Currency trading or Forex Trading is a practice in use for several years now. Its popularity has exploded since the internet allowed millions of users to work from the comfort of their homes.
This guide is designed from a professional point of view for those who want to start trading Forex online, with the aim of obtaining financial results by taking advantage of their free time and dedicating constant commitment to this activity.
With this short but intensive guide, you will be able to start trading on Forex through this free platform (click here to register), which provide practical examples of trading.
Ready? Let’s begin.
Here you can see the contents of this guide. To select a specific topic, you can use the Table of Contents.
- Chapter 1 – What is Forex
- Chapter 2 – How to trade Forex online
- Chapter 3 – Example of trading with demo
- Chapter 4 – Forex Trading Platforms
- Chapter 5 – Macroeconomic Variables
- Chapter 6 – Technical Analysis
- Chapter 7 – The best indicators for Forex Trading
- Chapter 8 – Advanced Forex Trading
Start now for free
We have selected the best free platforms for you to start practicing immediately at no cost.
Broker: 24optionMinimum Deposit: 100 €License: Cysec 207/13
*Terms and Conditions apply **Your capital is at risk (CFD service)
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Broker: Iq OptionMinimum Deposit: 10 €License: Cysec 247/14
*Terms and Conditions apply **Your capital is at risk (CFD service)
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Broker: eToroMinimum Deposit: 200 €License: Cysec 109/10
*Terms and Conditions apply **62% of retail CFD accounts lose money
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What is Forex?
Forex stands for Foreign Exchange Market, also called the Currency Market. In Forex, currencies are traded and the supply and demand movements change the value of one currency against another. We will see this aspect better in the next paragraph.
Introduction to Forex
Every day millions of users are trading Forex online, with small or medium capital, as a profession or hobby.
What is Forex? How does it work? We have just seen that Forex represents the currency market, or the market in which currencies are exchanged.
In this chapter, we will build the foundations: the pillars of our guide on which to build your learning.
Here are the main features of Forex:
- It is huge
- It has very low operating costs
- It allows you to operate even with small capitals
- It is located all over the world
- It is open 24 hours a day (excluding weekends)
- It is influenced by numerous factors (macroeconomic)
Forex is the largest market in the world in terms of transactions. In fact, every day exchanges are carried out with a total value of over 4000 billion dollars. It is a very huge market, and its size allows it to not be interested in speculative movements. It is so great that it is impossible to “manipulate” it. So Forex is a fair market, as well as a big one. This is especially true for primary exchange rates such as the Euro/Dollar (EUR/USD).
But where is Forex? In reality, Forex has no physical location. It is decentralized and totally telematic. It allows you to operate all over the world by telephone, fax and online.
The Forex market is an OTC (Over The Counter) market, as it is outside the official stock exchange and has much less constraints.
How Forex works
But what happens in Forex? We have said that it is a currency market, but how is it done?
Even though for the first few times it can be a bit confusing, the operation of Forex is quite simple. In Forex, you buy a currency and at the same time you sell another one. This is because currencies are listed and traded in pairs. For example, the EUR/USD is precisely a currency pair that includes the euro and the US dollar. When trading on EUR/USD it means that one buys one and sells the other.
- By buying the euro and selling the dollar if the euro is expected to strengthen in the EUR/USD pair
- Selling the euro and buying the dollar if the dollar is expected to strengthen in the EUR/USD pair
To trade, you can open long (upward) or short (down) positions. In the case of EUR/USD, a long position can be opened in case you want to “bet” on the euro, or short position if a dollar is expected to strengthen. The same mechanism applies to all currency pairs, also called “Cross Currency”. Each pair is in fact made up of two currencies, the base currency and the quoted currency (or “counter”).
How to trade Forex online
After seeing briefly what Forex is and how it works, let’s move on to the most interesting aspect: the possibility of doing Forex trading at home. In this chapter, we will find out how online trading in currency markets works, who can do it, what is needed and what knowledge is required in order to start operating. We will also discover how you can learn using the demos (offered free by this broker) without risk.
How does Forex trading work at home?
To trade Forex in order to obtain economic results, do you need to go to some market? We have seen that the currency market has no physical location and that it takes place primarily via electronic means. By “telematic”, we also mean the internet so you can access Forex trading through your computer, by connecting to the internet.
