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When you begin trading forex online it is important to have a plan, so you know what your goal is and what you are trying to achieve. If you are a new trader is it good to following some basic steps to assure you get of the ground with the rights tools. Later on in your forex trading career you will be able to add more advance strategies and learn more in debt how to trade various markets and use more advanced charts and trading tools
When you start to trade you can do it with a free forex demo account so that you do not risk any funds when you practice trading. This will help you to get familiar with the trading platform so that you don’t make stupid and expensive mistakes when you start to trade for real money. When you trade stick to your budget. If you lost your invested funds do not re-deposit until the month is over. Spend the time studying the market so you know what trades to make once you have cash to invest again. Diversify your trades so that you do not have all your money on one single position.
It is good to have several forex trading accounts. There is a saying that one should never put all the eggs in the same basket, and this is very much true when it comes to online forex brokers. It is recommended that, for example, if one is interested in funding a trading account with, let’s say 5000 $, then the logical thing to do is to split the amount into 2-3 equal parts and open 2-3 different trading accounts with 2-3 different brokers. This way the risk that the broker is going to go bankrupt or fail on its promises is being diminished by 2-3 times
As a trader you should decide the amount of money you wants to trade each month. It is good to have cash on the account to be ready to enter some good positions throughout the month. After all, trading goes like life goes, with its ups and downs, and this means some trades are positive, some not, but what is important is to be here on the long run and, of course to be profitable when the year ends. This comes with discipline and money management, and these two points are the pillars of this educational series.
It means managing your funds by having the ability of administering risk, and the ability to manage the money in your account without losing them all in one day.
It is good to split the investment you want to make into the currency pairs that are intended to be traded. In this sense, for example in trading FX majors, it makes no point to trade currencies that move in the same direction. If you buy contracts for EURUSD and the market moves in your favour, then buying more call positions for ex. GBPUSD makes no sense as long as EURUSD the call contract is in the money. If you do that you are essentially overtrading leaving yourself with overexposure.
Trading forex and CFDs on very short time frames is a risky business as you don’t have control over the potential outcome. True, you never do, but patterns are harder to spot and to build in very short time frames. Therefore, trading end of day expiration dates and even end of week/end of month expiration dates is a possibility and, a great opportunity as well for forex traders..
After deciding the amount to be invested the next thing to do is to divide it into the currency pairs and assets intended to be traded, and then again into different small amounts for having multiple entries. It makes no sense to trade one option with all the money for a respective week as putting all your eggs in the same basket is not the best decision to make.
A trading plan is key when deciding where to invest and what the expectations are. You need to make up your mind whether you want to be a day trader or investing long term. A day trader sells all positions within the day the positions are opened.
You have to decide what financial assets you to trade and if it is offered by the forex broker you have chosen or find a different forex broker with the assets you wish to trade. There are multiple asset classes and they are influenced by different factors.
The answer is that it depends what currency pair you want to trade and what time zone you are trading from.
A good starting point is the understanding that this is indeed a currency pair meaning the exchange rate moves are based on the differences between the two economies it represents: the Eurozone and US economies.
That being said, the economic calendar plays an important role in taking a trading decision in any currency pair, not only in the EURUSD.
What makes the eurusd special is the fact that it is the most liquid currency pair of them all as most traders are changing hands on the pair on a daily basis. Spreads are also low and this makes the pair appealing for the FX traders.
The AUDUSD, or the “aussie” pair, as it is also being known, is quite an interesting currency pair. It is highly dependent on what is happening on both the commodity markets and in China in general. The connection with the Chinese economy is quite strong because almost one third of all Australian exports are going to China so any moves into expansionary or recessionary territory in China should make the aussie pair travelling.
Commodities are highly important as well as Australia is a big producer of gold, coal, iron, etc, so what is happening on the commodities markets plays an important role for the Australian economy and the Australian dollar implicitly.
The first thing to keep in mind when it comes to the EURJPY pair is the fact that it is a cross and cross pairs are moving differently when compared with majors.
The difference between a major and a cross pair comes from the fact that majors have the US dollar as a component, while the crosses do not. The US dollar as the world’s reserve currency is maintaining it’s status as a funding currency and everything in the trading world is about the US dollar. It is not clear if this status for the US dollar brings benefits or not to the United States, but one thing is sure: crosses do not depend directly on it.
That being the case, EURJPY pair is moving based on the differences between the EURUSD and USDJPY pairs, two majors that are supposed to be inversely correlated.
However, this correlation is not 100% as that would mean that for one pip lower in the EURUSD market should move 1 pip higher in the USDJPY pair. Add to this the fact that the JPY pairs are highly dependent on what is happening with the equity markets and we have a pretty complicated picture.
Like any Euro related pais, this one is dependent on the European data and what is happening on the Eurozone as a whole.
Main data out of Europe is:
It goes without saying that economic news out of Europe are hardly influencing the way the EURJPY pair is moving as well as economic news out of Japan. When it comes to Europe, the most important is the CPI (Consumer Price Index) as it is representing inflation and the ECB (European Central Bank) is looking at inflation for setting up the monetary policy.
