Jan 26 2015
No sane human being is going to inflict pain on themselves for a prolonged period of time if deemed unnecessary. With the same line of thought, why would a central bank elect to inflict pain on itself. With impending EURO zone monetary policy measures due to be released, we are talking about shotgun sized wounds as opposed to paper cuts.
The Swiss had pegged a floor to the EUR/CHF exchange rate to 1.20. That means no matter how low the EUR currency went around the world, the CHF would guarantee it would not go lower in Switzerland.
What happens when the currency threatens to go below EUR/CHF 1.20? The Swiss central bank is forced to intervene in the markets and weaken its currency further against the rest of the world to make sure that it maintains the pegged floor of 1.20.
The reason for them announcing this measure in 2011 was to give investors around the world a sense of faith in the EURO. The Swiss Franc is considered one of the most safest and stable currencies around the world. With the Swiss making a bold statement like this promising to hold the value of the EURO is almost like giving the currency a AAA rating. And thus the EURO went off and traded well above the peg leaving the Swiss with little to worry about.
Fast Forward to 2015 and the Euro zone is crashing hard and fast. You are staring into the barrel of the gun. Are you going to pull the trigger or are you going to move out of the way? The Swiss decided to avoid self mutilation and removed the floor peg.
For me, it didn’t make sense that anyone would uphold a policy that hurts them instead of helps them. It made sense before, when the EURO was stronger. But now the EURO is headed astronomically lower. Yes, the week before the Swiss Central Bank came out and they said they were going to uphold the peg. But my point is, you shouldn’t jump off a bridge if somebody else says they will too or you should too.
Yesterday we covered the more standardized Forex trading orders that most of us are accustomed to. Today we will get into some other order types that are out there on some of the more advanced trading platforms.
GTC – Good Till Cancelled – a good until cancelled order will stay active until you close the order yourself. It is your responsibility to do so. Sometimes traders are used to having orders expire if they are not executed after a certain period of time. These orders do not expire until cancelled by the trader.
GFD – Good for the Day – this order is only good for the trading day or once the market is closed for the day. Since FX has no close during the week, most brokerages will close out the order at 5pm EST. It is recommended that you verify this with the broker however.
OCO – Once Cancels the Other – this is a mixture of two entry and/or stop loss orders. The orders having differing variables of price and other factors are placed above and below the current price. When one of those orders is executed the other order is cancelled.
For example there is a strong support or resistance line. You want to play either the break or reversal. You place one order above the price and one order below the price. If one of those orders is hit the other will be cancelled.
OTO – One Triggers the Other – this is just the reversal of OCO. When one order is hit it will trigger other pending orders.
There are many tools to a traders arsenal. Maybe the most important one is the different order types available to the trader. Each order carries out a different function. Each one just as critical. Orders will help you enter the market and exit the market. Let’s get going!
Market order – is an order to buy or sell right now at the best available price in the markets.
Limit order – is an order to buy below the current price or to sell above the current market price. For example the price of EUR/USD is 1.25 and the market is in an uptrend. However you feel that the market must retrace to 1.24 before the uptrend can continue. You would set a buy limit order at 1.24 and when the price goes down to that level it will buy EUR/USD for you. Alternatively if you believe the markets will fall to 1.24 but must retrace to 1.26 first you would place a sell limit at the top and position yourself to ride the trend down and catch more pips.
Stop entry order – is very similar to the limit order except the concept is switched around. This order type goes with the trend. If EUR/USD is at 1.25 and the trend is down, but it must break that support level you would place a sell stop order at 1.2490 right under the breach level. If you believe it were to go higher and needed to break above 1.25 you would place a Buy stop order at 1.2510.
Stop loss order – this is your best friend. This order helps you take the emotion out of trading. You set your risk. You find your key support and resistance levels and you place your stop loss. When your position moves into profit you can move your stop loss position up and lock in profits should the trade reverse. Practice using it with all trades you place.
Trailing stop – similar to the stop loss order. You set this order to close out the position if the current price retraces by a certain amount of points, which you set. As price advances so does the stop loss order, hence a trailing stop.
There are some more advanced order types for institutional platforms. We will get into those in another lesson.
Forex is traded from Sunday 5pm EST until market close at 5pm EST on Friday. The FX market is essentially traded 24/5 without rest. There are 3 major global trading hubs that account for much of the world trading volume and they span across the world to cover the whole 24 hour period of the day to make trading a continuous event throughout the week.
Unlike stock markets which close when their respective region finishes its business hours for the day, FX carries on to the next region. The trading week starts with the Asian session, carries on to the London/European session and closes out the day with the North American session leading back into the Asia session to start the cycle all over again.
Special note: watch how market hours shift as daylight savings time comes into effect differently throughout different parts of the world.
The best time to trade is when the markets are moving. This occurs most frequently when trading sessions from two regions overlap with one another, like the London and North American session do as many of the worlds traders are awake and in front of their charts all at the same time. This can provide more liquidity to the market and thus more volatility. The London trading session typically has the biggest pip movements in currency pairs as this session overlaps with Asia and North America.
Lets take a moment or two to go over trend lines. What are they and how can they help a trader? They are the easiest and most common tool for a trader to use and can do this with the skill of a well trained eye. Remember the trend is your friend! Always try and make sure you are trading with the trend.
Trend lines are used to identify up trends, down trends, and sideways trend movements. A trend is a continuous movement in one direction which can go up, down, or sideways.
Drawing trend lines may be tricky that is why it is important to understand how to draw them in order to use them properly.
An up trend is drawn along the bottoms of easily identifiable support areas. A down trend line on the contrary is drawn along the top of easily identifiable resistance areas. All you have to do to draw them correctly is identify two major tops or bottoms and connect them.
It takes two tops or bottoms to draw a trend line but it takes at least 3 to confirm the trend.
We know what trend lines are and how to draw them. Now how can we put these techniques to practice. Generally, you want to be trading in the direction of the trend, therefore when the trend line is hit it might be a good chance to buy or sell to go along with the trend. Alternatively when a trend line is broken it could be a good opportunity to close out your position and potentially reverse directions.
Hope this helps and do not ever try and force trend lines to fit within the market, that will only get you into trouble.