“Forex from home” means the buying and selling of currencies through tools available on the internet and therefore also in your own home. Trading orders, on Forex, are made through qualified operators and brokers.
There are different types of brokers, but to operate from home the cheapest are the so-called “discount brokers” which offer basic services to zero commission since their compensation is based on spreads (which we will go into later). In order to allow users to carry out purchase and sale transactions, brokers make their trading platforms available to their customers. These are virtual environments in which to trade, that is to make long (bullish) or short (bearish) orders on the financial instruments on which it is traded.
So, in summary, we can summarize in Forex Trading operation through the following infographic:
- The user connects to the internet from his computer
- Sign up or log in to a broker’s trading platform
- Purchase orders on currencies are effective
- For each order, the “discount broker” does not take commissions but gets a fee
- The user gains or loses depending on changes in market prices
What you need to do when trading Forex online
To trade on currencies, you need a minimum of equipment and a little practice in order to become familiar with the tools and gain experience in operating with real funds. Let’s see first of all what is materially necessary:
- A computer, a tablet or a good mobile device
- A stable internet connection (definitely better if you own it)
- A trading platform, like 24option (or one provided by the broker or selected by you)
As you can see, it does not need much more than what is already available. Consider that from the trading platform, from the broker’s site and on specialized sites such as ours, it is possible to access all the tools with which to integrate one’s own business. For example, when you want to apply a graphical feature to better interpret the price chart, you can activate it via the platform.
Instead, when you want to obtain information on a certain type of operation, you can obtain information from the broker’s platform or website. Again, when you want to explore any topic related to Forex trading, stocks, ETFs, commodities and more, you can look it up on our site.
In the fourth chapter of this guide, we will present you some platforms to be evaluated personally.
What experiences and knowledge are required
In this regard, you may have heard some falsehoods or exaggerations. It is not true that you do not need any experience, just as it is exaggerated to say that you need a degree in economics to do Forex trading.
The experience can be divided into two types:
- Experience gained: that is what is already enjoyed, in finance or in trading
- Experience needed: that is what can be done, both in practical trading and in finance in general
Everyone, sooner or later, start “from scratch”. The optimal steps to start trading on currencies are:
- General knowledge of the principles of the logic that regulate the market
- Specific knowledge of the mechanisms that influence a specific currency pair
- Knowledge of the trading operation (what are CFDs etc.)
With this course, you can start practicing with a demo very soon. In fact, practice is the best method for studying and therefore for the maturation of one’s own experience.
With regard to point 2 (specific knowledge of the mechanisms that influence a specific currency pair) we have set it up in this way because “specialization” in a few financial instruments is universally considered correct and optimal.
When you have decided on which currency pairs to negotiate, focus on those. “Specialize” in those. In this way, you will not lose your energy and your precious time. Each currency pair can offer a chance to make good profitable trades. Start with a couple, then gradually add more, but stop at 3-4 pairs at most, at least for the first year of practice and real operation.
Getting started, starting with a risk-free demo
The great competition among brokers has made it possible to offer increasingly cheaper conditions for customers. One of the most advantageous conditions offered today by some online brokers is the possibility to practice through demos, i.e., accounts in which you have a virtual capital, which you can use to practice on the trading platform under the same conditions as a real account, but without risk.
In a demo account, all data is real. The only thing that is not real is the funds with which you can open up and down positions. The only other difference is that the operations carried out with virtual funds do not influence the market.
In the course of this chapter we have explained in a simple and concise way what FOREX is and how it works, what tools are needed, and what knowledge or experience is needed.
Speaking of experience, there is no better experience than field practice. In this sense, the risk-free demo account will prove to be an excellent practice tool for the acquisition of experience and therefore also knowledge (of negotiation instruments, market dynamics, indicators for technical analysis, etc.).
Example of Forex Trading with Demo
Can’t wait to get started? We know that feeling well. So let’s start immediately with an example of Forex trading, which you can repeat independently with a demo.
Practice is the best way to learn, so activate a demo account (even without depositing) and repeat all the operations that we will include in this chapter on the trading platform.
If you have any difficulty at first, do not give up. Just a few repetitions are needed to make all the steps clear, which will prove easier than you think. Ready? Let’s start.
