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"Forex Thoughts" Articles

by Dirk du Toit


Thought provoking and informative articles about forex trading.

Forex Thoughts articles by Dirk du Toit


The Forex Market

Forex Trading

Forex Brokers

Forex Traders

FX Brokers vs FX Traders

Forex Trader Types

Forex Trading Styles

Forex Analysis

Many different approaches to Forex Trading

Forex Trading with Indicators

A forex indicator is a statistical tool that currency traders use to make judgements about the direction of a currency pair's price action. Forex indicators come in many types, including leading indicators, lagging indicators, confirming indicators and so on. (From forexdictionary.com)

Things to know about indicators

There is an online forex trading meme that the forex market is the ideal market for technical indicators as an analysis tool and trading style.

Technical indicators are very popular because it help traders to visualize reams and reams of price data in a way that it could be analyzed and used for prediction of future price moves.

Forex brokers build some popular indicators into their trading / charting platforms in order to induce the use of the indicators by traders.

    Advantages

  • Visual tools to assist in discretionary analysis of raw numbers generated by millions of trades.
  • Disadvantages

  • They are essentially "averages". Averages as a tool to determine specific unique elements of a data series is totally flawed.
  • The wrong assumption that any indicator is equally valid on any time interval (and any instrument).
  • There are hundreds of indicators which can be used in thousands of ways with different parameters.
  • They appear to be deceptively easy to implement but in practice it is a whole different story.

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Forex Trading with Chart / Price Patterns

A forex chart pattern is a subjective schematic pattern formed by changing prices. Chart pattern traders believe the same price action repeats itself when price and thus trading patterns develop. Different price patterns are usually seen to predict either the continuation or the reversal of the preceding trend.

Things to know about trading with chart patterns

  • Recognizing patterns is very subjective.
  • Price / chart pattern trading is highly discretionary.
  • As price patterns may be reflective of changing market psychology it is more associated with slightly longer trading horizons.

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Forex News Trading

Forex news traders use the systematic releases of economic data and other scheduled news events, like central bank interest rate announcements to enter and exit day trades in the forex market.

News trading is a day trading style. In day trading traders look for "trade setups" which could accurately predict a small exploitable move on an intraday basis.

News trading has scalping characteristics also. News traders usually try to remain as short as possible in the market, exploiting the immediate volatility following a data release, and usually with high leverage.

    Advantages

  • Due to the following of scheduled news events news trading is less time intensive than most chart based day trading styles.
  • News trading strategies to benefit more from volatility than directionality after news events can be devised.

    Disadvantages

  • The market dynamic is for spreads to be widened to discourage speculation on news events.
  • The relationship between expected data and market reaction is not clear on any single release, especially widely followed news events. As a result predictability is very low.
  • Tradable volatility on news releases is dependent on surprises.

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Automated Forex Trading

Automated trading involves the coding of a rule based algorithm to generate "trading signals" based on historical price behaviour in a computer program. Buy and sell signals generated by the program can further be executed automatically by the program.

    Advantages

  • Automated trading removes a lot of the time intensive aspect of day trading.
  • Automated trading makes it possible to trade 24/7, thereby trading on all the signals of the system. A major problem of non-discretionary "manual" systems based on historical prices is "cherry picking" of trades when the trader is available. This put a question mark over the validity of the whole system as system design and back-testing usually include that all signals are traded.
  • Automated forex trading can foster execution and trading discipline, preventing spur of the moment interference by the trader.
  • Automated trading can allow for diversification as different systems can run simultaneously.

    Disadvantages

  • The difficulty to design a profitable system based on historical intraday data in the forex market.
  • The problems associated with backtesting and optimization to determine rules. The more optimized the system the more reliant the trader become on the assumption that history will repeat itself sufficiently in miniscule timescales.
  • They are never "set and forget" and streaks of losses usually leads to excessive tampering, based on the trader's "need to control".
  • While emotions may be excluded from execution, the emotions cannot be excluded from the monitoring of the outcomes of the automated process.



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Thoughts on different ways to analyse the forex market
Another Forex Thoughts article by Dirk du Toit



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