how to trade in your spare time?

Many people think that trading foreign exchange (FX) requires a lot of time to research the market and to identify trading opportunities. However, I believe the 24 hour nature of FX makes it easier for traders to take advantage of trends in currencies because they are not bound by when an exchange allows them to trade. So regardless of what your busy schedule is like, there are trends in the market you can take advantage of with as little as 30 minutes of time invested per week.

There are several different ways to approach the market if you are short on time. Today, I want to share with you one of these strategies to trading FX in your spare time. Today’s strategy is called the Simple DNC Breakout. I chose this strategy because the tools involved in identifying trades are fairly intuitive even if you have never traded FX previously.

Before I get into some specifics of the strategy, you may be wondering how a trader can effectively find good trades if they are not constantly watching the market? You see, the essence of this approach is that you will place orders to enter into the market at strategic price points. When the market trades through these prices, this will be our signal to enter the trade and your resting order with your broker will take care of the entry and exit automatically.

So the strength of this strategy depends upon the strength of the trend. We want to utilize the strongest trends in the market at the moment…the stronger the trend the better. When these strategic price points are reached, we want to enter the trade in the direction of that strong trend.

As a result, there are 2 significant benefits to this type of strategy.

1. No need to baby sit the trades. Place orders to enter the market at specified prices then simply let the market enter you into these trades at these strategic prices. Many of these trades will trigger while you are away from your computer, sleeping, or busy with other time commitments.

1. This strategy can keep you out of SOME losing trades. Don’t get me wrong…you will still have losing trades. However, it happens frequently where you will be wrong on a trading idea but you never get entered into the trade…which would have been a losing trade. You see, if the market never trades to your strategic price point, then your entry into the market does not get triggered. This means you are kept away from the losing trade
2.  
   
   The Simple DNC Breakout Strategy
   Tools Needed:
   *A price chart set to the daily bar
   *The Donchian Channel (DNC) indicator
   *A strong trend
   *30 minutes of time to identify strategic price points
   To get started, open up a price chart of a currency pair that has been in a strong trend. The Australian Dollar has been one of the strongest currencies for the past 3 years. So the AUD/USD is a good place to start. A daily price chart means each bar or candle on the chart represents one day’s worth of price action.
   Secondly, add the DNC indicator to the chart (most charting packages include this for free). The DNC indicator will calculate the highest high and the lowest low price for the past X number of bars.
   Set the input value of the DNC indicator to 8. This means we want to see the highest high price and the lowest low price for the past 8 days worth of trading. Your chart should look like this.
   
   (Created using FXCM’s Marketscope 2.0 charts)
   Identifying the Strategic Price Points
   Now comes the fun part. Since the AUD/USD has been in a strong up trend for the past 3 years, we want to filter our trades so that we are only looking to buy this strong up trend. Conversely, if we were trading a strong down trend (like the EUR/AUD), then we would filter for only sell trades. Setting up the trade is a simple 4 step process.
   
   (Created using FXCM’s Marketscope 2.0 charts)
   Rules to Buy:
3. We will use the upper DNC line as are strategic price point to enter our position as a buyer (green circles).
4. We will use the lower DNC line as our stop loss.
5. Manually trail the stop loss at the lower DNC line.
6. Exit the trade when price reaches the lower DNC line (pink circles).

The opposite is true for selling a strong down trend.

1. Use the lower DNC line as the strategic price point to enter a sell trade.
2. Use the upper DNC line as the stop loss point.
3. Manually trail the stop loss at the upper DNC line.
4. Exit the trade when price reaches the upper DNC line.

You can see in the above chart, there were 3 trading opportunities from October 2011 to the present. When price tagged the upper line, we are entered into the market as a buyer. Our exit point in the trade is the lower DNC line.

Spare Time

While logging into your charts, most of your time will be spent reviewing the location of the upper and lower DNC lines. If the location of these lines moved since your last review, then you would change the entry orders in your brokerage account according to the strategy rules.