How to activate a demo account
The first thing to do to practice Forex with virtual funds is to activate a demo account. Here are the steps to follow to open an account and activate the demo:
1. Select the broker you wish to trade with (go to the list of trading platforms on the top of this page or use this one)
2. Complete the registration form
3. Check the e-mail to recover the access data
4. Use the login information to login on site and/or platform
Not all brokers allow you to practice with the demo without making any deposit. In fact, there are brokers that require a deposit and then offer both a real account and a demo account.
For our example, we used the 24option platform demo , which can be accessed by providing only an e-mail address and setting a password. For the optional real account, personal data is required.
To access the 24option demo account, visit this official page, choose “demo mode” and then “new user”. In less than 1 minute you will be able to access the browser negotiation platform, reachable from any device (both fixed and mobile) and from any operating system.
A look at the trading platform
Once the platform has started up, it is good to take a look at its appearance: how it is organized, how the sections are divided, how to easily visualize what it takes to do Forex trading.
Although each trading platform has specific characteristics, in general they are structured in the same way. In them you can find:
- A section dedicated to negotiable instruments
- A section dedicated to the orders, CFDs info and the graph in real time
- A section dedicated to the account
In our example with 24option, these sections are easily identifiable in the various numbered points present in this image.
The real-time graph allows you to view price changes. When the market is closed, at the weekend, this remains at the close of Friday night.
For Forex trading, the tradable instruments are on the top left hand column, under the “currency” category. These are usually divided into sub-categories: main, secondary, virtual. The most important currency pairs are found under “main”, where you will also find the EUR/USD.
The account section provides an overview of the account situation. Voices that are never lacking are available capital, the amount of margins (we will see later what they are), the profits or losses of positions still open.
Each platform offers different types of functions, which can be recalled via buttons or menus. Among the most important are those concerning the details of the tools and the technical analysis functions.
There can be simple platforms like the 24option, or much more complex like the MetaTrader 4, offered by 24option.
Choosing an asset and reading the chart
We start to put our hands in dough and to do so we select an asset, which in this case is represented by the currency pair on which to trade.
We will use EUR/USD, since in addition to being the most traded pair in the world, it is also among the least volatile.
Although there are “interesting” days, the two economies are strong enough and bureaucratic to not be subject to upsets or vertiginous collapses, if not for events in some way anticipated.
For example, the publication of changes in US interest rates is well known to influence the strength of the dollar on foreign exchange, but this is hardly a surprise.
Let’s begin our sample trading with material by selecting the EUR/USD currency pair.
To do this, first select “Main changes” from the tools section (1), then select EUR/USD in the section dedicated to specific tools (2). At this point, the selection of the currency pair will produce the visualization of the the order box (3). From the order box you can view also CFDs details and specific price chart.
From the chart we can get different information with a simple glance, including:
- the quotation at which the CFDs arrived on the selected currency pair
- the overall trend of the exchange over time (short, medium and long term)
- the presence of any strong and long trends
- possible repercussions in conjunction with events occurring in precise moments over time
The chart can generally be displayed in linear mode, but also in other modes, such as in Japanese candlestick mode.
In addition, you can easily apply graphical features that allow you to read it in more depth, interpret it and obtain information that is potentially important for your trading.
We will find out more about the graphical functions for technical analysis, but in the meantime, you can try to visualize the graph according to different periods.
Try for example to click on the buttons 1m, 5m, 15m etc. located just above the chart. In this way, you will have a more comprehensive or more specific view of price trends.
Opening a position and subsequent closure
After choosing the currency pair on which we want to operate in Forex trading and having a look at this chart, we open a position.
Opening a position means ordering the broker to carry out an operation.
The two market orders are:
- Long: the opening of an upward position, if a rise is expected
- Short: the opening of a bearish position, if a reduction is expected
So, if we anticipate that the Euro will strengthen on the dollar, and since the euro is the “Base Currency” (the one on the left) of the EUR/USD exchange rate, this means that we expect this change to rise. In this case, we will choose the LONG order, also called the PURCHASE order.
Otherwise, if we foresee a weakening of the euro against the dollar, it means that we expect a fall of EUR/USD. In this case, we will choose the SHORT order, also called the SALE order.