The next one in the order of importance is the PMI (Purchasing Manager Index) release as it shows if a sector is contracting or expanding and offers a clue regarding how the central bank is going to interpret the data: bullish or bearish, hawkish or dovish.
GDP (Gross Domestic Product) and unemployment rate are also pieces of data traders take into consideration when trading the EURJPY but the Euro does move when ECB is holding its monthly meeting as each and every meeting is being followed by a press conference. During this press conference, press representatives are asking questions and ECB President is answering and as a consequence market is fluctuating quite much.
After all, economic releases in a month are only for traders to form an educated guess about what the central bank is going to do next time a meeting takes place. If inflation, for example, is falling way below ECB’s target, then it is only normal to expect rates being cut and thus a negative for Euro as a whole and for EURJPY in particular.
The audcad cross is one of the most interesting pairs to be traded as it has a lot of particularities that are not to be found on other pairs. It is also called the commodity cross in the sense that is moving based on two different commodity currencies, namely the AUD and CAD currencies.
The Australian dollar is heavily dependent on the commodity markets so changes in price there are moving the currency. Look for how gold, palladium, platinum, silver, iron, etc is moving and you’ll have a pretty good idea about what the Aud is doing.
One other thing to consider when trading any AUD pair is the economic situation in China as the Chinese counts for almost a third of Australian exports. In other words, a slowdown in Chine shows a decreasing demand for Australian goods and this translates into a softer AUD as well. The opposite is true as well, with a strong Chinese demand being the equivalent of a stronger Australian dollar.
However, maybe the most important aspect to consider is the fact that the AUDCAD cross is paying a positive swap, and therefore traders interested in the carry trade event are driving the pair. Just as a side note, a positive swap means that each and every trading day the longs in the pair will receive an interest, or a swap, proportionate with the amount invested in the trade.
Because of that, AUDCAD moves are most of the times pointless from a technical analysis point of view and quick spikes in both sides are the name of the game.
The NZDUSD pair is also called the kiwi pair, after the New Zealand popular bird. Even that tells you almost anything you need to know about the New Zealand. However, there’s some more of course as the economy down there is mainly based on agriculture as there are more sheep than people on the island. Taking that into account, one may want to know where the diary index is released as the kiwi is going to strongly fluctuate at that release.
One of the main exporting products is represented by powder milk, to China, so what is happening to China in terms of economic growth (expansion/recession) is important as if demand plummets, then likely the milk prices will plummet as well, and therefore the kiwi pairs will be affected too.
RBNZ (Reserve Bank of New Zealand) is meeting on a regular basis, monthly, on a Wednesday, and sometimes it is coming right after the FOMC meeting and statement so the ones that are trading the NZDUSD may have the surprise of seeing the pair moving in one direction with the FOMC and in another one during the RBNZ.
The most important things to consider out of New Zealand are, of course, the GTI Index (dairy index) and RBNZ meetings, press conferences and speeches.
Look for the NZD pairs to travel aggressively when interest rate decisions are being announced as with current downturn in global economy commodities were the ones to suffer the most. As a consequence, both Australia and New Zealand had to adapt to the new situation and slashed the interest rates quite aggressively.
NZD pairs are extremely tricky to trade and especially the NZDUSD pair as for the FX market it is requiring little margin. This makes room for overtrading to appear and this is something everyone wants to avoid.
Changes in inflation expectations are moving the pair too and I would say economic releases out of the US are more important than the ones out of New Zealand when it comes to the way the NZDUSD pair is moving.
The kiwi pair because of the low margin required and a positive swap, is one of the favorite one for trading it on the long side and this makes the short side exposure vulnerable to quick and vicious moves. However, in binary trading this is not the case but considering that positive swap is influencing a trader’s perception when choosing what currency pair to trade is important for future price movements.
FOMC (Federal Open Market Committee) is meeting every six weeks and forward guidance and economic projections are being published as well as a press conference every 2-3 meetings. During these events, the US dollar is moving sharply and as a consequence all US dollar related currency pairs are moving as well, NZDUSD included.
The USDCHF is considered to be a special pair to trade in general but after the SNB (Swiss National Bank) this January, we can say now it is even more difficult to be trade.
The reasons for the above are coming from the fact that the CHF is thought to be a safe heaven currency, meaning when times are tough and people/investors are trying to protect their money, they are looking for the best value for them, even if sometimes they are paying a high interest. It is the case with the CHF today as the interest rate is negative, -0.75% and this means that a customer that wants to deposit in Swiss Francs, pays for the privilege the bank is keeping its money.
This negative interest rate territory is something new in modern economics and the purpose is to stimulate people to leave more money into the real economy rather that keeping them in a savings account.
The usdchf pair is of course reflecting the economic differences between the US and Swiss economies and therefore when such news are being released, the pair is traveling.
Out of the United States, the most important pieces of news that influence the pair are: FOMC meetings and minutes, press conferences and testimonies, Fed member speeches, CPI (Consumer Price Index), NFP (Nonfarm Payrolls), GDP, ISM manufacturing and non-manufacturing and Retail Sales.
