3.16.2009

Forex Trading Methods - Swing Trading

What is Swing Trading?

Swing Trading sits in the middle of the continuum between day trading and trend following. Swing traders hold a particular stock for a period of time, generally between a few days and two or three weeks, and trade the stock on the basis of the general upward or downward trends.

Swing Trading takes advantage of brief price swings in strongly trending stocks to ride the momentum in the direction of the trend and combines the best of two worlds - the slower pace of investing and the increased potential gains of day trading. Swing Trading is not high-speed day trading. Some people call it momentum investing, because you only hold positions that are making major moves. By rolling your money over rapidly through short term gains you can quickly build up your equity.

What are the (dis)advantages of Swing Trading?

Swing Trading combines the best of two worlds - the slower pace of investing and the increased potential gains of day trading. It works well for part-time traders - especially those doing it while at work. While day traders typically have to stay glued to their computers for hours at a time, feverishly watching minute-to-minute changes in quotes, Swing Trading doesn't require that type of focus and dedication.

While day traders gamble on stocks popping or falling by fractions of points, swing traders try to ride "swings" in the market. Swing Traders buy fewer stocks and aim for bigger gains, they pay lower brokerage and, theoretically, have a better chance of earning larger gains. With Day Trading, the only person getting rich is the broker. "Swing traders go for the meat of the move while a day trader just gets scraps." Furthermore, to swing trade, you don't need sophisticated computer hook-ups or lightning quick execution services and you don't have to play extremely volatile stocks.

Of course, the problem with both swing trading and long-term trend following is that success is based on correctly identifying what type of market is currently being experienced. Looking back over the past few years, trend following would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect.

There is a risk that prices will break the channel and that swing traders buy or sell at the worst time; thus losing invested capital. The 'preservation of capital' as a paramount consideration across all trading, and also applies when Swing Trading. Other risks inherent in equities or financial instruments trading exist, such as market risk, sector risk, and company risk.

How does Swing Trading work?

The basic strategy of Swing Trading is to jump into strongly trending currencies after its period of consolidation or correction is complete. Strongly trending currencies often make a quick move after completing its correction which one can profit from.

It should be noted that in either of the two market extremes, the bear-market environment or bull market, swing trading proves to be a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indices are relatively stable for a few weeks or months. In a bear market or a bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby ensuring that the best strategy will be to trade on the basis of the longer-term directional trend. The swing trader, therefore, is best positioned when markets are going nowhere—when indices rise for a couple of days and then decline for the next few days, only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indices roughly the same as their original levels, but the swing trader has had many opportunities to catch the short terms movements up and down (sometimes within a channel).

So, swing traders are not looking to hit the home run with a single trade—they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger up-trend or down-trend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.

When it comes time to take profits, the swing trader will want to exit the trade as close as possible to the upper or lower channel line without being overly precise, which may cause the risk of missing the best opportunity. In a strong market, when a stock is exhibiting a strong directional trend, traders can wait for the channel line to be reached before taking their profit, but in a weaker market they may take their profits before the line is hit (in the event that the direction changes and the line does not get hit on that particular swing).

Swing Trading, while a good trading style for beginning traders, still offers significant profit potential for intermediate and advanced traders. Swing traders can realize sufficient rewards on their trades after a couple of days, which keep them motivated, but their long and short positions of several days are of ideal duration so as to not lead to distraction. By contrast, trend following offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but there are few traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (Day Trading) may just prove too great a white-knuckle ride for some, making Swing Trading the perfect medium between the extremes.
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US Dollar Lower as Stocks Rally in Asia, Higher CPI Not Good News for Euro Zone

The US Dollar retreated as stocks moved higher on Asian exchanges on optimism fueled by an unexpectedly civil summit of G20 finance ministers, a neutral stance on oil production from OPEC, and a reassuring tone to in US Fed Chairman Ben Bernanke’s interview on CBS’ 60 minutes. The annual pace of Euro Zone inflation is set to rise but its unlikely coming from an economic rebound.

Key Overnight Developments

• UK House Prices Fall at Record Pace for Second Month in March
• G20 Finance Ministers Civil But Short on Substance at UK Summit
• Bernanke Says Recovery to Begin in 2010 Only if Banks are Stabilized
• Euro, British Pound Reverse Early Losses Against the US Dollar

Critical Levels



The Euro pared early losses late into the overnight session, climbing back over 1.29 having tested as low as 1.2834. The British Pound not only recovered from an early -0.8% drop but managed to move into positive territory above the 1.40 level against the US Dollar. The US Dollar retreated as stocks moved higher on Asian exchanges on optimism fueled by unexpected civility at an informal summit of G20 finance ministers, a neutral stance on oil production from OPEC, and a reassuring tone to an interview with US Fed Chairman Ben Bernanke on CBS’ 60 minutes.