In our example, we will open upwards. To open an upward position , we will click on “Buy” under “EUR/USD”.
In the window that opens, we will select the amount of euro we wish to negotiate, we will set a Stop Loss, a Stop limit and an Operational Stop, then we will confirm everything by clicking on “Buy”.
If you wish to open a downward position, click on “Sale” in the EUR/USD item. Everything else, works the same way but in exactly the opposite way.
The Stop Loss will in fact be linked to prices higher than the opening price, since the order envisions profits from the downside, and not from the upside.
Please note: when you have opened a purchase position, to close it you must select the operation and click on “close position”.
The opening of a sales position, subsequent to the purchase one, does not represent the sale of what was purchased, but the opening of a new position on the downside.
The position will remain open until we decide to close it. In case we did not have sufficient capital, did not set stop loss and the price would definitely go against our forecasts, the position would be closed automatically by the broker, not before notifying the situation (with a margin call) and requesting a deposit.
When the broker does not allow debt positions, the broker closes the position automatically when the trader can no longer offer him guarantees with maintenance margins.
Some details for better understanding
What are Stop Loss, Stop Limit, Operational Stop and Guaranteed Stop orders?
The Stop Loss is a closing order of the position set by the trader on the platform, to automatically close a position in loss once it reaches a certain level.
The Take Profit works the same way but in a way perfectly opposite, automatically closing a position once reached the desired profit level.
The Trailing Stop instead allows you to automatically change the stop loss bar if the market moves in your favor and thus close the position at cheaper price levels.
The Guaranteed Stop is not always activated and allows you to protect yourself against any strong market movements due to exceptional events.
How is the price of a CFD calculated? The percentage of spread from which the broker obtains its compensation is added to the price of the reference currency.
Margins and leverage
What are the margins? When you work with CFD you are only economically exposed to a small portion of the volume of currencies on which you are trading.
This is because CFDs are financial instruments subject to leverage.
For example, with a leverage of 1:300, you only expose a sum equal to 1/300 of the total. With 100 euros, in reality, there are 30,000 euros, despite the trader exposes himself to €100.
These €100 represent the initial margin, to which the maintenance margin is added, a sum that the broker blocks in order to maintain the open position and as a guarantee to such maintenance. When closing the position, the maintenance margin is returned to the trader, while the initial margin is returned net of the profits and losses accrued in the transaction.
All these details you can see them better by clicking on the “i” (information) icon corresponding to the currency pair on which you wish to trade.
Forex Trading Platforms
A platform is the virtual environment in which to trade.
Each platform for Forex trading presents differences and different levels of difficulty for the user.
In this chapter, we will show you some of the Forex trading platforms among the most interesting and used in the world, that we have personally evaluated over the years.
The 24option platform also offers an environment for Forex trading with binary options, even if lately the broker has expanded the offer by adding the possibility to operate with CFDs. The 24option platform is rather clear and tidy, with different functions for technical analysis.
24option is available in demo mode only for those who register and make the minimum deposit required by the broker. With regard to tradable assets, it specializes in those concerning Forex trading.
Check out our 24option tutorial.
24option users can use also MetaTrader 4. MetaTrader 4 is the most used professional trading platform by professional traders all over the world. It is in fact aimed at those who have a certain experience both in practical trading and in the analysis of financial markets in general. Equipped with numerous functions for technical analysis, it also presents resources that can be downloaded or purchased from connected servers, including guides and expert advisors.
MetaTrader 4 is also available in demo mode without deposit for 24option subscribers. Switching to real mode is not mandatory. For currency trading, it allows you to trade on the crosses offered by the selected broker. The MetaTrader 4 platform can be accessed through the dedicated server, associated with the specific broker.
The Plus500 platform is the same one that we used for our example of practical trading in chapter 3. Its great international success is due to both the wide variety of tools available and the ease of use assisted by a clear and intuitive interface.
Plus500 is also available in demo mode without deposit required. Switching to real mode is not mandatory. For Forex trading, it provides CFDs on all major, secondary and Bitcoin currencies.
Have a look to our Plus500 complete tutorial.
In reality, members of Markets.com can use an easy webtrader
The Web Trader platform, offered by the same broker Markets.com, presents a simpler trading environment than Metatrader.
