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TRADING PRINCIPLES

TRADING PRINCIPLES

All traders, who joined Forex, seek to reach best results. However, to trade with profit, traders need to know and follow some Forex principles.

• Have your own trading strategy. Develop your system, which is based on some significant factors for trading on Forex.
• Control your emotions. Unstable emotional condition may disturb the process of making decisions. Learn how to control your emotions and wishes.
• Have your own historical data. Write down under which circumstances and on what factors your decisions to open/close orders are based and your comments on every situation. Constantly review the results of your work.
• Learn from your mistakes. Analysis and work on mistakes are among the most important components of successful trade. It is important to be self-critical in the analysis of loss positions. Having dealt with loss positions, you can avoid repeating these mistakes.
• Do not trade without the reason. Do not open a trading platform only because you have nothing else to do or you cannot fall asleep. Trade only when there are factors that justify such actions.
• Work and think by yourself. Help and hint from another person may be helpful, but not while trading on Forex. You can consider advice from experienced traders, but do not just follow it without even thinking. Progress will appear only when you make your own analysis, develop your own strategies and rely only on your decisions.
• Trade only when you are confident about it. It is better to wait for the appropriate moment to enter the market, than open the order when you do not understand the situation. It is important to enter and leave the market at the right time. If you do not feel confident, you better not take the risk. A couple of lost pips cannot be compared with the large loss, which may be caused by rash action. Just open the order later: the market is not going anywhere.
• Limit your risk. Use for trading only the sum of money, the loss of which will not cause shortage in the family budget.
• Know your limits. Be able to stop.
• Be careful with early success. Do not lose your head from happiness just because of a few hundred dollars' profit (back to 2).
• Do not trade against the market. With the lack of experience, it is better not to take the risk. In the process of price movement in a particular direction, market starts jumping up/down. To learn how to use short – term fluctuations, you must gain experience, thus minimizing risks.

TRADING PROCESS

TRADING PROCESS

The most important steps of trading are order opening and order closing to fix the results of the trade.

Order Opening

It is possible to trade on the platform MetaTrader 4 using either market or pending orders. Market order is used to open positions at the current time. Pending order is executed when the price reaches a certain, earlier chosen level of price. Pending orders let you trade even when you do not have an opportunity to be at your working place. After the pending order is set, it will be executed when the desired price level is reached even if the platform is closed.

There are four pending orders on open positions:

• Buy Limit – the position to buy opens in case the Ask price becomes lower or equal to the order price (the current price level at the moment of placing an order is higher than the Buy Limit order level).
• Buy Stop – the position to buy opens in case the Ask price becomes higher or equal to the order price (the current price level at the moment of placing an order is lower than the Buy Stop order level).
• Sell Limit – the position to sell opens in case the Bid price becomes higher or equal to the order price (the current price level at the moment of placing an order is lower than the Sell Limit order level).
• Sell Stop – the position to sell opens in case the Bid price becomes lower or equal to the order price (the current price level at the moment of placing an order is higher than the Sell Stop order level). 

Pending Order Placing

• 1. Open the "New Order" tab. There are several ways to do this on MetaTrader 4:
  • in menu "Tools" choose "New order";
  • in the "Terminal" block, open the "Trade" tab and right-click and choose "New Order";
  • click twice on the currency pair in the "Market Watch" window;
  • right-click on the chart and choose "Trade" – "New order";
  • use F9 button.
• 2. Choose the type "Pending order" (under "comment" field). Then, you need to modify the main meanings of fields, such as:
  • symbol – the financial instrument that will be traded;
  • volume – the amount of lots;
  • stop loss (not necessarily) – the function of limiting losses at the indicated price;
  • take profit (not necessarily) – the function of fixing the profit at the indicated price;
  • type – the type of the pending order (buy limit, sell limit, buy stop, or sell stop);
  • at price – the level of the price, at which the order is to be open;
  • expiry (not necessarily) – the function of the cancellation of pending order (deletes pending order from the platform if it does not open until the indicated time).
• 3. When all the information is entered, click "Set" and after this, the pending order will show up in the "Terminal" – "Trade" window. If you want, you can modify or delete it (if it is not open yet), by right-clicking on the order in the "Terminal" window and choosing "Modify or Delete Order". You can also modify or delete pending order in one click. You can read here how to fullfill this.

Example: The bid price at USD/JPY is 83.23 at the current time, and according to your forecast, the price will increase up to 83.33 soon, and then, it will start falling. However, if you do not want to stay near the terminal and wait for the price that you want, you can place a pending order to sell (sell limit), which will be executed only if the price reaches the 83.33 level and goes down.

