Volume spread analysis is a school of thought that believes volume plays a crucial role in understanding moves of prices in financial markets. This text will highlight 5 core arguments that solidify this basic premise.
Volume Spread Analysis
1- Technical analysis is not enough.
An argument in favor of technical analysis is the idea that the securities’ prices may not be linked to their fundamentals. The behavior of financial markets is frequently a result of momentum, confidence, and sentiment. In this sense, traders analyze security price chart to know what is the upside and downside potential.
However, reading the market solely from prices is insufficient. Markets move on supply and demand, and so, volumes are also an important part of the equation.
Volume Spread Analysis is a good way to understand how the concepts of supply and demand influence prices. It allows spotting imbalances between buyers and sellers by looking at prices and volumes.
VSA helps traders understand what the major players are doing and benefit from their actions. When a small trader buys or sells a pair, he/she certainly will not influence the price. However, when a big bank trades millions of a certain currency, this will probably move the market up or down. Usually, these big traders have more information and knowledge about the markets, so it is wise to be on their side. Through volume analysis, traders can know if market makers are buying or selling and take advantage of their positions.
2- It’s all about perceived value.
Fundamental analysis states that we can always grasp the intrinsic value of a financial instrument – stocks, currencies, commodities, etc. An assessment of the economy would allow traders to explain oscillations in prices.
On the contrary, volume-based traders say that to fully know what goes on in the markets, we should rely on perceived values instead of intrinsic value. And what does perceived value mean? This is how different professional traders view a financial instrument. And this is always contextual and acquired through an analysis of volume.
Below you can find the evolution of the price to book value since 2000 of the S&P 500. This metric is considered an approximation of the perceived value. It’s possible to see how traders permanently evaluate companies above their book value, taking in mind other analysis besides the fundamental one.
3- Price and volume are inter-related.
Past prices are an important aspect to understand moves in financial markets. However, the analysis of price is not enough.
A lot of technical analysis theories say we can solely rely on the analysis of price to understand the next move. These can take the form of different theories: Dow theory, Elliot wave theory, harmonic theory, candle-based trade, etc. The bottom line for all these traders is that everything is reflected in prices and different patterns.
Volume spread analysts say that the analysis of price is incomplete. We need to understand where the money is and where it will be in the future. Only then we can try to predict what is going to happen in the markets.
4- The cause of moves is volume.
We already dismissed fundamental and technical analysis as the sole explanations for moves in financial markets. Now, let’s look at how volume spread analysts justify these moves.
In their opinion, we need to look at prices in relation to volume. It is only this interconnection between price action and volume that justifies moves in financial markets.
In the chart below you can observe how major moves in prices or price reversions were always accompanied by volumes higher than normal. An analysis of volume in this situation would help traders identify these movements of prices.
Relation between price movements and higher trading volumes
5 – It’s all about understanding the role of different traders in the market.
The 5th core idea is that different kinds of traders carry different sorts of information – and we can base our trading strategy on this idea.
Volume spread analysis tends to emphasize three different types of traders: retail, commercial and professional. Retail traders are those who have small accounts and tend to trade erratically. They do not have any particular trading strategy and traditionally tend to buy and sell when the uptrend/downtrend is exhausted.
Commercial traders are investment banks whose function is to place orders in the market to satisfy clients’ needs. They can also function as market makers. These traders have an impact because they often carry large orders, which usually cause volatility. However, they don’t have any strong rationale supporting their trading decisions.
Professional traders are large traders that are in the game to win, and they are behind most trends. These are the types of traders that volume spread analysis tends to be concerned with – the successful volume trader is the one that detects what these traders are doing.
The following chart illustrates the power of large traders in moving the markets. On the left side, large traders reduced their positions, which caused a downside movement in prices. Prices traded sideways while these traders had stable positions and, when they started buying, prices moved upside. A small trader aware of what large traders were doing could follow their steps and take advantage of this information.
COT Report Large Traders
Wish to know more? Learn more about volume spread analysis in this article.
The pivot points indicator is a key tool for Forex traders. It helps them find out the market direction, set support and resistance levels, and pick the right times to open and close trades. This article will provide a comprehensive guide to the pivot points indicator, covering its calculation methods, types, a pivot points strategy, a pivot points indicator for Metatrader (MT4), as well as its drawbacks. By understanding how to effectively use this indicator, traders can enhance their trading decisions and improve their overall success in the Forex market.
What is a Pivot Point Indicator?
The pivot points indicator is a technical analysis tool used to forecast market direction, support and resistance levels, and potential entry and exit points for trades. It is calculated based on the previous day’s high, low, and close prices and is widely used by day traders in various financial markets, including forex, commodities, and equities.
Calculation Methods for Pivot Points
There are several calculation methods for pivot points, including the standard method, Fibonacci method, Woodie’s method, Camarilla method, and Demark method. Each method has its own formula for calculating pivot point levels and offers unique insights into market trends and potential price levels.