Nonetheless, it has some very interesting features including real-time macroeconomic news, and numerous basic and advanced technical analysis tools.
Web Trader is also available in demo mode without deposit for Markets.com members. Switching to real mode is not mandatory. For Forex trading, all major currencies are present.
The IQ Option platform is offered by the binary options broker of the same name. It is probably one of the most graphically appreciable platforms in the entire market. Despite numerous functions, it is generally easy to use. IQ Option is much appreciated for the presence of the 1 euro options and for the many tournaments in which you can participate, in addition to personal trading.
IQ Option is also available in demo mode without deposit required for those who register. Switching to real mode is not mandatory. This platform specializes above all in Forex products, more than others.
You can also learn how to use it with our IQ Option Tutorial.
To introduce the concepts of macroeconomic indicator and macroeconomic variables, let’s take a step back.
What moves the Forex market? We know that a market price is based on the dynamics of supply and demand, but the point is to understand when you buy and when you sell.
What influences the market? What drives you to buy or sell? To answer these questions, a little study of the concept of macroeconomics is needed.
All of this is part of the so-called fundamental analysis of Forex.
What influences the exchange rate
In the Forex market, currency pairs are traded. Currency pairs express a relationship between the two component currencies. The relationship is called “exchange ratio” or simply “exchange”.
For example, when between the Euro and the Dollar there is an exchange ratio of 1.10 this means that to buy 1 euro, it takes 1.10 dollars.
But what influences this exchange ratio? Why should an investor or a trader buy euros and sell dollars? Why should another buy dollars and sell euros?
To understand the answer, let’s askJohn, the informed investor.
As you can see, Mr. John trades on Forex in daytrading mode (opening and closing positions on the same day) and is a fan of EUR/USD.
Every day, he decides from time to time on which of the two currencies to trade on. He decides whether to open up or down positions.
To evaluate, take a look at the economic news and in particular those that could affect the Eurozone economy (which issues euro) and that of the United States (which issues dollars).
Pay great attention to the so-called economic calendar, i.e., a calendar showing the dates and times when some data will be published, the most important of which are those relating to some macroeconomic indicators.
They are called “indicators” because together they indicate the overall trend of a large economy, such as the national one or a community of states (such as the Eurozone). The main macroeconomic indicators are:
- Change in interest rates
- GDP and deficit/GDP ratio
- Trade balance (ratio between import/export)
- Data on employment
- Industrial production
As you can see, this is data that is discussed every day on the main information channels. They are both general and economic, since these are the most important data of an economy.
How to exploit economic indicators
But now let’s see how economic indicators can influence the strength of a single currency:
|Interest rates||positive – strong||It is the cost of money. The more it increases, the more the currency is strengthened.|
|Inflation||negative – strong||The currency in circulation. The less money circulates, the more valuable it is, the greater the weight of foreign exchange currency.|
|GDP||positive – weak||The Gross Domestic Product, or what a country produces. Its growth is a positive value, especially when the data comes from a country that issues its own currency (e.g., United States) and when the annual figure shows significant changes.|
|Unemployment||negative – weak||The number of unemployed citizens who actively seek it or who have lost it.|
|Trade balance||positive – weak||The difference between export and import. An optimal condition sees the export greater than import.|
|Industrial production||positive – weak||The production of the secondary sector, or the industry.|
The types of relationship consist in the type of relationship between the data and its effect on the market.
- Positive: the more the data rises, the more the currency is strengthened
- Negative: the more the data rises, the more the currency weakens.
- Strong: the data has a strong influence on the market.
- Weak: the data has little influence on the market. However, it must be contextualized because one thing is taken on its own, one thing is if taken together with other data that offer the same interpretation of the performance of an economy.
Here we have taken into consideration only the most important macroeconomic indicators, to which you can also add those of the orders to industry, retail sales, durable goods orders, stocks of companies and wholesalers, household incomes, consumer spending.
Each of them has a small weight in the creation of the so-called market sentiment.
In every economic calendar you will also find the data of the consensus, that is the forecasts given for data, very useful to consult before the official publication of the data.
Technical analysis is the necessary step for those who want to trade “seriously”, i.e., with a minimum of effort to obtain more consistent results over time.
