yourself as a sign to enter the market
4
Examples include bar and candlestick patterns, as well as oscillators and bands like the RSI and stochastics

DEFINE AN EXIT TRIGGER

1
Similar to the entry, this trigger tells you when it is time to close the trade and exit the market
2
Having such a trigger is crucial as the market can sometimes go against you
3
With the trigger, it helps you limit your losses before things turn catastrophic
4
Even if you are making profits, having an exit trigger helps as the market will not trend in this direction forever, meaning it would be better to cash in and leave

FIGURE OUT HOW MUCH RISK YOU CAN STOMACH

1
Everyone has different risk appetites, and it is also crucial you find out about yours so you know what trades you can and cannot make
2
Work on limiting risk as much as possible
3
The main way to do so is by position sizing
4
This helps you figure out how much you can invest while staying within your risk limits

WRITE OUT YOUR TRADING RULES

1
This ensures that you stay consistent and disciplined enough to stick to your trading plan
2
It also provides a record of your trading strategy, allowing you to refine it as you move further along in your trading journey

BACKTEST YOUR TRADING STRATEGY

1
After writing out your rules, your next step should be to backtest it
2
Look at past trades and historical data to determine how robust your trading strategy is
3
This might be a long process especially if you record trades manually
4
However, doing so can provide you with invaluable insight into the market and allow you to refine your trading strategy further

REFINE YOUR TRADING STRATEGY

1
It is highly unlikely that your first strategy will be an unparalleled success
2
However, with experience and trading data available, you can gradually improve your strategy over time for higher rates of success
3
As you do so, remember to forward test your trading strategy.
4
Refine your strategy gradually over time, rather than making drastic changes as it that defeats the purpose of methodically coming up with a trading strategy

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