Standard Pivot Points
The standard pivot points method is the most common calculation method. It uses the previous day’s high, low, and close prices to determine the pivot point level, as well as support and resistance levels:
P = (High + Close + Low) / 3
S1 = 2*P – High
R1 = 2*P – Low
S2 = P – (High – Low)
R2 = P + (High – Low)
S3 = Low – 2(High – P)
R3 = High + 2(P – Low)
Fibonacci Pivot Points
The Fibonacci method incorporates Fibonacci retracement levels into the calculation of pivot points. It uses the previous day’s high, low, and close prices to calculate pivot point levels that correspond to Fibonacci levels such as 38.2%, 61.8%, and 100% (P is the same as the standard Pivots):
P = (High + Close + Low) / 3
R1 = P + 0.382 * (High – Low)
R2 = P + 0.618 * (High – Low)
R3 = P + 1 * (High – Low)
S1 = P – 0.382 * (High – Low)
S2 = P – 0.618 * (High – Low)
S3 = P – 1 * (High – Low)
Woodie’s Pivot Points
Woodie’s method gives more weight to the closing price in the calculation of pivot points. It uses the previous day’s high, low, and close prices to determine pivot point levels as well, which are then used to calculate support and resistance levels:
P = (High + Low + 2 * Close) / 4
R1 = 2*P – Low
R2 = P + (High – Low)
S1 = 2*P – High
S2 = P – (High + Low)
Camarilla Pivot Points
The Camarilla method calculates pivot point levels that are closer to the current price compared to other methods, whereas P has the same formula as the standard one:
P = (High + Close + Low) / 3
R1 = Close + (High – Low*1.0833
R2 = Close + (High – Low)*1.1666
R3 = Close + (High – Low)*1.2500
R4 = Close + (High – Low)*1.5000
S1 = Close – (High – Low)*1.0833
S2 = Close – (High -Low)*1.1666
S3 = Close – (High -Low)*1.2500
S4 = Close – (High-Low)*1.5000
Demark Pivot Points
Demark method uses the relationship between the opening and close prices to calculate pivot point levels. It uses different formulas depending on whether the close price is greater than, less than, or equal to the opening price:
The close price is lower than the opening price:
Reference = High + 2*Low + Close
The close price is greater than the opening price:
Reference = 2*High + Low + Close
The close price is equal to the open price:
Reference = High + Low + 2*Close
Once the reference value is calculated, you can calculate P, S1, and R1 in the following way:
P = Reference / 4
S1 = Reference / 2 – High
R2 = Reference / 2 – Low
Using Pivot Points in Forex Trading
The pivot points indicator can be used in various ways to enhance forex trading decisions. It can help identify market trends, determine support and resistance levels, suggest entry and exit points for trades, and identify potential trade areas.
Identifying Market Trends
By analyzing the asset price relative to the pivot point level, traders can determine the overall market trend. If the price is above the pivot point level, it indicates a bullish trend, while a price below the pivot point level suggests a bearish trend.
Support and Resistance Levels
Pivot points act as important support and resistance levels. When the price approaches these levels, traders can anticipate potential bounces or breaks. Support levels can be used as entry points for long trades, while resistance levels can be used as entry points for short trades.
Entry and Exit Points for Trades
Traders can use pivot points to determine entry and exit points for their trades. If the price hits a support level, it could indicate an opportunity to initiate a long trade. Conversely, when the price reaches a resistance level, it may be a signal to enter a short trade.
Potential Trade Areas
If the asset price breaks through a pivot level, the next pivot point may be considered as a potential spot for taking profits. Breakouts above pivot points indicate strength, while breakouts below pivot points indicate weakness.
Pivot Point Trading Strategies
There are several trading strategies that can be used with pivot points, including the pivot point candlesticks strategy, pivot points intraday trading, pivot points in forex, and pivot points in other markets. Each strategy utilizes pivot points in unique ways to make trading decisions.
Pivot Points Intraday Trading
Intraday traders often use pivot points to identify potential bounce or breakout trading opportunities. They can enter trades when the price bounces off a support level or breaks through a resistance level. Stop-loss orders can be placed to limit potential losses.
Pivot Points in Forex
Forex traders can use pivot points to identify potential support and resistance levels for currency pairs. By analyzing how the price interacts with these levels, traders can make informed decisions on entry and exit points for their forex trades.
Pivot Points in Other Markets
Pivot points can also be used in other financial markets, such as commodities and indices. Traders can apply pivot point strategies to identify potential support and resistance levels in these markets, enhancing their trading decisions.
Benefits of Using Pivot Points
Using pivot points offers a few benefits for Forex traders, such as:
- Easy Trend Identification: Pivot points provide a simple way to identify market trends. Traders can determine if the market is bullish or bearish based on the price’s position relative to the pivot point level.
- Reliability: Pivot points have been proven to provide reliable information for trading decisions, especially when combined with other technical indicators. Because many traders use pivot points, it’s more likely that the price will react to these levels.
Drawbacks of Using Pivot Points
While pivot points are valuable indicators, they have some drawbacks: pivot points may not be as useful for traders who only trade for short periods within a day. The price may not reach or react to the levels established by the pivot points indicator. Additionally, pivot points calculated based on daily data may not be as relevant for traders who only focus on specific trading sessions.
What is the best indicator for pivot points?
The best indicator for pivot points depends on the trader’s preferences, trading style, and the specific market being traded. The article provides several calculation methods for pivot points, including the standard method, Fibonacci method, Woodie’s method, Camarilla method, and Demark method. Each method has its own characteristics and offers unique insights into market trends.
Some traders may prefer the simplicity and widespread use of the standard method, while others may find value in incorporating Fibonacci retracement levels or giving more weight to the close price with Woodie’s method. The choice of the best indicator ultimately comes down to the trader’s personal preference and their understanding of how each method aligns with their trading goals and strategies.
