Home Author
Author

Dragan Stankovic

SMA
Learn to Trade

SMA is not WMA

by Dragan Stankovic
written by Dragan Stankovic

SMA or simple moving average in many ways differs from the weighted moving average. Being able to apply both under the right circumstances can mean all the difference between boom and bust. In order to achieve this, it is imperative to delve deeper into the nature of both technical analysis tools and discover how they work.

SMA or WMA: simple or otherwise

In a nutshell, the simple moving average, or SMA, is the average of all closing prices within the time period it refers to. You add all the closing values, divide it by the number of days and voila: SMA. The weighted moving average is similar, except later entries are given priority over the initial ones; they have more “weight” behind them. This is why the results of a technical analysis of a set of closing values achieved through simple moving average need not coincide with those of a weighted moving average (or exponential moving average for that matter). The time period and the set of closing values may be the same, but the results may vary due to weighted moving analysis being more biased towards recent data. All moving averages have the same purpose (to measure momentum) but they do so in different ways.

How does it work?

For example, let’s use both SMA and WMA to analyze a set of closing values for a currency pair over a five-day SMAperiod. EUR/JPY had closing values of, say, 150.090, 150.030, 150.000, 150.075 and 150.150, starting with the latest one. By adding them up we get 750.345; divide it by 5 and you get 150.069, which would be the SMA in this case. A WMA would allot, say, 15 points to all five entries, but distribute them so that the last entry gets 5 points, the previous gets 4 etc. The numbers would be: 750.045, 600.120, 450.000, 300.150 and 150.150; add up and you get 2,250.870; divide it by the number of points (15 in this case) and the WMA result would be 150,058.

What does this mean?

The results of SMA and WMA are off by 0.011. It may not seem like much, but even a discrepancy this minute could mean the difference between a downward and an upward trend, or at least a difference in momentum. It proves mathematically that SMA and WMA are not the same thing. By themselves, neither of them mean much, but in Forex markets, where fortunes are made and lost on a few pips, every single pip matters. And these are off by 11 pips. So, which one do you rely on? The worst part is that any of them could be off; heck, both of them, for all you know. Only time will tell. While Forex trading is not (quite) an exact science, if both SMA and WMA are rarely both wrong. This is why you should never rely on just one type of technical analysis. Try to diversify and play it safe, whenever you can.

An exhaustive study is available in the following link and the support team of your online broker can help you to understand it as well.

0 comment
0 FacebookTwitterPinterestEmail
learning forex
Learn to Trade

Learning Forex

by Dragan Stankovic
written by Dragan Stankovic

When it comes to learning Forex trading in the currency markets, there are two basic ways to achieve this. One is to create a dummy practice account offered by most brokerages as a tutorial on Forex trading, and the other is to create a real account, start trading and learning Forex form experience – either yours or that of any experts you can find. Now, considering that you may need to open a real account eventually, in order to start trading and make some real money, this may or may not be the ideal way to learn things as the losses you incur will also be real.

Learning Forex from practice / demo accounts

There are many tutorials on how to learn to trade Forex, and frankly speaking, this is not one of them. This is a comparison between two separate ways of learning Forex trading. Now, as far as Forex trading goes, these simulators are as realistic as it gets. The feeling is not quite the same, naturally, and any profits and losses are virtual, meaning if you wanted to go crazy with the odds and see how that plays out, it’s better for everyone to do it here. It’s better for you, that much is certain.

Learning Forex form real life

The biggest issue is not whether to learn through trial and error on the real market (you will definitely have to do itlearning forex eventually), but how to minimize any potential losses when you do it. Since they are aware this day would have to come, many traders simply choose to skip the tutorial and get straight to business. One way to compromise between the two ways, one of which offers no actual experience and the other offering potential bankruptcy, is to use an “expert advisor”, which is usually little more than an euphemism for Forex robots. Or, it could be a real person, sending you trading signals, but this is not as common as you might think.

