Categories
Forex Trading

A Guide To Using The Stochastic Oscillator In Forex

Stochastics is one of the most popular and simple-to-use forex oscillators, whether you’re using MT4 or another platform. This tool is based on many trading concepts like overbought/oversold, divergence and crossovers. Here, we’ll study this indicator in more detail by looking at its construction and uses.

Introduction

Stochastics is one of the most popular and simple-to-use forex oscillators, whether you’re using MT4 or another platform. 

This tool is based on many trading concepts like overbought/oversold, divergence and crossovers. Here, we’ll study this indicator in more detail by looking at its construction and uses.

What is the stochastic oscillator?

The stochastic oscillator is a momentum indicator credited to George Lane, who created it in the late 50s. In his words, he believed “momentum changes direction before price,” hence the inspiration for the tool.

Before going further, it’s good to explore what momentum is in forex. Any stochastic trading strategy is based on this concept, meaning it’s helpful to understand it.

The definition of momentum in the trading context is similar to what you might have studied in physics. It describes the quantity of force or rate of acceleration in price movements. The market can move in any direction, but momentum dictates how many pips it travels.

Strong momentum leads to sustained price movements, while weaker momentum results in slower motion.

A central component of the stochastic oscillator is the moving average (MA), which measures momentum over X number of days. This indicator consists of two MAs named the %K line and %D line (or trigger/signal line).

The %K line is the ‘fast’ MA (default setting of 3-period), while the %D line is the ‘slow’ MA (default setting of 5-period). Both of these moving averages are calculated over the past 14 periods. Of course, you can alter stochastic settings for forex to suit your preferences.

This information is plotted on a line graph that oscillates or moves between 0 and 100. 20 and 80 are the stochastic oscillator settings of extreme values. 

20 represents ‘oversold’, suggesting powerful downward movements. On the other hand, 80 reflects ‘overbought,’ meaning that the price is moving forcefully in an uptrend.


Below is an image of the forex stochastic oscillator on a candlestick chart for visual comprehension. The %K line is in blue, while the %D line is in orange.

Stochastic oscillator chart example

Stochastic trading strategies help identify divergence, overbought/oversold conditions and crossovers. Let’s explore these in more detail next.

Common stochastic strategies

Regardless of the stochastic indicator strategy, this tool has three primary uses:

Observing overbought/oversold conditions

In currencies, a pair is overbought when it has forcefully moved upward, while oversold means that the price has moved aggressively downwards. Traders interpret these scenarios in two ways when using a stochastic forex strategy. 

The first suggestion is that the price will retrace since it has gone too far. Although this does happen often, overbought/oversold is an excellent signal for trend continuation. This quality can serve you well when you’re in an existing position with the stochastic oscillator.

The idea is to keep holding the trade in anticipation that the price will continue moving rather than correcting itself.

On the GBP/CHF daily chart below, notice how long the market stayed overbought on the indicator. When the price first entered the 80 zone, some traders may have exited. Yet, with some patience, the pair continued moving tens of pips.

Stochastic oscillator strategy for overbought conditions

Here, you could have trailed your stop as the price moved in your favour, finally exiting when the indicator closed below 80.

Divergence

Divergence is a classic feature of the oscillator indicator family, found in several momentum tools like the CCI, MACD and RSI. It goes back to the concept of momentum changing before the price. 

Divergence in the stochastic oscillator shows a mismatch between the highs/lows of the market and the indicator.

Although we have several types of divergence, the idea is the same. With regular bullish divergence, the price shows two consecutive highs, while stochastics reflects a higher high and lower high.

The opposite is true for bearish divergence: two successive lower lows on price, and a lower low + higher low on the indicator.

Illustration of divergence

Divergence is a tried-and-tested method for detecting reversals, making it a component of the average stochastic oscillator strategy. However, it is something to combine with other elements rather than using it on its own.


You can achieve confluence with price action, chart patterns, support/resistance, Fibonacci, or another indicator. Let’s look at an example on the 4HR chart of EUR/AUD.

Stochastic oscillator divergence chart example

Here, we see a nice rising wedge, a classic reversal pattern. This was in addition to the bearish divergence, which would have offered more confirmation of the eventual reversal.

Trading crossovers

Any forex stochastic strategy relies on information from moving averages. So, using crossovers is a given. The main purpose of this feature is to spot trend changes. A crossover happens when one stochastic oscillator line intersects with another.

When the 3-period %K line crosses below the 5-period %D line, it is regarded as a selling trigger. Conversely, it is a buy signal when the 5-period %D line crosses above the 3-period % line.

Generally, traders use crossovers as entry or exit triggers. So it should only form a small part of your strategy combined with other factors as previously discussed. You can use crossovers with the stochastic oscillator for trends and reversals.

The 4HR chart below of EUR/USD shows an uptrend, and the various entry crossover triggers you could have identified.

Crossovers on stochastic oscillator

Pros and cons of using stochastic oscillator

So, what are the good and bad things about using the stochastic oscillator?

Pros

  • Universal availability: The stochastic oscillator is not a custom indicator. So, you should find it on all standard charting packages.
  • Identifies trend changes and reversals: Although most chartists consider stochastics a reversal tool, it can be useful for spotting trend changes too.

Cons

  • Inherent lagging: Like all technical tools, the stochastic oscillator lags. This means that the indicator produces a trigger after the fact. Therefore, you can expect many false signals. This is why using confluence or combining the tool with other elements is crucial for making the best decisions. 
  • Choppiness: Here, we mean that the indicator is more sensitive to the slightest price changes. This is because the default periods are shorter (3 and 5). Such a quality works best on lower time frames where scalpers and day traders thrive. 

Yet, it is a problem when you are looking at higher charts. You can derive ‘smoother’ results by using higher periods. On the plus side, the lower periods may offer an edge during range-bound conditions (but not in trending ones).

Conclusion

Forex stochastics are generally the least used momentum indicators since the RSI indicator is more preferred. It produces smoother results and has less components to it. However, you can combine the two with the Stochastic RSI custom indicator.

Otherwise, the stochastic oscillator is also brilliant on its own but, again, should be used in conjunction with something else. This not only applies to forex but other markets like crypto, options and metals.


One crucial tip is to apply solid risk and money management when things go wrong. In this way, you’ll have more chances of success.

Categories
Forex Trading

Forex High Frequency Trading: What It Is | The Impact of HFT

We know that the FX market is a trillion-dollar industry. So some speed goes a long way to handle all this money, which is where forex high frequency trading (HFT) comes in. HFT has been around for a long time and is not exclusive to currencies.

Introduction

If you blink, you might miss it!! Human civilization has been obsessed with speed since the beginning of time. Technological advancements are continuously making daily operations better and, of course, faster.

We know that the FX market is a trillion-dollar industry. So some speed goes a long way to handle all this money, which is where forex high frequency trading (HFT) comes in. HFT has been around for a long time and is not exclusive to currencies. 

Any traded market, whether it is crypto, options, or precious metals, benefits from high frequency execution. But here, we’ll look at HFT in forex, how it works, and whether it has a massive impact on retail traders.

What is high frequency forex trading?

Forex high frequency trading is the practice of using computer programs or algorithms to transact a massive amount of positions in microseconds.

Here, companies and investors can achieve a lot with a high frequency forex trading strategy that wouldn’t be possible ordinarily. HFT has its roots in the 90s through stock exchanges where companies saw incentives to add liquidity. 

Any market needs liquidity to function seamlessly, which is a market maker’s job. High frequency trading allows forex market makers or liquidity providers to process far more orders in seconds. Among other things, these companies profit more from spreads and transaction costs.

However, high frequency trading forex can achieve more:

  • Easier arbitrage opportunities
  • Faster news or short-term trading
  • Manipulative strategies like layering and spoofing

High frequency forex trading is generally reserved for large financial companies like hedge funds and investment banks, or firms specialising in HFT. 

The main reason is that high frequency trading software and infrastructure costs too much of an arm and a leg for the average trader.

Common high frequency forex trading strategies

Here, we’ll look at the simplest avenues where HFT is used in forex.

Arbitrage 

This is the easiest to understand of all the high-frequency forex trading strategy types. Arbitrage in forex is when you capitalise on tiny price differences from identical markets offered by two separate brokers

The most basic form of arbitrage is buying a forex pair at a lower value from one broker and quickly selling it for a higher value at another. We refer to this as two-currency arbitrage. However, we have other complex types like triangular, interest rate, spot future and statistical arbitrage.

Forex high frequency trading is capable of all kinds. Opportunities for arbitrage are limited and short-lived, lasting for a few seconds. Yet, advanced software can scan multiple markets and patterns from different trading venues connected simultaneously. When a set-up arises, it can execute for a quick profit. 

Let’s demonstrate an example of two-currency arbitrage.

Example of arbitrage

Assume that the exchange for GBP/USD was 1.11400 with one broker and 1.11450 with another. Let’s also imagine you had $1 million. Here, high frequency forex algorithms can buy the pair, receiving  £897 666.

Afterwards, they can sell the same pounds with the other broker at 1.11450, resulting in $1 000 448, a $448 profit from the initial investment.

News trading 

Trading the news is an attractive way to increase your equity in the markets. Scalpers and day traders have to be very quick to react to high-impact economic announcements. However, forex high frequency trading can trade even faster.

Speed is one of several crucial factors when trading the news. Algorithms are better at predicting the likely outcome of a news event by looking at past historical trends and scanning multiple sources like Bloomberg and Twitter.

News trading is about speed and processing information as quickly as possible without delays. High frequency trading software is well adept at performing these operations better than a human could.

The price movements usually last for a few minutes. However, combined with the large volume HFT produces, it’s no wonder why HFT firms trade the news. 

Spoofing and layering 

High frequency forex strategies have been criticised for manipulative and illegal tactics like spoofing and layering. While the two are slightly different, they aim to deceive the market with ‘fake’ orders to push the price in a particular direction.

Spoofing is cancelling before execution. It involves placing massive pending orders to attract one side of the market. Then, when the market reaches near the price, the ‘spoofer’ will cancel the execution.

This action would drive the market in the direction of the order. So, for buy orders, the price would go up; for sell orders, it would go down. At this point, high frequency trading software can enter the market at a favorable top or bottom, resulting in higher profits.

Layering is a type of spoofing with the same goal of gaining favorable entries. Here, the trader ‘layers’ or places massive orders at multiple close-by price tiers. This causes the spread’s midpoint to move away, allowing the trader to execute positions in the opposite direction.

Fortunately, there are rarely publicised cases of spoofing and layering in FX. But these are things that high frequency trading software is capable of producing.

Market making 

Market making process

The image above describes how market-making works. High frequency currency trading makes FX run more efficiently than ever before.

A market maker or liquidity provider should always have an ‘inventory’ of currency pairs they can trade instantly. Adding an element of high frequency improves the speed and volume. By enhancing liquidity, traders receive cheaper spreads, better pricing and reduced slippage.

The impact of high frequency currency trading

Truthfully, HFT-based trading is less documented in forex compared to other instruments, most notably stocks from the United States. One reason is that forex high frequency trading is reserved only for a few due to the expensive tools required.