Since we are interested in the highest high price for the past 8 trading days, these price points likely won’t move much on a day to day basis which affords us the opportunity to check on them at least 1 time per week. As you can imagine, it doesn’t take very long for check the change in the strategic price points and it can usually be completed within 30 minutes.

finding best forex broker

The Best Way to Find a Broker

Every trader knows that he or she will need a broker to trade in the Forex market. Yet they don’t know how to find a good Forex broker. There are many brokers in the Forex market. And there are many different types of brokers. Knowing how to find a broker is not a decision that should be made lightly.
When a person begins to make inquiries about trading Forex, he or she could be inundated with advertisements from brokers offering to help him or her trade in the Forex market easily, effortlessly, and inexpensively. Most of these brokers will be legitimate, but a few will be fraudulent. Beginning traders need to know the signs of an unscrupulous broker to avoid becoming a victim of Forex fraud.
The Best Way for New Traders
Many people don’t have any experience with brokerage houses or individual brokers. As the Forex market opens up to individuals, the number of new traders is growing. Don’t feel alone or alarmed because there are ways for a new trader to find a legitimate broker.
The best way for beginning traders to find a broker is to contact the National Futures Association. This organization monitors brokerage firms and brokers in the currencies market. It is a voluntary organization, but holds its members to very high standards, has a complaint and disciplinary procedure, and oversees the actions of its members. It is one of the best sources of information on a brokerage firm.
Anyone can obtain a directory of the NFA’s members. This directory will list all its members, provide contact details, and give the most current information (including complaints and disciplinary action) about the brokerage firm. It is an excellent way to begin the search for a Forex broker. To obtain this important directory, contact the NFA and complete the NFA Directory Order Form.
If you have already identified a broker, but you need more information, you can search the NFA’s database for the most current information and details about the broker

 
Several brokerage houses can trade in many different markets. For traders who have experience with trading stocks, options, or commodities, the best way could be to use their current broker if they have access to the Forex market.
If the current broker does not have this type of access, the trader could obtain a recommendation from their current broker about legitimate brokers in the Forex market. This is not to say that the trader should use any Forex broker who advertises with the current broker. No, an advertisement is not an endorsement. The trader should talk directly to the customer service department and ask about their recommendation for a Forex broker.
Alternatively, the trader can contact the National Futures Association.
The Best Steps:

• Use your current stock or commodities broker.
• Ask your broker for a recommendation.
• Talk directly to an in-house broker or customer service agent.
• Avoid advertisements.
• Contact the NFA (see above information for new traders).

One of the most important decisions to make for beginning traders is how to find a legitimate broker. Don’t take this decision lightly. This will be a relationship that should last a long time. It will also involve constant contact and a financial commitment.
Taking the above steps will help all traders reduce the risk of becoming the victim of a Forex scam and protect the money committed to trading currencies.

indicators 6 - Stochastics

Stochastic is an oscillator that determines where the most recent closing price is relative to its price range over a given time period. It is one of the most popular oscillators that traders use in range-bound market.
The indicator involves two lines:

1. %K
2. %D which is a D-period moving average of %K

Where

1. %K = 100 [ (C - Ln) / (Hn - Ln) ]
2. C = latest close, Ln = lowest close over last n periods, Hn = highest high over last n periods

The most commonly used time period is 14, and the most common value for K and D are 5 and 3 respectively.
As you can see in the formula, %K measures where the closing price is in relation to the price range over n period of time. If the lowest close over last periods is 0, highest high over last n periods is 100, and the closing price is 75, then %K = 75%, which means the price is close quite close to the highest high.

Applications of Stochastics:

1. Detect overbought/oversold levels
When Stochastic is over 80, the pair is considered to be overbought. If Stochastic is below 20, the pair is considered to be oversold. It works best in range-bound market. If the currency pair is in strong trend, the overbought/oversold levels offer limited value.
2. Crossovers
If the %K line crosses above the %D line, especially below the lower extreme of 20, a buy signal is generated. If the %K line crosses below the %D line, especially above the higher extreme of 80, a sell signal is generated.

In the above charts, six selling signals were generated in the range-bound period of EUR/USD. Notice that Stochastic may stay above 80 when the up-trend went strong at later stage.
 

Some Final Words about Technical Analysis

We have gone through some of the most common indicators in the previous articles. Traders may actually find that there are many other technical indicators in their charting software. There is no single indicator can do all the work, traders may pick a few of their favorites under different market situation.

When the Market is Ranging

When the market is ranging, there are only two possibilities if the price hits the boundary: retrace or breakthrough the boundary. The two possibilities make up the two major trading strategies in range-bound market: to trade inside the range or to trade after the breakthrough.