The Swiss economic releases are centered around the Swiss National Bank interest rate decisions as they are moving markets. Beside this, the KOF indicator, a sort of a local PMI in Switzerland, together with inflation (cpi) are the ones that matter the most.
One more thing to consider when trading the usdchf pair is the fact that the SNB (Swiss National Bank) is constantly intervening in markets so when you see a sudden spike and there’s no real reason for it, then you should kno the SNB is there.
2015 started with a bang when the Swiss National Bank (SNB) decided in early January to drop the peg on the EURCHF cross and it caused a lot of troubles in the market in the sense that brokers went busted and a lot of them had to cover for the losses their clients made.
The SNB is a central bank that is actively involved in the FX market so if you’re trading binary options based on an FX pair you should know that the central bank is influencing prices.
As long as the EURCHF peg at the 1.20 was functioning (and it did for some years), trading the USDCHF was pretty simple in the sense that the closer the EURCHF was dealing to the 1.20 level, the stronger the inversed correlation between the EURUSD and USDCHF became. In other words, if one had a scenario in which EURUSD is bullish, so traded call options, just taking a put option in the opposite direction on the USDCHF without even looking at a chart should have resulted in a profitable option.
Like any currency pair, this one is influenced by how the Swiss economy is doing. Swiss economy is a big exporting one and just think of the chocolate industry or the watch industry and you’ll have an idea about the size of its exports. Therefore, the value of the currency is extremely important to Swiss companies and this is one of the reasons why the SNB is intervening on the market with the sole purpose to devaluate it. So for, not with much success.
SNB meetings are followed by a press conference and when things really go to extremes, the currency is moving. Now that the SNB is having negative interest rates in place it is interesting to see that the USDCHF still is not trading above parity, as CHF buyers still persist despite adverse conditions.
Other news to be watched are the CPI – inflation of course as well as the KOF indicator as this one gives an overall view regarding the state of the Swiss economy.
We will go over a few of the most important currency pairs that a traded typically in forex.
The GBPUSD pair or the so called “cable” is a difficult pair to be traded as many times it seems like it is living in its own world.
However, it is highly traded as it represents two of 7 of the biggest economies in the world, so what is happening in UK and US should be tracked.
It has somehow a bigger spread than the EURUSD and this makes it unappealing for scalping or for automated trading on the short to very short term. However, it is extremely popular as it is moving more than the other pairs and as a consequence has a bigger average true range.
United Kingdom is one of the most important economies in the world and the currency, the Great Britain Pound, is influenced when economic news are being released. Even though the UK is a member of the European Union, it is worth mentioning that it is not having the Euro as a currency, so it is not part of the Eurozone.
Bank Of England is the central bank and the mandate is to keep inflation around two percent. In order to address that mandate, the MPC (Monetary Policy Committee) is meeting on a monthly basis to assess the economy.
The MPC meeting is not followed by a press conference like it is the case of the ECB (European Central Bank) unless the interest rate is being changed.
The GBP is strongly influenced when the GDP is being released (Gross Domestic Product) and the preliminary release is the most important one as the final one is rarely being different. Besides GDP, Retail Sales and PMI’s (Purchasing Manager Index) have the power to move markets as well as the CPI (Consumer Price Index) or inflation. In fact, inflation is on the top priorities list Bank of England has and when the Inflation Letter is being released markets are moving quite aggressively.
It is worth mentioning that PMIs are split in the service, construction and manufacturing sectors.
The Canadian dollar is also called “loonie” and therefore the USDCAD is being referred to as the loonie pair as well.
This is a currency pair a bit special as the Canadian economy is a special one in the sense that it is highly dependent on what is happening on the commodity markets, namely on the oil market. Canada is a big producer and player on the oil market so price fluctuations there are influencing the way the USDCAD is moving as well.
Representing two countries that share a border, the USDCAD is being viewed as a currency pair that reflects the differences between the US and Canadian economies. However, oil should be filled into the equation as, again, it makes the pair moving.
The EURGBP is a cross, and this is one of the most important things to keep in mind, besides the fact that it travels based on the differences between UK and Eurozone economies. It means that an important role in trading the cross is played by the two central banks, the ECB (European Central Bank) and BOE (Bank Of England), so knowing when key events regarding monetary policy are happening is crucial for trading this cross.
Let’s start with the ECB. It is meeting on a monthly basis, on the first Thursday of each month, with January being the sole exception due to holidays of course. Every meeting is being followed 45 minutes later by a press conference and the President of the ECB is reading the Governing Council statement plus takes questions from press representatives.
Euro as a whole is moving drastically on the press conference, which is even more important than the actual interest rate decision.
Moreover, on the same day, 45 minutes before the ECB interest rate decision, BOE is setting the monetary policy. One key fact is that BOE has no press conference to follow the decision, unless the interest rate is changed.
Expect strong and sharp moves to come when EURGBP is travelling and also expect a lot of volatility surrounding the Euro pairs. If one is looking at the bigger time frames then there is a clear and distinct correlation between the EURUSD pair and EURGBP and therefore we can safely assume that most of the times they move together.