At the moment of the pending order execution, slippages are possible. Slippage is the amount of market movements from the moment of placing the request for the order to be executed until the moment of its execution. The execution at the better or worse price than the one indicated in the order takes place.

You can also place/modify pending orders directly on the chart. You can read herehow to fullfil this.

Market Order Opening

• 1. Open tab "New Order".
• 2. Fill in the fields:
  • symbol – the financial instrument that will be traded;
  • volume – the size of the lot.
• 3. When all the information is entered, click "buy" or "sell" – depending on the position that you will open: a short one or a long one. Then, the market order appears in the "Terminal" – "Trade" window.

You can also open new order in one click. In order to fullfil this click "Show trading panel" in the top left of the chart or right-click on the chart and choose "One Click Trading", open an order by clicking "buy" or "sell". You can learn more about One Click Trading here.

The execution method of market orders is Market Execution therefore the slippage may take place during the execution process of such orders. As it has already been said, slippage is the amount of market movements from the time of placing order till its execution.

Note:

• It is impossible to place Take Profit and Stop Loss while opening a market order. This restriction is caused by the features of the work of the system with Market Execution of orders. They can be set only by modifying the order that is already open. To do this, in the tab "Trade" right-click on the order and choose "Modify order". Enter the desired levels of Take Profit, Stop Loss in the appeared window and click "Change". You can also set/modify Take Profit and Stop Loss directly on the chart. 
• When placing an order, clicking the Enter button does not give the broker the instruction to open the position.

Order Closing

To fix the result of your trade, you must close the order. There are several ways to do this: to set Take Profit and Stop loss levels or to close by market.

• 1. Stop Loss and Take Profit are clients' orders to close previously open positions. They are executed automatically. After setting these levels, you do not have to be near your terminal all the time waiting for the order execution.
  Stop Loss is meant for minimizing loss, in case the price of the financial instrument starts to move in the unprofitable direction. If the price reaches an indicated level, the order is closed automatically.
  Take Profit is designed to fix the profit at the moment when the price reaches the predicted level. The execution of this condition also leads to the automatic fixing of profit.
  It is very important to understand that you must set the Stop Loss/Take Profit at such a level, that will help you minimize risk and increase profit. When opening an order to sell, Take Profit must be lower than the level of the current price, whereas Stop Loss must be higher. When opening an order to buy, Stop Loss is set at a level that is lower than the current price, whereas Take Profit is set at a higher level.
  Take profit and Stop Loss execution occurs just like the execution of pending stop and limit orders. Take profit is a limit order and Stop Loss is a stop order.
  As it has already been said, Take Profit and Stop Loss can be set only when modifying the order which is already open.
• 2. Close by market is necessary when you want to close the order immediately. To close by market, you must double click on the order in the "Terminal"-"Trade" window or right-click on it and choose "Close order". In the appeared window click "Close". An order can also be closed in one click. Just click "x" in the "Profit" column in the line of the necessary order. forex
  After clicking, results of the trade will appear in the "Terminal" – "Account history" window. All the information on all closed orders is kept there.

TRADING PSYCHOLOGY

TRADING PSYCHOLOGY

Psychological preparation is very important when you want to reach good stable results. The beginner, who has just started the trading process, quite often considers Forex as something that is easy to learn, but this is not true. Having earned a small sum in the beginning, he loses his head and as a result can loose absolutely everything. During the first days of trading, you can start writing down all the actions made by you. In a little while, you might notice that there is not that much profit. You can start analyzing your trading strategy and notice at once that it is not that bad, but then you draw your attention to the comments: "closed too early", "kept position open for too long", etc. The reasons of such situations are unpreparedness and lack of confidence. Almost every trader who has made at least a dozen deals, will agree that self-discipline, control over emotions and the ability to make adequate decisions are vitally important trading conditions.

It is much better to use energy, spent on unnecessary emotions on learning new strategies and enjoyable moments of life.

Trader Psychology

There are too many nuances on the market, which cannot be predicted. If you knew everything, you would be a perfect trading machine. Because it is very important to understand that people are imperfect, it is necessary to cope with the psychological state that can only disturb. While trading on the Forex market, you stick to your own or borrowed strategy. You place the order, and then you see that everything does not go the way you planned. A majority starts to panic and close orders to reduce possible losses, thus changing trading strategy. However, as soon as the order is closed, you see that the graph moves in the desired direction, but the moment is lost. This situation is an example of psychological instability. When tiny changes are not in your favor and you are ready to escape. Only three results are possible during the trading process: profit, loss or zero result. Of the three possible situations, only one brings positive emotions, whereas the other two are soaked with negative emotions. However, if you respond on every negative result with panic, annoyance and fear, very soon, there will be no energy for trading. You must learn to control yourself and your emotions and not consider every failure as the end. Trading should benefit not only money, but also the joy of the process. It is much better to use energy, spent on unnecessary emotions on learning new strategies and enjoying moments of life.

