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Leverage in Forex
Rollover in Forex
You may have heard of the rollover in forex trading, and you might not be familiar with what it is. It's actually a very simple concept. Rollover is a situation that occurs when you hold a trade beyond the ending time of a particular day's trading.
There are different times at which this may happen, and that will depend on which broker you are using for your forex trading. But at any time of day, the rollover is the time when your trade is carried to a new day and you pay, or are paid, for the position you hold on that trade.
When you take a position in the forex market, you are simultaneously buying one currency and selling another. No matter what currency it is, all currencies are paired in forex, so you must sell one to buy another. When you do this, you are, in effect, borrowing one currency from someone to sell it or buy it. The in-depth details of this borrowing are not of much concern to you as a trader, but what is of concern is the interest rate for the currencies involved.
Each currency bears an interest rate that is very similar to the rate established by that currency's central bank. The difference between the rates of the currencies in the pair you are trading is what determines whether you pay, or are paid, when the day changes in the currency market. In some instances, you will pay regardless of the direction you take on a currency pair, such as the GBP/USD pair where the rates are so close at this time that the spread between them leads to you paying whether you buy or sell.
As noted earlier, the times vary as to when you will see the rollover occur. In the case of many US forex brokers and market makers, the time used for the rollover is the end of banking hours on the east coast. Basically, when the banks close in New York, the rollover occurs, and the next day is started. At that time you will either be charged or credited, depending on your trade.
To avoid this, all you have to do is to close your positions before the rollover occurs. In the case of most brokers, you can exit the trade prior to the rollover and incur no charges or credits for that day. However, some brokers have moved to a continuous rate calculation and charge or credit based on how long you held the position, regardless of whether or not it carries through the rollover.
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The Most Popular Indicators
When trading in the forex market, one of the most crucial things you will need is a good set of indicators. Forex indicators do as the name says, they indicate when to enter and exit trades based on how you've decided to use them.
There is no exact, agreed upon way of entry and exit based on indicators. Rather there are general guidelines on how to use the indicators when trading. In forex, the most popular indicators are MACD, Stochastics, Bollinger Bands, and RSI.
MACD, which stands for Moving Average Convergence/Divergence, is and indicator consisting of two moving averages and an activating period. What you see is one, faster moving, MA that will cross over a slower moving MA at various points.
This, along with a change in direction from up to down on the activating period, indicates a change in trend for the price action of the pair. However, sometimes consolidation will appear as a trend change on the MACD, and not as sideways action as it truly is.
Stochastics operate in much the same way as MACDs and are often used in conjunction with the MACD to help confirm trend changes. The two, viewed together, can offer confirmation of a true change versus a consolidation period.
Bollinger Bands are unique. They consist of three lines. The middle line is a moving average. The upper and lower lines are barriers, so to speak. When price action increased, the outer lines expand, and the contract when price action is decreased. There are many ways to use Bollinger Bands. One common way to use them is to view them as a trend indicator. When price is concentrated above the MA, it is an uptrend, and vice versa.
RSI stands for Relative Strength Indicator. This indicator give you information on whether the pair is overbought or oversold, and whether it is more likely in an uptrend or a downtrend. Generally, the price is trending up if the RSI is above 50.
Below 50, it is generally trending down. Readings above 70 usually mean overbought, whereas readings below 30 mean oversold. These overbought and oversold readings can often indicate a trend reversal in the making.
There are many different techniques traders use to read these indicators. While they are the most popular, many other indicators also exist that can help you with trading decisions. It is up to you how you will use them. Just remember, there is no perfect indicator.
Each one has its inadequacies, so don't count on any one indicator as an exclusive trade signal. Commonly, traders use three indicators to help them make trades. |
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Intermediate Forex Trading
There are many different intervals in forex trading, including scalpers (very short term), day traders (short term), intermediate traders (days), and investors (week, months, even years). Intermediate trading is advantageous for several reasons, and this is why it is perhaps one of the more popular trading intervals used.
Intermediate trading allows you to look at the market and say "this is where I think prices will go over the next several days". This allows you the opportunity to enter a position that you can hold for long enough to get through all of the "market noise", price action that occurs but is not relevant to the trend you are pursuing.
You should be aware that in order to trade over the intermediate term, you must scale back your leverage a bit to avoid margin calls as the result of this noise.
Intermediate trading is based largely on technical analysis, to include the usage of indicators, trend lines, and support and resistance lines on charts. However, it is helpful to also include some fundamental analysis in your decision.
Rather than the fundamentals that would tell you where a currency will be next year, use fundamentals to help you gauge the current market sentiment on the currencies you are trading. This can help you to know whether there is a particular favorite in the market, or if sideways action will occur because of market indecision.
As with any trading time frame, you should always be looking at three intervals of charts. For intermediate trading, perhaps the best way to do this is with daily charts for the overall trend, two- three- or four-hour charts for your actual trading, and one-hour charts for details, especially on good entry and exit points.
What indicators you choose for each of these charts will be up to you. However, you should never operate off just one time frame because you will miss the bigger picture of where price is going, and you will miss the perfect entry and exit points provided by the smaller time frame.
No matter what, leave room for prices to move against you. Study the charts for indications of how prices swing to know how much room to leave yourself on the trade, and consider stop-loss orders to help you avoid further loss.
The one thing you should never do is put yourself in the position of a margin call.
Related Topics: Forex Money Management,
History of Forex Trading, Simple Trading Mistakes
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