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Forex Trading Losses
The .382 Fibonacci Ratio
The basis of many Forex systems is Fibonacci Forex trading. Many successful and profitable Forex traders around the world use this type of a system.
These types of systems are based on Fibonacci ratios. Each of these ratios in combination with minor indicators helps identify accurate profitable levels for entry and exit.
The .382 Fibonacci ratio is among the most widely used.
Currency prices are continually fluctuating. When looking at a Forex chart it is easy to see a variable pattern in the prices with peaks and valleys. Peaks are called resistance levels while valleys are called supports.
To find the .382 ratio level, measure the rise or drop over the time of interest. Then this value is multiplied by .382 which gives the ratio.
When looking at a rise, the last value calculated is added to the total drop. If looking at a drop this value is subtracted from the total rise. This is the .382 Fibonacci ratio for either the rise or drop of interest.
With this ratio a strategy can be planned which increases the chances of success and profit. The .382 ratio level calculated for a rise is a highly probable support and for a drop it will be a highly probably resistance.
This type of calculation and analysis gives a vast advantage over most Forex traders when used in conjunction with proper secondary indicators and as known ahead of the market.
For these reasons Fibonacci trading is accepted widely over the world, and is profitable and successful.
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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.
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