November 25, 2014

Why December Is Such A Challenging Month For Forex Traders

I have been trading the forex markets for a number of years now, and in my experience December is always the hardest month of the year to make money. So why is this?

Well it's basically because as Christmas approaches, volatility in all of the major currency pairs always tends to drop off quite considerably.

As a result, you get a lot of slow-moving markets and a lot of trading sessions that are very quiet indeed, with very little price movement at all.

To verify this for yourself, you only have to apply the average true range indicator to a daily chart of any of the main forex pairs, and see how it falls during December every single year.

It doesn't get any easier to make money just after Christmas either because the markets tend to remain subdued until well into January when all of the traders are back at their desks.

So if you have a profitable trading strategy in place that is able to generate consistent profits during the rest of the year, you might want to consider reducing your profit targets or making changes to your strategy during the month of December because you could easily come unstuck in this quiet trading period.

I myself tend to reduce my trading activity at the start of the month, and only take on the best high probability trades on the longer time frames, before stopping altogether once we get to around 15 December. I will then slowly get back into the swing of things during the first or second full working week of the new year.

To compensate for the reduced earnings during this period, the stock markets tend to do well as we approach the end of year, which is why people often refer to a 'Santa Claus rally'. So as I invest in a lot of high quality dividend stocks, this is usually a good time to bank some profits and make some money from a few short-term trades if I have opened any trades in October or November, for example.

A strategy that has always worked for me every year is to buy Tesco when they are oversold in the months leading up to Christmas and sell them in the new year, either after or just before they announce their results for the Christmas period.

However I won't be doing that this year because for once I can't be sure that they will have another good Christmas now that they have so much other competition from the discount supermarkets, and I'm wary of trading them at all since they issued their profit warnings earlier in the year.

Anyway I've gone off track somewhat. The point is that from a forex trader's perspective, it is worth remembering that like the quiet summer period, it can be very difficult to make money during December. So you should prepare yourself for this and either stop trading fairly early on, or make changes to your trading strategy if you have to in order to earn some money before Christmas.

Permalink • Print • 5 Comments

November 14, 2014

Average Daily Trading Range Of The Major Forex Pairs In November 2014

It's that time of the month again where I look at the average daily trading range of all the major currency pairs to see which pairs are currently the most volatile, and to see whether volatility in the markets is going up or down in general.

So listed below are the average trading ranges of all of these markets right now in November 2014, based on the latest ATR reading (with October's numbers in brackets):

GBP/USD – 96 (103)
GBP/JPY – 159 (129)
EUR/USD – 86 (86)
EUR/GBP – 43 (41)
EUR/CHF – 14 (21)
USD/JPY – 98 (73)
USD/CAD – 76 (75)
USD/CHF – 66 (63)
AUD/USD – 87 (90)

FTSE 100 – 68 (89)
DOW JONES – 144 (189)
NASDAQ – 43 (56)
S & P 500 – 18 (25)

BRENT CRUDE – 198 (197)
CRUDE OIL – 190 (211)

It's no surprise at all that the Japanese Yen pairs have increased in volatility quite significantly after the Bank of Japan announced a new quantitative easing program at the end of last month in a desperate attempt to kickstart the Japanese economy.

On the whole, though, most pairs have remained pretty much the same as last month in terms of daily volatility, and remain high enough to make a decent return every day because many of the most popular pairs are still trading in quite a wide range on a day to day basis.

The only exception is the EUR/CHF pair which is currently trading is a range of just 14 points every day on average, down from 21 points the month before.

With regards to the other markets, volatility remains high on the oil markets with both Brent Crude and US Crude Oil trading in a range of nearly 200 points every day (with a strong downward bias in general).

Finally, the main stock market indices have fallen in volatility quite a bit since last month, but this is hardly surprising because after a decent rally in recent weeks, there seems to be a lot of indecision and caution at these slightly inflated levels.

Permalink • Print • Comment

November 7, 2014

Why Is Day Trading So Hard?

I am sure that I have discussed this many times before on this blog, but after being asked this exact question by one of my readers, I promised him that I would write a new article that addresses this issue.

A lot of people are drawn to forex trading because they see this as a means of earning a lot of money, and after an initial learning period, they start to trade off the short-term charts using one or two trading strategies that they may have picked up along the way.

However the vast majority of these traders will quickly discover how hard it is to make consistent profits trading the 1-minute or 5-minute charts. So why is this?

Well for a start, if you study these short-term charts for any length of time, you will soon notice that you get a lot of seemingly random price movements for large parts of the day. This is referred to as noise, and it is this noise that is ultimately the undoing of many a short-term trader because they are constantly being stopped out all the time.