This means that if one is looking for EURUSD to move higher and EURGBP lower than most of the times this is not going to happen.
The USDJPY is one of the most traded currency pairs and most interesting to trade as it’s main characteristic is the fact that it is highly correlated with equity markets.This means that what is happening with equity markets around the globe is influencing the USDJPY and the USDJPY influences the equities markets around the world.
Therefore, monetary policy and economic data that move equities should matter the most for the USDJPY, even more than economic releases out of Japan.
The pair lately witnessed an impressive rally as Bank of Japan is running a massive quantitative easing program and there are no signs it is going to stop anytime soon. This makes the JPY to be a victim of inflating assets in the equity markets.
Lately, the most important thing to watch when it comes to the Japanese economy is what the central bank (Bank of Japan) is doing or saying when it comes to the Japanese bond buying program.
It is well-known now that the bond buying program in Japan, or the quantitative easing as it is being also called, is the most aggressive one in the world in the sense that, in order for you to have a comparison, it is three times bigger than the one in the United States but applied on an economy that is two times smaller.
This makes the dynamics in the Japanese economy being heavily influenced by the monetary policy Bank of Japan is conducting and this makes every speech, press conference, meeting, to be carefully scrutinized by traders all over the world trying to understand the faith of the JPY.
As mentioned in the first part of this article, regular economic releases like CPI (Consumer Price Index), GDP (Gross Domestic Product), Tankan report, etc, are also market movers in the USDJPY pair but are secondary in importance as market is focused most of the times on the direct correlation between USDJPY and the world equity markets in general, and US equity markets in special.
The classical relationship between interest rates and central bank decision applies here as well as it is known that higher inflation brings higher interest rates while lower inflation brings lower interest rates. This means whenever the CPI release is due, traders should embrace for an increase in volatility.
Expect economic releases to mean almost nothing for the USDJPY most of the times as they are being released in an Asian trading session that is characterized by low liquidity and low volatility. However, if the actual economic release differs greatly from the actual one, look for market to move as this low liquidity environment is great for sharp moves.
But still, the one thing that really matters is the correlation with US equity markets so when cash is opening in the United States as well and on futures one should look for what is the direction of the equity markets in order to have an educated guess about what is happening with the USDJPY.
As comparison between the two types of economic news, by far, the really important one are those that come from the United States and not from Japan. In this way, we can actually say that news out of Japan should be interpreted as 2nd tier news when it comes to those out of the United States.
The currency market is the most generous one as currency pairs represent the bread and butter for fast trading. However, it doesn’t mean that medium to long term expiration dates should be ignored as staying on the bigger time frames should be safer on the long run. The currency market in general is difficult to be traded as there are a lot of factors to influence the way a currency pair is moving, from political and geopolitical factors, to mergers and acquisitions market, and from interest rate decisions to simple supply and demand theory.
To give you an example of how a currency is influenced by deals in the mergers and acquisitions market, imagine for example that a company from the United States of America is planning to buy a company in Europe. For that to happen, it should pay for it in local currency, namely in Euro, and therefore the Euro will be on demand.
The stock market is a nice place to find companies that are suitable for day trading. You can find a certain sector like travel or big tech, and get to know as much as possible in this field. When doing that you should get to know what moves the stock market and specific stock picks. Jobs data in the United States and the NFP in the United States are the benchmark for global stock market as what is happening in the US economy.
The next step is to divide the asset classes into sub-classes if there is this possibility and the resulting number of sub-classes should benefit from the original amount of that class divided with the number of sub-classes.
The biggest threat to successful trading is overtrading and this means simply taking too many trades Overtrading is a result of greed or panic. The explanation comes from the human nature. It is well known that people are more adverse to risk than favor a profit. In plain English, the idea of losing something is way more painful than the pleasant effect of actually winning. This is called risk aversion and was one of the vital parts of Daniel Kahneman’s amazing book “Thinking Slow Fast“.
There are two instances in which overtrading appears and both of them can be avoided. One is the situation where a contract is moving against your strike price and the contract is out of the money, the trader has the tendency to take another trade in the same direction, which increases the exposure. Then if market keeps moving against the original target price, adding to the original entry will only lead to more losses and risking whipping out the account balance completely. Sometimes it is OK to cut your loses on a position and instead look for a better opening in the days to come.
Trend lines in forex trading are one of the basic tools for trading in all markets. Trend lines are one of the most valuable and effective tools for a trader. Forex traders who learn how to apply trend lines for shaping diagnosis of the market patterns are likely to rely a lot less on the many technical indicators that are frequently used.
Trending is a concept used for a market that is travelling, or moving, while ranging represents exactly the opposite – moving sideways. Adapting your trading strategy to different concepts and time frames is key.
Determining trend lines helps to find the conditions of the sentiment in the market. The trend in terms of sentiment can be seen as a persistence of sentiment. When the trader speculates that the sentiment is strong, the forex strategy which makes sense is to go with the sentiment. Be wary if you determine that the sentiment is very strong. A very strong trend is more difficult since it may be a prelude to a continuation of the action, however, it may also be a contra-indicator that the price is ready to reverse.