Technical analysis will not only allow you to get better results, but will make you become more passionate about this activity, turning it into a real discipline.
Technical analysis is the first step for those who want to start trading professionally.
What is technical analysis
When we do not yet know what it is, we think of technical analysis as something only technicians can do. In reality, “technical” is an adjective associated with analysis or study.
The analysis is technical when it is carried out according to specific rules, which regulate the practical exercise of an activity.
In the case of Forex trading, technical analysis represents the study of price trends in the currency market over time, with the aim of predicting future trends through the adoption of graphical and statistical methods.
In simple terms, we interpret the price charts with technical analysis in order to predict what will happen in the future and in some cases to identify a phenomenon in progress.
How technical analysis is applied
Technical analysis can be applied in several ways including:
- Via graphical indicators
- Through graphical patterns
The graphical indicators are nothing more than mathematical and statistical functions in graphical form, which are applied by superimposing them or adding them to the price charts. For example, there are indicators that identify and follow trends, while others seek points of inversion.
There are meters that measure market volatility while others estimate normalized prices in situations of overbought or oversold.
The patterns, which literally translate into “paths”, are precisely the paths that the price travels theoretically on the graph if necessary for certain conditions. Very famous are the theorized patterns together with the use of Japanese candlesticks, which we talked about in a special lesson in our CFD course.
Indicators and Oscillators
In technical analysis protagonists are the indicators (lagging indicator) and the oscillators (leading indicator). The difference between indicators and oscillators is that:
- The indicators follow a trend in progress and are ideal for well-defined market phases
- Oscillators move, “swing”, in a predefined interval and are ideal for undefined market phases (called lateral phases)
In chapter 7 we will find out which oscillators and indicators are most recommended and used for Forex trading.
The Japanese candlesticks is a particular type of chart that, unlike the linear one, draws the bars at predetermined time intervals (as if they were wax candles with a certain duration). Japanese candles vary in two ways:
- They are longer or shorter depending on the price variation that has taken place during its duration
- Depending on whether there has been a rise or fall from its “activation”, the candle will be green or red
Once the candlestick starts its course (for example 5 minutes) at the end it will be green or red depending on whether there has been an overall rise or fall, and it will be long or short depending on the price change intervened.
Basic technical terms
Even those who have never deepened the technical analysis will have heard or will have read at least once these terms: support, resistance, break, trend line. This is because they are basic terms, like the vowels of the alphabet.
- Resistance is the price level above which a quote is struggling to rise. Thus, it is located in an area where vendor pressure increases and is represented by a horizontal line at the top of the price chart.
- Support is the price level below which a quote is struggling to fall. Thus, it is located in an area where buyer pressure increases and is represented by a horizontal line at the bottom of the price chart.
- The trend line is a line that joins at least two points of maximum or minimum and outlines a trend which can be upward, downward or static.
- For breakage or break-out, it means the breaking of the support or resistance line by the prices. This event often anticipates an inversion of the price.
- Maximum: this is the highest point reached by the price in a given period
- Minimum: it is the lowest point touched by the price in a given period
The best indicators for Forex Trading
In trading, you cannot simply “aim” always upwards or downwards so it is necessary from time to time to try to understand how the market will move.
The indicators are precisely used for this purpose: to help us understand when is the best time to buy or sell. But what are the best technical analysis indicators to be applied in Forex Trading?
Although there are many types of indicators, here is a selection of some of the most effective for Forex trading.
Let’s start by saying that there are 4 different types of indicators that are optimal for Forex:
- Indicators that follow the trend (among which we will explain the simple moving average)
- Trend confirmation indicators (among which we will explain the MACD and the ROC)
- Indicators that identify situations of oversold and overbought (among which we will explain the RSI)
- Indicators for profit taking, or that help to identify the moments in which to close the position (among which we will explain the Bollinger Bands)
Simple moving average
The simple moving average is an excellent tool for tracking a trend. The purpose of pursuing a trend is to understand whether it is better to open up or down. The simple moving average represents the average of the closing prices of a certain number of days.
One of the easiest and most effective ways to use simple moving average is to find crossovers. For instance, using a simple 15-period moving average and a 5-period moving average.