Expert advisors

Learning Forex from expert advisor means taking hints on Forex trading from either a piece of software or an actual person (or both). There is no rule that you can’t do this on practice accounts, but even people who did fine on their own during these simulations usually resort to expert advisors once they enter the real market. Some even get lazy and resort to “copy trading”, a practice when you match someone else’s trades to the letter and share their fate – if they lose, you lose and vice versa. But then you’re not really the one trading, are you? Plus you need to account for slippage, i.e. the lag between expert’s actions and you becoming aware of them. If anything happens, he is not going to warn you first, he is going to save his money. If you catch on in time, great, if not, well… You’re on your own.

Having said that, learning from experts in real life does have its merits. Not only do you get to learn things first hand, you’ll make actual money doing it. Just be careful.

0 comment
0 FacebookTwitterPinterestEmail
Analysis

Exponential Moving Average (EMA)

by Dragan Stankovic
written by Dragan Stankovic

Apart from simple and weighted moving average, EMA or exponential moving average is among crucial factors influencing trade in Forex and other financial markets. With moving average in general being the most widely used tool for technical analysis, it is important to discern the different types and their importance, hence the topic at hand.

What is exponential moving average?

Well, like simple moving average, EMA is calculated using the sum of closing price figures over a number of periods and then divided by the number of said periods. The reason for this similarity is in the title “moving average”, and this is how (moving) average is calculated. However, this is where the “exponential” part comes into play. Unlike simple moving average, exponential moving average shifts the focus toward more recent results, rather than treating them equally. Basically, it means the last few periods are more important than the first few periods (or any periods in between), as the former spearhead the direction of the trend as well as the trend itself. The weight of data shifts as they grow older and new data come in, a process which happens exponentially – hence, the term exponential moving average.

exponential moving average

Why is it important?

Before modern computers were developed, simple moving average was the norm when analyzing things such as trends in financial markets. They were easy and straightforward, but they had flaws. Exponential moving average, among others, was a way to correct some of those flaws. Since the main point is to predict the future, rather than statistically describe the past, it stands to reason that recent results should carry more weight than the others. Thus, EMA came into play. It can predict future development with greater certainty than the simple moving average.

How does it work?

What makes exponential moving average so different from simple moving average is the mathematical formula used to calculate it. Without going into the grueling details, suffice to say each entry gets assigned with a weight index in terms of percentage: the latest entry gets, say, 18%, the previous one gets 15%, and so on while the first one (chronologically) gets, say 3%. The percentage amount never reaches 100% as the data flow is perceived to be indefinite. However, by assigning these percentages to respective entries, we get a result that may differ from the one from simple moving average, which treats all entries equally.

Conclusion

While there is no objective way to determine which moving average is more effective, or better (“better” being a subjective term in itself), this issue generally comes down to people who prefer simplicity and people who consider new and complex things are superior in the long run. The compromise would be to use all three types of moving averages: simple, weighted and exponential and look for matches: after all, if all three point to the same conclusion, surely it is more reliable than any individual moving average. But then again, it all depends on you.

***Start trading for your chance to win a share of the $10,000 prize pool. Entering the competition is easy and requires a minimum deposit of only $100. We will reward the top 6 traders with amazing cash prizes! Register now for your chance to win. Click here!***

0 comment
0 FacebookTwitterPinterestEmail
Analysis

Weighted Moving Average

by Dragan Stankovic
written by Dragan Stankovic

For a long time, simple moving average was considered the norm when it came to technical analysis in any field, including financial markets; however, several drawbacks have prompted the research and development of another technique, weighted moving average. This is especially true when it comes to exponential moving average, itself a highly specialized form of weighted moving average.

Why do we need weighted average in the first place?

The reason is simple: the previous model, simple moving average, only accounted for arithmetic average of closing prices over a number of time periods – usually days. By comparing simple moving averages, you could theoretically hazard a guess as to the direction and strength of a financial trend, while effectively nullifying any fluctuations that might throw you off. However, to most people, this would not even qualify as an educated guess, since the first and the last entry (as well as all entries in between) are treated equally. This would not be an issue if the goal was to analyze data statistically and preserve it for posterity; however, the goal is to use previous experience to guess future events, and this requires a different mathematical formula.