Technical indicators in Range-bound market

1. Oscillators (RSI, MACD, Stochastic)
The oscillators are the best detectors of overbought and oversold conditions. When the market is ranging, traders can pay attention to the overbought/oversold levels of the oscillators, or the crossovers of the MACD lines and Stochastic lines. The signals from the oscillators are always few bars behind the prices. Traders should compare the current price with support/resistance levels and the indicators' signals, so as to make a better trading decision.
2. Bollinger bands
In range-bound market, Bollinger bands help to tell the future direction of the price movement, particularly when the price breaks through the bands or rebounces away from the bands. If the bands are getting wider towards one direction (either up or down) in a range-bound market, it means the price is moving more vigorously towards that direction, and it is getting higher volatility. Price may eventually break through that boundary. If the bands and the central line is moving parallel and keep a constant width, the price is more likely to retrace at the two bands.
3. Support/resistant levels
Resistant levels are formed by recent highs, and support levels are formed by recent lows. The more times the price hits the recent highs/lows, the stronger is the resistance/support levels. Traders can buy at support levels and sell at resistant levels, and should always set tight stop just below the support level or above the resistant level to prevent any severe loss with subsequent breakthroughs.
4. Candlestick patterns
There are three indications from the candlestick patterns: bearish, bullish or neutral. Traders should not place their trades solely base on candlestick patterns. A bearish pattern (like a bearish engulfing pattern) is only valid when it occurs near the resistance levels. If the price rises further after a Doji, and it breaks through a resistant level, the Doji is seen as a bullish signal.

When the Market is Trending

Trends occur when the market makes higher highs or higher lows (or lowers lows and lower highs). When the price is near the support/resistance levels in a trending market, there are only two possibilities for the price movement: to retrace or to keep going in the original trending direction.

Technical indicators in Trending market

1. Trend-lines
The trend-lines indicate the direction of the trend and the support/resistant levels. Traders can buy at support level when the market is undergoing retracement, or can sell when the price falls below support level. On the other side, traders can sell at resistance level when the market re-bounces, or can buy when the price rises above the resistant level.
2. Fibonacci retracements
If the market is undergoing retracements, Fibonacci levels can estimate to which level the market is expected to resume its current trending direction. Traders can place orders near those Fibonacci levels.
3. Moving averages
Moving averages can tell the direction of the current trend and they can also act as support/resistant levels. If the price falls below a moving average support level, or it breaks above a moving average resistant level, it is a signal of reversal. The longer the period of the moving average, the more reliable is the signal.
4. Divergence of oscillators
Although the overbought/oversold levels of oscillators are of less use in trending market, the divergence of oscillators can indicate the future direction of the trend. When a divergence occurs, traders should pay attention to the trend-lines, moving averages and Fibonacci levels, to see if the retracements have caused any breakthroughs and confirms any reversal signals.
To conclude, traders shall not rely on only one technical analysis tool to make trading decisions. They shall consider the overall situation on the market and take references from different technical analysis tools. Even so, it does not mean that the more technical analysis tools they use, the more accurate are the decisions. In general, three to four references from different technical analysis tool groups would be enough.

indicators 5 - RSI and MOMENTUM

Relative Strength Index (RSI) measures the strength of all upward movement against the strength of all downward movement in a specified time frame.
For mathematical formula of RSI is as follow:

• RSI = 100 - [100/(1+RS)]
• RS = average of n day's up closes / average of n day's down closes

The most common parameter for RSI is period 14, although users can pick their favorite period of time if they wish. It is one of the most popular oscillators that works well in range-bound market.
RSI can range from 0-100. In the formula, if RS = 1, which means the average n day's up closes equals to the average of n day's down closes, RSI = 50. In that case, the market is having an equal strength of upward and downward force. If RSI > 50, which means the upward force is stronger than the downward force. If RSI < 50, which means the downward force is stronger than the upward force.

Applications of RSI:

1. Detect overbought and oversold condition
If RSI > 70, the market is considered to be overbought, a selling signal is issued; if RSI < 30, the market is considered to be oversold, a buying signal is issued.

2. Spot Divergence
If the price near support/resistance level and the RSI begin to diverge and are heading different direction, it may signal a weakening of trend.
The occurrence of divergence can deemed to be the weakening of the current trend or a reversal is about to happen.
In the chart below, the price is making lower lows, however, the RSI does not make any lower lows, it lows are going higher and higher. That marks the weakening of the current downtrend.