It is recommended for traders to experiment with different methods, observe how they perform in their trading scenarios, and choose the one that provides them with the most reliable and actionable information for their decision-making process. Additionally, combining pivot points with other technical indicators and analysis tools can further enhance the accuracy and effectiveness of trading strategies.
How accurate is pivot points indicator?
Pivot points are widely used by traders and have proven to be effective in identifying support and resistance levels, potential entry and exit points, and market trends. However, like any technical indicator, pivot points should be used in conjunction with other analysis tools and indicators to make informed trading decisions. Traders should also consider market dynamics, news events, and other factors that may impact price movements.
Conclusion
The pivot points indicator is a powerful tool for forex traders, providing insights into market trends, support and resistance levels, and potential entry and exit points for trades. By mastering pivot points and implementing effective trading strategies, traders can improve their decision-making process and enhance their success in the forex market. Remember to combine pivot points with other technical indicators for more accurate and reliable trading signals.
Download a Pivot Points Indicator for Metatrader (MT4)
You can download AT – Pivots indicator for free for your Metatrader 4 here:
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The average daily range (ADR) is an indicator that shows you the historical average of each day’s range (high – low). In this article, we will cover:
- How to calculate the average daily range
- How to use the average daily range in your Forex trading
- Average vs confidence values
- Why confidence values are important and how to use them
- A free average daily range indicator for Metatrader 4 (MT4)
- The distinction between Average Daily Range (ADR) vs Average True Range (ATR)
How to calculate the average daily range?
The ADR is calculated by simply summing the daily ranges (a daily range is the difference between the day’s high and low) and dividing it by a certain number of days, thereby averaging out the daily range over this time period. Typically, 21 days or 30 days are used as the ADR’s period in an ADR indicator.
How to use the average daily range in your Forex trading
This indicator can be used to gauge the volatility and to decide whether to trade a pair or sit out on the sidelines.
When today’s range gets to a value near the average range – for example, if the average is 100 pips, and today’s range is already at 90 pips – it might be wise to consider not trading the pair any longer for the day and instead look for opportunities in other pairs, as it already reached the historical volatility.
But let’s say that you’ve found the setup you were looking for, yet the daily range is already close to its average! So as not to miss a potentially lucrative opportunity, there is another value you should look at in these situations – the confidence levels.
Average vs confidence level
So what is a confidence level, and how does it relate to the average?
A confidence level of 90% with the value of 200 pips for example, means that 90% of the times, the daily range will be below 200 pips. In other words, the daily range will be at most 200 pips with a 90% confidence.
Typically, the 70% confidence level and above will be a higher value than the average. Whereas, the 50% confidence level is called the median, and typically it’s fairly close to the average as long as the averaging period is long enough. In certain situations it can deviate significantly from the average though (especially when there have been recent highly volatile days), so it’s good to keep an eye on both the average and these confidence levels.
How to use the confidence levels
You can use a confidence level of 75% to 90% instead of the average in those situations where you have a good reason to believe the pair still has room to trend, such as in days when:
- There was a news event with a major impact
- Prices broke an important Support/Resistance
- The pair has been on a strong trend for the last few days
In these situations, the average might not be a good “bet” on where the day’s range will reach, and so, using a high confidence level could make more sense.
Average daily range (ADR) vs Average true range (ATR)
These two terms may sometimes generate confusion, but they are distinct indicators that measure different things:
Average daily range (ADR) – average of the daily range (range = high – low).
Average true range (ATR) – the average bar’s “range” (range = high – low). So the difference is that unlike the daily range, it may use other timeframes other than the daily one. So we can speak of the ATR of EUR/USD 15 minutes timeframe, or the 1-hour timeframe for example.
On that note, the ATR of daily timeframe, would be a very close (or equal) value to the ADR.
Why not exactly equal? Because the ATR also takes into account price gaps. So unlike the ADR, it does not average over ranges, it averages over true ranges.
What is the true range?
For example, if yesterday’s high was 1.0500, but on the next day the low/high were at 1.0600/1.0700 respectively, there would be a gap between the two bars. And so instead of calculating today’s range as simply the high – low:
Range = 1.0700 – 1.0600 = 100 pips
You would use the previous day’s high instead:
True range = 1.0700 – 1.0500 = 200 pips
This way, the volatility between different bars is also taken into account, and for that reason, there is typically a small difference between the average range and average true range.
Get a free average daily range (ADR) indicator for Metatrader 4 (MT4)
We have a free average daily range indicator available, called AT – Daily Range, that also includes the confidence levels mentioned above. Along with showing all these values, it conveniently plots the expected daily high and low based on the average.
Download AT – Daily Range for Metatrader 4 HERE (free)
After opening an account with a broker, traders need to be aware of the different chart types out there. These are essential for traders in terms of decision-making as the information they supply is much valuable. In the following article, we will cover the most popular chart types used not only in Foreign Exchange but in most financial markets. We will also reference other ways in which technical analysis can be more effective. But first, how exactly are Charts illustrated in trading?
Chart
Charts are usually represented either linearly or logarithmically, being the X axis time and the Y axis price. Most commonly used Charts are time-based, but there are also popular Charts that do not rely on this factor, as we will see on ahead. As such, in this type of Charts, price movement is represented depending on what Time Frame you are analyzing. These can be set to be daily, weekly or even monthly or charted on Intraday Time Frames as small as 4 hours, 1 hours, 30 minutes, 5 minutes or even every 1 minute.
