If you are not new to forex trading, you have probably heard about the stop loss hunting myth and it can generally influence the way traders perceive the market. That is why in this article we will digest this issue and make clear once and for all if stop loss hunting is true or not and what any forex trader can do in order to avoid being involved in such situations.
Retail trading and conflict of interest
One thing that most of the retail traders do not know is that any broker that lacks regulation and internal ethic is basically functioning as a betting company. This type of broker is literally opening positions on the other side of the market without telling anything to traders.
Also, the broker can see where the majority of people is placing stop losses and take profits, and by widening the spread (the difference between the bid and ask price) is able to trigger stops and thus make clients lose money.
What should a trader do?
You as a trader cannot stop this kind of activity, but you can take some measure in order to protect yourself. You must start to think outside of the box and take precautions, so you won’t work with a broker that does what we have described above.
The first thing to do is to choose a broker regulated by a strong and popular financial watchdog. The Financial Conduct Authority in the UK and the Securities and Exchange Commission in the United States are just two examples with that respect.
Another important aspect is the liquidity provider your broker works with. 5 digits quotes and a clear chart can prove that.
It is also a good thing to check for other broker’s quotes to see if there are significant discrepancies between them. If the liquidity provider is different, the quotes might vary a bit, but significant differences should ring alarm bells.
Your trading strategy should also be set correctly. Most of the beginners lack a deep understanding of the markets and blame the broker for their losses.
Trading forex requires a lot of work and many things to take into account. The small details can add up and in the long run, can generate huge returns. Make sure to take into account all the information we have mentioned here in order to avoid working with an online broker that only looks after its interests.
If you are reading this article you are most likely one of those that have a strong desire to achieve success in forex trading. However, when it comes to actually do what is required for that, you find it hard to implement all the things. Also, some of the information that had been given to you by all the “online expert traders” seems to be useless and that is why we want to give you a few trading tips that will certainly help you in your day to day activity.
Tip #1 Focus on the process not on the reward
We know that each one of you is trading because each of you wants to have more money. That is a fact which can’t be denied. However, focusing on the money and not paying 100% of your attention to the process that will eventually lead you to have more money, can end up with you actually losing money and become emotional when it comes to forex trading.
How you treat this activity is crucial if you want to be a professional forex trader. We’ve emphasized in a previous article, that treating forex like a business is the best way a person could approach this process.
Also, as we have learned from Jesse Livermore, understanding the fundamentals of the market and tracking its performance represent aspects of the trading process that you should focus on.
Tip #2 Constantly improve your game
Maybe you are one of those that already manage to get results trading forex. Maybe you have understood the market rhythm and you have developed a trading strategy that makes money. Congratulations on that, but things do not end here. There always room for the better, so this tip is to constantly look for ways that will improve your performance. You can do that by reviewing your trading activity. By doing so, you will be able to spot subtle details in your trading that could be optimized.
Tip #3 Don’t take yourself too serious
Even though you might be taking into account all the good information about trading (which is relatively impossible to do) you are still going to make mistakes. Agonizing on those mistakes and not be able to move forward can be a huge roadblock in your journey. Learn to embrace your weaknesses and your vulnerabilities and accept yourself just as you are right now. Without doing these things, you won’t be able to become a better person that you are now.
The Relative Strength Index is probably one of the most popular price indicators and it is being used by those traders who are at the beginning with forex trading. However, the indicator might be misleading for most of the traders, as they fail to understand it properly, which leads to some painful mistakes. In this article, we will cover the basics of RSI and we will also try to answer the question: Is RSI good for Forex trading?
General Information about RSI
What is RSI?
It is a technical indicator used to measure the strength of a particular trend, based on the closing price for a given period of time. The most popular period is 14, but other ones could be used, as well. The indicator can have a value between 0 and 100, with two levels being used as a threshold in order to determine in what kind of environment a particular asset is in.
If the RSI is located around or below the 30 level, that means we are in an oversold condition. A value above the 70 level will mean that an overbought condition is in play. Simple enough to understand, but some particularities will need to be taken into account in order to use the indicator properly.
Is RSI reliable?
It could be, but you must apply it in a certain context. Technical analysis is like an art, it can be mastered with time and in order to do that, you must practice and go over a lot of mistakes.