MOMENTUM

Momentum measures the rate of change of the currency pair.
Momentum = V - Vn
Where
V = latest closing price
Vn = closing price n periods ago
If there is no change of closing price, momentum equals to 0, which is the central line of the indicator. When there is a rise of price, momentum is greater than 0. If the closing price is smaller than the closing price n periods ago, momentum is a negative value. The most common period for n is 14, traders can adjust the value according to their preference.

Applications of momentum

1. Detect overbought/oversold conditions
When momentum reaches upper boundary level, the pair is considered to be overbought. If momentum reaches lower boundary level, the pair is consider to be in oversold condition. Since momentum has no fix range, there is no standard value for the upper and lower boundary. Traders may consider different boundary values for different currencies after a while of observation.
2. Spot divergence
If momentum is at near its boundary and it heads different direction with the price, a divergence is occurred. Divergence may signal a weakening of the current trend or a reversal may happen.

3. Crossing the central line
The cross over of the central line is deemed as a change of direction of the general trend. When momentum crosses below the central line, a sell signal is issued, whereas a cross above the central line, a buy signal is generated.

indicators 4 - envelope and macd

The moving average envelope is a variant application to the moving average. It is a trading band composed of two moving averages, which attempts to determine the range of market should be trading in. Traders can choose their period of MA, then form the upper line of the envelope by shifting the MA upwards and the lower line of the envelope by shifting the MA downwards.
The reasoning behind the envelope is that moving averages define the general trend of the market and are the best-fit line to the recent movement of the price. Most of the data should appear close to the moving average lines. The envelopes define a range away from the moving average that the price should return to the center in a short term if the price strays too far away from the moving average. Therefore, the envelopes are best to identify potential reversals when the price hits the envelope boundaries.
On a daily chart, it is common to use 21-day Simple Moving Average and form the envelopes with 2% or 3% above and below the 21 day SMA. For longer term trading, traders can choose longer time frame like 50-day SMA and larger percentage variation like 5%.

In the above chart, you can see prices stay within the 3% band most of the time. When the price hits the boundary of the envelopes, it is a sign of reversal. Somehow the price returned to the centerline and move on again. However, traders are reminded that not every signal is valid. When the trend is strong enough, it can raise (or fall) along the envelope boundary resulting many false signals.
MACD
Moving Average Convergence Divergence (MACD) shows the difference of two moving averages - EMA12 and EMA26, and a 9-day EMA of the difference is plotted against it to trigger buy or sell signal.
There are three parameters in MACD:

1. MACD line - the difference between the 12 and 26 period EMA
2. Signal line - the 9 day EMA of the MACD line
3. Histogram - a visual representation of the difference between the MACD line and the signal line

MACD is best use in range-bound market to detect the momentum change and overbought/oversold conditions within a price range.

Applications of MACD:

1. Detect overbought/oversold levels
When the MACD line is far above from the centerline, the market is considered to be in overbought condition; while the MACD line is far below the centerline, the market is deemed to be in oversold condition.

2. Crossovers
When the MACD line crosses above the signal line, a buying signal is generated; while the MACD line crosses below the signal line, a selling signal is generated.

3. Divergences
If the price is moving higher, but the MACD line is moving lower, it signals the weakening of the up-trend or a reversal. If the price is moving lower, but the MACD line is moving higher, it signals the weakening of the downtrend or a reversal.

indicators 3 - bollinger bands

Bollinger bands were created by John Bollinger in the early 1980s. The bands have similar theory and application with the Moving Average Envelopes. It has a set of three curves, the typical parameters are:

• Middle Bollinger Band = 20-period simple moving average
• Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation
• Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation

The theory behind Bollinger Bands is that, in a normal distribution data set, 68% of data should fall within one standard deviation and that roughly 95% should fall within two standard deviations. So 95% of the price should fall within the 2-width standard deviation, which is within the upper and lower band.
Bollinger bands are often used to forecast reversals in rangebound markets. When the price is close to the upper band, the market is more likely to be in overbought condition, and is likely to reverse. The same holds for the lower band condition.
In the chart below, you can see that prices are likely to reverse at the upper and lower bands. Since 95% of the prices should fall within the band, the price should move back within the envelope if it rises above the top band or falls below the bottom one.