The power of trend analysis is its ability to predict into the future. Keep in mind that the trend lines are not indicators, and they are not lagging. Trend lines are in fact actual maps that define the boundary optimism and fear.
When you are new to trading you might not know how to draw a trend line which result in misjudging the price action.
When you understand how to draw trend lines then you need to be able to detect whether there is an outer and inner trend. When you notice an inner trend line it indicates a shift in sentiment and momentum and should be an alert that conditions are changing fast. The trader can further more use the outer trend line as a boundary where the price will have a hard time in breaking. This means that finding an outer and inner trend line helps to find the right strike price.
Drawing a trend line is the simplest thing to do. At least this is the common thinking when coming to drawing a channel based on trend lines and finding support and resistance. In reality, few people really know how to actually draw a trend line and, more importantly, when is a trend line validated/invalidated and when does a trend really ends or not. The answer to all the above comes from the classical higher high/lower low series and respecting some simple rules one can be successful in identifying fake breaks and if price is really turning or not.
Fundamentally to be able to trade you need to be capable of describing what the price activity is doing on a chart. When you look at the chart, you are in the process of identifying and describing where the price is and what it is doing. A common and basic tool is resistance and support lines. The resistance and support lines prove where the emotions of the market are clustered.
When drawing a resistance or support line you need to find out the following: Where is the most recent low? Where is the most recent high? From there you simply draw a horizontal line under the low and the one more above the high. It is common you need to wait a bit to see if these lines are taking form. You need to verify that there is a zone of support, which typically means waiting to see three failed attempts to break support or resistance.
We should look into buying forex options or CFDs only when the whole higher/high lower/low series is broken. Otherwise, we should stick to the original two points for the trend line and after that just adjusting them.
You may be surprised to hear that drawing correct a trend line is a thing many traders miss as while it is a simple thing, some rules need to be respect.
A trend line represents a connection of two points that is being projected further on the right side of the chart – to the future. That being said, it means we should have a series or higher lows or lower highs as that would be the trend line to define our trend.
In a bearish market or a bearish trend, by the time price is making a new low we can say that the previous lower high is the second point that needs to be connected in order to generate our trend line. The way to go is to take a trend line and connect the highest value on the chart, basically the top, with that lower high and drag it on the right side of the chart. That is the main trend line that is supposed to guide the move lower.
What is a price movement corridor? This term means the possible spread of price swings in either direction.This practice is used to identify the general mood of the market and helps in projection making. Two parallel lines are plotted in order to determine the corridor.
As you can see, there is a downward trend on the chart that shows the superiority of market sentiment towards the sale of the asset and the continuation of the current trend. In such situations (if the trend in the future is not beyond the range), a trader can safely buy Put contracts or sell currency hoping for the fall of the price.
In this regard, let’s introduce two key concepts and give them the example of an uptrend definition:
The line, drawn by the lower price extremes. It takes that name, since within this trend it does not fall below the price of the mark and thus supported the uptrend.
The line has drawn through the upper price extremes. It takes that name, since within this trend it does not give a price break above themselves, thus, providing resistance.
As longer in a time warp unchanged support and resistance lines, so the stronger and more reliable trend.
Remember the rule: as the trend is stronger, so more likely that it will retain its direction. That is, investors need to do the forecast according to its direction.
Another indicator of the trend’s reliability is the number of times that the price has tested support and resistance lines (that is trying to break them), but it did not stand their power and come back. The more frustrated breakdowns, the stronger is the trend.
You may be thinking this sounds too simple and how can it be? Well, in reality the lines break through often and you will soon realize this and you need to be able to incorporate this in your strategy. When a line is broken, it changes character. The support line begins to act as a new resistance line. The resistance line begins to act as a new support line depending on which line that breaks through.
It is evident that you try to determine how strong the support and resistance lines are. The stronger they are the greater the confidence the trader has in applying these lines to shape a trade.
The more frequent these lines have been touched without breaking, the stronger indication it is to the trader. We tend to say three touches confirm a good possible entry point. The longer the time-frame, the better indicator this is. When you get more advanced, you will need to consider the price action in relation to other patterns such as Bollinger Bands and the presence or absence of Doji candles.
To become a successful trader you need to be able to apply the standard Fibonacci resistance tool to the price action of the underlying market. Fibonacci ratios are the most important pattern and apply to all price patterns. If you do not know them yet, you need to learn how to apply the usage of them right away. It is hard to say why traders use Fibonacci lines, but part of the reason must be it is a self-fulfilling prophecy. Because traders find Fibonacci lines important, they become important.
You will find that Stops and Limits and Puts and Calls are all placed close to the Fibonacci lines. The Fibonacci lines do not predict the future of the underlying market, but they are useful markers when locating where resistance and support will be. When trading forex, the weekly or daily and four-hour times price charts will be an effective time period to use. When markets react and change to even risks, they often move in Fibonacci ratios. Here is how you apply usage of Fibonacci lines in forex trading.