Also, despite how it offers the big players an edge, it’s not without risks. These factors decrease the profitability or worthwhileness of a high frequency forex trading strategy. Finally, let’s remember the competition.

Another problem is detection. It is nearly impossible to conclude whether HFT caused a large pip movement or not because of the decentralized nature of FX. 

Flash crashes are rare events in any traded market. And even then, there is never a conclusive report with evidence of HFT, only speculation.


For instance, let’s look at the flash crash of October 2016 on GBP/USD. This was a highly volatile period for the pair, as it was during Brexit. The price fell by almost 8% in two minutes on this chart below.

Example of 2016 GBP/USD flash crash

To this day, no research has provided a definite answer on why this happened. Yet, many theories revolved around forex high frequency trading reacting to negative news at the time. 

We can assume that only an advanced computer would have been capable of such an unexpected drop. However, such events are few and far between. 

Therefore, retail traders shouldn’t yet worry about HFT because we rarely experience its negative effects.

Can retail traders use high frequency trading software?

Of course, anyone can technically invest in such software. But the long answer is no because it’s expensive!! Although we couldn’t find actual figures, our research suggests starting prices from $200 000 (or $10 000 monthly), but this isn’t all.

Forex high frequency trading needs a data provider, for which you pay at least $5000 monthly. Additionally, a dedicated server can set you back a further $2000 monthly at best.

Oh, let’s not forget that you’d probably need a trading account with a couple of million dollars to make any high frequency trading strategy worthwhile. Unless you’re Bill Gates, HFT is reserved for elite financial institutions for a reason.

Conclusion

Forex high frequency trading is only a subset of automation or robots in FX. We have only scratched the surface, considering that AI will also become influential in the near future.

But what about right now? 
As we mentioned previously, HFT isn’t a threat in the current trading climate. For now, we can only implement strong risk or money management, along with an edge-defining strategy, to find success in the markets.

Categories
Forex Trading

Do You Need Forex Mentorship? Finding A Mentor In Forex Trading

It keeps getting repeated that most high-profile celebrities or well-known people have mentors. Trading is quite a solo career. Although you can interact with other traders, you usually have yourself to rely on when it comes to pressing that buy/sell button. This is where a decent mentor for forex trading can be precious. Yet, finding this person is like finding a needle in a haystack for various reasons.

Introduction

The late Bob Proctor once said, “A mentor is someone who sees more talent and ability within you than you see in yourself and helps bring it out of you.”

It keeps getting repeated that most high-profile celebrities or well-known people have mentors. Trading is quite a solo career. Although you can interact with other traders, you usually have yourself to rely on when it comes to pressing that buy/sell button.

Rarely will you have someone that can hold your hand during these times. It can become quite emotional, an intense psychological battle that sees traders dealing with margin calls or blowing their accounts. 

Still, many self-taught and successful traders made it without forex mentors. However, most will probably admit having someone to shorten their learning curve would have saved tons of time and money.

This is where a decent mentor for forex trading can be precious. Yet, finding this person is like finding a needle in a haystack for various reasons. But it doesn’t hurt to try if you want some pips!

What is a forex trading mentor?

Mentor for forex trading stock image

The Cambridge Dictionary defines a mentor as a “person who gives a less experienced person help or advice over some time.” In simple terms, a mentor is supposed to be a trusted adviser. It is an individual already successful in your field and whose success you’d like to replicate.

Therefore, the best forex mentors are existing profitable traders. They may also have other interests in the FX world, like influencing, education, affiliate marketing, working for an FX-related company, writing, vlogging, or any combination of these.

Some mentors may have coaching services they offer publicly, while others are more private and may not qualify as official coaches. Regardless, a mentor for forex trading should be a trader with a verifiable and profitable track record.

Are forex trading mentors necessary?

Here comes the ‘golden question;’ is a mentor for forex trading crucial? Like many things in life, it depends. As previously mentioned, most traders are self-taught and learn the inner workings of FX through years of trial and error.

The main reason is how informal forex trading is. There is technically no proper school or educational institution to teach you how to trade. Also, there are many ways to trade, like scalping, day trading, swing trading, position trading, etc. 

Some traders go the automated route by using robots. You can observe and implement countless chart patterns, indicators, and other structures.

While this variety is good, it also means there is no right way to invest because it depends on the individual. The internet has been a key enabler in the massive retail industry and dissemination of information at scale.

However, not all information is safe to use. With no regulated forex trading mentoring programs, traders often have to experiment by themselves. The lack of formality in the industry makes it challenging to spot traders qualified to teach and guide others.

Yet, if you can find a mentor with your best interests at heart, they can help with a lot of things. Firstly, they can save you a lot of time you would have spent learning from scratch. Getting to a pro or mastery level in any traded market can take at least two years. A proper mentor for forex trading can cut this time down in half.

Another wonderful benefit is, of course, the money-saving aspect. Virtually all profitable traders have lost their capital a few times in their careers. These mistakes are primarily a result of a lack of education.

Yet, a mentor for forex trading should be able to prevent you from making these errors by teaching you proper risk or money management.

The final reason why forex mentors are necessary is that they can offer specialised knowledge not found online. Being successful in trading FX pairs is about having a proven edge, which can take several years to find.

However, a mentor with profitable long-term performance can give you ‘secrets‘ and tools you won’t find online or in a book sooner. Learning the basics is easy, but experience can only be earned over an extended period. This is what a mentor can offer.

What to look for in a mentor for forex trading

The best forex mentors can back up their claims of success with results. A proven track record is the foundation. The best way to verify a trader’s performance is by looking at their live account connected to an analytics platform like FX Blue and Myfxbook.

Most so-called experienced traders do not share their trading results in this manner. Instead, they show screenshots of positions. Yet, there needs to be an indication of their long-term consistency and profitability.

A brilliant mentor for forex trading should be happy to share their performance on analytics platforms, as in the image below.

Here, the two things you’ll want to observe are the age of the account and, most importantly, whether it shows a profit.

Two years worth of data is a decent indication of proficiency –  however, the more years, the better. Regardless, live results are one of the main elements that provide a trader with strong transparency.

Other things also include reviews or testimonials, but verifiable results are the most important.

Something that offers a mentor for forex trading credibility is their general reputation online and offline. A mentor may have other interests in FX (as discussed previously) or have a normal day job. You’ll want to research what they do outside the candlestick charts and ensure their name is clean.

Should you pay for forex mentoring?

There remains an ongoing debate on whether anyone should pay for mentorship generally. We believe that the best forex mentors should have a vested long-term relationship with their mentees.

They should genuinely desire to help and see you succeed as they did. Their role is different from a coach or educator/tutor, where they provide a short-lived service that you can quantify in monetary terms. Also, it boils down to affordability. Some traders, whether they are new or have some experience, have no problem paying. 

Yet, not everyone has the funds, especially if they’re new. This is why getting forex mentors from family or friend recommendations is an excellent route. 

You are likely to get someone that can offer the highest personal interaction, someone you can contact at any time to answer your questions. Also, a relative or recommended friend is less likely to ask for money due to the mutual connection. 

It is more challenging to get this relationship or arrangement from an outsider. Still, you can compensate your mentor or ‘thank them’ in other methods without money exchange. For instance, it may be offering a service or skill they need for free; think of it like bartering.

Where to find a mentor for forex trading

We’ve already mentioned that friends and family are a superb route for forex trading mentoring. However, the primary alternative is online if this option doesn’t work. The platform isn’t so important as the research behind your potential mentor.

Earlier, we spoke about mentors already involved in FX outside of the charts. Therefore, in your search, you’ll get to know that person through their existing work. For instance, if you’re a fan of YouTube, your potential mentor may be a YouTuber. It becomes easier to contact them, given the established familiarity.

The next option is simply asking for a mentor on niche social media networks or forums. We advise avoiding the more prominent sites like Instagram, Twitter and Facebook. This is because these platforms are filled with spam, materialism and course-selling.

Reddit is one the most well-moderated online social communities where you are less likely to get scammed or deal with bogus individuals. You are likely to receive good recommendations from other niche forums for getting forex trading mentorship. 

Conclusion

The journey to consistent profitability for most traders is long and lonely, involving a lot of system-hopping and expensive mistakes. A caring and skilled mentor for forex trading can solve all these problems to increase your equity curve.

Still, finding such a person in this industry can be challenging. The tips we have offered should make your search easier.

Categories
Crypto Trading

How To Trade Crypto In 2023

Stocks, commodities and forex have been around for decades. However, what about the new kid on the block? Cryptocurrency. Bitcoin grabs a lot of the headlines. But what are the gritty details of how to make it in the volatile and turbulent world of cryptocurrency?

Introduction

Trading cryptocurrency is one of the hottest topics in modern investment. However, the general mainstream consensus remains polarised regarding digital assets. More traditional investors are upset by the emergence of an asset with no centralized overseeing body. 

However, it only helps fuel the speculation, hysteria and mystery that clouds this emerging asset. Unfortunately, the global economy didn’t have its best year in 2022. Stocks suffered, the cost of living crisis squeezed many of our pockets, and the cryptocurrency market took a seismic hit. 

Investing in crypto for beginners and finding out how to take advantage of this volatile asset is usually the number one goal. We aren’t going to sit here and say you are only in the cryptocurrency space to make money. Given that it is so new and the vast possibilities, there’s so much to learn, and with that knowledge will come opportunity. If you take the time to understand the market you are investing in, you can make better-informed decisions.

Today we will be breaking down ways to trade crypto, how to begin investing in cryptocurrency and specific essential trading tools, such as how you get cryptocurrency from one exchange to another. This is specifically relevant when discussing methods such as arbitrage trading, which is something else we will discuss in more detail for you today.

What Is Cryptocurrency?

Starting with the basics, it is surprising the number of people who invest in digital assets without understanding the basics of how it works. Knowing where to start with cryptocurrency will be the first hurdle you need to climb. As it stands today, in early 2023, there are over 20,000 cryptocurrencies. Many of these digital assets have a variety of different functions.

Simply put, cryptocurrency is a digital currency that is secured by cryptography. The underlying technology is called the blockchain. The blockchain registers, verifies, and authorizes any transactions that take place. One of the critical features of the blockchain is that it cannot be amended and can be viewed publicly at any time. 

Therefore, it simultaneously removes the need for a central bank or third party to facilitate a secure transaction. In addition, it increases transparency and makes sending currencies more efficient. 

Bitcoin coin standing upright in a collection of GBP & Euro coins.

As there is no need for a central authority to provide a platform for these types of transactions, this is where the term “decentralized” comes from. A decentralized system does not rely on any central authority or government. 

It is an autonomous function that relies on the blockchain as the sole level of security. Up to now, this security method has been invaluable, and other industries are using blockchain technology outside of finance. The use will likely accelerate as time moves forward.

The Creation Of Bitcoin & The Origins Of Cryptocurrency

The first cryptocurrency devised was Bitcoin back in 2008. The whitepaper was written by an anonymous cryptographer who goes by the name of Satoshi Nakamoto. The designer of the innovative and original cryptocurrency is still unknown. Some believe it may be a group of designers or just one sole individual. Either way, the landscape of investing and finance has been changed forever thanks to the technology created all those years ago. 