Leverage can play cruel joke on traders. The effect of leverage allows you to trade larger amounts of money than you invest. However, leverage can either work on your side or against you. Some traders choose a big size of leverage to operate bigger sums. It creates the illusion of "unlimited opportunities without any risk", but actually it is not always like that. A big volume of traded funds may bring great profit because of the leverage, but never forget that along with income, there is a big possibility to lose almost all deposits. Experienced traders advise to carefully analyze and choose the size of the leverage that will help you avoid a high level of risk. 

It is possible to indicate three main phenomena of the work on the market: greed, hope and fear. Each trader has his own reaction on every emotion previously mentioned, but these emotions have one thing in common – in excess they do not let you make correct decisions. Greed must be tempered, hope – justified and fear motivating. Only under these conditions the emotions would not harm, they will help.

Trading psychology is a very important discipline, which must be studied by every trader, who counts on long-term work on the currency market.

How to reduce trading stress?

Stress is the main newbie's enemy. People act differently when in a stressful situation. Someone gives up and does not want to fix anything, whereas someone decisively saves the situation. Trading on the Forex market is second, after sapper, most stressful profession in the world. However, if you know the core of the problem, you can solve it. It is extremely important to study stress management skills. The sources of stress can be different: from loss of several pips, to the attitude of your spouse towards your work. External factors will always follow you, but you can change your attitude toward them. The biggest enemy you struggle with, is you.

While working on the Forex market, you need confidence, concentration, practice and persistence. After all, not absolutely everything depends on trading systems and chosen strategies. It is quite hard to work and overcome difficulties by yourself, but it will help you in trading and it will become one of the main factors of success. Trading psychology is a very important discipline, which must be studied by every trader, who counts on long-term work on the currency market.

CENTRAL BANKS

CENTRAL BANKS

The central bank is a bank that provides financial services to the government and the commercial banks of its country.

The main functions of the central bank are:

• money supply and exchange rate regulation;
• control of the release of national currency's notes;
• lending and accepting deposits from commercial banks, as well as control of their activity;
• management of a country's debt;
• maintenance of the gold currency reserves of the country;
• interaction with other central banks.

There are four main ways that central banks influence the foreign exchange market:

• Interest rate changing. Central banks increase interest rates in such a way that they make the currency of their country attractive to investors, but complicates the life of commercial banks. For investors, savings in the currency of the country will bring more revenue, but for the commercial banks, it will cause a situation wherein lending money from central banks will cost more for them, which will automatically lead to an increase in interest rates for lending and deposit funds for the people. By cutting interest rates, the process is reverse. forex
• Financial market instruments. These are usually direct transactions with securities on the open market. Purchase of securities by the central bank leads to the increase of its reserves, which makes it possible to increase the volume of lending to enterprise in the various sectors of the economy, or lending of commercial banks, which lend money to these organizations in turn (depending on the structure of the interaction in one particular country). In such way, the central bank stimulates the development of the economy. By selling securities, the reserves of the bank decrease as well as the possibility of credit from the bank, which causes a dampening effect on the economy.
• Reserve requirements changing. By changing these conditions, the central bank can limit the volume of credits, issued by the commercial banks, which will cause the change in the amount of money in the country.
• Foreign exchange operations. Central banks can operate on the foreign exchange market to cheapen/strengthen the national currency (intervention) or vise versa and hold it on the certain level. This is done by infusing or exempting the national currency into or from the international market. In addition, central banks can place their assets in other central banks and directly exchange currency.

Central banks, such as the Federal Reserve System (U.S.A.), the European Central Bank (Europe), the Bank of England (Great Britain), the Bank of Japan (Japan), the Swiss National Bank (Switzerland), the Bank of Canada (Canada), the Reserve Bank of Australia (Australia) and the Reserve Bank of New Zealand (New Zealand) are the biggest and most powerful banks in the world, which have their impact on Forex.

The Federal Reserve System U.S.A.