The main advantage of having several Time Frames is that you can conduct Multiple Time Frame Analysis. This, as we discussed in previous articles, is a great aid when trying to spot better trading Scenarios. Furthermore, being time-based, this enables traders to view prices live, base their actions on past data and time their orders in a simple and effective way.
Another indicator, often overlooked but commonly used with time-based Charts in technical analysis are Volumes. These give us the number of times a contract or share was traded in the market and are a measurement of market strength. This means that the relevance of the price action often depends on volume in that time.
Line Chart
The Line Chart, one of the simplest charts, only illustrates the closing price of the security in the specific Time Frame. The line is drawn, per example, by connecting the closing price of the GBP/USD at 11 p.m. to its next closing price at 12 p.m.
It is a clear and simple way of getting a general idea of the price movement’s direction in the market, which is preferred by some traders.
Nonetheless, it lacks information that is also important like the highest and lowest prices that the security reached in that Time Frame. This fact may be a deal breaker for traders whose strategies rely on these indicators, such as those who trade supports or resistances. Trading trends or retracements can also be applicable in a line chart. However, other charts simply provide a more in depth analysis than line charts which is in most cases is preferable for technical Analysis
Bar Chart
Bar Charts, also referred to sometimes a type of OHLC Charts, add on the previous chart by being able to show Opening, High, Low and Closing prices, as the acronym sujests. They are composed of a series of vertical lines that represent the price range during that Time Frame. In addition, each vertical bar has two horizontal bars: One on the left indicating at what price the security opened and another on the right indicating at what price it closed.
Contrary to the line charts this will enable the trader to paint a better picture of the market with ease. Patterns and different signs that these bars can give allow the trader for a much more thorough analysis.
Candlestick Chart
Similar to the bar chart, the Candlestick Chart gives traders the same information but are represented in a different way.
The wider part of the candlestick is shown between the opening and closing price. It is typically colored in black/red when the security closes on a lower price and white/green the other way around.
The thinner parts of the candlestick are commonly referred to as the upper/lower wicks or as shadows. These show us the highest and/or lowest prices during that timeframe, compared to the closing and opening price.
The main distinction between both charts has to do with the opening and closing prices. The bar chart focuses more on the relationship of the closing price from one Time Frame to another. On the other hand, with a quick look to a candlestick chart, market sentiment becomes much clearer. This due to the coloring of the real body of the candlestick which emphasizes the relationship between the closing and opening price within the same time frame. This illustration is one of the reasons why this type of chart is so popular.
Renko Chart
Unlike the other Charts, the Renko Chart focuses only on price movement, completely disregarding time and the usage of volumes.
This Chart is composed of white and black bricks. These are placed depending on weather the price rose or not compared with the previous brick. If it did by enough pips, established by the brick size, a new one is placed. White bricks are used when the price of the security goes up and black bricks when they go down.
It is important to point out the fact that a new brick is only placed under certain volatility criteria. Either resulting in a major advantage or disadvantage for traders. It can be placed in a matter of minutes or take more than a day depending on market conditions. On one hand, this may be advantageous. Especially for traders who want a simple way of identifying supports and resistances, the overall trend and filter noise. On the other hand, this can make market sentiment hard to determine. Consequently rendering the usage of other analysis tools useless.
To Sum Up
Each Chart has its own utility. However, their usage depends on the type of trader you are and strategies that you prefer to put in practice. So, having a general knowledge of the options you have when it comes to analyzing securitie’s behaviour is an advantage.
To go even further and put to practice some of the concepts discussed in this article you can download a demo of our VSA package. Improve your trading results with supply/demand Signals and other indicators that this Trading System provides.
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Still on Forex terms and concepts, we found more terminology that we think is also really important. Especially for Traders wanting to open their first account and taking their first steps in Forex. As such, in this article we will go through 4 more concepts that traders starting out should know.
Lots
Generically, a lot is measurement for a group of goods, that are alike, that are transacted in the market. In Forex, lots are the standard measurement in trading when placing orders.
One lot represents an order of 100.000 units. This means that you would be buying/selling 100.000 units of the base currency while selling/buying 100.000 of the quoted currency.
Subdivisions of a lot are also common. Namely mini lots and micro lots, which ate composed of 10.000 and 1.000 units respectively.
Leverage
Being leveraged consists of contracting debt for whatever investment strategy a trader might have. It is mostly used as a way to aid and amplify a trader’s position on any type of financial asset. If a Trader opens an account with a leverage factor of 250:1, this means that for every euro he holds, he can control up to 250 euros. One can refer to this account as being highly leveraged.
It is important to point out that a common misperception is that having more leverage means that trading forex is riskier and thus should be completely disregarded. This is should not be the case. Traders should be aware of both sides of the coin.
The major benefit is that you can make much larger gains with a small investment. However the other way around also applies. Losses are amplified when the trade is leveraged.
So, taking this into consideration, if that added capital to your account is controlled, it will enable you to trade more currency pairs, a higher lot, and diversify your Portfolio.
Margin
Margin and leverage are two terms that refer to borrowing money. So, they might appear to be very similar. However, they should not be confused, as they are two different concepts.
If you have margin, this means you can borrow money from your broker at a fixed interest rate to invest. The act of borrowing the money with this purpose is to have a margin, whereas being leveraged is just having debt.
Simply put, if you are trading on a margin you have to be necessarily leveraged but the other way around might not be true. This because you can have leverage for a different purpose than to acquire financial assets.