How does weighted moving average work?

The main difference between simple moving average and weighted moving average is the fact that the latter is biased toward certain entries and the former is not. Otherwise, the principle is the same: you add all entry values and divide the sum by the number of entries to get the average. However, weighted moving average usually involves a number of points (or percentages) which are added to entries based on how recent they are: the latest entry gets the biggest boost, the one before it gets a slightly smaller boost and so on. The oldest entry gets the smallest boost or none at all. Needless to say, simple moving average and weighted moving average of the same set of data need not necessarily show the same tendency, let alone the same result. As to which one is right, only time will tell.

How does one calculate moving averages?

weighted moving averageThe answer is simple: One does not. Most platforms will do it automatically for you, by displaying all kinds of charts, which unfortunately you need to learn to decipher. You will probably get to switch between simple, weighted and exponential moving averages at will, and base your trade decisions accordingly. Generally speaking, any one of them can be wrong, but all three… If they all agree on a general trend, it is usually a good sign, meaning this is a trend you can count on – theoretically. Usually just the simple and exponential moving average will suffice, as those are the most reliable ones available.

Conclusion

As for weighted moving averages, they are popular because they allow traders some freedom when assigning criteria for their own private analysis. Their versatility means you can make any kind of calculations and assign points. Usually, traders go for a variation called EMA.

***Start trading for your chance to win a share of the $10,000 prize pool. Entering the competition is easy and requires a minimum deposit of only $100. We will reward the top 6 traders with amazing cash prizes! Register now for your chance to win. Click here!***

 

0 comment
0 FacebookTwitterPinterestEmail
Analysis

Simple Moving Average

by Dragan Stankovic
written by Dragan Stankovic

There are two types of Forex traders and investors: those who prefer simple moving average, and those who prefer weighted moving average. While it is impossible to claim one of them as superior, it is possible to outline the qualities of simple moving average from the standpoint of those who prefer it.

What is simple moving average?

Simply speaking, simple moving average, or SMA, is the arithmetic average of closing prices over a number of days. In terms of Forex markets, simple moving average of a currency pair would be calculated by adding closing prices of said pair over a certain time period and then dividing the sum by the number of periods you used. For instance, if you are interested in a simple moving average of USD/EUR over the last ten days, you would look up the closing prices on each of those ten days, add them up, and divide that sum by ten – the number of days you were interested in. The result is the simple moving average of said currency pair.simple moving average

Why is it important for a Forex trader?

Forex trend trading may sound simple enough, but getting in at the right time and staying just long enough to make that sweet, easy money is nothing short of a form of art. There are numerous trade strategies, and some of the more successful ones rely on simple moving average, among other things. The importance of simple moving average for those strategies cannot be overstated. In fact, the 200 simple moving average is how you determine if a trend is long or not. The number 200 refers to the number of days. Anything above 200 simple moving average is considered a strong and rising trend, while everything below 200 simple moving average is considered a mark of a trend in decline. It is so universally accepted, that 200 simple moving average determines how a stock or a currency pair is perceived, which can have a profound impact on the market as well as your bottom line. Naturally, there are simple moving averages for any number of days, and they are usually used in conjunction, but the 200 simple moving average is considered the standard in modern markets.

A fair warning

A simple moving average is just an average of previous closing values, and as such, need not necessarily indicate anything in terms of future performance. There are no guarantees that the trend will follow the prognosis to the letter. However, a lot of people monitor these things, and do take these predictions very seriously. While the prediction itself may not even come true, a lot of people will act as if it will, which in turn may make it come true in real life. If simple moving average indicates an increase in future value and people start buying that financial instrument (having seen the SMA), it will, in fact, drive the price up, just as SMA predicted. Except it didn’t actually predict it.