The outcome of overlaying the Fibonacci lines on the underlying market can be very valuable to the trader. The connection between strike prices and Fibonacci lines are important since they can verify whether the intended strike price is the best one to use for a trade.
Example: A trader goes long, but that strike price is just above a key 61.8 Fib line, which means that there is a high possibility of resistance. The chances of a successful trade is unlikely and would require a much more momentum than anticipated.
A Fibonacci line can help to find a good price if the spot market has recently probed above a 61.8% Fib line and if the trader wants to go with an in-the-money strategy, choosing the strike price right below the Fib line is a good choice. The most important Fibonacci ratios are 38.2%, 50%, and 61.8%.
You need to locate the high and low formed on a price chart. The Fibonacci tool connects the high to the low and generates the Fibonacci ratios.
As a trader, you need to identify patterns in the price action. These patterns reflect market sentiment. Forex trading is focused on direction and, therefore, the trader should apply patterns analysis and initially focus on the trend analysis, to boost confidence about the trading decisions. By doing this, you increase the chances to get profitable results.
One of the most important trading tools one trading platform can offer are for sure the Fibonacci tools, the retracement, expansion, but also the time zones and arcs. Knowing what they are useful for and what to do with them offers you a competitive advantage in finding the perfect striking price and expiration date needed for the option to expire in the money. For Forex and CFDs traders they are indispensable in trying to predict the future movement of the underlying assets
Regardless of the trading platform involved, this is the tool that takes into consideration the retracement for specific waves (Fibonacci Retracement), the extension for impulsive moves (Fibonacci Extension) or even the time element (Fibonacci time zone). In our situation here with the Forex Academy program we are looking at the Fibonacci Extension Tool and how can a trader use it and, more importantly, how to actually trade based on it or with it.
Trading implies taking the time element into consideration and, depending on the time frame traded, the expansion tool provided by Fibonacci is of real help. Our examples there deal with one of the most common pattern of them all in trading markets: the impulsive move using Elliott Waves theory. The thing is that in an impulsive move at least one wave needs to be extended and this wave it is usually the third one. That means the trader, after identifying a possible first wave, should take the Fibonacci expansion tool and look for the 161.8% extension when compared with the previous wave. Clicking on the beginning on the first wave a, the end of it and the end of the possible second wave gives us the setup for the extension tool and the outcome should be expected at the 161.8% level. If this is not coming, then the move is not impulsive and the whole count prior to that point should be reconsidered.
This tool is only of the many that any trading platform is offering as Fibonacci is being used in pretty much everything that is related to technical analysis theories. There is simply not possible to make a prediction based on patterns if one is not considering the Fibonacci numbers. The Expansion tool is used to find out the extended waves in impulsive move, but also in finding out, let’s say, the end of the b waves in running triangles.
In any impulsive move there is mandatory for price to go and extend one wave and this means that one wave should go and stand out of the crowd, it should be the longest one. The extension has some minimum boundaries, and in order to find the exact place we need to use the Fibonacci expansion. In other words, let’s say we have a move to the upside and market is accelerating but according to our analysis it should reverse at some point. The way to find out the potential level is to look at the length of the first move higher and then measure the 161.8% extension out of it.
Applying the extension from the end of the second wave would offer the trade an educated guess regarding the end of the third wave and a put option can be traded with the expiration date being related with the time frame the impulsive move was appearing on. It is advisable that one should look for extended waves or move before important economic events as market needs a reason for a specific move and the reason is coming out of the economic agenda. Therefore, releases like jobs data, GDP (Gross Domestic Product), retails sales, unemployment rate, etc, may prove decisive for a central bank to change the monetary policy stance and that is the moment markets are travelling.
The expansion tool can be used in corrective waves as well as the b wave in a flat for example can be a strong one, and this means it should break the highs/lows of the previous wave a, depending if wave a is bearish or bullish. In this case, a move for the b wave above the 161.8% level signals a c wave to come that should not break the lows/highs in the previous wave a and therefore trading call options by the time price comes into the territory of wave a is indicated.
The Fibonacci Expansion tool is a simple one to use in the sense that one should only select it from the Menu (in the case the analysis is made on Metatrader then one should go on Insert/Fibonacci/Expansion) and then click and drag it on the screen. It should be noted that if you’re looking for a running correction, namely when the bearish correction ends above the end of the previous bullish move, then the expansion tool on the Metatrader cannot be used. Other trading platforms though, like the JForex for example, are not having this issue.
Find out exactly where and how to use the Fibonacci expansion tool by watching the two video analysis that are coming with this educational series.
One of the most important technical analysis tool available to traders is the Fibonacci Retracement and it is widely used when forecasting future price movements. Fibonacci Retracement is used in different situations, like:
All in all, it should be considered that the Fibonacci levels are extremely important in technical analysis so a proper understanding of such levels is a must for any trader, regardless the market it is traded.
Like mentioned at the start of this article, the golden ratio, or the 61.8% retracement level is key for trading with Elliott as so many things depend on it that it is virtually impossible to list them all here.