Commissions
In Forex, these depend on the type of account you open with your broker. The most basic accounts that brokers usually offer don’t have any commissioning per negotiated lot, only a spread associated with trading.
Both “Pro” and “ECN” accounts, however, typically have commissions associated with each trade, with the added benefit of tighter spreads, being must more advantageous for Traders with more capital.
Moreover, it is also advised to take into account the spreads offered by brokers. More importantly, on the currency pairs that you normally trade as a few pips can make a difference in big lots.
To Sum Up
When first starting out, educating yourself is fundamental. Like we said in the previous article, there are many more concepts out there. As such constantly reviewing the ones you know and adding more to your vocabulary is a definite plus.
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Like in any work environment, getting a hold of the terminology used on a daily basis is crucial. Trading forex is no exception. In this article we will go through some of the terms that we think are most commonly used in Forex. These are essential to better understanding how the market works.
Currency pair
All transactions being made in foreign exchange involve buying a currency while selling another one. Furthermore, a currency’s value can only be determined through comparison with another one. As such currencies are quoted in pairs. For example, one of the most traded currency pairs is the EUR/USD.
In this case, the base currency, the one on the left of the slash is the Euro. Conversely, the US Dollar is designated the quote currency. The base currency is the security you want to buy or sell while the quote currency sets the price at which you can exchange the base currency.
Still on the EUR/USD example, if the quote is 1.1862, this means that to buy 1 euro you would have to sell 1.1862 dollars. If the trader wanted to sell 1 euro he would receive 1.1862 dollars.
These currency pairs can be thought as being a single asset being traded. So, if someone buys the EUR/USD pair, this means that they are exchanging dollars for euros and when selling the other way around.
Major and Minor pairs
When talking about currency pairs, they can be usually referred to as Major or minor pairs. Major pairs are among the most transacted in Forex and the ones that offer more liquidity. For example the EUR/USD, USD/JPY and GBP/USD. All other currency pairs that aren’t as transacted are considered to be minor pairs.
It is also important to point out cross currency pairs. Although not so commonly traded, these are the currency pairs that don’t involve the USD, and thus usually have associated with them higher transaction costs.
Pips and Pippetes
A pip (percentage in point) is the most basic measurement of price movement in currency pairs in the Forex market. Usually, currency pairs are expressed to the fourth decimal case, being the pip the last one. For added precision, some traders even look at pippete, which are 1/10 f the pip, in other words, the fifth decimal case. So, for instance, if a currency pair changed from 1.1862 to 1.1863 this meant that it changed 1 pip. This measurement applies to most cases but there are some exceptions, such as the USD/JPY (109.55) which is presented in most cases to the second decimal case.
Being aware of pip variation is extremely important when calculating expected returns and positioning yourself in the market.
Bid-Ask Spread
The bid is the price that traders are willing to pay to acquire a security. On the other hand, the ask is the price that traders are willing to make to sell a security, being the bid the smallest of the two. These are, essentially, indicators of the supply and demand for a specific security. The difference between both gives us the bid ask-spread. The tighter the gap between both the more liquid is security being traded. In other words, it can be sold more easily and quickly converted to money. Trading currency pairs are thus considered to be the most liquid assets to trade.
You can think of this as an ongoing negotiation taking place in the market. On one side you have those who want to exchange the base currency for the quote currency. On the other side, you have those that want the exact opposite. The broker/market maker will offset this apparent imbalance in the market and charge you the spread every time you want to exchange. This is considered the main transaction cost each time you trade.
It is important to point out that the current price of a pair is usually neither the bid nor the ask. It is the price at which the currency was last exchanged.
Going Long/Short
As previously mentioned, when buying/selling currency pairs, this is usually done depending on a traders’ belief on the future value of the base currency compared to the quote currency.
A trader is said to be bullish when he has a positive expectation regarding the value of a pair. In foreign exchange, like in any other market, bull traders hope to profit from an upward movement in a pairs’ price. Simply put they hope to buy and hold a currency pair and eventually sell it at a higher price after appreciating in value. This is usually designated as “opening a long position“.
Investors’ and traders’ attitude towards the market is called sentiment. So, even though there are bull traders, pessimistic traders also exist.
Which brings us to bearish traders. A trader is said to be bearish when he expects a currency pair to devaluate. In this case, they will go short on a currency pair. This means that a trader will borrow a currency pair from a broker, sell it and then, when closing the short position, repurchase it to the broker at a lower price.
To Sum Up
There a lot of jargons used in Forex and it can be easy to be overwhelmed with all of these concepts. However, when you get down to what they really mean, it isn’t all that difficult.
Constantly learning about new ones, or just reviewing them, is essential to becoming a better trader. With this in mind, we advise you to read more on our other articles and improve your knowledge on the subject.
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After the fall of the Bretton Woods System in 1971, the world’s major currencies soon followed a floating exchange rate regime. Simply put, this meant that a currency’s value would be determined based on its supply and demand compared with another currency. With the exchange rate being such an important factor weighing on a country’s economic growth, currencies are always highly demanded. From central banks and governments to retail traders and businesses, all constantly make and meet orders. This means that the Forex market has a lot of liquidity and is open 24 hours, providing a very flexible scenario for traders.
These factors are some of the main advantages of the Forex market over other financial markets such as the stock or bond markets. Nevertheless, this also has its drawbacks. Just because the market is always open on weekdays that does not mean that you get the same market conditions every time. Depending on the time and session you’re in, ranges, volumes and the pairs being predominantly traded vary.