0 comment
0 FacebookTwitterPinterestEmail
AnalysisBlog

Retail Forex Trading

by Dragan Stankovic
written by Dragan Stankovic

Despite being a relatively small offshoot of larger Forex markets, retail Forex trading is turning into one of the fastest growing segments of Forex markets. It involves speculation on the exchange rates through numerous trading platforms. In the past, Forex markets were open only to a select few, mostly large financial institutions. However, as the markets grew and technology improved, a new trail was blazed for the brave Forex traders to make their fortune. Online retail Forex trading via specialized platforms started in 1996 and has not stopped since.retail Forex trading

How does retail Forex trading work nowadays?

The process has been greatly simplified since its humble beginnings in the late 1990s. It now involves only a short series of steps and you’re ready to begin trading. First, you need to log in to the platform (such as the most widely used MetaTrader 4) of the Forex broker of your choosing (see our recommendations here), in order to register and deposit your initial funds. From there on, you can take long and short positions on currency pairs and profit from the exchange rates. Your broker may or may not be your counterparty, but he or she will certainly offer you lots of leverage. You can use that leverage to borrow money, which you invest in currency pairs and repay once trade has been concluded.

***Open now a Live Account with HotForex broker and you can get 100% Credit Bonus. Official choose-forex.com Introducing Broker ID: 42867. Click here.***

If you’ve done your part right, the proceeds should easily cover all your expenses and net you a far greater profit than you could otherwise make. This high leverage means you can compete in the big league and not lose to any heavyweight only because you don’t have as much money to trade with. Sure retail trading on margin opens up many possibilities, but it also leaves you exposed to market fluctuations. Remember, the profits need to cover the borrowed sum, the interest, your investment and on top of that, make a profit. It is kind of ironic that the whole reason you’ve entered into this arrangement in the first place comes last at the end of any deal, and if said deal falls through, it is the first thing to go.

Fraud

Speaking of things that could go wrong, Forex fraud is an ever-present concern these days in retail Forex trading. You need to pick your broker carefully. They all promise a return that is many times what you’d invest. However, in unregulated markets, there is no guarantee that the broker will actually place the money where it was supposed to go. They could simply divert it to their own account and play dumb. There are many types of fraud, but what most of them have in common is that they happen in unregulated markets, where traders have no recourse except to move on.

Risk management

It never hurts to exercise caution in retail Forex trading. Aside from using trusted platforms and regulated markets, there is something called “automatic stop loss”. This means your trades cease if your losses reach a certain amount so you don’t lose any more money, but you also get a margin call and need to deposit additional funds to continue.

0 comment
0 FacebookTwitterPinterestEmail
Analysis

Market Sentiment

by Dragan Stankovic
written by Dragan Stankovic

In Forex markets, like any other free market, prices are determined by the relationship between supply and demand – these, in turn, are determined by the market sentiment. After all, you are not alone in Forex markets, nor are you acting in some sort of vacuum. Quite the contrary, everything you do has an impact (albeit a minuscule one) on the other traders and vice versa: everything they do impacts you, in one way or another. If everybody starts taking the same positions on a currency pair, this will undoubtedly affect its value in a meaningful way. It will also determine the duration of such a state, because it will eventually return to normal as Forex traders make their profits and move on.

Market sentiment indicators

market sentimentSentiment indicators in Forex markets indicate the market sentiment towards a particular currency pair: how popular it is, how many traders in the Forex market have taken that particular position on that particular pair (in terms of percentage rather than an exact number) etc. When enough people starts doing the same thing, you have yourself a trend. And you can make money on trends, especially in Forex markets. Forex traders usually use Forex market sentiment indicators in conjunction with Forex fundamental analysis in order to maximize their chances of success.

Why are they important?

They become more and more practical as the market sentiment reaches extreme levels. As you probably know by this point, no trend can continue indefinitely, without an interruption and it eventually reverses. Market sentiment indicators can indicate how close a trend is to reversal, as there are only so many people who could participate and inflate the bubble further, before it bursts. If you manage to go short at the critical point, you will reap maximum profit that Forex trends could possibly have to offer (or at least that particular trend). However, if you wait too long or go prematurely, your profits take a cut or you could even take a loss (although this would be an extremely rare turn of events, diminished profits are far more likely unless you mess up big time).

