An Industry War: The Foreign Exchange Market vs. Real Estate

Before entering the foreign exchange market, some may scratch their heads while wondering whether they’re going with a brilliant decision or investing in real estate is the better idea. Especially if it’s their debut to handle a lot of cash, they’d rather be stressed by the predicament, than end up bankrupt over time. For someone who wishes to make his way to a financially secure future, the doubts that both parties are dealing with may put you in a confusing position.

Let’s Talk about the Capital
Capital is hardly a problem in the foreign exchange business. With less than $1,000, you can open a trading account. $200 will allow you to trade 40,000 currency units. With real estate, however, you’ll need a grand sum - particularly, 10% (at least) of the acquisition cost. If the property costs $155,000, for instance, $15,500 has to be in your hands to start investing.

The Target: Capital Gains or Passive Income
Ask yourself what you prefer: an easy and fast transaction (capital gains) or a long and often complicated money-making technique (passive income). Trading assets in forex markets is ideal if you plan on taking advantage of quick action since rates in the business tend to fluctuate instantly. In less than a year, you can acquire a fortune, provided you conduct smart deals. If the concept of owning property for you to sell eventually excites you, on the other hand, real estate is the industry for you. 

Market Options
With an economic crisis, which could indicate that the prices of real estate properties are heading down, a safe option is to let go of your investment by selling it. In Forex, you have the opportunity to keep that similar form of investment. If you suspect that the value for your assets is going to depreciate, all you need is to exchange them for a different currency, then, buy them back after their value increases. 

The Liquidity of It All
In the event that you want to have a break, you’ll be presented options. In forex, whenever you decide it’s time to sell assets, you can expect another trader to buy them within seconds. With real estate, if you plan on selling property, the tactic is to make the place marketable first. After, you’ll have to wait a week, months, or even, years to get it sold.

The Bottom Line
In the battle between the foreign exchange market and real estate, the industry that YOU will choose to put your money in will be the one that wins. Since both sides have their perks and drawbacks, it’s up to you to give your unrelenting focus as a trader or as an investor. Granted you’re willing to come up with surefire strategies to beat the odds, you can be triumphant regardless of the field you enter.

The MACD Indicator: Why Do You & Other Momentum Traders Like It So Much?

With the knowledge that you can use the MACD indicator, every momentum trader can take a breather. To you, it’s no secret that trading stocks in the foreign exchange market using short-term and long-term momentum can bury you in a load of stress. Regardless, you refuse to try your odds in another industry for one mere reason: you fancy all the rewards that come along.

The MACD & Its History
The MACD or Moving Average Convergence Divergence indicator is a momentum indicator developed by professional money manager, Gerald Appel, in 1979. Then, it was modified (with an additional histogram) by technical analyst, Thomas Aspray, in 1986. It features vertical bars that show differences with its lines.

Moreover, the MACD’s focus is on following trends and defining the deal between 2 moving averages. Instead of basing computations on percentages, it highlights actual prices. With it, you can calculate more accurate differences, which will then, help you determine basic and intermediate changes in stock prices.

It’s Time for Calculations
Calculating the MACD indicator isn’t simple; neither is it too challenging, however. You simply need practice in terms of getting accurate computation, as well as plotting the results on a histogram. 

The steps:

1. Identify the 12-day exponential moving average. 
2. From the 12-day exponential moving average, subtract the 26-day exponential moving average.
3. Plot the results on the histogram and identify the MACD indicator.

Surefire Techniques of Using the MACD Indicator 

• Be aware of a divergence. Whenever stock prices suddenly go off course, they’re indicating that the trend you’re following has come to an end. Insisting on heading a similar path can have setbacks since you’re not relying on any trend anymore. 
• Keep your eye open for crossovers, which offer clues of either a bullish or a bearish market. If the MACD indicator goes above the signal line, it’s the right time for buyers to enter the forex market. Conversely, if the MACD indicator falls below the signal line, it implies that a selling condition is in place.
• Observe for dramatic rises. In the event that the shorter moving average distances itself as far as possible from the longer moving average, you can tell that market conditions are reaching extreme levels. Particularly, it indicates overbought and oversold prices.

Can You Be Doomed with the MACD?
As much as you want to remain positive, you shouldn’t be blind to the fact that you can get in trouble with the MACD indicator. It’s a lagging indicator and like most technical analysis tools, it can generate faulty signals. 

For instance, it can suggest a false negative, which means that in spite of the absence of bullish crossovers, stock prices are still heading upward. However, granted you’re always equipped with a strategy, the indicator’s slight chances of screwing you over won’t have to be an irrevocable problem.