In this article, we will discuss when one should trade by covering the main forex hours and sessions.
Major Forex Sessions
Firstly, what exactly are trading sessions? A trading session is a period of time during a business day in financial markets in which buyers and sellers set the current market price. In this case the pair’s exchange rate. In the Forex market, those considered to be the most important ones are the major financial centers in North America, Europe, and Asia. Namely Tokyo, London, and New York.
In the following table we can observe at what time they open and close according to the Greenwich Mean Time (GMT):
Note: It is important to point out that the Forex market opens on Sundays at 21.00 (GMT+0) and closes on Fridays at 21.00 (GMT+0) in the Winter time. Adjusting to your time zone and taking into consideration the daylight saving time, will tell you at what hours the market opens and closes for you. For example, if you live in Portugal (GMT+1), the market schedule will be from Sundays to Fridays at 22:00 pm.
Asian Session
Trading in the Asia-Pacific region accounts for approximately a quarter of all transactions made in Forex. When being referred to, the Asian Session is often associated with the Tokyo session as it is one of the largest trading centers in the world. This should come as no surprise as the Japanese yen is the third most traded currency in the world. However not only Japan trades in this session. Russia, Malaysia and South Korea are among others participating. Moreover, with Asia and the Pacific region’s rapid development over the years, financial centers such as Singapore, Hong Kong, and Sydney gained importance.
One characteristic of this session is that prices are usually less volatile and average hourly moves are smaller. This leads to supports and resistances being more likely to hold, allowing to trade ranges. Although less likely, news events can serve to trade breakouts as well.
Currency pairs that involve the Japanese Yen (JPY) , Australian dollar (AUD) or the New Zealand dollar (NZD) are more likely to show stronger movements. Being the first session of the trading day, it sets the tone for the following market sessions to come.
European Session
Before the Asian trading hours come to an end, the European session opens. A number of big trading centers operate during this time. However, London is undeniably the most important one. Mostly due to its location and the fact that it accounts for approximately 30% of all transactions being made in Forex. As a result, it is considered to be the Forex capital of the world and the epicenter of this session.
In the beginning, the previously stubborn supports/resistances are more likely to be broken due to volatility. This Tokyo/London overlap is the second most active period of the trading day, only outclassed in the afternoon. More specifically when London and New York are open at the same time.
During this session, the subjacent higher liquidity provides a better setup to trade trends. In between, as lunchtime approaches, there is a significant loss in activity as traders fuel up for the busiest overlap to come. At the end of the session, with so much activity, trends may reverse as traders seek to lock their earnings (excess supply/demand).
North American Session
The US Dollar is by far the most traded currency in the world. It is present in 80% of all trades being made in the market, either directly or as a vehicle. Like all currencies, fundamental economic variables support its value. In this case, those variables come from the world’s largest economy, the United States, hence its value.
As previously mentioned, the most active hours occur when major sessions overlap. Being the London/New York overlap the most active one, this allows for transaction costs to be at their lowest values. The bid-ask spread is thus minimized and placing orders becomes much cheaper. With so much liquidity nearly any pair can be traded, but major pairs like EUR/USD, USD/CHF and GBP/USD offer the smallest spreads.
After the overlap with the European session, activity usually dies down. At the end of the New York session, most traders start closing their positions. Those that trade the North American/Asian overlap still find some liquidy. However not as pronounced, and falling once more into the range trading associated with the Tokyo session. The market activity naturally reaches its lowest point on Friday afternoon.
To Sum up
Some might argue that the Asian session is the best as low volatility enables you to manage your trades more functionally . Others might say that most liquid hours will provide more opportunities for good trades. So overlapping sessions are the best answer. But it all comes down to the same thing. It depends on what works better for you.
When deciding when to trade you should take several factors into consideration:
- Volatility – Evaluate if greater pip ranges suit your trading and risk profile or not;
- Your schedule – There is always a new opportunity for a good trade. There is no need to overdo it. Being tired or not having the right mindset won’t help your results at all;
- Other time frames – Don’t stick to just one time frame. Conducting multi-timeframe analysis will enable you to better identify trends and signals;
- Economics Drivers – Central banks’ reaction to economic growth, commodity trading, etc. Being aware of them can greatly aid your market analysis and ultimately provide you with better trades;
Hope you found this article useful. Be sure to comment and share this article with a friend!
Trading Forex might seem like a fast and easy way to make money due to its high liquidity, leverage and many trading opportunities. However, many common mistakes are made, and getting started isn’t as easy as one might think. In this article, we will go through 4 challenges newbie traders face when taking their first steps in the Forex Market.
1 – Too much Information
Better understanding the market before risking your own money is always a good idea. Often newbie traders have high expectations regarding trading that do not correspond to reality. Consequently, such an approach can come at the cost of your whole account. So, educating yourself is key to avoid falling into these types of mistakes. You should get acquainted with different strategies, indicators, on what time-frame to trade, etc.
However, too much information can easily be overwhelming. Distinguishing good advice from all the noise the internet has to offer is definitely a challenge. Especially for any traders starting out.
Thus, finding the absolute way of getting money without fail will always be impossible and you will never start trading, which leads us to the next challenge newbie traders usually face…
2 – Sticking to a Trading Plan
There always seems to be a new strategy out there that is better and more efficient than the one you are currently approaching. This idea goes in line with what we previously discussed, as too much information can actually cut down your profits.