Downside

In the interest of full disclosure, Forex market sentiment is a fickle thing, and no indicator can be 100% accurate. This problem can be addressed with a sound fundamental analysis, but this is by no means a permanent solution. It merely reduces the flaws of current indicators until something better comes along. Also, keep in mind you are not the only one with access to these, and there are probably many others waiting for the same thing as you. Finding the right time to execute your move is a form of art.

To conclude

Forex market sentiment is what drives supply and demand, effectively reigning supreme over the events that transpire as well as the consequences for the traders. No single trader, no matter how powerful, cannot control it, but every single trader, even the smallest one, can influence it to a point.

0 comment
0 FacebookTwitterPinterestEmail
Analysis

Fundamental market analysis

by Dragan Stankovic
written by Dragan Stankovic

Fundamental market analysisWhen talking about fundamental market analysis, both in general and in relation to Forex markets, it is very important to keep a few things in mind. Fundamental market analysis is a way to estimate the true value of a company, stock, or a currency pair. It is not a universal guide or a magical crystal ball that is supposed to predict future development with 100% accuracy. At best, it helps you estimate whether or not the investment is worth your while, and those who rely on fundamental market analysis in forex markets are called forex fundamental traders.

What is fundamental market analysis in Forex?

Technically speaking, fundamental analysis in Forex markets is no different than that of any other type of financial market; they too rely on news, events and the same types of data and other economic factors to determine just how solvent and valuable their object is. For fundamental forex market analysis, that object is a currency or a currency pair. Since the growth of an economy and finances in general are never static, in fact these things change all the time, forex fundamental traders require constant updates and fresh analysis in order to stay in touch with current affairs.

Why would anyone base their trading strategy on fundamental market analysis?

Fundamental analysis is a tool, one that has seen a broad use, versatile enough to be employed in a number of strategies. In other words, forex fundamental traders are not limited to a single strategy; they are the people who employ fundamental analysis as a basis for any number of strategies they see fit.

What they actually do is simple: they sell currencies at high interest rates while buying other currencies at low interest rates at the same time, effectively making money on the difference between interest rates. Buy low, sell high. Forex fundamental analysis can tell them which currencies to buy and which to sell, based on their general condition as well as that of the economy backing those same currencies. In addition, the high leverage of forex markets is what enables traders to really capitalize on even the most minute changes or discrepancies in interest rates.

Here is how it works: you acquire a certain amount of currency at the lowest interest level possible, convert it into a different currency with a much higher interest rate, and make money on interest alone, after the other currency is sold at a much higher price. But then again, the currency pair in question needs to remain stable before the deal is concluded, or there could be losses.

Apart from interest rates, fundamental analysis also deals with other factors, such as the employment situation (high unemployment means low activity, ergo the economy is weak, and so is the currency), budget issues (whether or not a government is forced to sell off currency in the foreseeable future), GDP (directly linked to interest rates) etc. All these factors matter when deciding which currencies to trade.

0 comment
0 FacebookTwitterPinterestEmail
Signals

Software trading signals

by Dragan Stankovic
written by Dragan Stankovic

Software trading signals are a category of services offered by most trading platforms. Their purpose is to alert Forex traders of any changes they should be aware of. Naturally, there is a myriad of things that can and do happen in Forex markets every second of every work day, and no system could possibly account for every single one of them. No software in existence is that complex and advanced. None that we know of, anyway.

software trading

Software trading signals are a category of services offered by most trading platforms. Their purpose is to alert Forex traders of any changes they should be aware of. Naturally, there is a myriad of things that can and do happen in Forex markets every second of every work day, and no system could possibly account for every single one of them. No software in existence is that complex and advanced. None that we know of, anyway.

What are software trading signals?