Just to give you some examples, the golden ratio is a MUST to be retraced after say a double zigzag is completed. How to know that the pattern you are looking at is a double zigzag? Well, looking at the move and seeing if it is a move that channels really well. If that is happening, then it is a double zigzag. That being said, a put options can be traded after a double zigzag to the upside concludes or a call options after a double zigzag to the downside ends.
There is no secret that markets are moving in waves, or cycles, and not in a straight line. Therefore, even if one is bullish for example, it may decide to add to a long position. Splitting the amount into different entries and then looking for possible places to trade is the normal thing to do and this is the purpose of this educational series, to identify retracement levels to add to a position. Retracement levels are to be found by using the Fibonacci levels and the most important ones are 61.8%, 50% and 38.2%.
These are usual places where a corrective wave should end and by splitting your entry into different amounts and buying call options in a rising trend at the 38.2%, 50% and 61.8% would give a trader better chances for the options to expire in the money than otherwise.
When it comes to Fibonacci numbers, there is no other place to look for those numbers in trading or technical analysis but together with the Elliott Waves Theory. Elliott Waves without the Fibonacci numbers is basically useless as all the patterns, especially the corrective ones but not only those, are related to the Fibonacci retracement levels.
In a zigzag, there is no way any part of wave b ( a zigzag is always labeled with letters, a-b-c and it is a corrective wave – make sure you check the part dedicated to zigzags in our Forex Academy) is allowed to retrace more than 61.8% out of the first move, namely wave a. That being the case, and knowing that in a zigzag wave a is a five waves structure, or an impulsive move, all we have to do is to find a five waves structure for the wave.
The next step is to take a Fibonacci retracement tool and measure the whole length of wave a, from the beginning of the move all the way to the end of it. Because no part of wave b to follow should retrace more than 61.8%, we can scale into a position. Scaling means finding the perfect open trade price in a specific move by investing/trading smaller amounts than the original intended.
According to the Gartley approach, the 80% retracement of a move is mandatory if one is too short the move. That means that if you have a bearish trend that looks like the beginning of a new trend, then you should wait for the 80% retracement until deciding to short the pair and the stop loss should be above the highs where the bearish move started. That is if you trade the regular forex CFDs spot market of course. You BUY when the market reaches 80%.
But if one is trading binary options, the retracement level should be the same, and the direction to be traded should be the same as well: buying put options when the market is reaching the 80% retracement is the right thing to do and the expiration date is to be set depending on the time frame the analysis is being made.
It is said that 3 out of 4 times such an approach will turn out to be profitable and this means quite a nice ratio. In the case of Elliott, 80% retracement is possible only in corrective waves and the first thing to come to mind when you meet such a retracement level is to look for a flat, a common one or an irregular.
It is said that Fibonacci without Elliott waves means nothing in forex trading but I would say that the other way around it is more valid: there is no Elliott Waves Theory if one is not looking at the patterns Elliott described with a Fibonacci tool. The Fibonacci numbers are all over the place and it is only normal that the technical analysis field is using the numbers.
The 80% retracement level is not that well known or important as, say, the golden ratio, the now famous 61.8%, but I would say it is a pretty rewarding one. According to the Elliott Waves Theory, when the market is traveling after an impulsive move, it makes a corrective wave, a so-called wave a. This being the case, this wave a, depending on the pattern and structure of it, it is followed by another corrective wave, wave b.
But nature and levels for the b wave retracement are highly correlated with the structure of wave a and this gives us the levels the market is going to retrace.
Taking into account the fact that the structure of wave a is a corrective one, the minimum distance to be traveled for the b wave is 61.8% so that would be the level.
Taking into account the fact that the structure of wave a is a corrective one, the minimum distance to be traveled for the b wave is 61.8% so that would be the level.
If, for example, wave a is a double combination (meaning it is formed out of two simple corrective waves connected by an x wave, or an intervening/connecting wave), then the maximum retracement level for wave b is 80%.
Fibonacci numbers are very useful in trading and all trading platforms offer the Fibonacci levels. Beside the Retracement tool, there are the Fibonacci Expansion, Time zones, and even arcs and other levels. However, they are all based on the same sequence and the projected levels are nothing but important support/resistance areas that start from the most important level, the golden ratio (61.8%), and move into secondary levels as well.
When looking at confluence areas, the term should be clearly understood in the sense that market is showing a stronger area to be broken if such a confluence of factors are coming in the same place.
In our case its about Fibonacci levels of different degrees that are around the same level. Elliott waves without Fibonacci it is simply not working and the fact that we can play with different degrees in terms of the wave structure but keeping in the same time the Fibonacci levels for the pattern we’re trading allows us to find strong support and resistance areas.
A confluence area is defined as an area that is supposed to offer strong support or resistance simply because in that area different smaller degree support and resistance levels are to be found. These support and resistance levels are not mandatory to be and act like a classical one, but also dynamic support and resistance levels are qualifying.
To be clearer, a classical support and resistance level is one that is forming on the horizontal, while a dynamic one is always forming on the vertical. Fibonacci is one of the tools that makes it possible to find such areas that are difficult to be broken and if the confluence area is acting as a resistance, SELL contracts / PUT options should be traded, while if the confluence area is acting as support, BUY orders/ CALL options should be bought.