The bottom line is that you should find the strategy that best fits you and run with it. What might seem like a winning strategy for one person may not apply for you. Trading Forex is a learning process and only through practice, learning with the mistakes you make and sticking to one strategy for a while will you be able to perfect your craft.
3 – Finding the Right Mindset
Being able to trade with a clear mindset has and always will be a challenge. From the most experienced traders to the newcomers in the Forex market, all of them at some point fail to trade with their heads in the game.
Being undercapitalized in the beginning, for instance, puts a lot of emotional pressure for time and money on newbie traders. Often, this leads to impatience when looking for the right setup to open a position, usually resulting in reckless trading.
Another example is not knowing when to close a position and accepting a loss, and in trading you can’t really afford to do that. Always setting a stop-loss and moving on to another trade when things don’t turn out as expected is the way to go.
If you would like to know more on the subject check our article on building a winning traider mindset.
4 – Trade for the Long-Run
Without proper planning, several losses that traders might have will make them lose interest and curse Forex. That’s why newbie traders need to have a long-term perspective. Potential blows that they experience won’t then be as hurtful.
Recurring to money management techniques in Forex trading is thus detrimental for this to occur.
Instead of risking half of your account in one trade, establishing a realistic risk/return ratio each time you trade, according to your risk profile, will enable you to trade consistently. Furthermore, it will allow newbie traders to stay motivated and better cope with their losses.
To Sum up
Newbie traders should focus on getting acquainted with trading systems and trading platforms. After doing so, practice with historical data, challenge yourself, and eventually, you can start to trade for real.
Having friends or colleagues who are also interested in Forex and developing a community also makes a huge difference. Mainly because you can find support in them and share experiences.
Lastly, developing and maintaining a strong mindset, regardless of any market conditions or any other factors, will be fundamental.
Feel free to leave a comment below, ask any question or provide feedback on this article. If you enjoyed it, don’t forget to share it with a friend!
To be successful in trading, you need more than a winning strategy. You need to have the correct trading mindset to succeed over the long run. A trader with a winning strategy but who starts being overconfident about it may end up losing control and making mistakes. To be a winner, it’s important to have several edges against all the other traders. One of this edges is mental – you should think like a winner to become one. In this article, we present 9 characteristics of a successful trading mindset, which will give you some powerful insights to complement you as a winning trader.
1 – Flexibility
First of all, you need to be flexible and open-minded. Especially in Forex, given that the market is open 24h a day, you need to be flexible enough to trade during the London session, the New York session and the Tokyo session. A good opportunity may appear at any time, and you need to be ready to be there and catch it. Besides, open-mindedness is really important when analyzing a currency. Markets change fast, and what was true last week may not necessarily be correct this week. You should always keep your mind open to sudden changes that may occur.
2 – Find what works FOR YOU
There are some traders who prefer to risk more, others prefer to trade only during a certain session, others like to look only at fundamental analysis and some only trade on technical analysis. This means that each one of us should develop a strategy that is good only for himself. What has proved to be a winning strategy for your partner may not necessarily work that well for you. He may look at the market in a different way than you do, and the strategy will reflect that. In this sense, you should discover what is your trade profile and start working on a personal trading strategy or use a proven trading strategy that fits you.
3 – Don’t be overconfident when you win
We all know how it’s easy to become overconfident after a good winning streak. However, it’s crucial to maintain the same posture towards trading as always. If you become too confident and start being more relaxed about your trades, hoping that you’ll continue to win, you may end up losing what you already won because of your sloppiness. Basic mistakes can occur due to a lack of attention. Instead, you should “convert” your confidence into focus to keep having good results.
4 – Don’t lose your confidence after some bad trades
As important as not being overconfident when you win is to not lose your confidence after some bad trades. It’s usual to have some bad moments and enter on a losing streak. This doesn’t necessarily mean your strategy is failing or you’ve lost the plot. Even the best strategies happen to fail under certain market conditions, and losing is important to improve your trading. If you’re having troubles in being confident, you may want to check our article on 3 Ways to Boost the Confidence in Your Trading.
“Losing a position is aggravating, whereas losing your nerve is devastating.”
– Ed Seykota
5 – Don’t trade to get your money back
As we all know, it’s difficult to remain focused after a bad trade. Besides losing confidence, it’s usual to see traders getting angry and trying to recover what they’ve lost. First of all, don’t let your emotions interfere with your trading, that will only guide you to a poor performance. Second, don’t trade just to recover your losses, as you’ll probably end up losing even more. Instead, you should remain calm and recover what you’ve lost over a certain period of time and get back on track. Haste will not lead you to good decisions. Besides, getting into a confrontation with the market won’t recover your losses. Don’t be mad at the market, try instead to think about what went wrong and improve it.
6 – Don’t trade just for the money
This may seem a little bit strange since the majority of traders do it to earn some money. However, some of the greatest traders of all time, like it is the case of Ed Seykota, reach a state in which they “forget” about the money involved and are much more focused on being good traders than in the money they can make. Always thinking about money may prevent you from focusing solely on your analysis and making the right trades. Moreover, if you’re a good trader, the returns will eventually come.
7 – Be patient
One of the most important characteristics of a successful trader is being patient and wait for the right chance. The market is full of opportunities, you only have to be aware and get the right ones. Sometimes prices may be flat for a long period of time, without any major change worth trading. During this time you should not “force” any trade, simply wait for a better time. Some strategies work better under specific market conditions. By applying them in a different way, you may risk its failure. If you wait for the certain opportunity, you’ll have a higher chance of success.