Bitcoin investing for beginners might be the ideal place to start if you are new to the space. The reason is that Bitcoin has plenty of visibility and is the most traded digital asset among large institutional investors, such as Tesla and Blackrock.

These multi-billion dollar companies that hold trillions of assets don’t just directly purchase Bitcoin. They also know how to invest in cryptocurrencies that operate successfully within the space. This is just one example of how to invest in cryptocurrency stock. Although many potential Bitcoin ETF ideas have been considered, the SEC in America is yet to approve one. Once an ETF is approved, tens of billions could quickly float into the digital asset space.

How to invest in Bitcoin for beginners revolves around learning how charts shape up, the analyses that professionals use and what sort of news can drive the market in either direction. So we will look at this in more detail in the section below.

Common Methods Of Trading

Starting cryptocurrency trading can be overwhelming at first. To learn how to trade crypto, understanding how the markets work is the first port of call. It doesn’t matter whether you are looking to trade crypto in general, how to trade crypto on a grander scale or how to invest in cryptocurrencies in a broader fashion (such as altcoins) – understanding analysis is vital. 

Some experienced traders will use specific technical analyses such as the diamond chart pattern. However, investing in cryptocurrencies for beginners involves more basic methods. For example, swing trading is one of the most common methods that novice traders use to understand the market. 

It doesn’t use higher-risk positions like leverage or more complex chart analysis. Instead, it is simply identifying the price of an asset that is low, purchasing it, and then selling it for a higher price. A swing trader can hold on to an asset for days, weeks, months or sometimes years. 

Holding an asset for a while will give you the necessary experience you need to assess charts, find out how they operate over the course of a day and how to plan accordingly. So, if you have spent some time dwelling over questions such as “how do I invest in cryptocurrency?” hopefully, we can shine some light on this trading area for you today.

Risk Management

If you are learning the basics and how to start investing in cryptocurrency over any period, whether it be short, medium or long-term, risk management is critical. This applies across a whole host of markets. Even if you trade across a host of markets and assets and you have a diversified portfolio, which in itself is a risk management tool, it is a good idea to read up on how you can protect your portfolio in the event of a market downturn.

Cryptocurrency investing for beginners involves several strategies. It doesn’t just apply to knowing how to read a chart. Plenty of the preparation is before you even execute your trade. As well as diversifying, there are other effective strategies that investors use. This includes dollar cost averaging and setting up take profit and stop loss limits. 

Sitting and watching your asset continue to print profit for you is not a good idea. It might sound like it doesn’t have negatives, but this mentality can cause you to lose money in the long run. One of the key reasons people trade crypto is the opportunity the volatility provides. This can work as an advantage and a disadvantage. Setting up a take profit limit is something all successful traders do once they are live in their position.

It is a disadvantage because people can get drawn into the emotions of trading and think the profits will continue to rise. However, many experienced traders will tell you things can turn around very quickly in cryptocurrency. 

Just one piece of bad news can send the market tumbling, or it can send it to new highs. Knowing what type of news to look out for can help your risk management and overall trading psychology

How To Trade Crypto Effectively

As we have established, crypto investing for beginners can be a difficult market to navigate. Therefore, risk management is critical to imprint into your overall philosophy. However, once you have implemented this and know how to start with cryptocurrency basics, you can then use this as a springboard to trade crypto.

Much like any market, you must know what you are investing in, whether you are trading gold or other commodities such as silver. We don’t know every professional commodity trader personally. However, we could say with a fair degree of certainty that they do not blindly buy and sell their commodity without performing due diligence. This includes research, chart analysis and understanding of the product itself. 

Allowing yourself time to understand cryptocurrency is critical. This is a bad idea if you enter the cryptocurrency market without knowing what Bitcoin is. You also need to know the answers to essential questions, such as

  • What are altcoins?
  • What is a smart contract?
  • How does the blockchain work?
  • What is a market cap?

If you can’t answer these four questions, you are essentially gambling. 

This may sound harsh, but if you do not understand what you are investing in, you will eventually lose all of your money. Knowledge is vital. When your money is on the line, you want to be sure that you’re treating the cryptocurrency market with the respect it deserves.

Other Chart Analyses To Trade Crypto Efficiently

There are dozens of chart analyses that traders use. You do not need to imprint them all into your memory. Using these tools alongside other tools to complement your trading knowledge gives you the best chance of success. Ultimately, turning your venture into a passive income stream is the goal. However, there are many things to consider if you trade outside your full-time job.

Due to the rise of the internet and mobile phone accessibility, there are now plenty more retail traders than ever before. Platforms such as MetaTrader have exploded in popularity following the widespread accessibility of the internet and smartphones. 

You can use the internet to your advantage by sourcing news specific to the digital asset you are invested in, and you can also use it to study detailed chart analyses. You can also check out our guides on some of the other chart patterns you can find, such as

Head And Shoulders Pattern

Triangle Patterns 

The Doji Star

Heikin Ashi

Japanese Candlesticks

Bear Flags & Bull Flags

Other Avenues To Consider

You can find more information on each of these patterns in our guides. However, there’s plenty of literature you can access online. In addition, you can find books on other markets, such as forex, from traders who are successful in their field. 

As cryptocurrency is such a new area of investing and trading, learning how to trade crypto is something you can predominantly do online. However, you must be aware of the sources you are using. Ensuring they are verified to provide you with the advice you need to increase your knowledge.

For example, many traders and investors will offer advice on social media. Still, it is easy to get overwhelmed by this advice and know which investors to listen to and ignore. 

Many traders will have online communities where they will learn and build each other’s knowledge. In addition, more experienced traders will have strategies that work for them. Taking in experience and knowledge from all sources is usually good practice so you can get a good idea of how to trade crypto as a beginner.

The Future Of Crypto Trading

When it comes to knowing how to trade crypto, a large part of that knowledge stems from how to weigh up what sort of changes are on the horizon. There have been sensationalist headlines about major countries banning cryptocurrencies. In addition, black swan events, like the collapse of FTX wiping billions off the value of many cryptocurrencies, have also brought digital assets into the public spotlight for the wrong reasons. 

The collapse of FTX and the fallout that has ensued has pressured some of the world’s biggest economies to begin to regulate cryptocurrency properly. Some people believe this may signal the beginning of the end. However, many analysts think it could be the catalyst that invites big institutions to stake large amounts of capital in digital assets.

With the number of exchanges and avenues you can use to trade crypto, it would be difficult to imagine a scenario where cryptocurrency is heavily banned or crippled by regulation. 

In addition, some institutions have hundreds of millions in cryptocurrency. This includes financial institutions and private companies we discussed earlier, such as Tesla.

If the global economy continues to stagnate, this will also impact retail investors’ ability to trade crypto. Balancing the positives and negatives before you begin trading is essential in any field. Cryptocurrency is no different. 

Depending on the overall economic conditions, cryptocurrency could stabilize again and regain some ground it has lost over the last twelve months. 

Conclusion

Cryptocurrency has started off the year strong. After such a sharp retracement in 2023, many analysts and experts expected some bounce. Instead, however, just a month into the year, plenty of cryptocurrencies have bounced back to levels above what we saw before the FTX collapse.

To recap what we have discussed today. You must ensure that you understand cryptocurrencies before you invest in them. You must also understand what drives the market and know how to perform effective risk management. 

Looking at the internet and social media, it’s easy to find people who invested in assets they needed help understanding. Unfortunately, some of these people invested money they couldn’t afford to lose and ended up in financial turmoil. Learn from other people’s mistakes. Otherwise, you could make them yourself. To trade crypto with no research isn’t wise.

Quite a few traders have also retired under 30 due to their gains from trading. Knowing how to trade crypto includes all of this prior due diligence. However, it would help if you also implemented practical analysis when your position is live. In addition, you should know when to close it and the indicators to look out for on the horizon that could signal good buying and selling opportunities. 

Like anything in life, success doesn’t come overnight. It takes years of learning and practice. It usually involves losing money before you begin to make a profit. Any professional will tell you this is all part of the learning curve. 

Once you accept that these factors are in play, you will understand that a journey to trade crypto doesn’t involve shortcuts. On the contrary, if you can stomach the volatility and understand the assets, you are immediately in a better position than other novices.

Categories
Trading Platforms & Tools

Understanding Japanese Candlesticks (And Why They Are Awesome)

Japanese candlesticks work across various markets like crypto, forex, options and metals. Yet, they are more popular with forex traders who use them with countless indicators and patterns. We’ll look at trading Japanese candlesticks in more detail here.

Introduction

Although traders can use things like bar charts, line charts and Heikin Ashi, candlesticks are the most versatile. A single or a few candles offer powerful information on the psychology of buyers and sellers.

Image of Japanese candlesticks and its creator

Japanese candlesticks have roots in the 18th century from an unlikely market: rice. Munehisa Homma, a Japanese rice merchant, is regarded as the creator of this charting style.

It wasn’t until 1991, with the release of the Steve Nison book Japanese Candlestick Charting Techniques, that candlesticks became popular. Nowadays, you can find them on all mainstream trading platforms like MT4, cTrader, TradingView, NinjaTrader and many others.

Japanese candlesticks work across various markets like crypto, forex, options and metals. Yet, they are more popular with forex traders who use them with countless indicators and patterns.

So, let’s look at trading Japanese candlesticks in more detail.

What is Japanese candlestick charting? The anatomy of Japanese candle sticks

Japanese candle stick chart

Japanese candlesticks are a type of detailed color-based price chart borrowing elements from the bar chart. They come in various body shapes and sizes, which traders use for predicting price movements.

In their basic form, Japanese candlesticks show the open, close, low and high prices:

Anatomy of Japanese candlestick charting

Traders generally use green (or white) for bullish candles and red (or black) for bearish ones. Of course, you can alter these colours to suit your preferences.

The open represents the candle’s original formation, the price where a particular market has opened in a session. Of course, the close signifies the end price of that trading period. The candle will fluctuate, depending on market activity, to form its lowest and highest points.

We refer to the coloured of a candle stick as the ‘body.’ The upper or lower parts of the candle are called the ‘wick,’ ‘shadow’, or ‘tail.’

Japanese candlesticks are effective because they quickly provide the four most important price points. We can derive several meanings by looking at the size of the body in relation to the wick. For instance, 

  • A candle with a little wick suggests dominance and the likelihood of it continuing in the next session.
  • Candles with long wicks and small bodies are the first clues of a potential reversal.

Most candlestick patterns are derived from this theory. 

Of course, another reason for the popularity of candlesticks is aesthetics. Because these charts are easy on the eye, they enhance your overall trading experience and make charting more fun.

Finally, there are many, many interesting candle stick patterns (with quirky names) to learn and exploit.

Popular Japanese candlestick trading formations and patterns

Let’s explore all the various traded candle stick formations and patterns with illustrations.

Marubozu

The Marubozu (Japanese for ‘bald hill’) is a candle frequently appearing in trending and fast-moving markets. It is characterised by a whole body with little to no wicks.

Marubozu candlesticks

A bullish Marubozu means that few or no sellers pushed the price below the open. The opposite is true for a bearish Marubozu. In either case, this suggests dominance. Therefore, in any trend, you’ll typically find a string of Marubozus. 