The Federal Reserve System (FRS or FED) in United States was founded in 1913 and had the functions of the central bank of the United States. The state has a main influence on the bank, although the capital is owned by private shareholders with a special status.
FED is the most powerful central bank of the world. Because USD is the world's reserve currency, FED has a large impact on the value of many currencies.
The committee: The Federal Open Market Committee (FOMC), consists of the seven leaders of the Council of the Federal Reserve and five presidents of the 12 regional reserve banks. The Committee sets the interest rates.
Objectives: price stability and growth of the U.S. economy.
Meetings: eight times a year.

The European Central Bank

The European Central Bank (ECB) was founded in 1998. It is the central financial authority of the European zone, following the European Monetary Institute (EMI). EMI has played a major role in preparing the introduction into the circulation of one European currency.
The committee: six members of ECB's Governing Council and the heads of the 12 national central banks of the countries of the European zone. They make decisions on monetary policy.
Objectives: price stability, growth and maintenance of the annual consumer price growth below 2%. The bank seeks to prevent the rising cost of the European currency because of the European zone's export-dependence.
Meetings: once every 2 weeks. However, meetings on monetary policy are held 11 times a year and are accompanied by press conference.

The Bank of England

The Bank of England (BOE) was organized as a private bank in 1694 but it started to serve as the central bank of Great Britain in 1946 after nationalization. BOE is considered to be one of the most powerful central banks in the world.
The committee: the head of the BOE, two deputies, two executives and four external experts. The committee is responsible for monetary policy.
Objectives: monetary and financial stability support and holding the inflation on the level of 2%. As a matter of fact, if the inflation is less than this level, the bank will do everything to increase it to a level of 2%.
Meetings: once a month.

The Bank of Japan

The Bank of Japan (BOJ) was founded in 1873 based on the Law of National Banks, influenced by the American law of 1863. It has the status of joint-stock company which is the main feature of the bank. The Japanese government is the owner of 55% of the capital. The remaining 45% are held by insurance companies, financial institutions and other investors.
The committee: the head of the bank, his two deputies and six other members. The committee is responsible for monetary policy.
Objectives: support of the price and financial stability of Japan. Just like ECB, BOJ seeks to prevent the increase of the national currency's value because of the export-dependence of the country.
Meeting: once or twice a month.

The Swiss National Bank

The Swiss National Bank (SNB) was founded in 1907. It has two headquarters: in Bern and in Zürich.
The committee: the head of the bank, his deputy and one member. The committee makes decisions on interest rates. Unlike other central banks, SNB sets only the range of interest rates.
Objectives: ensure price stability and prevent the excessive growth of the national currency (because of the export-dependence of the country).
Meetings: once in three months.

The Bank of Canada

The Bank of Canada (BOC) started its work in 1935. The headquarters of the bank is situated in Ottawa.
The committee: the head of the bank and five deputies. The committee makes decisions on monetary policy.
Objectives: maintain the integrity and value of the currency, and hold inflation at 1% to 3%.
Meetings: eight times a year.

The Reserve Bank of Australia

The Reserve Bank of Australia (RBA) is officially a central bank since 1960, after getting its rights from the Commonwealth Bank of Australia.
The committee: the head of the bank, his deputy, the Minister of Finance and six independent members, appointed by the government. The committee is responsible for monetary policy.
Objectives: ensure monetary stability and economic growth, maintain the full employment and the rising incomes of the country, and holding inflation at 2% to 3%.
Meetings: once a month, except January.

The Reserve Bank of New Zealand

The Reserve Bank of New Zealand (RBNZ) was founded in 1934. It is fully owned by the state. The main feature of the bank is tough control over the implementation of goals. In case of failure, the head of the bank may be changed.
The committee: the final decisions on monetary policy are made by the head of the bank.
Objectives: ensure price stability and the stability of interest rates, exchange rates and the economy, as well as hold inflation at 1.5%.
Meetings: eight times a year.

SWAP

SWAP

Transactions on the Forex market are made on Spot terms. It means that all the deals are made with the actual delivery of the currency the next workday after their execution. However, there is no need for the real delivery of the currency in case of speculative trading (speculative trading is actually something that you are about to start). If you execute order during one workday, the delivery is canceled. It does not cause any problems. But what if you have to leave your order open for more than one day?

For Wednesday–Thursday rollover, swap is deducted/added in a triple size (for Wednesday, Saturday, Sunday).

What is SWAP?

The operation of the rollover of the position which is called Swap has been created for this purpose. The basis of this operation is that you need to "close" the order and reopen it at the close price. At the same time, funds that are equal to the swap size are deducted from or added to your account. The swap size depends on the interest rates of the Central Banks and the range of other factors. Because the interest rate is set by the Central Bank of each country, this leads to a situation wherein the difference between the interest rates of various currencies may be quite considerable. The calculation of the swap rate is carried out in the view of this difference.

