Archive for July, 2009

Forex Trading Signal Providers: What To Look For

As the popularity of trading the currency exchange markets online from home increases, the number of forex trading signal providers is increasing too. In fact they are proliferating to such an extent that it can be very difficult to know how to find the best one.

Signals are the main source of information for some traders who do not have the time, experience or inclination to analyze the markets for themselves but do not want to trust their trading to a robot. Equally they can be a useful source of additional information and trades for those who mainly make their own trading decisions.

You usually have to pay to subscribe to a forex signal service. Fees may be charged per month or per signal. Some companies offer a trial period where you can test their service on a demo account. If not, you will be paying out money from the start so to have a chance of making profits, you need to be trading at a level where you can expect to make more money from the signals than they are costing you.

The first thing that most people look at when considering forex trading signal providers is their recent results. This can be a mistake. Recent results are not as important as performance over the long term. So do not be seduced into signing up with a company who make a huge deal of their last month’s good results but will not tell you what their signals have made over a full year. Also remember that when they show their profits, they do not have to take account of the cost of the signal service itself.

Remember that most traders starting out in the forex markets lose money. Forex is a risky form of investment and you should be prepared for this. Losses are not always the fault of the information. Even if you are receiving profitable signals, you can make losses if you do not have a clear plan for managing your funds. It is very easy to take bigger risks than you should, so that an unexpected loss has a big impact.

Most companies who offer forex signals will send them to you by email and/or SMS text message. It is best to get both, although SMS alone can be enough for some people. The only problem with SMS messages is that it is very frustrating when one arrives and you are too far from a computer to access your account. If you are a serious forex trader relying on signals, you may want to get your PDA hooked up to your trading account so that you can deal with those signals that arrive when you are stuck in traffic or having lunch with a client.

Remember that the foreign exchange is a 24 hour market. Be prepared to be woken in the middle of night by your cell phone bleeping with an SMS that you need to act on right away. You may want to check how your spouse feels about this too. Even the best information from the top forex trading signal companies is probably not worth getting a divorce for!

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Monday, July 6th, 2009 Strategy No Comments

FX Charts: How To Use The MACD Indicator

The MACD or Moving Average Convergence Divergence indicator is one of the most popular tools on FX charts. It can be used either as an indicator in itself, or as a check when you are mainly relying on other tools.

The MACD chart measures faster and slower moving averages and whether they are getting closer together (converging) or farther apart (diverging).

When they are converging you will see the two lines on the chart approaching each other and the bars on the histogram at the bottom of the chart become smaller. This usually indicates that the current trend is coming to an end or has ended.

Of course the faster line reacts to a change in price movements more quickly than the slower line. So when a new trend forms, the faster line will get closer and finally cross the slower line. If it then separates or diverges from the slower line, this is often an indicator that a new trend has formed.

When the two lines cross, the bars of the histogram will be at zero and then cross their axis so that if they were below the axis before, they are now above it, and vice versa. If a strong new trend is forming, the bars will quickly lengthen in the new direction.

So this crossover could be used as a signal to place an order. You have a buy signal when the faster line crosses the slower line from below, and a sell signal when it crosses from above.

However, there are disadvantages to the MACD which make the crossover unreliable as a self standing signal. The main problem is that even the so-called fast line is significantly behind actual prices because it measures averages of the past prices. So when the market is very volatile, trends could be ending before the MACD crossover marks that they have begun.

Generally the MACD is a better indicator of the strength of a trend than it is of its direction. For this reason some traders ignore the crossover and look instead at the length of the histogram bars. However it is not a good idea to enter a trade on the basis of this histogram (measuring divergence) and then leave it as soon as the price goes against you.

So if you decide to trade the MACD, you should probably use it for both your entry and exit signals. This takes a lot of nerve and experience, and it is not recommended for beginner forex traders. So if you are just starting out, you are probably better advised to base your trading decisions on other indicators on FX charts and refer to the MACD only for background.

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Sunday, July 5th, 2009 Strategy No Comments

FX Technical Analysis: What Is An MACD Indicator

The MACD indicator is one of the most useful tools of FX technical analysis but it is not usually well understood. This is a pity because many traders could probably use it more effectively if they understood it better.

The letters of its name stand for Moving Average Convergence Divergence. It is true that the name sounds rather complicated and unfortunately this is often enough to put people off from wanting to know more. So they only use the very simplest applications without understanding the power of the tool itself.

Like most forex tools, this indicator is used to show us when a new trend is forming, so that we can get in on it and make money. The MACD does this by plotting the relationship between two moving averages.

Settings

The settings are usually expressed as three numbers. Commonly you might see 12,26,9.

Traders using FX technical analysis often make the mistake of thinking that the first number on the MACD indicator (12 in this example) relates to the faster moving average line, the second number (26) relates to the slower moving average line and the third number (9) relates to the histogram at the bottom of the chart. That is not quite correct.