So, depending on the session, its appearance is a clue that the price will travel in the previous direction. Yet, you should note that the Marubozu is a natural occurrence in Japanese candlestick charting, not a pattern.

So, traders cannot always assume one Marubozu leads to another without looking at the market context.

Doji

A doji is a rare occurrence when trading Japanese candlesticks. The term ‘doji’ is Japanese for ‘same thing.’ This is because the open and close prices are near the exact level. Such an event produces a T-shaped or cross-shaped candle where the body is small while the wicks are long.

Dojis represent indecision. When they appear, it implies no dominant force between buyers and sellers. Therefore, the next candle may move in the previous direction or be the trigger for a reversal.

This is why Dojis are neutral patterns. Also, Dojis are more common on lower time frames because of the amount of price action. You’ll see less of these on higher charts. The best way of trading Dojis is using the Doji star formations.

We have four kinds of Dojis: the normal Doji, dragonfly Doji, gravestone Doji, and long-legged Doji. Although these are slightly different in appearance, they serve the same function.

Doji Japanese candles

Spinning top

A spinning top is a Japanese candle stick that looks similar to a Doji. The main exception is that it has a slightly bigger (but overall small) body than its counterpart. Also, while some traders consider the spinning top an indecision candle, some traders use it only for reversal signals.

Let’s look at an image of this candlestick before explaining how it works:

Spinning top candlesticks

The final colour of the spinning top is generally different from when the candle opened. For instance, with a bullish spinning top, the candle is often red at the beginning. This is because buyers and sellers push the price at considerable distances on either end during the session.

That’s what produces the long wick. However, the colour change is a slight but notable indication of a potentially new dominant force. If the colour stays the same, the trend will likely continue in its previous direction.

Pin bars

The pin bar is another intriguing set-up when looking at Japanese candlestick trading. It’s a candle with a small body (usually covering about 15 to 20% of the entire candle) and a long wick on the other side.

The body’s remaining end has a small tail or ‘Pinnochio nose,’ which is why it’s called a pin bar.

Pin bar candlesticks

Chartists like to regard the pin bar as a ‘rejection’ candlestick with a similar structure to a spinning top. The length of the wicks is more or less the same as its counterpart. Yet, the pin bar’s body is a little bigger.

So, it can offer a more accurate picture of the dominant force going forward based on the colour. 

Hammers

The ‘hammer’ goes by several names like the ‘hanging man’ and ‘shooting star.’ It looks similar to a pin bar; long wick (covering most of the candle) and a small body. The difference is that the body doesn’t have a ‘nose’ or a tiny tail.

Hammer Japanese candlesticks

There is always confusion between hammers and pin bars as both are rejection candle sticks. It boils down to individual preference. Some traders consider hammers as continuation signals while pin bars as reversal set-ups.

However, both hammers and pin bars can indicate either, depending on where and how they form. 

Engulfings

Now we’re looking at double Japanese candlestick formations. An engulfing consists of a bullish/bearish candle with another candle of a noticeably larger size. We say the latter candle is ‘engulfing’ the one next to it, given its superior proportion.

Engulfing Japanese candlesticks

Like other single-candle formations, an engulfing pattern can signal a reversal or continuation.

Harami

Think of the harami as a ‘reverse’ engulfing candle stick set-up. It is a two-candle pattern where the first candle is considerably bigger than the second. This is in contrast to an engulfing pattern where the roles are reversed.

Harami candlesticks

The name ‘harami’ is Japanese for pregnant, referencing how the pattern resembles a pregnant stomach. Like the engulfing, traders use the harami in trend and non-direct scenarios./

Evening and morning stars

The evening and morning star candlesticks are three-pronged reversal patterns (check out the Doji version here), combining elements of several formations. 

An evening star consists of a bullish candle, a bullish spinning top and a bearish candle that engulfs the previous two.

On the other hand, the morning star has a bearish candle, a bearish spinning top and a bullish candle engulfing the last two candles.

Evening and morning star Japanese candles

What makes evening and morning stars more compelling is the time they take to form. The extra engulfing candle offers confirmation that the price is more likely to reverse.

Three white soldiers and three black crows

Three white soldiers/black crows Japanese candlestick pattern

The other popular reversal formations of three candles are white soldiers and black crows.

The former appears after a downtrend, where you get three consecutive bullish candles. On the other, ‘three black crows’ form after an uptrend, where you see three successive bearish candles.

The main drawback of this pattern is that your stop loss will need to be wider, given the distance from the entry to the bottom swing low or top swing high.

Why using Japanese candlestick charts is the best

Japanese candlesticks borrow elements from line and bar charts. While line charts are simplistic, they only consider the open and close prices. Bar charts are slightly better because they consider the open, close, high and low.

Yet, their construction is bland since the bars look the same. Think of Japanese candles as the 3-D version of bar charts. They add variety or spice to the price and tell a story through various unique patterns. 

Excellent technical analysis needs the most visual approach, which candle sticks provide.

On the downside, some traders feel Japanese candlesticks offer too much information. This is why some prefer Heikin Ashi, which also uses colours. The main difference is that an average-based formula is applied to the chart, giving them a ‘smoother’ look.

Yet, this calculation leaves out the nuance and detail that candlesticks have. 

Drawbacks of Japanese candlestick charts

We’ve just mentioned one disadvantage of these charts. However, the biggest one to keep in mind is a problem with technical analysis generally: predictive ability. Candlesticks are not the be-all and end-all.

Everything in trading is about context. A pin bar or hammer alone is not a powerful signal. Yet, if you’re trading forex and combining it with support/resistance, or patterns like head and shoulders and double bottoms/tops, they become more effective.

Something else worth mentioning about candle stick patterns is the time frame. The higher the time frame, the more reliable they become. This is because of the concept of ‘noise.’ The lower charts show higher volatility, given that they reflect a greater number of candlesticks.

The depth of information makes it challenging to form an idea of the trend and can lead to false signals. Yet, the bigger time frames ‘smooth’ out the movements, making them more reliable.

Overall, with a volatile market like forex, noise is something to keep in mind regardless of whether you’re a scalper, day trader, swing trader or position trader

Conclusion

The type of chart traders use greatly impacts the quality of their trading decisions. While you can use many charts, it’s hard to beat Japanese candlesticks. They are easy to use, visually aesthetic and data-rich.

Remember that context and confluence are crucial if you’re looking to incorporate candle stick patterns.

Categories
Forex Trading

What Are The Risks Of Forex Trading?

If you are intrigued by the world of finance, it’s hard to escape the bombardment of adverts you receive regarding expert traders and how to trade forex. Unfortunately, however, not many of these adverts or experts will explain the risks involved.

Introduction

With so much money at stake in such a liquid market, there are some serious risks you need to be aware of in the world of forex trading. Today we will look at some of those risks and see how you can mitigate and protect yourself from the most common risks in the foreign currency market.

As a beginner, you have probably heard of the risks of forex trading and other associated risks within this market and other markets, such as stocks and commodities. It is a risky and volatile business. There are several vital factors you must be aware of, including specific, common risks of forex trading, such as

  • Currency risk
  • Liquidity risk
  • Leverage risk
  • Market volatility risk

We will examine these in more detail today and suggest tips for preventing yourself from being caught up in volatility. This includes short-term and long-term strategies.

Currency Risk

With so many foreign currencies trading over 24 hours, it can be easy to lose track of the movements of each currency. Currency risk encompasses this type of risk. A currency risk loss stems from severe fluctuations in the exchange rate you use.

A variety of different components can cause currency risk. Political risk is one of the main driving forces behind currency risk. If there is political instability within a country, this can cause the price of a currency to crash. In addition, economic risk is also something to factor in. 

However, these two components can often go hand in hand. Political instability is usually fueled by a dire economic performance, outlook or underlying economic problems such as mass unemployment. Economic and political risks are serious risks of forex trading and tend to go hand in hand. 

Although some central bank policies can cause the price of a currency to fluctuate on its own, rarely, these factors won’t combine to create a volatile currency risk situation. Risk in forex trading can be mitigated more efficiently when you know the indicators to look out for too.

Liquidity Risk

Liquidity risk occurs when traders cannot easily convert their position into cash. For example, the forex market sees the most volume compared to other markets like stocks and cryptocurrency. Therefore, you likely see more issues with liquidity in these markets, cryptocurrency especially.

If you are privy to how futures trading works, you will know that the risks are gigantic. In standard investing, your money will go up or down, but futures trading can result in your investment disappearing completely. Futures trading accelerates your investment, in theory, it can explode in value, but it can also depreciate rapidly.

In forex, there are a few examples of enormous successful trades. For example, George Soros made hundreds of millions of dollars when he shorted the GBP during Black Wednesday in 1992. 

The most traded forex pairings revolve around the US Dollar and other major world economies. Therefore, liquidity is rarely an issue in forex. If you are trading lesser-known currencies in emerging economies, this is one of many risks of forex trading. With lesser-known economies, it has the risk of becoming far more prevalent. However, it is scarce you would witness liquidity issues when trading forex, on the whole.

Leverage Risk

As discussed in today’s article, leverage risk (futures trading) is the most volatile way to trade any asset. In markets such as cryptocurrency, futures trading involves trading the most volatile asset with the most volatile instrument. The results can be disastrous. 

You must ensure that you invest with capital you can afford to lose. Of course, nobody wants to lose money, but if you find yourself in a worst-case scenario where your trade has gone badly, you want to ensure it doesn’t put you into financial difficulty.

Trading with leverage and overleveraging can accelerate these losses, so you need to be extremely careful and try to avoid this method if you can. As a beginner, avoiding this type of trade is highly recommended. In forex, you can use a leverage of up to 25:1. This means you can get liquidated quickly. In some currency pairs, you can use even higher leverage, so the risks of forex trading are amplified if you don’t know what you’re doing.

One way to mitigate this risk is by employing practical risk management tools and advice. This can range from dollar cost averaging (where you buy your asset on the way down to lower your average entry price) to implementing stop loss and take profit measures. 

Too often, traders, especially beginner traders, will need to set effective places to make a profit. But conversely, they will not have a reasonable limit to exit their trade if it doesn’t hit their chosen price and begins to drop dramatically. Having plans to help you manage this leveraged risk could be the difference between a steep learning curve and liquidating all your money.

Market Volatility

As we segue from the point made in the final paragraph of the previous section, market volatility can often be the risk that catches a lot of traders out. However, even experienced traders with multiple years of experience operating in the market intimately know the dangers of forex trading. 

Volatility can catch any trader out. Professionals will have a better strategy to protect themselves in a tough market retrace. However, there’s no way of predicting when an event on the cards will cause significant volatility.

How Risky Is Forex Trading?

All markets are risky; depending on how much due diligence you perform and how well you understand the market, you can minimise the trading risks you encounter. For example, with trillion dollars worth of currency traded over 24 hours, forex trading risks are considerable.

However, as far as it squares up against its counterparts, forex is not considered as risky as cryptocurrency trading. Cryptocurrency is the most volatile market as it hasn’t got the same specific regulations you can find in stocks, commodities and forex. You can use bots to help you trade forex, which enables you to establish good buy and sell points. However, this doesn’t mean you will turn a profit. 