Now, getting back to RSI, let’s take an actual example from the chart. You can see below the EURUSD on the 4h chart and three situations we’ve spotted, two oversold and one overbought.
You can see that the market started to move in the opposite direction each time. The first thing to take into account is to use the indicator on a higher time frame. You could find signals on the smaller time frames, but it will most likely generate a lot of false signals.
The second thing and the last is to take signals that form on the dominant side of the market. In the example above, the pair had been in a bullish trend and buying the pair on oversold conditions would have generated strong signals, as it is highlighted on the chart.
An ordinary forex trader will go out and learn technical analysis, fundamental analysis, and sentiment analysis, as all the books and online courses are saying, but only a few go deeper than that and learn some subtle details of the market. That is what we are going to do today, as we aim to explain a bit what the market rhythm is and how it could help you to anticipate recurrent patterns in the market.
What does rhythm have to do with Forex?
Well, it does. The market functions exactly like a car piston. It cannot move in a single direction, without moving in the opposite. No matter how an impulsive trend it, if you zoom on the smaller time frames, you will see counter trend players. Their influence is small, but it exists. Now, this series of moves on both sides sometimes has predictable unfolding.
Let’s see an example from the chart, to explain the concept better.
Below we have the EURUSD on the 1h chart, a pair which had performed very well in 2017. What we have spotted there is a series of legs that are similar to each other.
The legs a, c, e, and g are considered consolidations on the other side of the dominant trend. On the other hand, legs b, d, f, and h, are impulsive moves in the dominant side of the market, since they cover more ground.
What we can notice there is this pattern of small consolidations followed by impulsive moves occurring four. This is what we mean by market rhythm. Is a recurring behavior of price which can lead to an anticipation of the future movements.
What you need to understand, though, is that not all the moves will be exactly the same. The length will be different, maybe some of them will cover more ground than the others. In such a liquid environment like the forex market, it is possible. What is important is to develop your focus and discipline in order to be able to spot this kind of price structure. Combined with a technical strategy it can lead to successful forex trades, for sure.
You’ve probably heard this phrase a lot of times and you haven’t manage to understand it. Also, even though you manage to understand, you don’t really find a way to apply it, so your actions will evolve for the better. Today we’ll cover this topic related to market psychology and mindset of trading and hopefully, you will be able to get what this is all about. We must say from the start that thinking outside of the box is a skill that can be practiced with time, so don’t worry if you are not able to master it right now.
Crowd behavior and its bad consequences
The Forex market is formed of a large number of people – a crowd and the way it evolves over is a result of the actions this large group makes. Some of them have a higher influence than other and so forth, but the bottom line is that crowd behavior drives the market.
If we analyze this crowd, we could see that we can split it into more categories. We will stick to just one of them- losers and winners, for the sake of the current subject.
People that are part of the winning side are able to understand the force of crowd behavior and anticipate what could influence that behavior in the future ahead. If they can anticipate the behavior that could lead to the anticipation of the market moves.
Thinking outside of the box simply means having a collateral view of the situation and managing to form objective conclusions. A person who thinks outside the box will never act impulsively and will never take a trading position just because he thinks all the people are doing that.
The crowd behavior is influenced by emotions and if we talk about professional forex trading, those emotions must not intervene in the decision-making process. That is why most of the people do not manage to generate profits. They act impulsively most of the time, while professionals manage to think outside of the box and anticipate future moves. Easy to talk about, but it can take years to master this skill, so make sure to start from now.
In order to understand better the market psychology, this time we will discuss another interesting concept, which is the risk aversion. The current economic context is another reason why we want to approach this subject. The global economy had been expanding since 2011 and since 2009 in the United States. A recession is something normal in this case, as the economic cycles principle is stating. During those periods, risks aversion appears as the market sentiment deteriorates. Let’s dig into this subject and see what the particularities of this concept are.
What is risk aversion?
Risk aversion is a situation when the market participants are no more willing to invest their money in risky assets (stocks, precious metals, commodities etc) and place their money into safe assets (bonds, bank deposits etc.) due to economic contraction, political uncertainty, natural disasters or any other even with a significant negative impact on the economy.
Periods with high-risk aversion have low market performance associated and thus returns are low, especially for long-term investors.
What should forex traders do during these periods?