Asia Session Highlights



UK House Prices fell -9.0% in the year through March according to Rightmove, an online listing of for-sale properties. The pace of decline is effectively unchanged from the previous month’s record-setting -9.1%, suggesting the real estate slump that has eroded household wealth and cut consumption is showing now signs of abating. Market research agency GfK has predicted that a staggering 40% of British mortgage holders to be in negative equity by the end of this year, compounding already significant downward pressure on spending from rising unemployment with disastrous results for economic growth. A survey conducted by Bloomberg puts the output drop at -2.7% through 2009 and the International Monetary fund reckons the UK will face the deepest recession among the G7 nations.

An informal summit of finance ministers from the G20 struck a conciliatory tone after US Treasury Secretary Tim Geithner ignited tempers by calling on Europe to do more in fiscal stimulus to help support US efforts to revive global growth, specifying that governments should look to commit 2% of GDP in 2009 and 2010 in spending and tax cuts. The communiqué following the meeting introduced a “twin-track” approach of immediate stimulus and financial system repair in conjunction with medium-term goals of strengthening regulatory oversight. Importantly, the document seemed big on generalities, espousing such admirable intangibles as taking “whatever action is necessary until growth is restored” but offering little in terms of concrete policy prescriptions. This meeting was designed to set the stage for a sit-down of the G20 heads of state in April.

US Federal Reserve Chairman Ben Bernanke gave his first interview since taking up his post to CBS’ 60 Minutes. The Fed chief said that economic growth will likely find a bottom this year and begin to recover in 2010. However, Bernanke cautioned that, “recovery is not going to happen until the financial markets and the banks are stabilized.” The chairman indentified a “lack of political will” as the biggest threat to putting the economy back on track.

The Organization of Petroleum Exporting Countries (OPEC) decided to keep production quotes unchanged, sending the price of crude oil tumbling to test as low as $43.85/barrel.

Euro Session: What to Expect



The Euro Zone Consumer Price Index is set to show that the annual pace of inflation rose to 1.2% in February from 1.1% in the previous month, the first tick higher since price growth peaked at 4% in July 2008. Indicators measuring business and consumer sentiment extended months of losses to set new all-time lows in the same period, so it seems unlikely that this inflation will be of the benign variety that comes with renewing vigor in economic activity. Rather, rapid depreciation may be the reason for the higher CPI reading. On average, the Euro has fallen 15.1% against the currencies of the regional bloc’s top five import partners, raising the cost of foreign-made goods for consumers on the continent. The implications of this trend could be quite ominous considering the pace of price growth is rising even as the economy sinks deeper into recession, limiting the ability of the European Central Bank stimulate growth through monetary policy for fear of letting inflation skyrocket. Where some countries are worried about deflation (falling prices), it seems the Euro Zone could see stagflation (rising prices and falling output) as a real threat in the near term.

Separately, fourth-quarter Euro Zone Employment figures are set for release. The jobless rate grew 6.6% to the highest in over 2 years through the last three months of 2008, raising the likelihood of a down print for today’s release.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Lower as Stocks Rally in Asia, Higher CPI Not Good News for Euro Zone
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USD Losing Strength Ahead of Interest Rate Announcement

After depreciating consistently over the past few weeks, the USD is now traded over 1.29 against the EUR, and over 1.40 against the GBP. This week on Wednesday, at 18:15 GMT, the Federal Reserve will deliver an Interest Rates statement, and is widely expected to leave it on 0.25%. However, Bernanke's speech from yesterday might hint that a rates hike is no longer taboo. Such decision could create mayhem for the leading currencies, and forex traders must be prepared.



USD - USD Propped-Up by this Week's Bullish Expectations

With a rally in stocks and other equity markets last week, traders witnessed a significant downtrend in USD pairs and crosses. Losing strength to almost all currency rivals, save the JPY, the greenback indeed suffered from this increase in risk appetite. Trading down against the EUR at 1.2926 last Friday, and also returning to the 1.4000 level against the GBP, the short-covering action on the USD inflicted some deep wounds to the American currency.