Forex trading risks can vary in severity. One of the critical risks of forex trading that you need to be aware of is needing to understand the news and how it moves the market. Although all calls are affected by the information, due to the 24/7 interconnected nature of forex, it can be more susceptible to specific economic and international news.

As we touched on earlier, political instability currency risk is what to look for when it comes to foreign currency trading. This is one of several risks to be wary of.

How To Manage The Risks Of Forex Trading

While you can learn dozens of techniques to assist you in trading forex, managing any trading risks is a universal set of criteria. Even legendary traders such as Warren Buffett implement effective risk management strategies to shield themselves from serious market volatility.

As we have already discussed, risk management is critical in any market. For example, you can choose to dollar cost average or set up take profit and stop loss limits to ensure that you aren’t holding your chosen asset for too long. 

You can learn how chart patterns form and which ones to look out for, which can help complement your trading. There are a variety of different chart formations that professional traders use, such as

Diversify Your Assets

Many traders will have their favourite market or a market where they hold most of their assets. However, professional traders will often have a wide range of diverse assets, which can help protect you in the event of a market downturn in one specific asset class. 

In the event of a stock market crash, if you hold other assets, you are in a position where you are better equipped to insulate yourself from financial loss. One example of a proven hedge against economic turbulence is when investors purchase gold to counteract inflation

Only Use Instruments You Are Familiar With

When you’re first finding your feet in the forex market, it can be intimidating. However, using methods such as swing trading, novice traders will learn how the market works without exposing themselves to too much risk. 

However, as we discussed earlier, specialist trading tools such as futures trading and other tools many professional traders implement, such as options trading, are also risky for a beginner.

Risks of forex trading don’t just mean specific tools once you have entered your trade. There are just as many risks when preparing to enter the market. These include timing your entry and the devices you use. Professional traders also use spreads to hedge their forex trades.

Don’t just have your focus on one specific area of knowledge either. You can find guides from people on social media, YouTube or online courses, but it is always best to supplement your understanding with proven literature on the topic as well. Even though you can find a lot of good information and resources online, finding books written by proven professionals with decades of experience will help bolster your knowledge. 

Conclusion

The critical thing to remember when discussing the risks of forex trading is to remember that it is nowhere near as complicated as some of the methods used to understand how charts move. You can spend months or years studying charts, but it doesn’t mean you are guaranteed to make a profit. If it were as easy as studying charts, everybody would be doing it, surely?

Effective risk management is constructed of two things

  1. Understand the risks of forex trading
  2. Learn how to manage those risks properly

Today we have provided you with a practical guide to navigate these markets. Still, each trader or investor will have their own strategy, and you must settle on one you are comfortable with before you put your capital at risk. 

Categories
Forex Trading

Must-Have Forex Trading Tools | Best Tools For Trading Profitably

Fortunately, most forex trading tools are freely available online and easy to use. Most tools don’t provide buy or sell signals, but this doesn’t mean they are not worth using. The point is to offer insights and data not available on your chart. Some tools help with managing your risk, knowing when the most anticipated news will be released, and observing your long-term performance.

Introduction

Winston Churchill once said, “Give us the tools, and we will finish the job.” And what’s the job of a forex trader? Finding opportunities to net some pips and increase the equity curve! The better your forex tools are, the higher the chances of achieving consistent success.

Fortunately, most forex trading tools are freely available online and easy to use. Most tools don’t provide buy or sell signals, but this doesn’t mean they are not worth using. The point is to offer insights and data not available on your chart.

Some tools help with managing your risk, knowing when the most anticipated news will be released, and observing your long-term performance.

Let’s also remember that a trader is also an instrument. This means that your mind and skills must always be sharp every time you engage with the markets.

So, let’s look at the must-have forex tools for trading and why they are necessary for traders. 

List of useful tools for forex trading (and how they work)

Without further ado, let’s get straight into it.

Charting software

Image of a charting software trading tool

It makes sense to begin this list by speaking about charting software. This is usually the first trading tool traders learn about when starting. One of the main jobs of charting software is to allow traders to place orders through their connected broker

The second crucial aspect is analysis. The best trading platforms will have a suite of indicators like moving averages and stochastics, along with graphical additions like Fibonacci and ways to draw numerous chart patterns.

The more forex trading tools the software has, the better. It’s all about enhancing the experience and ensuring you can complete the best analysis possible.

Also, charting software helps traders stream live prices across numerous non-FX markets like crypto and metals

Most people start using MT4 or MT5 as these are the most popular in forex (check out our guide comparing the two here).

However, once you get more experienced, you’ll realise there are more advanced platforms like cTrader, NinjaTrader and TradingView. While a monthly subscription may be required, it is worth considering once you start making profits. 

Trading calculators

We know that forex is a math-based game of risk and money management. So, we have to use a range of calculators when making charting decisions. Fortunately, these forex trading tools are freely available online from countless broker and other third-party sites.

Let’s look at them in more detail.

  • Position size calculator

This is the most crucial calculator when it comes to trader tools. Proper position sizing is the make or break of ensuring comfortable monetary risk. Unfortunately, many traders use any lot size without realising that the wrong one can quickly lead them to a margin call.

Image of a position size forex trading tool

When trading any forex pair, you buy or sell particular units of the base currency. For instance, the base currency in USD/JPY is USD. So a buy order here would represent purchasing a certain amount of US dollars for Japanese Yen, while a sell order would mean selling a specific amount of the Yen for the US dollar.

We measure these units according to contract or lot sizes, for which we have four:

– Standard (1 lot, 100 000 units)

– Mini (0.10 lots, 10 000 units)

– Micro (0.01 lots, 1000 units)

– Nano (0.001 lots, 100 units)

Each unit for every pair has a quantifiable monetary value (for more info, check out our guide on pips). For most calculators, the only information you need is the pair, account size, percentage of account risked, and stop loss distance. 

You should use a position size calculator before EVERY position you take.

  • Margin calculator

We know that forex is trading on high margin, which can lead to substantial losses. Therefore, a margin calculator determines the precise margin you need to open a trade on a particular market. Why is this necessary?

Using too much leverage can increase the chances of blowing your account. Also, it is possible to use a larger lot size than what is available in your balance.

Image of a margin calculator trading tool

The margin calculator does a similar job to a position size calculator. The main differences are that it considers your leverage ratio in relation to the traded pair.

This results in the dollar (or currency equivalent) value of how much money you need to open a specific lot size.

  • Pip calculator
Image of a margin calculator trading tool

A pip calculator is also quite helpful when looking at forex trading tools. In forex, we measure price distances in pips. Only a few pairs have standard pip values. It takes some time to work out the others through pen and paper. 

This is why a pip calculator can speed up the process. There are several reasons for using this trading tool. 

Firstly, it is necessary to track price changes. Traders need to measure these with the highest accuracy. So, a calculator helps us express pips in the quickest way possible.

The second benefit is that you can calculate the dollar value of spreads. Although spreads in forex are quite low, some traders like to compare them across brokers for pricier markets like exotic pairs.

The final benefit of pip calculators as forex trading tools is quantifying profits and losses. For instance, when we look at risk-to-reward ratios, we need to know the value of our stop loss and profit target in pips to gain a true reflection.

Although trading platforms provide pip values for these things, a pip calculator is useful in planning.

  • Profit calculator

The profit calculator has a similar function to a pip calculator. The main difference is that you can add the open and close prices for a particular trade. Hence, it is more effective in helping traders work out their exact loss and profit amounts before entering a position.

Using the pair, lot size and base currency, this calculator computes the difference between the entry and exit prices and multiplies it by the pip value.

Image of a profit calculator trader tool
  • Swap calculator

This forex tool primarily applies to swing traders and position traders rather than scalpers and day traders. A swap (or rollover) is interest that traders pay or are credited with for holding a trade overnight. 

The amount of rollover depends on the interest rate differential between two currencies. This is where a swap calculator excels as a forex trading tool. You can use it before any trade you plan to hold for several days.

This is where you can see how much interest you’ll pay or receive depending on the traded pair. Swap calculators are available with individual brokers because the long/short swap rates will differ depending on the service provider.

Another useful addition for swap forex trading tools is the swap comparison tables you can find with sites like Myfxbook and Forex Church.

Here, you can compare swaps across multiple brokers. This is helpful for carry trading, where traders look to gain the most interest by holding their positions for the longest time.

Image of a swap comparison forex tool

Journal

Journals are some of the under-utilized forex trading tools. However, it is a professional method of logging your activity in the markets. 

A journal is a way of record-keeping all your positions to help monitor your performance, fix errors and maintain consistency.

Think of it like a database of your orders to keep you on track. Trading journals are not only about numbers. They make traders accountable for emotional discipline based on their trading plan.

Your average journal will contain the following information (but not limited to):

~ The date and time when a new position has been opened

~ The traded pair of the executed order

~ The direction of the trade, either buy or sell

~ The position size in lots

~ The entry price, stop loss, and the exit price

~ The outcome of the trade, including whether it was a loss or profit and how much

~ Reasons for taking a trade

There are two ways of journaling: through spreadsheets or dedicated journaling software. While the manual is free, it is time-consuming. Also, it is more challenging to input other valuable data without mathematical or complex knowledge.

So, the best way to journal as a trader tool is by using software like Edgewonk, TraderSync, and Tradervue.

Image of a dashboard from the Edgewonk journaling trading tool

Here, you can export the data from your trading platform or input it manually. However, this software can provide other powerful insights or metrics like:

  • Drawdown
  • Average wins/loss
  • Expectancy
  • R-multiple
  • Profit factor

The only downside is you need to purchase this software for a yearly subscription. Yet, if you can afford it, a journal is one of the best forex trading tools to have.

Trade result analyzers

These analytics platforms share some functionality with journals when presenting advanced P&L statistics. However, the main job of a result analyzer is to show your results in real-time.

Image of a result analyzer trading tool from FX Blue

If you’re profitable, you can present this data to other investors or companies that may be interested in providing funding. Some traders can use these services to run trading competitions where it is simple to view the true top performers. 

Also, like a journal, result analyzers offer a snapshot of your performance and areas of potential.

Using these forex trading tools is straightforward. You simply connect your account with a read-only password. 

The software will present your performance and update it in real time as you execute new positions. The best part is that you cannot fake the data from your account, offering much-needed transparency.

Popular analyzers include Myfxbook, FX Blue and Tradervue, among others.

Economic calendar

Image of an economic calendar trader tool

This free online trading tool shows daily scheduled economic releases across different countries. You can find economic calendars on various finance, trading or investing-related websites like Investing.com, Myfxbook, Dailyfx and FXStreet.

They work on a simple scale of low, medium or high-impact events, with traders paying the most attention to the latter. Low and medium-impact releases rarely make a difference to the price. Yet, high-impact news, like interest rates and job figures, usually generates volatility and powerful movements.

Economic calendars are non-negotiables when it comes to trading the news. But even if you are not doing so, they are helpful in anticipating potentially volatile movements. 

For instance, interest rates can cause the markets to go haywire. As a result, it’s not always the best time to trade. So, some traders use the economic calendar as a warning to avoid such conditions.

Short-term traders use this forex tool to time their positions based on the anticipated effect. A negative result is expected to drive the price of a pair down, while we hope a positive result will have the opposite effect.