The Bottom Line
By using the MACD indicator, your job as a momentum trader becomes less difficult and even quite enjoyable. Other than trend-following, its application includes analyses with daily and weekly trades. 

The MACD is yet to be a perfect technical analysis tool. However, since it makes it unnecessary to cross your fingers every time you anticipate a trade to approach a certain direction, with it, you’re likely glad to be in the business.

Technical points have been shared by Mr. Steven, a Forex expert from MTrading India.

Greatly Increase Your Profits With Effective Use Of Leverage

Leverage is a powerful, but often misunderstood trading tool that offers great potential for profit but also paves the way for substantial losses. Unfortunately, many Forex traders often focus on the former while ignoring the risk of the latter, and end up losing big amounts of money on their trades. The main thing that many of these traders fail to understand is that leverage is money that is borrowed from their brokers and thus, if their trade is unsuccessful, they not only suffer a loss but they also have to pay back the amount of the leverage.

The main reason why forex traders use leverage is to greatly boost their profits when price movements of currencies are just incremental. For example, let’s say you opened a position for the USD/EUR currency pair when the exchange rate was 1:0.88947. If the exchange rate went up to 1:0.89449 and you were able to afford a regular lot of 100,000 units of the base currency you were trading in, then you would make a profit of USD$502. On the other hand, if you could only afford a micro-lot of 1,000 units or a mini-lot of 10,000 units, then your profit would be only $5.02 and $50.20 respectively. If you used leverage, then you could invest in a standard lot with only $10,000 in your trading account (at a rate of 10:1).

How much leverage are you using? You can compute your effective leverage using a simple formula: simply divide the total amount of open positions that you have with the amount of equity in your trading account. Thus, if you have three open positions totaling $70,000 and your trading account has $10,000 then your effective leverage is 7:1.

One of the most important lessons that forex traders need to learn is how to use leverage most effectively. The big problem is that forex brokers may offer big amounts of leverage of as much as 50:1 or more and this is very tempting to traders who think they can make a huge profit on just one successful trade. But, of course this is a mistake, and many traders who suffer from big losses tend to react in two ways, both of which are undesirable. One is that they simply give up trading forex, and the other is that they continue to use high amounts of leverage in the hope that they would be able to make up their losses.

In general you should be more conservative with your use of leverage. The recommended amount of leverage is 10:1 or less depending on the size of your trading account.  Keep in mind that the best traders make their money not from a single big trade but from a series of winning trades over time. In addition, the best traders actually focus on how much money they could potentially lose, not how much they could gain. 

So keep an eye on your effective leverage and if it is higher than the recommended amounts, you can address it either by increasing their trading account or reducing their open positions. 

Technical parts have been shared by Mr. Abdul, a Forex analyst from MTrading Egypt.

News Trading Guide Series 2 - When Deviation Goes Wrong

This series reveals factors and deep secrets why you should not depend SOLELY on the outcome of a news event to BUY or SELL because of certain factors that makes deviations useless whether they are met or not.....

One of the major key decider to BUY or SELL after a news release is the DEVIATION. The deviation is the difference between the FORECAST & the ACTUAL result. The outcome of the measurement of the difference of the actual result to the forecasted deviation is what triggers either a Spike (extreme sharp movement), Slow Action, No Action, or Delayed Action. So it is expected that when a deviation is met you take the next action, but this is not true all the time time. See real scenario below:

On 12th March, 2015 the market waited eagerly for the US Core Retail Sales news release. The previous figure was -0.9%, and the forecast was 0.6%. The deviation was 0.5%, meaning that the USD should be sold if the result falls 0.1% lower or the USD should be bought if the results is 1.1% or higher. Economists were of the view that the result would be positive taking into consideration the good outcome of the NFP, which took place 6th March 2015. This is true since both components are correlated. However the results came at -0.1% and previous figure was revised downward to -1.1%. This was an extremely negative result for the US Core Retail Sales m/m and our best guess is SELL the USD but that decision didn't go well. See what happened below.

Source: www.forexfactory.com CLICK TO ENLARGE

The above illustration do not occur always but lots of traders especially retail traders are victim of this, and many never know what went wrong. A clear deviation against the USD went the wrong direction.

CAUTION: Do not react too quickly to a news release....

Discount Offer Available

How Is Deviation Derived

Deviation is sometimes derived through a broad survey of a fundamental component like spending habits or job availability from economic experts, financial institutions, stores, consumers, manufacturers, e.t.c. The data collated from these survey is statistically computed to derive a possible deviation. Deviations are also derived from the collation of previous actual results of an economic event against the forecasted figures over a period (monthly, quarterly or a timeframe determined by the issuing financial authority).