In order to identify such areas one should consider different patterns the market is making. For example, it is well-known that a triangle is the most common way a market is consolidating but also that a triangle is retracing almost always minimum fifty percent of the previous leg, regardless if the triangle is contracting or expanding.
That being said, the way to go is to measure the longest leg of the triangle and to mark the fifty percent retracement. The next step would be to measure the next leg and mark as well the fifty percent retracement. The outcome will be a confluence area that is difficult to be broken and by the time the triangle is finishing the e wave, any move into the area is a reason for entering the market.
One of the most important economic releases watched by traders all over the world, after central banks meetings is the time the monthly inflation report is released. Inflation is called Consumer Price Index, or the CPI. You can go on the economic calendar and look for the CPI to be released in all the important economies in the world: United States, Eurozone, United Kingdom, Australia, Japan, etc.
Answer: Consumer Price Index
If the CPI release falls short of expectations, then it is being viewed as negative for the currency and therefore we should buy put options or sell the currency if trading CFDs. Central banks have a mandate and the classical mandate is to keep inflation below or close to two percent. This means that higher inflation levels than 2% are not desirable, as money is losing value, while lower inflation levels are a threat as below zero and we’re talking about deflation and not inflation anymore.
Inflation or the CPI is being released on a monthly basis and has some variations in the way it is calculated as it is different from country to country. Just to give you an idea, in the United States, the Federal Reserve is looking at the core inflation and PCE Index and not at the overall CPI. Core inflation means prices of oil and energy are not considered in the whole equation as they have the tendency to be volatile and cyclical, so at the actual release one should interpret the core number and not the full inflation headline.
Trading the news is difficult nowadays as markets are influenced by algo trading or algorithms. Because of that, trying to pick the right direction on a news release is difficult, but not an impossible task. The way to go is to wait for the news to be released and then trade based on the actual figure when compared with the expectations. If the actual is bigger than the expected headline, let’s say on Australian CPI, then chances the central bank is going to come at the next meeting and increase the rates or at least use a hawkish/bullish tone are really high.
In this case, if one wants to trade binary options based on an Australian dollar financial product, say audusd, then trading call options would be wise. As for the expiration date, one has to go and check the economic calendar and see when the next interest rate decision is being scheduled. The call option should go end stretch with the expiration date beyond that date in order for it to have good chances for expiring in the money.
Find out more about inflation and why it is vital to understand the concept when looking to trade by watching the video recordings in this article.
Trading the NFP days is one of the most trickiest things to do when forex trading, as such an economic release comes usually with at least one fake move. Before we dive in, let’s try to explain what the NFP is.
The term comes from the Non-Farm Payrolls release in the United States and it is always being accompanied by the unemployment rate. It is important to note that the whole world is looking at the shape of the United States of America economy as this is the biggest economy in the world and what is happening there it clearly affects the whole global economy.
Second, when trading it all comes to the central banks and their monetary policy. Well, the Federal Reserve has a dual mandate, and this means there are two things these guys are looking at when deciding what to do with the interest rate or when establishing monetary policy: one is the inflation level, like any other central bank in the world, and the other one is the to create jobs. So actually their job is to stimulate the economy to create jobs and the economic policy/monetary policy will be set based on that.
NFP is released on the first Friday of each month and there is a saying that the first swing price makes when the NFP is released is a fake one. Well, I don’t know if that is necessarily true, but try to trade binary options with end of day expiration date on the NFP release as volatility levels are quite high and market are moving aggressively. So short term binary options are not necessarily the wisest idea, even though price moves fast on nothing at all.
Because the central bank in the USA, the Federal Reserve, is having a dual mandate, NFP is probably the most important economic release that makes markets moving strongly. The mandate of the Federal Reserve is to keep inflation below or close to 2% and to create jobs. This second attribute makes the job related economic releases to be of top priority interest for traders.Therefore, traders are trying to get as many clues as possible regarding the potential NFP number by looking at other economic releases that may hint to the NFP outcome. Such releases are:
Because the Federal Reserve is setting the monetary policy and interest rates based on the jobs numbers too, then a strong NFP number implies a strong US economy and therefore an expansionary monetary policy should follow if the pace of NFP releases gets better and better.
Buying call options/buy CFD on the US dollar on dips between NFP releases is indicated and trying to pick end of month expiration dates or one month expiries should be more profitable than trading on the short term horizon.
After all, interpreting the state of an economy and trying to take a trade based on the info obtained is the very essence of trading, only that this is called fundamental analysis.
Technical analysis, on the other hand implies making a forecast on the right side of the chart based on the info on the left side of the chart. However, both fundamental and technical analysis are important and therefore there are different trading styles. Some are focusing more on the economic outlook and try to have an idea about the changes that are taking place at the macroeconomic level, while others are looking at technical indicators and take a trading decision based on them.
From my point of view, they are mandatory so make sure you’re taking them into consideration for binary options trading to be successful.