Currency strength meter

Currency strength meters are forex trading tools that provide a visual overview of weak and strong currencies across various time frames. They use the real-time exchange rates of different currencies and aggregate them against each other using a specific weighting.

Image of a currency strength meter forex tool

Conclusion

Of course, there are many other forex trading tools you can use. But the ones we have provided here should be sufficient for all traders. Also, this isn’t to say that you should use all these tools for trading. 

One of the secrets to trading success is keeping things simple. So, add a tool only if it provides a valuable edge.

Finally, we mentioned traders themselves are their own tools. This means that you must be pretty skilled and know your way around a chart. Your mentality and experience ultimately determine the quality of your trading decisions.

So, use yourself, along with these forex trading tools, to get the job done!

Categories
Forex Trading

Top Forex Reversal Patterns To Have In Your Strategy

Ed Seykota once said, “The trend is your friend until the end when it bends.” This is where candle reversal patterns come into the picture. Although it is necessary to spot a trend, it’s equally crucial to identify when it is about to finish. Fortunately, we have many forex reversal candlestick patterns to exploit.

Introduction

Whether it is forex, crypto, metals or options, traders are looking to ride trends. Trend-following is sticking to the most dominant force in any market. 

Even the legendary Jesse Livermore once said, “Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.”

However, Ed Seykota has said, “The trend is your friend until the end when it bends.” This is where candle reversal patterns come into the picture.

Although it is necessary to spot a trend, it’s equally crucial to identify when it is about to finish. Fortunately, we have many forex reversal candlestick patterns to exploit. Without further ado, let’s take a look.

(Side note: We covered overall chart patterns here if you’re interested, looking at trend continuations and reversals.)

What are reversal patterns?

A reversal pattern is any chart formation that signals the likelihood of the price moving in a counter direction to a trend. It is generally much harder to trade reversals than to stick with the trend.

Think of it like trying to stop a moving train. Trends have the strongest momentum behind them, meaning they are stubborn in changing direction. Also, it is sometimes challenging to tell whether a trend retracement will become something more.

Yet, through intricate formations, we can get early clues. We primarily have two types of reversal set-ups: chart reversal patterns and candlestick reversal patterns. 

Chart-based formations are more reliable because they take longer to form, offering greater market context.

Forex candlestick reversal patterns consist of a uniquely-shaped, individual candle or a series of 2-3 candles. Because these can form anywhere, you need more confirmation when trading them. 

Best chart reversal patterns

Let’s look at the top chart-based reversal formations with real examples and entry parameters.

Head and shoulders

The head and shoulders reversal pattern is a fan favourite. It’s an interesting formation consisting of several parts. As you may have guessed, the name comes from how the set-up resembles the human head and shoulders.

This reversal pattern consists of three successive peaks, where the central peak (or the ‘head’) is higher than the other peaks of relatively the same height. A ‘neckline’ or breakout resistance zone connects these swing highs.

Of course, an inverse version of the head and shoulders exists, where everything is the opposite.

Illustration of the head & shoulders reversal pattern

Entry point: once the price breaks the neckline

Stop loss: at the highest shoulder

Profit target: distance from the head to the neckline
The chart below shows this reversal pattern in better detail. Here, we have marked the entry point (including a ‘secret‘ entry technique) and other parameters.

Chart example of the head & shoulders reversal pattern

Wedges

These are reversal patterns that look similar to triangles. With wedges the price converges between two diagonal lines. The result is a thinner, cone-like triangular shape.

Traders use wedges as continuation and reversal patterns. We have a rising wedge, signalling a bearish reversal, and a falling wedge, suggesting a bullish reversal.

Illustration of the wedge reversal patterns

Ensure that you connect at least swing highs/lows when drawing wedges. Here are the trading parameters below.

Entry point: once the price breaks out of the trend line

Stop loss: below/above the nearest swing low/high

Profit target: the height of the wedge

Let’s look at a real chart example of a falling wedge.

Chart example of the falling wedge reversal pattern

Double bottoms and double tops

Double bottoms and double tops are reversal candlesticks with a similar structure to the head and shoulders (but without the head). The formation consists of two consecutive swing highs/lows of equal depth.

Each of these reach a particular support (for double bottoms) or resistance level (for double tops). The price will move in the opposite direction to break the ‘neckline,’ the entry point of this set-up.

A simple way to remember these reversal patterns is that the double bottom is shaped like a W, while the double top is shaped like an M.

Illustration of the double bottom/top reversal pattern

Entry point: once the price breaks out of the neckline

Stop loss: below/above the nearest swing low/high

Profit target: the distance from the swing/low to the neckline.

Like head and shoulders reversal patterns, you can use an alternative entry technique. Once the market has broken out of the neckline, some traders wait for a 50% Fibonacci retracement. This allows for a better entry, meaning more pips in profit.

Below is a picture of this set-up in action.

Chart example of the double bottom reversal pattern

Best reversal candlestick reversal patterns

As briefly mentioned, it’s always best to combine forex reversal candlestick patterns with something else. Here, we’re referring to confluence or elements that align with these formations on the chart; the more, the better.

For instance, this can be:

Also, another tip is to trade on higher time frames (from the H4 chart) for the best chance of success.

Pin bars

A pin bar is an intriguing reversal candlestick formation with a pin-like appearance that has a long wick and a small body. The wick stands out and makes up at least 75% of the candle. So, how does it form? 

The pin bar is a classic example of rejection. During its formation, the candle appears like a regular full-bodied bullish or bearish candle. However, the price eventually moves sharply in the other direction, with the close near the open. 

This is what gives it a strikingly long wick and petite body.

Illustration of the pin bar candlestick reversal pattern

The example below will look at the pin bar reverse candlestick on a real chart, along with two confluent elements. Here, we are looking at the daily chart of CAD/JPY, where we see a nice bullish pin bar at an obvious support level.

Chart example of the pin bar reversal pattern

Also, a bullish divergence formed on the RSI, offering a second confirmation factor. Generally, traders enter pin bar reversal patterns by waiting for the candle to close. It’s crucial to enter after the set-up has formed completely to prevent a false signal. As with the other formations, you can wait for a 50% Fib entry if you missed the first entry. 

The stop loss would go beneath the low. There is no set profit target for the pin bar. Yet, experts recommend aiming for a 2:1 risk-to-reward.

Engulfing candles

Engulfing candlestick reversals consist of a bullish/bearish candle followed by another of a much larger size closing in the opposite direction. The second candle is said to ‘engulf’ the previous, suggesting that one group of participants has become more prominent than the other.

The image below shows the bullish and bearish versions of this reversal pattern.

Engulfing patterns illustrations

Of course, bullish candlestick reversals happen during downtrends, while bearish candlestick reversals occur during uptrends.

Let’s explore this pattern in a real-life setting below. We see an excellent bearish engulfing set-up on a clear daily resistance zone (orange rectangle). Here, the stop loss would go above the high. As with the last example, aim for a minimum of 2:1 profit.

Chart example with engulfing reversal candlesticks

Conclusion

Although trading reversal patterns is considered riskier than trend trading, they offer higher profit potential. This is because you are entering at the earliest stage of the move in a pair. You know what they say: the early bird catches the worm. 


Remember, always use a stop loss for effective money management because these patterns aren’t foolproof.

Categories
Forex Trading

MT4 Forex Trading | The Ultimate Guide To Using MetaTrader 4

MT4 is like an aged but reliable car that doesn’t have mechanical issues and does the job. It’s a platform with age and popularity, used by everyone from newbies and experienced folk. Therefore, it is simple to become an MT4 trader thanks to its user-friendliness and simplicity.

Introduction

They say old is gold, and that’s what trading with MT4 is. MT4 is like an aged but reliable car that doesn’t have mechanical issues and does the job.

It’s a platform with age and popularity, used by everyone from newbies and experienced folk. Therefore, it is simple to become an MT4 trader thanks to its user-friendliness and simplicity.

But if this is your first time exploring the MT4 platform, consider this article a simplified but helpful Meta Trader 4 tutorial. Let’s get started!

What is MT4?

MT4 logo

MetaTrader 4 is a charting platform first released in July 2005 by MetaQuotes, a then-Russian (now Cyprus-based) software corporation. As the name suggests, MT4 is the company’s fourth product in the MetaTrader series (click here for a comparison between it and MT5).

It is their most successful and popular trading software known for its simplicity, reliability and ease of creating expert advisors (EAs) or robots.

Although trading on MT4 is heavily associated with forex, you can trade many other instruments, depending on the broker. These include stocks, indices, bonds, precious metals, commodities, and crypto (check out our guide on trading crypto on MT4 here).

MetaTrader 4 works in browser, web, and mobile formats on Windows, Android, Linux, and Huawei operating systems. While MT4 doesn’t run natively on Mac OS, a third-party platform like Wine and PlayOnMac does the job.

So, how does MetaTrader 4 work? Understanding MT4 is simple. It is a charting software licensed to CFD brokers. Therefore, you must open a brokerage account with a supported financial services company to trade MT4.

The broker’s entire suite of instruments will then be available for MT4 traders to stream charts, place orders and manage their accounts.

If you’re asking how to withdraw money from MT4, understand that it isn’t possible on the platform. Only the broker can allow this on the account you created, which you can access.

MT4 trading platform features

Main chart interface of the MT4 trading platform.

The table below is an overview of MetaTrader’s 4 main features. We’ll only go through the most significant in more detail after that.

Minimum system requirementsAny 32-bit Intel-based processor with at least 1.7 GHz frequency (or equivalent) and 256MB RAM Windows XP (or equivalent)
Trading instrumentsUp to 1024
Programming languageMQL4
Depth of market (DOM)No
Time-frames 9
Chart types3
Order fill policyFill or kill
Order execution types6
Hedging/nettingYes/No
Built-in indicators30
Graphical objects19
Embedded community chatNo
Email system No attachment 
Built-in economic calendarNo

Time frames

When exploring how to use MT4, you will see only nine time frames exist:

  • M1 (1 minute)
  • M5 (5 minutes)
  • M15 (15 minutes) 
  • M30 (30 minutes)
  • H1 (1 hour)
  • H4 (4 hours)
  • D1 (daily) 
  • W1 (weekly)
  • MN (monthly)

These chart references are sufficient for all traders. Scalpers and day traders prefer time frames from M1 to M30 since they present more price action and short-term opportunities. The downside is that these charts have the most noise.

On the other hand, swing traders and position traders generally view time frames from H1 to MN. Although they offer fewer set-ups, they have fewer erratic movements and are, therefore, ‘cleaner.’

The default nine time frames appear just above the chart. When you right-click next to the dotted lines at the nearest chart, this is where you can add or remove time frames (by going to ‘Customize’).

List of time frames on MT4

Chart types

MetaTrader 4 simply has three kinds of charts: bar, candlestick, and line. Of course, candlestick charts are the most popular and all you’ll usually need. Advanced charts like Heikin Ashi are not available, even on MT5. 

You can access the chart types at the toolbar near the top of your screen. A shortcut is to click Alt + 1 (for bars), Alt + 2 (for candlesticks) and Alt + 3 (for line).

Order fill policy

Here, we refer to how the MT4 forex platform handles your executed order. Fortunately, the platform has a simple approach, the standard ‘Fill or Kill.’ This means that MT4 will fill your order at your chosen volume.