How Deviations Are Used In Making Trade Decisions

It's simple as BUY/SELL when a deviation is met or exceeded.

For example: 

March 6th 2015 - US Nonfarm Payroll Employment

FORECAST - 241K

PREVIOUS - 257k

DEVIATION - 70K

Trade Decision Formula: 

BUY = Forecast + Deviation = 311K and above (result is bigger than the previous)

SELL = Forecast - Deviation = 171K (result is smaller than the previous)

See outcome below (Actual = 295K)

US NFP March 6th, 2015

In most cases when the Actual is considerably bigger than the Previous figure but not equal to the expected deviation, the market still reacts. Even at 1% difference in some cases market can overreact. This is common for very high impact news release.

CAUTION: Do not focus or trade any news event that has a statement or press statement few minutes or immediately after the news release. Speeches especially statements from Central Bank's Governors can cause the market to react and reverse or continue it's momentum. A particular news release from the UK came out bad, and the GBP fell immediately but rose up sharply few minutes during Gov. Carney's Speech after the rates were released. Lot's of traders got stopped out with losses.

NZD Cash Rate Actual Result did not meet Deviation of 3.75% to BUY or 3.25% to SELL

Source: www.forexfactory.com

 

Reaction of Gov Wheeler's Press Conference despite a stalemate in the actual result

Deviation Met But Market Moved Wrong Direction - What Went Wrong?

Like i said earlier that the deviation could be met but the market still moves to the "wrong" direction. The following reasons explains why this happens:

1. Contrary press statement overruled the actual results or painted a positive outlook on the currency. In some cases we have seen press statements that gives hope of a perceived failing economy or intention to hike rates, and since this is coming from the highest authority, investors are keen to change their minds.
2. Insider tricks by government and financial bodies. It might surprise you but this happens. There was a time that the figure for a very high impact news release came out negative for the US. Few minutes later the market rebounded sharply in favour of the USD, and we found out that the results were changed citing reasons that the released results was not correct. Of course you can bet something funny must have happened!!!!!. Also there are bigger financial investors who are privy to the result before the result. They are capable of spurning the market to go one side, and then chop off their positions through counter trades.
3. Revisions. This is very common and usually causes serious market counter reaction despite the actual result being released.
4. A strong psychological confidence on a currency can cause the deviation to hold less meaning.
5. Future expectation of a currency's value or economic outlook. If for example the European Union has agreed to tight rates or announce a date for QE then the deviation of the news release against the upcoming action would be meaningless.
6. Mixed actual results from multiple news event. For example the deviation to BUY the CAD Employment Change might be met but if the CAD Unemployment Rate is extremely poor then a negative reaction might occur.

These are some of the reasons why deviations can mislead. It is very important to understand the dynamics, politics, and pulse of the market during news trading. A lot can happen right under your nose without your knowledge, which can be very devastating.

How To Protect Yourself

1. Always use stoploss
2. Do not add to positions excessively even while the deviations are met.
3. Always watch out for revisions as they can cause serious counter reaction.
4. Do not trade with too large volumes especially for account with high leverage.
5. Take your profits quickly or use trailing stops

While all the above tips would help there are still situations beyond your control because of the big personalities involved in news trading that has the power to turn things around

We appreciate sharing your experience on issues like this on our comments column. Wish you success all the way.

Image (Disappointed Businessman Looking At Laptop) courtesy of stockimages / FreeDigitalPhotos.net

News Trading Guide Series 1 - How Spreads Affect News Trading Results

News Trading can be very lucrative if you know how to trade the news effectively. Unfortunately the size of a spread is a known challenge in Forex trading, and can be much worse in news trading due to the extreme volatility involved, and pranks played by some brokers.

I have tried virtually all kinds of trading systems/strategies, and based from my experience, news tradings seems to be very consistent, and highly profitable. See our news trading weekly report

In this series we will be looking out how spreads affect news trading results. 

What is a Spread?

A spread is the difference between the BID Price and the ASK Price or the difference of pips between the bidding price and the asking price.

How do I know the amount of spread I'm paying?

Spread values being advertised by some brokers do not match with what is obtainable on the trading platforms all the time. So it is important you know how much you pay your broker from spreads.

It is important you understand how spreads are calculated since we have Two (2) pricing digits in Forex namely the 2/4 pricing digits, and 3/5 pricing digits also called 5th Decimal. In the 2/4 pricing digits, the Yen pairs have 2 digits after the decimal e.g. 120.25 while the 3/5 have 3 digits after the decimal e.g 120.254. Other pairs in the 2/4 pricing digits have 4 digits after the decimal, while the 3/5 have 5 digits after the decimal. In the 3/5 pricing digits, the last digit is a fraction and it is only added as a single digit when it is bigger than 5. So subtracting the bidding from the asking price tells you how much you are paying as spread. Secondly you can use the Crosshair tool on the MT4 line studies menu to know the amount of spread. Make sure your chart is configured to show Ask Line as the bidding line is enabled by default. Click on the Crosshair and place it on the bidding line and drag it to the asking line while holding down the mouse and a display of the difference between both lines in pip value will show. The middle value is the spread.