Who and How Calculates Swaps?

Swap is calculated automatically in the end of every trading day. For Wednesday to Thursday rollover, swap is deducted/added in a triple size (for Wednesday, Saturday and Sunday). In the MetaTrader 4 trading platform you can see all the current swap rates of every currency pair (to do this, right click and choose "Symbols" in the "Market Watch". Choose the currency pair you need in the appeared window and click the "Properties" button. Swap rates of long and short positions are displayed in pips).

ANALYSIS ON THE FOREX MARKET

ANALYSIS ON THE FOREX MARKET

To interpret the situation on the market correctly and figure out what some actions and events will cause, you need to learn to "read", group and analyze information, received from external sources. To predict future currency fluctuations, you must learn two types of analyses: technical and fundamental.

Let us find out what are the features of each one of them.

Fundamental Analysis

This type of analysis is based on the analysis of economic and political news and their influence on the changes in currency rates. It is a set of actions, and their main task is to predict the behavior of the prices on the Forex market. The basis of these actions is the consideration of the fundamental data of the countries, whose currencies are involved in transactions. It is quite difficult to fulfill this analysis, because the same factors may have different influences on the situation. Therefore, the consequences may differ as well. The success of the fundamental analysis depends on the clear understanding of the impact of its components on the currency market.

Fundamental analysis considers in consideration the following list of indicators:

• the interest rates of central banks;
• the economic policy of the state;
• the political situation;
• the characteristics of economic growth;
• the indicators of the trade balance;
• the inflation rates;
• state solvency;
• investor sentiment;
• the competitiveness of the product;
• consumer sentiment;
• state of the real estate market;
• state of the labor market;
• other indicators.

Fundamental data is published in the form of indexes and often can be reviewed and reevaluated. When estimating data, the comparison of previous and current indexes happens and the dynamic and economic processes for several years are analyzed. However, it is not enough just to have the necessary data: it is also vital to have analytical skills to associate information and the possible consequences that it will cause. Analytical skills may be developed through constant trainings because only professionals can analyze the situation and make the most effective decision in a short period.

The conducting of fundamental and technical analyses must be the mandatory part of every trader's work.

Fundamental analysis is the process of reviewing the global economy news, careful studying them and the choice of the right algorithm of action. Events that happen in the world, influence position of the currency on the Forex market. For example, the tense situation among the banks of one country may result to a drop of the currency of this country. Fundamental analysis requires patience and time. The feature of the analysis is its orientation on long-term deals (year, half a year, quarter). That is why some traders refuse to conduct this analysis. Although having understood its basics and having read a book on macroeconomics, a powerful tool for the prediction of future situations will be at your disposal.

Technical Analysis

This is the method of currency rate prediction, based on the analysis of charts, using technical indicators. This type of analysis has been an irreplaceable instrument in trader's work and has been used for many years. It helps determine the future direction of the price movement based on historical data. The advantage of this analysis is the opportunity to use it in short-term and middle-term forecasts, from operations carried out within one day to transactions, that last for several weeks.

Technical analysis is based on three axioms:

• Market considers everything. Factors that influence the market has already been reflected in the price and determined the behavior of market participants.
• Price moves in a specific direction. Any price change has one of three directions – trends. The trend may go up (rising or "bullish"), down (or "bearish") or may be "flat". The task of the trader is to identify the trend in its infancy and follow it while trading until it changes.
• Market has a good memory (history repeats). The pattern of the previous situations is reflected in the present. Laws, that influence the market remain unchanged.

Charles Dow (1851-1902) is called the "father" of technical analysis. In the late 19th century he published a series of articles in which he outlined his observations of the stock market. His observations formed the basis of the technical analysis. Technical analysis includes methods that lets one figure out the most beneficial moment to enter the market. All the methods are based on the evaluation of the trade volume and price patterns. Instruments, which help in making decisions, are graphical ways to display the information (candlesticks, bar charts, line charts and other less popular ones) and other technical indicators, based on historical price data. All the signals provided by indicators are advisory. The use of indicators, together with other instruments, that lets one conduct market analysis, will make your work more effective.

The most effective option is to combine fundamental and technical analyses. Of course, it is quite difficult, but this will help you significantly increase chances to get stable income from trading on the currency market. Fundamental analysis is based on the search of the reason unlike technical analysis, that does not look for the reason but observes what is going on with the currency rate. Тhus, both analyses are intended to complement each other.

Conducting fundamental and technical analyses must be the mandatory part of every trader's work. That is the only way that a trader would be able to identify the sequence of actions and make the right decision.