If you don’t have enough money (where the lot size is too high), no parts of the trade will go through, effectively ‘killing’ the order.

Order execution types

The MT4 platform has two live execution orders (market and instant) and four pending orders. The chosen live order depends on the broker. It is usually a default setting, but some accounts from that broker could have something different on the MT4 platform.

So, what’s the difference? Market execution is where the software executes at the market price regardless of volatility. It is typically the most preferred option because it’s faster. Yet, high volatility could result in a less (or more) favourable entry due to slippage.

Instant execution is where the MetaTrader 4 platform offers a requote if the order is executed during sharp price changes. Here, you can choose to accept or decline the new price. Although some traders like this option, it is slower.

The available pending orders (which only execute once the price meets a certain level) are: 

  • Buy stop: a pending order to execute a buy position at a level above the current price. For example, if the euro was trading at 1.1100, you may decide to have a buy stop at 1.1120.
  • Sell stop: a pending order to short at a lower level than the current value. For instance, if EUR/USD was trading at 1.1100, you could place a sell stop at 1.1098.
  • Buy limit: a pending order to buy at a price below the current one. For example, you could have a buy limit at 1.1098 if EUR/USD is trading at 1.1100. 
  • Sell limit: a pending order to sell at a price above the present one. For instance, you could have a sell limit at 1.1120 if GBP/USD is trading at 1.1100.

The image below demonstrates how these orders work visually to explore better how to trade in MetaTrader 4.

Pending orders on the MT4 platform.

Built-in Indicators

When trading MT4, you have access to 30 built-in indicators. Of course, you can add tons of custom ones, modify them or build your own. Indicators are the cornerstone of technical analysis, helping traders identify trends, momentum, volume, volatility and more.

While they are helpful in Meta4 trading, they are lagging tools, producing a signal after the fact. So, it’s crucial to combine extra charting or fundamental confirmation while using indicators.

Here is a list of the built-in indicators on the MT4 platform. 

TrendAverage Directional Movement Index, Bollinger Bands®, Envelopes, Ichimoku Kinko Hyo, Moving Average, Parabolic SAR, Standard Deviation
OscillatorsAverage True Range, Bears Power, Bulls Power, Commodity Channel Index, DeMarker, Force Index, MACD, Momentum, Moving Average of Oscillator, Relative Strength Index, Relative Vigor Index, Stochastic Oscillator, Williams’ Percent Range
VolumeAccumulation/ Distribution, Money Flow Index, On Balance Volume, Volumes
Bill WilliamsAccelerator Oscillator, Alligator, Awesome Oscillator, Fractals, Gator Oscillator, Market Facilitation Index

Graphical objects

There are 19 graphical objects on the MT4 trading platform, which is sufficient for basic charting. Your and channel-based objects help with drawing many chart patterns like flags, head and shoulders, triangles, etc.

More advanced chartists use Gann and Fibonacci. You can also use:

  • Arrows – for marking particular points on a chart
  • Text – for adding comments on a chart

Here is a complete list of graphical objects on the Meta4 trading software”

LineVertical, Horizontal, Trend, Trendline by Angle
ChannelEquidistant, Linear Regression, Standard Deviation Channel, Cycle Lines, Andrews’ Pitchfork
GannLine, Fan, Grid
FibonacciRetracement, Arcs, Expansion, Channel
ShapesRectangle, Triangle, Ellipse
ArrowsThumbs Up, Thumbs Down, Arrow Up, Arrow Down, Stop Sign, Check Sign, Left Price Label, Right Price Label

How to use MetaTrader 4: getting started

The following sections outline the features you’ll use when forex trading with MetaTrader 4. 

Downloading and installing MT4

So, how to setup MetaTrader 4? The first step most traders follow is finding a supported broker, and downloading from their website. This is a better option because you can also create a live or demo account with that broker simultaneously. 

Alternatively, you can also go to MT4’s website and download from there (but you will still need a broker account).

Once downloaded, follow all the prompts and input your account details. You can have multiple accounts from different brokers on one MT4 platform. When opening an individual account, go to View > Navigator (or Ctrl + N).

A window appears that displays all the connected MT4 accounts based on different servers. Click on the plus sign to show the registered names, and double-click on your preferred one, bringing up this screen below. This is how you can log in to different accounts. 

Account login screen for MT 4 platform

(Another option is going to File > Login to Trade Account, where you can select your account from the drop-down list).

Using the terminal

The terminal is one of the most crucial parts of learning how to trade with MetaTrader 4. It consists of a multifunctional window to view your trading activity, read news, manage alerts, look at your account history, and more.

Truthfully, most traders only use the ‘Trade’ and ‘Account History’ sections. Accessing the terminal while trading on MT4 is simple. It can appear in a simplified form at the bottom of your screen:

A simplified window of the terminal on the Meta4 trading platform

You need to double-click at the bottom section to open up the terminal.

Note: When you close it (by clicking the X), the shortcut is Ctrl + T to open it up again. Or, go to View > Terminal.

The image below displays the entire terminal, always displaying your positions (if any). You can adjust how much space this tab covers your screen by sizing it up or down on its edges.

The full window of the terminal on the Meta4 trading platform

The ‘Trade’ tab is what always pops up on MetaTrader 4.0. When you have running positions, you can see the:

  • Order number
  • Time when the position was placed
  • Type of trade (buy or sell)
  • Size (number of lots)
  • Symbol (the market provided)
  • Entry price
  • S/L (stop loss) and T/P (take profit)
  • T/P price (if you have trailed your stop)
  • Swap
  • Profit (shows your floating P&L)

Furthermore, the other aspects you need to know about the MT4 platform terminal are:

  • Balance (your account balance)
  • Equity (your balance and floating P&L)
  • Margin (the amount of margin used with your current orders)
  • Free margin (equity – margin)
  • Margin level: the overall percentage of your margin

You can edit your orders on the terminal in two ways. The first is going on the chart and right-clicking on dotted lines aligning with your position’s entry price. Alternatively, you can right-click on the order.

Here, a pop-up screen will show; go to ‘Modify or Delete Order’: 

Order screen on MetaTrader 4

Here, you can modify your stop loss and take profit price. To automatically close an order, go to the Profit tab and click on the cross.

Setting up profiles and templates

Profiles and templates are useful features for understanding MetaTrader 4. A profile is a way of grouping multiple chart settings across different instruments and preferences. 

For example, you might be trading forex pairs and use charts with a white background. Simultaneously, you may prefer charts with a black background when observing crypto markets. So, you can create a profile (say ‘forex’ and ‘crypto’) for each where you have saved these settings.

So, for instance, when you open the forex MT4 profile, the MT4 platform will open up all the markets that were saved with your chosen settings. The downside is that you must update the profile when making additions or removals.

To create a new profile, go to File > Profile > Save As. MetaTrader 4 will show the following screen where you can type the profile name.

Profile setting on MT4

After saving, you go to File > Profile, where you will see it on the list.

A template is a way of saving indicator and chart-specific settings. A common method of trading on MT4 with this feature is maintaining the same color scheme and indicator across the board. So, for instance, you can create a template with blue and red candles along with the RSI.

The MT4 platform will make your charts appear with these settings whenever you open this template on any market. For our example, we’ve named a template ‘Colored,’ with blue and red candles and a red-colored RSI.

The shortcut for accessing this template would be right-clicking on the chart, going to ‘Template’ and clicking on your preferred saved option (the long way is going to Charts > Templates).

Opening of templates on MetaTrader 4

You can also apply a template to a specific instrument where you have created particular drawings, added various graphical objects, indicators, etc. But note that these settings will only populate when you’ve opened that market, not in others.

Adding and removing indicator

As a technical analyst, you’ll use indicators frequently while mastering how to trade with Meta Trader 4. Doing this is quite simple. At the top of your screen, go to the ‘Insert’ tab, then ‘Indicators.’ This will display a list of MT4’s built-in indicators. 

Opening of indicators when trading on MT4

Let’s add moving averages for our MT4 trading example, the RSi and Bollinger Bands. We would go through the same step (Insert > Indicators) to add each indicator. Before adding each tool, the MT4 platform allows you to edit various parameters.

Indicator settings when trading with MT4

When you wish to remove or edit indicators, simply click Ctrl + I, and a window opens up with these options.

Removal/editing of indicators on MetaTrader 4

Opening and closing charts

When mastering how to use MT4, you’ll be tinkering with charts. There are two ways to open a chart on this software. The first is going to File > New Chart, which will bring up all the available instruments from the connected broker.

Opening of charts on MetaTrader 4.0

The second option is going to the Market Watch: View > Market Watch (or Ctrl + M as the shortcut). Here, you can go to the instrument you want and drag it to the right-hand side. Note that this will replace the chart which was there previously.

Market Watch windown MT4

Tip: It’s common for the Market Watch section to have a few symbols when using a new account. Here, you just right-click and select ‘Show All,’ bringing up all the broker’s securities.

To close a chart, simply go to its name at the bottom left, right-click on that tab and select ‘Close’ (the shortcut is Ctrl + F4).

Setting up price alerts/notifications

Price alerts are useful when you are waiting for the market to reach a certain level but don’t have the time to watch your charts. Most traders prefer getting these notifications via the MT4 trading app.

Setting up alerts on the platform is straightforward. On the terminal, head to the ‘Alerts’ tab and right-click in the white space. This brings up the window below, where you can decide on your alert’s price, expiration date, and other parameters.

Opening of alerts on the Meta4 trading software

Once set, the alert will appear on your terminal (right-click for editing or deleting). Also, an arrow appears on the chart marking the price level. Whether you’re receiving the alerts via the app or mail, there are steps to follow so that your MT4 is synced up.

Executing an order

Opening a position on the MetaTrader 4 platform is straightforward. Firstly, right-click on the chart or market you wish to trade, select ‘Trading,’ then ‘New Order’ (F9 is the shortcut).

Executing an order when trading with MT4

Tip: The quicker alternative is using one-click trading, located at the chart’s top left corner. This feature automatically executes your order but doesn’t attach a stop loss nor take profit. Therefore, you must add a stop after the order is live.

Once you’ve clicked on ‘New Order,’ this screen pops up.

MetaTrader 4's order screen

For the purpose of this ‘how to set up MetaTrader 4’ guide, let’s assume we wanted to sell this market at 0.10, with an S/L at 1.34500 and a T/P at 1.35500.

Once this position is executed, your order (including its entry, S/L and T/P prices) will appear on the chart. Note that it also shows up on your terminal, where you can make edits.

How your executed order shows on MT4's chart and terminal

To change the S/L or T/P levels (or remove them), simply right-click on the order on the terminal. Here, you can open a new trade, modify or close the existing order, add a trailing stop, etc.

Modifying/deleting your order on MT4's terminal

Alternatively, you can go to the actual order on the chart by right-clicking on the dotted line. This brings up a tab where you are presented with similar options.

Adding a robot

Firstly, note that a legit MT4 trading EA has an ex4 extension and a source code file. Before downloading, locate the Experts folder (in your MetaTrader 4 folder) on your hard drive since this is where you’ll save the robot.