Using Crosshairs to detect spread value - CLICK TO ENLARGE

Also there are many third party free indicators that can display the real time amount of spread on your chart.

Who Benefits From Spread?

Spreads are beneficial to brokers ONLY. Brokers make their money from spreads. For example a broker might receive or pay for the price of EURUSD from their liquidity provider at 1.2000 and sell to their clients at 1.2002 (2 pip spread). Apart from spreads, brokers make their profits through commissions, administrative fees like deposit/withdrawal fees and also from swap deals. There are other means by which brokers make their profits apart from spreads.

Some Liquidity Providers:  Boston Prime, Morgan Stanley, SMBC, UBS, BNP PARIBAS, Bank of America, Goldman Sachs, JPMorgan Chase, LMAX, Saxo Bank, FXCM, MBTrading, Citi, SBI, GKGOH, FCStone,  Lucid Markets, ADS Securities, ABN Amro, BNP, Nomura, GSA Capital..... Some of these institutions are middlemen and intermediaries

What are the Standard Spread Values?

Spread values differ according to broker operational status such as ECN, STP, Market Maker, Currenex, & custom account types, e.t.c. There is no central authority that regulates or determine the value of spreads.

Why do spread increase arbitrarily?

Most brokers attribute the increase of spreads to the following factors:

1. Daily bank rollover from 23:55 to 00:05 server time. In case of inadequate liquidity/spreads during bank rollover, widened spreads and excessive slippage may occur.
2. High surge and demand for price feed from liquidity providers during extreme market movement, volatility and high volume orders during news release trigger spread widening. 
3. In some cases spreads are widened during Asian Sessions.

 How Spreads Affect News Trading Results

CLICK TO ENLARGE

When a trader buys GBPCAD at the displayed price above, the profit/loss displayed on the chart immediately shows a negative figure because the cost of the spread is added to the price, and deducted from the profit/loss displayed on the trading platform. In the scenario above the spread is approximately 4pips (5 digit pricing), and not 46pips. The illustration above was taken from a normal or quiet market situation. But during news releases, spreads are widened for various reasons by brokers. While some reasons being stated by some brokers are understandable others are way out of abnormal.

Prior to news releases, the market is charged up due to excessive anxiety, fear, uncertainty on the outcome of an economic decision with the capacity to send shocks to the financial market. During this period liquidity providers are on their toes trying to ensure adequate provision of liquidity or total shutdown should in case the worst scenario occur. The participants in news trading can be very massive and qualitative. All sectors of the financial market (stocks, futures, e.t.c.) are involved because of the spiral effect of the outcome of a news release most especially GDP, Interest rates, and Central Bank decisions and speeches. Unfortunately some brokers take advantage of this situation to widen their spread beyond normal as they too expect to gain from this action.

Top brokers, financial institutions as well as liquidity providers were seriously affected to the extent of bankruptcy during the recent Swiss Franc Capping Episode in January, 2015.

When spreads are widened beyond normal the cost is transferred to traders. Even when a trader enters a trade at a good fill but a bad spread he/she will need to make extra extra profits to cover the spread cost before counting his/her profit on the trade. It becomes worse when the trade goes against the trader. For example if a trader buys GBPUSD at 1.2000, and the spread widens to 5 or 6 pips instead of the normal 2.3 pips then that means the trader got into the market at 1.2006. The trader would need to make 1.2012 to get 1 pip profit. This is aside the cost of the pip value, order volume and other components that will determine the final profit/loss. So this is why your broker matters a lot when it comes to news trading.

Is there a way out?

Yes. Inform your broker about the spread issues especially if it occurs more often without any good reason. Like i said earlier, spread widening during news release is normal to an extent but when it's excessive then you should complain to your broker otherwise it's time to switch broker.  

Another method is to develop trading strategies that avoids high spreads during some sessions or accommodates it into its logic. For example our news trading strategy was developed to maximize profits even when spreads are high so we do not usually feel the effects of high spreads during news release.

So do yourself some good by checking the advertised spread values on your broker's website against the values on your trading platform.

In news trading your broker matters a lot. FXTradeCity recommends HotForex Zero Spread Account (specially designed for news trading and scalpers)

Further Guide
How I Trade The News Part-1, Part-2, Part-3