Because standard deviation is also a measure of volatility, traders can know the market condition by observing the Bollinger bandwidth. The bands widen, meaning moves further away from the middle band, when the market is more volatile. The bands contact, meaning moves closer to the middle band, when the market is less volatile.
The Bollinger bands are best to use in ranging markets, but are of limited value in trending markets. As shown on the above chart, when the market is in strong trend, the price can move along the upper or lower band, resulting in many false signals. Traders are better to combine Bollinger bands with other indicators or candlestick patterns to determine a trade.

indicators 2 - moving averages

What is moving average?

Moving average is the average rate of a currency pair over a set period. For example, if you conduct a 20-day moving average (20 day MA), you simply add the close price of the past 20 days and divide it by 20. This is called a simple moving average (SMA).
The most common parameters for moving averages are 5, 10, 20, 50 and 100. The smaller the time frame, the more reactive and sensitive is the indicator to the market movement. The longer the time frame, the smoother is the moving average. Traders should keep in mind that the longer the time frame, the more reliable is the study.

Moving averages show the direction of the trend. As shown in the above chart, the shorter the time frame, the more sensitive is the SMA to the direction of the trend. In an up-trend, the shorter time frame averages should be above the longer ones, where the current price should be above the shortest SMA.

SMA, EMA and WMA

There are few varieties of the moving averages. The most common ones are: Simple Moving Average (SMA), Exponential Moving Average (EMA) and Linearly Weighted Moving Average (WMA). EMA and WMA are under the moving average family that they put more weight on recent data in calculations. They react faster than SMA to the current price movement. As shown on the chart below, 10 WMA is more sensitive to the current price movement than the 10 SMA.

Applications of Moving Average

1. Direction of the trend
Moving averages can show the direction of the current trend. Generally, an up-trend is confirmed when a short-term moving average crosses above a long-term one, and the short-term moving average remains above the long-term moving average. Conversely, a downtrend is confirmed when a short-term moving average crosses below a long-term one, and it remains below the long-term moving average.
Traders can recognize the direction of the trend with reference to the direction of the trend line and their order of arrangement.

2. Support and resistance
The moving averages can act as support and resistance lines. In an up-trend, the SMAs below the rising price can act as support levels. If there is a retracement, the price is likely to bounce off the moving averages. It is the same for a downtrend movement, that the SMAs above the falling price can act as resistance levels.
As shown in the chart below, EUR/USD has experienced a strong downtrend since April 2005. The price retraced a couple of times to the 10 day SMA, however failed to break through and followed with subsequent drops.
The longer the time frames of moving averages are regard as stronger support or resistance than shorter time frames ones. When the price hits the longer time frame moving average, it means a stronger retracement. Traders can combine the candlestick patterns when decide to trade with the moving averages. For instance, a selling decision in a downtrend can be confirmed by price retracement to a 20 day SMA level and a bearish engulfing pattern.

3. Crossovers Signals
Whenever a shorter-term moving average crosses over a longer-term one, it indicates that there is a momentum shift. Traders can use this opportunity to enter a trade in the direction of the crossover.
Since the shorter-term moving averages react more quickly to the market price, a crossover indicates a change of sentiment in the market. In the chart below, the 10-day SMA cut above the 20-day SMA in April 2006, it was a bullish crossover. It indicated an upward momentum. Later in June 2006, the 10-day SMA cut below the 20-day SMA, it indicated the up-trend had lost its momentum and the downtrend was in control. Traders can use the crossovers as entry and exit signals of trades.
The shorter term moving averages generate more crossovers as they react more quickly to the market. However, they also generate more false signals. Traders are recommend to trade the moving averages along with other technical analysis tools, like candlestick patterns or other technical indicators.

Limitations of Moving Averages

Moving averages are best to apply in a strong trending market, otherwise, there can be too frequent crossovers that includes many false signals.
In the chart below, USD/CHF was going an up-trend and there were many retracements to the support line. There were numerous crossovers between the 10-day SMA and 20-day SMA. In this case, the crossovers were inexact signals and they do not take into account the price in relation to the support level. Trading based on SMA crossovers requires caution and better to wait for other signals or candlestick patterns to confirm the trade once a crossover signal occurs.