When the 5-period one crosses over the 15-period one, it can be interpreted as an imminent sign of an inversion of a trend.
The MACD or Moving Average Convergence/Divergence allows you to make various interpretations about possible future bullish or bearish movements.
It consists of two lines that correspond to differences in exponential moving averages. The first line is the representation of the difference in the exponential moving average at 12 and 26 days, while the other is the representation of an exponential moving average of 9 days of the first.
This indicator can be used in three different ways:
- Reporting it to the zero line (bullish visions when it is cut on the upside, bearish visions when it is cut downwards)
- Using the 9-day moving average as a simple moving average (same as in point 1, but using the moving average 9 instead of the zero line)
It is used to identify any divergences between price trends and the oscillator. In practice, when there will be two rising prices in correspondence of two maximum decreases on the MACD one can (for the theories linked to this indicator) interpret as bearish signs.
Likewise, two minimum decreasing prices at two growing minimum on the MACD can be interpreted as bullish signs.
At the beginning of the chapter we said that the MACD can be used together with the ROC.
The Rate of Change is nothing more than the rate at which a variable changes over a given period of time. Thus, it fits into the “force” discourse of a given price change.
This is a “momentum” type that measures the acceleration of a price or a volume.
RSI or Relative Strength Index, can be translated with Relative Strength Index.
That “relative” highlights the fact that the strength of a price must not be seen in an absolute but relative sense.
In fact, the RSI index measures the excesses of the market, i.e., the situations of “overbought” and “oversold”.
- Overpriced (i.e., when prices would theoretically be overestimated): when the value of the RSI is above 70. In this situation, according to this index, the price may soon present a bearish inversion.
- Oversold (i.e., when prices would theoretically be undervalued): when the RSI value is less than 30. In this situation, according to this index, the price may soon present a bullish inversion.
Given these characteristics, it goes without saying that this indicator is used above all near highs or lows, in order to find points in which to “enter” the market.
The indicator that we will use to take profit is the indicator of the Bollinger Bands, which in reality also lends itself to the identification of possible propitious moments to enter the market.
The BB indicator is based on the simple moving average and on the standard deviation and serves to identify moments in which the market changes behavior in terms of volatility.
This behavior can also vary for reasons of fundamental analysis (macroeconomic indicators or relevant events) and Bollinger Bands can project their effect on the graph.
The Bollinger bands then measure volatility. They widen when there is more volatility, while they shrink when there is less volatility and the market could therefore “take a direction” (up or down) or remain “flat” (balance or uncertainty, but without volatility).
We will set it this way:
- Deviation period at 20, Deviation at 2 (Valid in general)
- Deviation period at 10, Deviation at 1.9 (if a short moving average is to be used for shorter reference periods)
- Deviation period at 50, Deviation at 2.1 (if it is necessary to use a very long moving average.
If we use Bollinger Bands we could take profit if:
- We have opened up and the price reaches the upper band
- We have opened a downward position and the price reaches the lower band
Keep in mind that breaking a higher or lower band is an “important” event, since about 90% of the price action occurs between the two bands.
Given that they highlight the volatility well, it should be noted that in times of high volatility alternating rises and falls are more frequent, while when the bands are shrinking, it means that there is less volatility and therefore greater probability that a given trend is formed in a “natural” way.
In the case that it is formed in the opposite direction to the one you open, you could profit.
As for the opportunity to use Bollinger Bands to look for moments in which to enter the market, it must be said that the price could undergo an inversion but also continue in the same direction. To get more clues about the direction, you need to associate the “entry” clues offered by the Bollinger Bands indicator with those of MACD and RSI. Those who use Bollinger Bands to look for a moment to enter the market usually wait for moments
of potential trend reversals.
Advanced Forex Trading
We conclude our guide by talking about advanced Forex trading. Advanced or professional trading is not only characterized by the use of technical tools, but also by a more complex approach to the currency market.
Besides a “doing”, there is a “thinking”, therefore a study of the context both from a technical point of view (statistical and graphical data) and from the fundamental point of view (macroeconomics).
To these is added a self-analysis of the personal context, of its objectives and of the type of investment intended both as funds and as time.
Which platform to use for professional trading?