Alternatively, these are the steps to follow if you’ve saved the EA in another location:

  • Open the MT4 platform
  • Click File > Open Data Folder > MQL4 > Experts

This is the folder where you should move or copy the robot. Afterwards, restart the software. Open the Navigator window (Ctrl + N or View > Navigator), and go to the Expert Advisors tab. Here, you’ll see a list of the EA on your platform. 

Let’s say we wanted to open the Moving Averages EA for our example. All we’d do is drag it onto a chart, which brings up this screen (repeat this process if you need to make changes to the EA).

Adding a robot when trading with MT4

Sidenote: Ensure the ‘AutoTrading’ tab at the top is green (as highlighted in the image) to run the robot.

Conclusion: pros and cons of the MT4 trading platform

Needless to say, there are many more things you can do on this platform. However, this in-depth guide should be enough for you to learn how to setup MetaTrader 4 sufficiently. 

While not the most sophisticated charting software, everything is seamless. Let’s examine its pros and cons to summarise our forex trading MetaTrader 4 guide.

Pros:

  • Beginner-friendly; easy to use
  • Supported by the majority of forex brokers
  • Compatible with several third-party platforms like trade copiers, analytics platforms and journals
  • Works with old operating systems

Cons:

  • Less sophisticated compared to the likes of cTrader, NinjaTrader and TradingView
  • Has an outdated look
Categories
Uncategorized

How To Use Alligator Trading Strategy: Complete Guide

Did you want to trade forex, learn a little bit about the business of it and find out how chart analysis works? You may have been surprised at the level of study and how many types of chart formations there are. With our help, you will gain a clearer understanding of how they work. Today we will start with the alligator trading strategy.

Introduction

An alligator trading strategy may sound like a bizarre term. It can be a dizzying and humbling experience to enter the world of trading without knowing what any terms mean. Even the best traders in the world had to start somewhere and learn their trade. Usually, the best approach is through proven, well-sourced and highly-rated literature about your asset. While this is an ideal start, digesting online literature and speaking to traders who know the industry are two key things to consider.

Much like other chart formations such as candlestick formations, head and shoulder patterns and diamond chart patterns, an alligator chart is named after the shape it forms on an asset’s graph.

It isn’t specific to one asset, either. It could form a shape on a forex chart, a cryptocurrency chart or another type of chart, including commodities such as gold.

These terms may sound complex and challenging to get your head around, but much like anything in life, the anticipation is scarier than the practical execution. Today we will explain to you what an alligator trading strategy looks like. This includes

  • A stock alligator indicator
  • Alligator strategy forex
  • Alligator indicator strategy
  • Alligator technical indicator

That’s only part of what we will be discussing today. However, by the end of this page, we hope you will fully grasp the idea of an alligator trading strategy and how alligator trading plays out on a live trading desk.

Who Created The Alligator Trading Strategy?

The legendary trader Bill Williams, who sadly passed away in 2019, created the alligator trading strategy. He also developed the idea of several other strategies that professional traders still implement. Throughout his distinguished career, he authored many books about trading and was widely respected in the field.

With over half a century of experience in his expert fields of stocks and commodities, Bill Williams has left a lasting legacy in the trading world. The Bill Williams alligator indicator began to gain serious traction as the man who coined the theory had a decorated and esteemed history in the trading world. Even after his death, the alligator trading strategy is still widely discussed and used by analysts and traders alike.

Who Was Bill Williams?

Bill Williams was born in 1932 and gained expert qualifications in several fields. It was part of this education that allowed him a unique insight into trading. With degrees in psychology and engineering physics, he has identified many new pieces of chart analysis and strategies that professional traders have used for decades.

Williams began to cultivate the idea that strategies were based on human psychology much more so than any method derived from studying chart analysis or theory regarding a specific asset. By establishing that psychology played a leading role in this, Williams identified how this played out on a trading chart and how to execute your trade appropriately. Some traders even refer to this pattern as a William alligator indicator. 

He then went on to provide his knowledge to traders worldwide, visiting every continent and over 50 countries to give back the ability he discovered. As we discussed in our introduction, he had multiple best-sellers. The highlights of his collection were Trading Chaos (first and second editions) and New Trading Dimensions. 

Focussing on the considerable role that psychology plays in trading is now something that virtually every trader agrees with. The impact that negative emotions can have when it comes to trading is phenomenal. Tools that involve risk mitigation, such as automated take profit and stop loss limits and dollar cost averaging, are two ways to protect yourself when the market begins to take a turn.

Managing Risk

For several reasons, you must do ample research on the market you are investing in. First, if you don’t take the time and effort to use considerable resources to understand better the asset you are trading, this is a perilous game. Essentially, if you are investing in an asset you don’t understand, you are gambling.

Applying the risk mitigation tools we mentioned at the end of the previous paragraph is some of the key ways you can help protect yourself in severe market volatility.

What Is The Alligator Pattern?

When applying the alligator trading strategy to your investment strategy, it would be best to identify when a pattern has formed. Before we explain how you can use the alligator trading strategy to your advantage, we will show you what one looks like on a chart. 

Source: https://www.ig.com/en/trading-strategies/what-is-the-alligator-indicator-and-how-do-you-use-it-in-forex-t-210412

As you can see in the chart above, the alligator strategy takes shape in the most literal way. The alligator lips, teeth and jaw all form part of a moving average shape. Dozens of chart analyses take their name from how they shape up on a chart, and the alligator trading strategy is no different.

So What Is An Alligator Chart Indicator?

The alligator trading strategy is set at five, eight, and 13 periods. The indicator applies convergence-divergence indicators to establish effective points of trading. Once this pattern has been established, it is relatively straightforward to use the logic for the raw data. The lips perform the fastest turns, and the jaw performs the slowest turns.

It has proven to be a reliable indicator for decades. Many traders still rate the alligator trading strategy so highly because of how it works, irrespective of the asset class you are trading.

The fact that traders monitor various moving averages in this particular strategy shows that the research and analytical vision of Bill William’s alligator method compromised several different observations. It might seem obvious and not that much of a groundbreaking idea that psychology plays a more prominent role than initially thought. 

However, when Williams devised the alligator trading strategy, he was implementing psychological theory and mathematical analysis to effectively construct a model that traders could use to try and make a profit. Given that so many are still using the alligator trading strategy and we are still writing about it, we would say he devised a pretty solid strategy.

Alligator Indicator Forex

The buying and selling of foreign currencies are one of the biggest markets in the world. With trillions of dollars worth of activity every day, it is one of the most profitable and active asset markets anywhere in the world.

Regarding forex trading, the significant pairings stretch across multiple continents and dozens of countries. Although the primary currency pairings are between seven to ten of the biggest world economies, the majority of which are paired with the US Dollar, plenty of other currencies are also available.

Identifying which pairs reveal an emerging alligator pattern could be the difference between executing a solid, profitable trade and losing your initial investment. However, it is more complex. You could still lose your investment even with plenty of excellent chart analysis and a firm grip on what drives the market.

Because forex is a volatile market, several significant factors are at play, ranging from economic policy announcements to huge world events. Ensuring you are managing risk appropriately while taking on all of these variables will give you ample time to learn how the market works, how it reacts, and how to build a successful strategy that works for you.

Do All Alligator Forex Strategies Look The Same?

Your alligator forex strategy may look different to another trader. This doesn’t necessarily mean either of you is incorrect. The market can be ambiguous and unpredictable. As long as you can justify why you believe it will move in one way and appreciate the factors that cause these volatile swings, you will be thinking like a trader.

An alligator forex strategy may sound complex if you are starting as a beginner in the market. Learning how to identify how to use the alligator indicator successfully is a great first step. You have then completed a significant learning curve in how to conduct thorough and proper market analysis.

Alligator Stock Indicator

As we discussed in our previous section, if you identify the teeth, lips and jaw of the alligator trading strategy, you can effectively implement it across a range of assets. Many analysts and traders will often say that having a diversified portfolio is essential to shield yourself from bearing the brunt of one specific market downturn.

A stop loss is often considered a smart move to protect yourself in a market crash. Although some traders such as Warren Buffett disagree with the psychology behind stop losses. He believes it is a short-term strategy. However, for those of us not working with multi-billion dollar portfolios, mitigating risk is usually a good idea.

How Does An Alligator Forex Indicator Look On A Live Chart?

As a novice trader, how to read an alligator indicator on a forex chart might be a bit of a stretch. You must understand the market effectively before learning more about specific strategies. You can see an example of a forex indicator alligator on the chart below.

Source: https://forex-indicators.net/bill-williams/alligator-indicator 

As you can see, the chart looks the same. It is the shape that we need to pay close attention to instead of the asset. The asset price isn’t relevant as long as you can identify where the alligator chart forms.

Regarding stock trading, it can be easier than a forex pair for some. This is because you only deal with one specific asset and price. However, when it comes to forex trades, you will usually have to weigh the individual factors. Many things will drive the price and how both currencies will interact with each other on a global market. 

Some traders find it easier to trade stocks. Simply because you can buy the asset at one price and sell it at another (hopefully higher) price. Some traders believe there are fewer variables to consider. Both markets require serious knowledge and respect.

However, every trader has their journey and their ideas. There will be plenty of traders who prefer to trade forex compared to stocks. They will have their own reasons why this is the case. In terms of dealing with trade from a novice perspective, you may not enjoy researching a company or its stock.

Irrespective of this, the alligator trading strategy is something you can apply across all assets, and it doesn’t change shape regardless of what you choose to trade.

How To Use The Alligator Indicator

Even though identifying chart patterns is a critical skill for those looking to make it in the world of trading, other variables are at play. You could correctly identify the shape and then execute an effective alligator trading strategy and still lose money because of other market variables. Always manage your risk appropriately and factor in many different variables before entering a trade. 

If you were looking to use an alligator indicator to execute your strategy, it would be a case of viewing it simply as:

When the lines are apart, the “Alligator” is eating. As long as the candlestick stays above or below the alligator, traders will usually remain in the trade. However, when the lines begin to get tight or cross over, that is when volatility arises. Traders who use this technique will consider this cross-over as a sign to exit the trade.

You could spend hours reading through chapters on how this strategy works. However, this is an alligator indicator explained simply. If you identify these alligator indicator settings, you are already placing yourself at an advantage over other novice traders who need more help to grasp chart analysis.

Conclusion

How to read an alligator indicator is an integral piece of any trade. Once you know what to look for and what the signs are, you can look to implement your alligator trading strategy across a broad range of assets.

However, if you are a beginner trader, it is advisable to stick to one asset class and understand thoroughly how it works before you begin to trade another asset. Your capital is always at risk, and if you enter a market without solid prior knowledge, you are already on thin ice. 

An alligator trading strategy might not be the first strategy you wish to employ if you are only starting in the market. Some beginner traders will use more conventional methods, such as swing trading, while they find their feet on how the market works.

We hope you now have enough knowledge to apply this practically to your trading methods and psychology. We have mentioned this already today, but it is essential to emphasise that accurate chart analysis isn’t something you can magically master overnight. 

It takes a lot of time, effort and usually plenty of financial loss before you settle on a strategy that works for you. However, mastering the art of chart analysis will set you well on your way to understanding the market better and give you a better chance of making a more profitable trade in the future.