8 – Trade with money you can afford to lose
In our article about money management, we give some advice about how much money you should put in each trade and how you can ensure a positive expected return. It’s crucial that you don’t risk too much in each trade given that, if things go against what you planned, you may end up losing more than you can afford. Take small losses and let your profits run. The more you lose in each trade, the higher your winning rate has to be in order to be profitable over the long run.
9 – Be realistic
The final characteristic of a successful trader is the ability to be realistic regarding your expectation. If you don’t already know how much money you should expect to make in Forex, our article may give you some help on that. No trader starting with 1000€ can expect to win like 10,000€ per month. Your account will grow slowly at the beginning and then the compounding effect will ensure you win more as time goes by. Keep a realistic expectation about what you can win and define your goals according to that view.
The Bottom Line
To be a successful trader, you have to get as many edges as you can, and the mental edge is one of the most important. The above-mentioned characteristics are some of the ones you should try to implement to improve your trading mindset. This will complement your strategy and turn you into a mentally strong trader, able to go through bad times and prosper on good ones.
As a retail trader, your orders will hardly have any influence on the overall market prices. However, when large investors such as commercial traders or professional traders place their orders, they will likely define where prices are heading. Therefore, it’s of extreme importance to find what these large traders are doing and to be on their side. In this article, we intend to explain how you can spot what the big players are doing, i.e., tracking the “smart money”, and take advantage of their actions.
What is the “Smart Money”?
So, what exactly is the “Smart money”? It’s the name we use to describe professional and large traders with a big amount of capital. In this category, we may find both institutional investors, investment banks and hedge/mutual funds. Not all funds can be considered professional since some of them lack the expertise or the size to truly impact markets. Besides, small funds usually do not have enough capital to place orders capable of influencing prices.
Besides being the traders with the largest amount of capital, these are also the traders with access to more information and knowledge about the markets. Note that both hedge funds and investment banks have huge teams of researchers continuously analyzing the market. They also spend large sums to have access to the latest news before the rest of the market. As such, the odds are that professional traders will spot some opportunities faster than the “average trader”. This is why it’s extremely important to know what they are doing. Due to the size of the organized actions of these traders, they are usually behind biggest price movements. Therefore, knowing what they are doing should be one of the first objectives of any trader.
Tracking the Smart Money
The most direct and efficient method to understand when these players act in simply by looking at a price-volume chart. Due to the large size of their orders, these traders are not able to hide their actions. There is a myth that says that because of dark pools, they are able to hide their actions. Some institutional traders do use dark pools, but they can only hide their orders during execution, which can be a matter of milliseconds. After the order is executed, there’s no way to hide it, as exchanges (and consequently Forex liquidity providers) will report it in the volume.
1- Interpret the direction of their trading
You’ll need to look at prices and volumes to know this. Our article about volume trading explains some ways to observe this. The important thing here is to see where there is a general and organized action, and various funds are buying or selling a currency consistently. You can see this in lower timeframes, like 1 minute, as well as in daily/weekly timeframes.
There are many supply/demand patterns, which our VSA indicator shows, and one of the most prominent SUPPLY ones is a wide range bar, closing on the lows, with volume above the average. The demand ones close on the highs instead. Even though these are wide range bars, many times the prices will continue trending, as you can see in the chart below.
General buying/selling pressure leading fast price movements
Buying pressure marked by high volumes that move prices upwards.
2- Take a look at fundamentals
In long-term trading (daily timeframe and above), good fundamentals make it more likely for big traders to have an interest in a given currency. Traders should be aware when talking about “fundamentals” given that some economic measures like the GDP growth or the interest rate hikes, although important, are not a leading indicator. We frequently see these variables changing only after price corrections in the value of the currency. Traders are better off by looking to the increase of the spread of the interest rates or the movement of a related commodity. These variables are usually a good proxy for the fundamentals that drive currencies and often are leading indicators. In the image below, for instance, we can see how correlated are the AUD with the price of Gold. If the price of gold increases, large traders know that this will benefit the AUD and start buying the currency.
AUD/USD – Gold (Source: Bloomberg)
3- Sentiment
“Listen to what the market is saying about others, not what others are saying about the market.”
-Richard Wyckoff
- Sentiment indicators such as COT report and SSI index will give you secondary information. Although it has its usefulness, COT report shows the actions of ALL large traders, even the ones that aren’t so good. Traders should, therefore, pay special attention to their analysis, because the report may have some lag in what comes to be a market turn. Traders should use the COT report mainly as a confirmation, or as a search mechanism for extreme values between large investors and hedgers. The image below presents some examples when the large spread was linked with a market turn
COT report
- On the other hand, the SSI shows the actions of small retail traders, which are usually wrong and in the opposite direction of smart money. In this indicator, look for historically high % of long positions to look for a short, and vice-versa for long positions. You can combine both information to be more confident about the right direction you should trade.
SSI Index
Conclusion
If you aren’t using volumes in your analysis, you are missing a big part of the picture. By showing the market’s activity, volume together with prices shows what the big traders are doing. Only these traders are capable of placing orders large enough, and in an organized manner, to sustain market trends, so you should look closely at what they are doing. By tracking the smart money, you can follow their actions and be on the right side of the price movement.
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