What usually happens in the forex market is that investors are buying safe-haven currencies. We’ve covered the topic of safe-havens in a previous article and you can check it as well.
During the last severe economic crisis, which took place back in 2018, the yen, US dollar and the Swiss franc had been the biggest gainers, due to their safety profile.
Our assumption is that due to extreme nonconventional monetary policy from the Switzerland National Bank, the franc might not be able to gain as much as the yen or the US dollar.
The biggest economy of the world at this point, the United States, and US bonds are considered to be safe, that is why investors are selling currencies in order to buy US dollars so they will be able to buy bonds.
Also, following the crisis of 2018, the major central banks had embarked on a road of easy money, lowering rates and printing money, leaving them with little room for action in case another economic contraction takes place. Protection is the first objective when risk aversion is high and that is what you should do, as well, not expecting huge returns in short periods of time.
The trading strategy a forex trader chooses can be a defining tool for the future positive performance. This material had been designed for beginning forex traders that are searching for an effective trading strategy. What we need to mention from the start is that this strategy, like any other one, should be tested first. Forex trading demo account is a must, especially if you are at the beginning and you need to develop those skills required for you to generate consistent returns.
So, without further a due, let’s jump into the actual strategy that we want to talk about.
False breakout trading strategy
False breakouts happen many times in the forex markets, simply because support and resistance levels are not like a line in the sand. They are actually several layers deep and you will usually find the market breaking a certain support/resistance only to resume impulsively in the opposite direction.
This could be a great opportunity for you, but you need to learn how to do it. First, we must mention that this strategy should only be used for with trend trading. Do not even apply it for counter-trend trading.
Let’s show an actual example, so you could understand the strategy better.
Above you can see the EURUSD chart on the 4h time frame. Since the beginning of 2018, the pair had a good performance, following around 13% gain in 2017.
We’ve drawn on the chart the 1.1941 level, which was a key support level. As you can see, the sellers managed to break it in the first place. Considering that the selling leg down was pretty impulsive, some of the traders might have assumed that the market will continue lower. The exact opposite happened and the price surged impulsively on the upside.
Let us know explain the basic rules of the system:
First, find the dominant direction of the market (the context)
Look for a key support/resistance level to which the market had responded in the past
Wait until that particular level had been broken on the other side of the dominant direction of the market.
For conservative traders, you can wait until the dominant side resumes and breaks again the level and tests it.
You can place stop loss below/above the false break formation, and target at least 2 or 3 times the stop loss value. This kind of setup had a good accuracy and over time it can be very effective.
As we’ve already mentioned, don’t forget the forex trading on demo account before you actually trade live, with your own money.
Foreign exchange trading carries high risk and may not be suitable for everyone. You should carefully consider before deciding to invest in speculative assets. No information contained in this article should be regarded as a decision to buy a certain asset.
The Canadian Dollar has been trading under pressure as tariffs could weigh on the currency. The Bank of Canada delivered the widely expected lack of change, leaving the setting for the overnight rate at 1.25%. While higher rates over time remain implied by their economic outlook, they repeated that they will be cautious in considering future policy adjustments. Their views on recent developments were largely balanced, but with a notable mention of the growing uncertainty to Canada’s outlook posed by trade policy. The markets projection is for two more rate increases this year, in July and October, leaving a 1.75% setting by year-end.
The crucial final paragraph of the announcement was little changed relative to January. The repeat of “further rate hikes likely but guided by data and implemented with caution” is a place-holder as they observe the evolution of trade policy, wages, housing and GDP.
The Bank of Canada expects GDP growth of 3% in 2017 in-line with the Bank’s projection in the January monetary policy report. Yet that was largely due to higher imports, which mainly reflected stronger business investment. The key for policy going forward is the evolution of GDP and inflation relative to their projections. But uncertainty remains elevated, including the tariff plans from the White House in the United States making for a policy outlook that is written in very light pencil.
The March announcement revealed little change in the cautious, data dependent Bank of Canada. Hence, they should be able to hold policy steady until past mid-year, providing ample time to access the impact of NAFTA and possible U.S. tariffs on trade and investment. The long-anticipated rotation to export and business investment from household spending and housing is moving along in fits and starts. Of course, household spending did slow in Q4, which is something the Bank has been eying for some time. The announcement assured that they are continuing to monitor the economy’s sensitivity to higher interest rates, noting that household credit growth has decelerated for three consecutive months.