With few data releases helping or harming the EUR, the USD was likely losing strength from the unwinding of long positions on the Dollar in exchange for higher-yielding assets. In today's early trading sessions, the USD regained some of its lost momentum and is currently trading at 1.2886 against the EUR.

As European markets come online later on, the increased liquidity may in fact push the USD lower against the EUR as European indicators are forecasting a lack of any significant change, whereas the U.S. government will be releasing figures which are predicted to present relatively bullish results. Under normal circumstances the USD would receive a positive boost, but during these times of recession and financial crisis, positive figures may result in an increase to risk appetite; causing a turn of events similar to those of last week. The USD could turn around from this morning's gains and test the 1.3100 level by day's end.

Traders should be watching for today's release of Treasury International Capital's (TIC's) Long Term Purchases report, which is expected to indicate that demand for U.S. long-term securities has increased, most likely leading to a concurrent increase in demand for the USD. As interest in American securities increases, the value of the Dollar rises with it since investors must purchase these securities in USD. Whatever the outcome, today will likely see a sharp volatile movement in the value of the USD's pairs and crosses.

EUR - EUR Lacks Clear Direction; Will Euro-Zone Confidence Continue Weakening?

After a week of solid gains against many of its currency rivals, the EUR now appears to be leveling off, and in some instances weakening against other currencies. Last week's strength may actually have been attributed to an increase in risk appetite and therefore an unwinding of safe-haven USD positions, of which the EUR was the beneficiary. With neutral economic data emanating from Europe last week, this may indeed be the case. Ending the week up against the USD at 1.2926, and at 0.9228 against the GBP, the EUR made gains in its tug of war against its primary currency counterparts.

As economic suffering begins to build across Europe, the European Central Bank (ECB) is finding itself under greater pressure to reduce interest rates in an effort to stem the economic slide, as well as prevent a deflationary cycle from forming. With a multitude of countries comprising the European Monetary Union (EMU), it is less likely that further monetary easing can or will take place in the Euro-Zone, but a further reduction of interest rates is possible in the near future. With such a turn of events, the EUR is not likely to regain any mantle of strength in the coming days. As the USD leads the other currencies in making the market, EUR strength will most likely be attributed to an unwinding of Dollar positions, not from any inherent strength in the EUR itself.

Looking ahead this week, traders will see a series of data releases which would be foolish to ignore. Today's consumer pricing and inflationary information for the region may set the tone for the EUR this week, but the market-maker for this regional currency is likely going to be tomorrow's release of the ZEW economic sentiment reports from Germany and the broader Euro-Zone regional economy. If consumer confidence continues to decline, traders will likely see a reduction in interest rates happening much quicker, and potentially deeper than expected, and the EUR will continue to be sold off to fund safer investments. Without a strong vote of confidence this week, the EUR may be on the receiving end of a downward slump lasting through Friday.

JPY - Bank of Japan Desires Weaker Yen; Expect Monetary Easing?

After seeing a short rally from sudden USD-weakness, the JPY has now resumed its previous downtrend against many currency rivals. Ending last Friday at 98.01 against the USD and 126.43 against the EUR, the JPY has continued to weaken from the unpleasant economic situation which has been brewing in Japan these last few months. The Bank of Japan (BoJ) is scheduled to discuss another potential interest rate cut later this week, but with the lowest rate worldwide, a further reduction seems counter-productive.

The BoJ has made it clear that a weakened Yen is what they desire as it will help stimulate exports for this heavily trade-dependent nation. With further negative economic data set to be released this week, traders will likely see a continuation in the downtrend of the JPY through Friday.

Crude Oil - Output Cuts Claimed to Produce Results

The Organization of Petroleum Exporting Countries (OPEC) has recently claimed that their previous production cuts have begun to take effect and the price of Crude Oil has continued to hold strength. Finding support in the $40-50 price range, the price for a barrel of Crude Oil has finally stabilized, according to the cartel, and further production cuts will not be necessary since expectations are for demand to begin increasing by 2010.

Various accounts have been given for what a reasonable price for Crude Oil might be, and a few oil ministers from within the cartel are aiming for a price range near $70 a barrel. The expectation is for the price for Crude to hold within the current range until the recession begins to ease and demand picks back up. Once achieved, the price of Oil should climb back towards the $60-70 price range by early 2010. However, without accomplishing an economic turn-around, prices may drop once more and OPEC could consider a further production cut towards the end of this year.

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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!