In fact the first two numbers (12 and 26) indicate the number of periods used to calculate two moving averages. The faster moving average line, which is often green on the chart, measures the moving average of the difference between the 12 period and the 26 period moving averages.

The slower moving average line is often red on the chart. This line plots the average of the last 9 (or whatever is the third number) periods of the faster moving average line. It usually shows smoother curves because its effect is to smooth out the fast moving average line.

Divergence And Convergence

The histogram that measures convergence and divergence is the series of blocks stretching above and below an axis near the bottom of the chart. This simply records the difference between the faster and slower moving averages.

As the two moving averages separate from each other (diverge), the blocks of the histogram will become longer. As they get closer (converge), the blocks become shorter. If the two lines cross, the blocks of the histogram will switch from stretching above the line to dropping below it or vice versa.

So the histogram measures the convergence and divergence of the two moving averages. And that is why this tool for FX technical analysis is called a Moving Average Convergence Divergence or MACD indicator.

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Saturday, July 4th, 2009 Strategy No Comments

Stochastic Indicator: What Is It And How Do I Use It?

The stochastic indicator is an oscillator that enables you to see at a glance the momentum of the market. Momentum is the pressure or weight behind the current trend. It is based on the idea that while prices are rising, the closing price will tend to be higher than it would be if the market was stable. Equally, when prices are falling, the closing price will tend to be low. From this assumption the oscillator measures when a trend is considered to have reached its limit and is about to turn.

The actual calculations are complex but fortunately you do not need to do them because most trading software will do this automatically for you. This means that you should be able to access the indicator plotted on a chart in your forex brokerage account.

The stochastic indicator will give you two lines that usually run fairly close together:

- the line called %K gives a comparison of the last closing price to previous closing prices.

- the line called %D smooths out the %K line and can be used as a signal line.

So what does the stochastic indicator actually tell you, and how can you use it to make money?

Using it is quite simple. It gives a signal that a market is overbought or oversold. In other words, it will tell you when a trend should be about to reverse, according to the basis of their calculations.

If both lines are high, this is a signal that the market is overbought. If you are trading forex on the basis of this indicator you would put in an order to sell.

Conversely if both lines are low, they are telling you that the market is oversold and you could put in an order to buy.

Keep in mind that you should not trade on the basis of one indicator alone, but always seek confirmation from at least one other.

You will normally have horizontal lines on your charts marking the high and low points for you so that you can see at a glance when to act. In many cases you can alter the position of these lines to suit your trading style. The most common settings are 70, 75 or 80 for the high line and 30, 25 or 20 for the low line.

If your settings are closer (70 and 30) you will want the stochastic lines to stay above or below your trigger lines for a longer time before you trade. If your settings are at 80 and 20, any movement above them would be a strong signal. Check this out with your own backtests to decide when you would be comfortable putting in an order.

Many currency traders also regard the relative positions of the two stochastic indicator lines as a signal for forex trading. They would buy when %K crosses %D line from below going upwards, or from above going downwards.

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Friday, July 3rd, 2009 Strategy No Comments

Foreign Exchange Basics: How To Handle Forex News

If you want to make money from the forex market then you will need to know foreign exchange basics. You may have a good mathematical understanding of trends and charts but it is also important to understand the foundation on which the currency trading markets are based. If you do not, you could enter a trade at exactly the wrong time.

The forex market is heavily influenced by national and international news and current affairs. This especially relates to financial news but other major events can have an effect too. These may be expected or unexpected.

For example a disaster such as a major earthquake or terrorist attack is usually unpredictable but could affect currency values. There is not much you can do about this except always to be sure to use stop losses.

A more predictable event would be the announcement that the Olympic Games will be held in a certain country. This could strengthen confidence in that country’s economy and lead to a rise in the value of its currency. At the same time the other major contenders for the Games may suffer a fall in currency values. So it is important for a trader to know when an announcement like that is expected, and which countries are involved.

Similar situations are the financial reports that are released almost daily in many countries. Less regularly, but usually foreseeable, there will also be announcements about interest rates, inflation, gross domestic product and other matters of national economic importance.

Try to avoid trading on rumors. You might see news reports or hear other traders speculating that an announcement will go one way or the other. Do not trade on the basis that they are right. First because they still could be wrong, and second because if it is such a sure thing, the price has probably already changed to take into account the rumors and you will not gain much even if they are right.

Do not forget that you are always trading on two nation’s currencies, not just one. If your own country is one of them, you will have much easier access to financial reports for that currency and it is easy to forget to check on events in the second country. This is particularly true for Americans because dollar news tends to dominate the forex alerts anyway. It is even more true if you are trading the dollar against a minor currency. You may have to take positive steps to ensure that your information is not one-sided.

Even if you are just beginning as a forex trader, it is important to keep in mind these aspects of fundamental analysis for the forex market. Exiting the market before any major announcement is usually the best move for a beginner. As you become more experienced you may develop a system based on this type of forfundamental analysis, but it is important to become familiar with all of the foreign exchange basics first.

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Thursday, July 2nd, 2009 Introduction No Comments