Three Rate Hikes in 2018
The Bank of Canada is expected to move again in July, lifting rates 25 basis point to 1.50%. Another 25-basis point rate hike is penciled in for October to leave a 1.75% rate that should close out the year. But the risk is intensifying that the economy faces fresh headwinds from trade and housing this year. Of course, an expanding U.S. economy would provide a strong tailwind for Canada, if trade protectionism does not weaken the link between the two nations. In other words, uncertainty clouds the outlook, leaving a gradual and cautious course ahead as the most sensible policy path for the Bank of Canada this year.
Canada housing starts improved
Canada housing starts improved to a 229.7k unit pace in February from a revised 215.3k growth rate in January. Currency trading of the Canadian Dollar saw the Loonie remain stable. The pick-up in starts was contrary to expectations for a mild dip and comes amid general softness in sales and prices so far this year as new mortgage rules and other measures pulled-activity ahead to late 2017. Starts saw a 6-month average of 225.3k in February versus 224.6k in January, maintain a steady growth rate since November of last year. Single detached starts fell 9.8% to a 56.7k rate in February while multiple urban starts jumped 15% to 154.5k in February. By region, starts improved in Toronto and Vancouver, with a record number of apartment starts featuring in Toronto.
We won’t talk about any strategy or economic subject this time. Instead, we want to focus on something that is more like a psychological skill professional and successful traders manage to develop over time. It is in their mindset to have this approach and we’ll talk about it in a few seconds. What we are going to discuss won’t make you a millionaire in the next few months (sorry, if you were hoping that), but it will definitely help you be more prosperous and be more abundant.
How ordinary traders approach forex trading
If you have been trading for at least a few months, you are now able to spot some patterns in your behavior, which repeat themselves over and over again. The main thing that characterizes beginners is their rush to get rich quickly.
There is no reason to hide the fact that all the traders join this activity because they want to be wealthier than they are now. But in order to overcome a current condition, things are more complicated than most of you think.
The first step towards that should be to have a different approach towards forex trading. You, as most of the traders, lost money sometimes and you’ve seen with your own eyes how tough it is to make money trading.
What you need to do is treat forex trading like any ordinary business. People see it as some kind of Holy Grail of infinite mine of wealth which they could have access to. In fact, trading is just like any other business. It is a competition between individuals and companies. It is a place with few winners and a lot of losers. It might be harsh for some of you to admit this, but folks, this is the truth.
Even though you will face losses, you have to learn how to deal with them and manage to succeed in this tough environment. By choosing the path of forex trading, you will become a more evolved person than you are now. That is the most important, probably more important than money – becoming a better person as you progress throughout life.
For those of you that heard about Jesse Livermore, you will find a little weird the analogy with forex trading. However, his methodology was focused on the technical aspects of price and that is why you may find some useful information which could be applied to trading.
If you really want to learn more about him, we recommend the book “How to trade in stocks”. It is very short to read, but it really contains a lot of interesting and valuable points.
Briefings about Jesse Livermore
He is regarded by many as one of the greatest speculators of all times. He made and lost fortunes at the beginning of the twentieth century. During the great crash of 1929, he made around 100 million US dollars, by shorting the US stock market.
What stands out from his approach to trading was the focus on technical aspects of price. He kept journals with price changes, as you will see from the book we’ve mentioned above.
At that particular time, the fundamental analysis was trending, since the technology was not as it is today and it was pretty tough to monitor charts.
If you decide to read his book, you will find a lot of interesting things about crowd psychology and market sentiment. No get-rich-quick scheme can be found there, but instead, a thorough analysis of markets and how they behave from a technical point of view.
What can forex traders learn from Jesse Livermore?
First, its desire to accomplish everything that he wanted. He came from a really small town, started trading with 5 dollars and managed to be successful in a field where most fail.
Second, it is his unique mindset and approach that helped him generate the wealth he had. Although he had a terrible personal life, from a professional point of view we cannot judge him.
Make sure to study his life and work and you will find a lot of inspiring things about trading, especially if you are one of those that need to start with huge disadvantages. Hope you enjoyed the material and stay tuned for the next ones.