Choosing the trading platform is a bit like choosing a camera. You can choose a basic or a technique, but if those who work have no ideas, it will be difficult to achieve satisfactory results.
What matters, therefore, before the platform, is the trader.
To obtain results in trading a professional platform is not indispensable, while it becomes when you want to do it using advanced technical tools.
A platform for Forex trading like 24optionfor example, it is a platform designed for essentiality and to be used by users of different levels.
This fact presents a simple display, which allows you to get “immediately to the point”. To open a position it takes a few seconds, while to close it you need only one mouse click. As for the technical analysis, it has the main tools, which are also applicable in a few seconds.
These tools are appreciated by the most advanced traders as they represent the most important in technical analysis, both by traders who start to chew technical analysis because of the simplicity of application and the small number (but well selected) of selectable indicators.
A platform like MetaTrader 4 (offered for free by Markets.com ), on the other hand, is a platform dedicated to traders who want to exploit a large amount of data in order to apply them to their analysis and trading.
The large number of technical analysis tools, drawing tools, automated applications, configurable displays to follow more graphs at the same time, data resources from external servers, are some of the features that can be found on the professional trading platform MetaTrader 4 also known as MT4.
What changes? The depth of analysis possible within the environment of the platform itself.
Choice of the instrument
Up to now, we have used the EUR / USD as an example tool. We have also said that at least at the beginning it would be advisable to concentrate on very few instruments, in order to better understand their dynamics.
When you become more confident with the tools or the market in general, you can proceed in the same way with few currencies, or “attacking” the market more. In this sense, for advanced Forex trading , you can proceed in this way:
- Take advantage of an event that concerns a currency and then consider the hypothesis of entry on the couples in which it is present. Let’s say that, for example, the FED raises or reduces interest rates. In this case, this event will affect the value of the US dollar (USD) in the various exchange rates in which it is present. As? We talked about this in chapter 5.
- Consider the correlations between currencies and other instruments. Experienced traders always pay a lot of attention and updating to the correlation. Indeed, there are currencies that for various reasons are linked to other currencies or other instruments (such as oil or gold).
- Analyze from a technical point of view the graphs of several currency pairs and then negotiate on those that offer “signals” of entry.
Correlation between currencies
We devote to the correlation a specific paragraph, because the concept behind this mechanism is important.
In practice, it should be remembered that markets do not follow mathematical models, so there is always a margin of error and exception to the rule.
The concept behind the correlation is that there are currency pairs that are influenced by proceeding in the same direction (positive correlation) or in opposite directions (negative correlation).
However, it should be emphasized that there are no fixed rules or power relations over time.
This below is a correlation table between currencies.
Here’s how to read it:
- If the correlation is high, i.e., the data is above 80 and positive (there is no -), it means that the currency crosses move in the same direction
- If the correlation is high, i.e., the data is above 80 and negative (there is sign -), it means that the crosses move in the opposite direction (inversely related)
- If the correlation is low, i.e., the data is below 60, the cross does not move in the same direction
Opening and closing the position
Just as the opening of an upward or downward position requires an entry “signal” to be assessed personally, the same applies to the closure.
What is the best time to close a position? There is not a single answer to this question:
- There may be a “signal” to close the position, as theorized by the technical indicator used. The approach here is merely technical.
- We follow our own “fundamental” evaluation, which analyzes the economic (but also political and social) context that influences a particular currency and therefore the currency pairs in which it appears. For example, regardless of what the technical indicators say, one could make a prediction on the outcome of the market following an important event (a news or a publication, especially if it’s “surprising”).
- It can depend on needs and objectives. It is always good to establish a minimum profit level that you want to achieve and close the position once you have reached it. In this case the automatic “Take Profit” or “Stop Limit” order is useful, which closes the position automatically once a certain percentage of profit has been reached.
- It can depend on your limits. If a price does not go in the intended direction, you can wait (progressively losing more capital) or close the position to prevent an excessive loss. The more limited the capital, the more the latter option is preferred. It is for this reason that it is advisable not to trade with too limited budgets, in order to have more elasticity and to give more scope to their forecasts, obtaining more time for the wait linked to an inversion of the price trend of the asset.
Now it’s your turn
Now that you know the basis of Forex you just have to sign up for this free platform and start trading.
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