High Probability Trading >>>>Part 3 >>> Final Part

The following 60-minute chart shows how the Pound rallied to the SK resistance level, and the trend-line. It rallied over those, tested them briefly, then retreated. There are several ways to determine whether resistance has materialized. I have some very powerful techniques for that purpose. However we want this tutorial to focus on some basics. So for now we will use the obvious breaking of the rising trend as our trigger.

During that rally upward, the 60-minute chart has a series of higher swing highs and higher swing lows. Once we broke the highest swing low (see the last bar on the above chart), we know that up-trend has expired. So we want to start shorting rallies and take profits on dips as shown on the next chart (60-minute chart).

Notice how the market broke down, and never looked back! That is what happens when you combine trend-lines with Fibonacci techniques. The best trades go your way and keep on going. That is a characteristic of higher-probability trading.

High Probability Trading >>>>Part 2

If you are new to Fibonacci, those studies look like a confusing series of colored lines. Learning how to use these Fibonacci studies, and which of them are stronger (higher probability), is really easy! I have made two video seminars that explain this.





That "SK Resistance" level, coinciding with a trend-line is an optimum shorting zone. If the market reaches that area (we can't be sure it will), and if the market resists there, we want to take a short position. Once the resistance materializes, it will be difficult for the market to move against us.

Most of us are not trading the daily chart, but we can use the longer-term charts to find powerful trends and Fibonacci levels. The next chart is a 60-minute chart. I choose 60-minutes because it clearly shows when resistance has materialized. You may prefer a 30 minute of 5 minute chart.

High Probability Trading >>>>Part 1

This lesson looks at forex fibonacci techniques and how to look for and find those "higher probability" trades that will make us money.

Even traders with limited experience start to realize that we are not trying to capture every market move. We want to improve our odds and reduce our frustration by filtering, for high-probability trades.

The combination of Trend and Fibonacci techniques can provide powerful signals for higher probability trading. We already know that trend-lines have some validity, and so do Fibonacci levels. Combine the two, to improve your chances.

The following charts are the USD/British Pound GBP. First, the daily chart as of October 5th 2005. I have drawn a red down-sloping trend-line joining the two recent swing highs.

The chart has moved down since early September , making a down-trend of consecutive "waves" with lower swing highs and lower swing lows. There were several opportunities to take advantage of the down-move. In this tutorial we will focus on the October 6th opportunity.

In a down-trend we want to short those swing highs, and take profits on swing lows. We don't want to short every time we think we have a swing high. If you have tried that, you know about whipsaw and fake-outs already. ;-) We only want the best trades, those which are more likely to succeed. So how do we choose an optimum entry point?

Our odds are improved if we have a swing high near a down-sloping trend-line (in red on the chart). Markets tend to reverse at Fibonacci levels. So if we have a significant resistance level near a trend-line we have an even better chance of success.

The next chart shows the GBP with Fibonacci resistance levels. Notice the "SK Resistance" level. This represents an area of significant resistance, with a higher probability of a reversal.

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Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

How is the Forex Market Different?

There are some significant differences between the forex market and others like the stock market. While it may be the feeling that a good trader should be able to handle any market, the fact of the matter is that some structural differences in forex can require a different trading approach.

Time

For most stock traders, the first difference they will notice between the forex market and equities is timeframe. Although the hours of stock trading have been expanding in recent years, the forex market is still the only one which can truly be viewed as 24-hour. There is ready forex trading activity in all time zones during the week, and sometimes even on the weekends as well. Other markets may in fact transact 24-hours, but the volume outside their primary trading day is thin and inconsistent.

No Exchanges

The lack of an exchange is probably the next big thing that sticks out as being different in forex. While it is true that there is exchange-based forex trading in the form of futures, the primary trading takes place over-the-counter via the spot market. There is no NYSE of forex.
On the largest scale, forex transactions are done in what is referred to as the inter-bank market. That literally means banks trading with each other on behalf of their customers. Larger speculators also operate in the inter-bank market where they can execute multi-million dollar trades with ease. Individual traders, who generally trade in much smaller sizes, primarily do so through brokers and dealers.
This is something which can trouble stock traders. There is no central location for price data, and no real volume information is attainable. Since volume is an often reported figure in the stock market, the lack of it in spot forex trading is something which takes a bit of getting used to for those making the switch.

Transaction Processing

Also, the lack of an exchange means a difference in how trading is actually done. In the stock market an order is submitted to a broker who facilitates the trade with another broker/dealer (over-the-counter) or through an exchange. In spot forex much of the trading done by individuals is actually executed directly with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case, but is the most common approach.

Transaction Costs

The lack of an exchange and the direct trade with the broker creates another difference between stock and forex trading. In the stock market brokers will generally charge a commission for each buy and sell transaction you do. In forex, though, most brokers do not charge any commissions. Since they are taking the other side of all the customer trades, they profit by making the spread between the bid and offer prices.
Some traders do not like the structure of the spot forex market. They are not comfortable with their broker being on the other side of their trades as they feel it presents a type of conflict of interest. They also question the safety of their funds and the lack of overall regulation. There are some worthwhile concerns, certainly, but the fact of the matter is that the majority of forex brokers are very reliable and ethical. Those that are not don't stay in business very long.