Another reason why day trading is so hard is simply because the price doesn't always move far enough in one direction to generate a decent sized profit.

Whilst you can expect the price to move as much as 100-300 points in any given direction over the course of a few days when trading off the daily chart, for example, the price moves on an intraday basis are obviously a lot smaller.

Even if you use a set of technical indicators that are all lined up and strongly indicate a move to the upside or downside, this breakout may be all over after about 15-20 points (or less), and may therefore stop short of your price target.

If you trade one of the least volatile pairs, such as the EUR/GBP pair, for instance, there are some days when even a 10-15 point move is asking a lot.

So when you factor in the spreads, which can be anywhere between 1 and 4 points, depending on which pair you trade and which broker you use, it can be difficult just to break-even in some cases, let alone make a profit.

Finally, I am writing this article just hours before the latest non-farm payrolls report, which is the one economic data release that moves the forex markets more than any other, and this is another point I want to make.

There are economic data releases scheduled pretty much every day (although Monday is often a quiet day in this respect), and these latest figures will have a direct impact on the currency pairs that they are most relevant to.

For instance, the UK GDP report will have an impact on any GBP-based currency pair, whilst any data releases coming out of the United States will directly affect the USD pairs.

So even if all of your indicators are in agreement with each other, and you take a position that subsequently moves into profit, this could quickly turn into a losing position if there is an important economic data release scheduled later that day.

Some news announcements are more important than others, so you really need to keep an eye on the calendar each day and plan your trades around these releases if you are trading the short-term charts.

On the whole, though, you are better off extending your time frames and focusing on the longer term charts, such as the 4-hour and daily charts, for example, because the trends here are a lot clearer and you can a lot less noise and the trends last a lot longer, which equates to greater profits.

If you do wish to continue trying to make money from day trading, you should at least look at the longer term charts before entering a position on the shorter term ones in order to see the bigger picture and to trade in the same directions as the long term trend.

Otherwise you might want to think about using a service such as Zulutrade because you will find some seasoned day traders on this site, all of which you can subscribe to for free and have their signals traded automatically in your own trading account.

The point is that it is definitely possible to make money from forex day trading, but it is a skill that few traders are able to master because you have so many factors working against you.

Permalink • Print • 2 Comments

October 30, 2014

Traders: Millions By The Minute - A Trading Documentary That Is Well Worth Watching

It's quite rare to find a program about trading on one of the main TV channels, and the ones that are shown are generally dumbed down, but there was a documentary called Traders: Millions By The Minute that was shown on the BBC a few months ago that was surprisingly good.

I didn't talk about it at the time because only a small percentage of my readers are from the UK, but I have just discovered that is now available to watch on YouTube, which obviously means that everyone can now get a chance to watch it.

This documentary takes a close look at the financial trading industry and follows some of the individual traders who trade the markets every day, including people who work in the city and people such as myself who trade from home.

It is split into two parts. The first part is more focused on the city workers, and goes behind the scenes at a training company that teaches people how to trade the markets, whilst the second part focuses more on the people who trade the markets using their own money, some of which are extremely naive and almost certain to lose money in the long run.

Here are both parts of this excellent documentary if you would like to check it out for yourself:

Part 1:

Part 2:

Permalink • Print • Comment

October 29, 2014

A Profitable Pennant Breakout On The AUD/USD Pair

If you have been following me on Twitter (@forexarticles1), you will know that I have been watching the AUD/USD very closely in recent weeks because it has been trading in a very narrow range and has been preparing to break out for quite a while now.

More specifically, if you zoom in on the 4 hour chart and draw a line connecting both the high and the low points, you will see that it formed a nice-looking pennant on this time frame.

So for me it was just a case of waiting for the price to break out of this pennant to herald the beginning of a new trend, and enter a trade in the same position as soon as this happened.


You can see that there was initially a couple of false breakouts, but it's the candles that actually close above (or below) this pennant that I was most interested in, and although I missed the first one as it occurred in the overnight session, I did manage to get in on the action the second time around after one of the 4 hour candles closed above this pennant at 0.8815.

A perfect pennant breakout would have seen the price break below this pennant in the direction of the underlying longer term trend, so I wasn't looking for a huge price move.

The obvious natural target was the EMA (200) on this 4-hour chart, and this is where I closed half of my position at 0.8860 for a profit of around 45 points. I have since moved my stop loss to break-even and am currently targeting 0.8900 and a profit of 85 points with the second half of the trade, so we will have to wait and see if this comes to fruition (UPDATE: thankfully it has just hit this price target this afternoon).