Well, everyone who has ever done any Forex trading in person through a platform has received some form of notification or signal. These software trading signals are usually sent either by living people, i.e. brokers, or robots (not actual robots, Forex robots provided by the owner of the platform, acting through computer-generated messages) notifying you of developments and passing on instructions. These things require speed and expediency, due to the hyperactive nature of Forex markets. The ideal medium, therefore, should embody the haste and sense of urgency associated with these matters. However, we must make do with what we have, and what we have are emails, SMS, tweets, RSS, websites and other similar forms of communication. As long as they get the message across, and in a timely manner, their deficiencies matter little. But they still matter.

Types of signals / services

All software trading signals can be roughly distributed into four categories: free signals, paid signals from a single provider, paid signals from multiple sources and signals generated by Forex robots from the user’s own computer or some other device.

You get free software signals at no cost (obviously), usually as a part of a broader service package provided by a broker or a website. If paid signals offer you a lot of bang for your buck, these offer you, well, more than you paid for, at least. In terms of reliability, even though there are no guarantees with these matters, these signals do not stand out in any meaningful way.

Signals from a single provider usually involve some form of analysis or advice. These are what you get from a broker if you request some form of guidance. They are passable for beginners looking to learn the trade, but more serious traders need bigger ordinance.

Speaking of which, signals generated by multiple sources are some of the most complex trading signals there are. A true professional will make full use of their versatility and possibilities they offer.

Last but not least, Forex robots are programs you install on your own computer or device. They are meant to “assist” you in your everyday Forex activities, not do them for you (no matter what they claim!). Some are free, others come at cost. While their effectiveness is mediocre at best, the potential for abuse is enormous. Many “free” Forex robots are scams at best. At worst, they are the work of malicious third parties that can and will cause damage to your business, your data, and your bottom line.

0 comment
0 FacebookTwitterPinterestEmail
forex traders - finance minister
Analysis

Hope arising for negotiations end, euro shares go up again

by Dragan Stankovic
written by Dragan Stankovic

choose forex - euro stronger but not for longEuropean shares made a big jump on the markets today after information spread about the Greece –IMF negotiations progress. “A deal could be reached” is the sentence that gave wings to euro shares and also kept a save ground under the U.S stocks. U.S dollar and bond yields also made huge jumps as the Federal Reserve interest hike that was announced got some more certainty.

The new U.S single family home sales made it to highest numbers in seven years, a fact that helped in bolstering the case for lifting benchmark U.S interest rates, of course in combination with other data. “The U.S economy could maybe get the first interest hike already in September, followed by a second increase in December. Our economy should be a lot stronger in the second half of the year” – said the Federal Reserve Governor Jerome Powell.

Negotiations between Greece and the euro zone creditors are still in the world’s focus. Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis brought some new ideas and proposals in Brussels that caught the eye of the creditors. They believe that this new ideas could be a solid ground on which a final deal may be built on, in order for Greece to get some financial help and escape the worse. The new proposals from the Prime Minister may have caused smiles in Brussels, but even more angry faces in his country’s lawmaker society. They are dissatisfied by the offerings made by their government.forex traders - finance minister

Mark Chandler, global head of currency strategy at Brown Brothers Harriman in New York believes that the negotiation topic is affecting the stock markets around the world too much and too long. “If you can look aside the Greek problem and take a glimpse on the monetary policy divergence theme, you could see what is really important in the stock market world these days. After the Fed rate hike, that is on its way, the U.S economy will speed up really hard” – he said.

Steve Sosnick, equity –risk manager at Timber Hill Interactive Brokers Group in Greenwich, Connecticut, has a slightly different opinion. “ Stock markets at the moment believe that the situation will end in peace and no harm will be done, but I believe that everyone should consider the other possible ending”.

The A.U.S dollar index .DXY jumped 1.1 percent, and the euro recovered at the end of the day for 1.38 percent, even though at one point it was on the lowest point in the recent two weeks.

Nasdaq Composite .IXIC dropped 0.04 percent, S&P 500.SPX lost 0.03 percent. The Dow Jones industrial average .DJI on the other hand jumped 0.05 percent.

0 comment
0 FacebookTwitterPinterestEmail
Newer Posts
Older Posts