Margin Trading

The forex market is a 100% margin-based market. This is a familiar thing for those used to trading futures.
In fact, spot forex trading is essentially trading a 2-day forward (futures) contract. You do not take actual possession of any currency, but rather have a theoretical agreement to do so in the future. That puts you in a position of benefiting from prices changes. For that your broker requires a deposit on your trades to provide surety against any losses you may incur. How much of a deposit can vary. Some brokers will asked for as little as 1/2%. That is fairly aggressive, though. Expect 1%-2% on the value of the position in most cases.
Now, unlike the stock market, margin trading does not mean margin loans. Your broker will not be lending you money to buy securities (at least not the way a stock broker does). As such, there is no margin interest charged. In fact, since you are the one putting money on deposit with your broker, you may earn interest in your margin funds.

Interest Rate Carry (Rollover)

When trading forex, one is essentially borrowing one currency, converting it in to another, and depositing it. This is all done on an overnight basis, so the trader is paying the overnight interest rate on the borrowed currency and at the same time earning the overnight rate on the currency being held. This means the trader is either paying out or receiving interest on their position, depending on whether the interest rate differential is for or against them.
This is commonly handled is what is referred to as a rollover. Spot forex trades are done on a trading day basis, and as such are technically closed out at the end of each day. If you are holding your position longer than that, your broker rolls you forward in to a new position for the next trading day. This is generally done transparently, but it does mean that at the end of each day you will either pay or receive the interest differential on your position.
The type of trader you are and the way your broker handles rollover will be the deciding factors in determining whether the interest rate differentials are an important concern for you. Some brokers will not apply the day's interest differential value on positions closed out during the trading day. By that I mean if you were to enter a position at 10am and exit at 2pm, no interest would come in to play. If you were to open a position on Monday and close it on Tuesday, though, you would have the interest for Monday applied (the full day regardless of when you entered the position), but nothing for Tuesday. (Note: There is at least one broker who calculates interest on a continuous basis, so you will always make or pay the interest differential on all positions, no matter when you put them on or took them off).
It should also be noted that although some folks will claim there is no rollover in forex futures, the interest rate spread is definitely factored in. You can see this when comparing the futures prices with the spot market rates. As the futures contracts approach their delivery date their prices will converge with the spot rate so that the holders will pay or receive the differential just as if they had been in a spot position.

Intervention

Fixed income traders know that central bankers, like the Federal Reserve, are active in the markets, buying and selling securities to influence prices, and thereby interest rates. This is not something which happens in stocks, but it does in the forex markets. This is known as intervention. It happens when a central bank or other national monetary authority buys or sells currency in the market with the objective of influencing exchange rates.
Intervention is most often seen at times when exchange rates get a bit out of hand, either falling or rising too rapidly. At those times, central banks may step in to try to nullify the trend. Sometimes it works. Sometimes not.
The US has traditionally taken a hands-off approach when it comes to the value of the Dollar, preferring to allow the markets to do their thing. Others are not quite so willing to let speculators determine their currency's value. The Bank of Japan has the most active track record in that regard.

Forex transactions

Forex transactions are carried out by Forex brokerage companies, also known as major banks dealers.

Forex market is worldwide and your European colleagues may make a transaction with Japanese traders when it's time for you to sleep in the North America.

There are 3 shifts for the major institutions to work in due to 24-hours a day activity of the Forex market. It's possible to ask for overnight execution for take-profit and stop-loss orders of the client.
Prices in the Forex market fluctuate without any dramatic changes unlike stock market where considerable gaps are likely to be seen. There isn't any problems entering and exit the market due to its daily turnover of about $1.2 trillion. Forex market can not ever be forced to stop. The transactions were carried out even in 2001, on September, 11th.

Forex currency exchange

The simple sense of Forex (Forex currency exchange, Foreign Exchange) is simultaneous purchase and sale of the currency or the exchange of one country's currency for the one of another country.

The world currencies do not have a fixed exchange rate and are always fluctuating being traded in the currency pairs like Euro/Dollar, Dollar/Yen an others. 85% of daily trades are taken by major currencies trading.

Investments usually deal with 4 major pairs: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign these pairs accordingly.

These major pairs are considered as Forex market's "blue chips". You will not receive any dividends on the currencies. Well known "buy low - sell high" gives the profit for currency trades.

In case you have a forecast that one currency would get higher to another you can exchange the second one for the first one and wait for the profit. If you are lucky to see the trades following your forecast you can make an opposite transaction and to exchange currencies back gaining the profit.

What is Forex?

The foreign exchange market, often referred to as forex, is the market for the various currencies of the world. It is a market which, at its core, is rooted in global trade. Goods and services are exchanged 24 hours a day all over the world.

Those transactions done across national borders require payments in non-domestic currencies.

For example, a US company purchases widgets from a Mexican company. To do the transaction, one of two things is going to happen.

The US firm may, depending on the contract terms, make payment in Mexican Pesos. That would require a conversion of Dollars in to Pesos to make payment. Alternately, the payment could be made in Dollars, in which case the Mexican company would then exchange the Dollars for Pesos on their end.

Either way, there is going to be some transaction which takes Dollars and swaps them for Pesos.
That is where the forex market comes in.

Transactions like that take place all the time.

The market maintains a rate of exchange between the US Dollar and the Mexican Peso (and between and amongst all other world currencies) to facilitate that activity. Consider the amount of global trade which takes place and you can see why the forex market is the biggest in the world, dwarfing all others. Literally trillions of dollars worth of forex transactions take place each and every day.

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