Either way, this was a good example of a profitable breakout trade and demonstrates that you don't necessarily need to use lots of technical indicators. Sometimes sitting on the sidelines and waiting patiently for a breakout to occur using nothing more than price action and trendlines can be just as profitable.

Permalink • Print • Comment

October 26, 2014

Is Forex A Suitable Business For Everybody?

I have a guest post for you today from Luke Peters that basically discusses whether or not forex trading is suitable for everybody, so hopefully you will find it useful.

Foreign exchange exists in a niche of its own. If you wish to enter, then you must learn it, adapt to it and be involved very deeply in its development. It cannot be learnt, unlearnt and re-learnt. It is a skill for life, pretty much like riding a bike. You may still possess the right balance, you know how the gears work and you can take the weight of the bike, but practice is that fine line of difference between you falling in a ditch and riding safely on the highway. Practice does make perfect and that is exactly what is needed in forex trading. Anyone who lacks practice can get minced when trading the forex markets. How suitable is it for anyone? That again depends on how well equipped the person is with regards to the following requirements:

1. Knowledge is power

Knowledge helps in every circumstance. It is with great care and precision that a person receives the knowledge to do things and when it is associated with their livelihood, they tend to be extra vigilant. Similarly when it is their livelihood, people tend to learn everything they can about the subject. In that case, you might argue that someone with a penchant for finance and mathematics would rule the forex market, but that is not necessarily the case. Someone with a fine understanding of international relations will realise how nations are responding to one another's statements and how it affects their respective economies, and on that basis can make an estimate on how the forex market will perform.

This can give you a very rough idea of where you stand. There is no doubt that a financial or economic background can be best suited for forex, but it can also be said that despite having no education or knowledge of these subjects, rough estimations on global scenarios can still be made. Do however note that you can never be too knowledgeable or educated about the forex market. You will always have something new to learn.

2. Experience is strength

A lot can be said about how the forex market treats first-timers and how more often than not, only the most intelligent and lucky ones will walk away with more than they started with. But experience plays a big part. One must realise that like any other market, a relatively newly developed system such as forex will take its own time to adapt to the people's requirement. Right now, it entirely depends on how good a trader is and how experienced he is in these matters. As and when he faces new challenges, his experience grows and sooner or later he starts finding patterns and sticks by them in order to reap profits.

That is why forex trading can be rightly called a fruit that leaves a bitter taste in many people's mouths. Not everyone has the patience or the stamina to go back to the place where they lost out a lot. Hence, you can learn from a forex tutorial until you feel good about yourself and start generating consistent returns. Or else it's time to hang up your boots and not enter the trading ring again.

3. Mind and soul are cleansed

This comes down to how well your heart and mind can respond to the market, and there are a few pre-requisites to have before entering the market. First on that list would be patience. You have to learn to cannot control yourself for a few hours, sitting in front of your computer looking at numbers that may not make sense, and accepting that there may be days where you don't make a single cent. If you lack such patience, then the forex market is not the place to be. It is this patience that separates an expert from a rookie.

Greed can also be the root cause of all failures in the forex market. Your greed can make you lose much more than you would under normal circumstances. This has primarily got to do with the way in which you respond to your first winning trades. If your greed takes over, it is quite certain that you will invest the full amount of winnings back into the market in the hope of earning bigger and better returns. It's important to note that not everyone can earn supernormal profits in this market. It is just not possible for many people, but greed will encourage many people to attempt to do so. So forex trading is not the place to be for greedy traders.

Fear can be the greatest obstacle in this market. It has got to do with the fact that as and when people start experiencing losses, they tend to let go of opportunities as they are afraid of making the wrong decision. They wait too long and at times take harsh and brash decisions fearing they have lost their opportunity and this in turn can lead to another problem. Thus, fear can be the obstruction in the path of a trader that either makes or breaks him. One must learn not to be afraid and to take the risk that is necessary for any form of business, because at the end of the day the greater the risk, the greater the reward.

4. It's just business, nothing personal

Another simple way of looking at forex is to think of it as a business with its ups and downs. If you can do that, then half the battle is won. When things can too personal or important for a person, then the line between business and oneself is broken and separate entities no longer exist.

By now, you must already have decided whether or not you are cut out to be a forex trader. Having considered each of the above points, you will know that forex trading is not for everyone, but it can still be mastered by anyone if they are disciplined and have the right mindset.


photo by alan

Permalink • Print • Comment