Understanding Internet Trading
The Forex, or foreign currency exchange market, came to life in the 1970s when international trade went from fixed exchange rates to floating exchange rates. Currency trading is the part of the Forex markets that allows investors to buy and sell currencies from a wide variety of countries at mutually agreed prices. The Forex market has grown to be the largest form of investment in the world and Internet trading has become a key part of that market.
To understand any form of commodity trading, it is wise to take some time reviewing the terms involved. This is true for Forex trading. A number of terms are included below. Take some time to review them and understand their meanings.
Ask – Also known as "the offer". This the rate at which you can buy the base currency. When you talk with your commodity broker or perform Internet trading, the price will be in terms of the currency you are looking to sell.
Balance – This is the total financial result of all completed transactions and deposits or withdrawals on the trading account.
Bid – This is the rate at which you can sell the base currency, either through Internet trading or with a brokerage firm.
Base Currency – This is the first currency in a pair. In Forex currency trading for beginners, this is currency that you would be buying in a transaction.
Currency Rate – The value of one currency expressed in terms of another. This rate is controlled by supply and demand on the market or restrictions by a government or by a central bank.
Equity – When trading commodities, this calculation is your balance, plus floating profit, minus floating loss.
Floating Profit / Floating Loss – Both in a brokerage firm and in Internet trading, this is current profit or loss on open positions calculated at the current prices.
Free Margin – This is the amount in your trading account which may be used to open a position. It is commodities trading term that is calculated as equity less necessary margin.
Forex – This the acronym for the foreign exchange market of currency. Forex trade, whether through a broker or via Internet trading has become the largest method of trading worldwide.
Leverage – The term used to describe margin requirements. This is the ratio between the collateral and the value of the contract. In Forex trading, 1:100 leverage means that you can control $100,000 with only $1,000.
Long Position - This is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.
Lot Size – For both brokerage firms and in Internet trading, this term describes an abstract idea of the amount of a base currency. This amount can vary at each futures exchange.
Margin – This is the collateral required in a brokerage or Internet trading account to open and maintain a position.
PIP – The price interest point of a Forex trade or the minimum possible price change. Both brokerage firms and Internet trading use this term to define movements in price.
Quote Currency – This is the second currency in a trading pair. In commodity trading, this tells you how much of a currency is needed to buy the base currency
Short Position – In Internet trading as well as brokerage trading, this is a sell position whereby you profit from a decrease in price. For currency pairs, this is selling the base currency against the quote currency. In futures trading, this position has risk if the price rises instead of falling.
Spread – In Internet trading and brokerage houses, this is the difference between the bid and the ask price.
Transaction Size – This is a numerical value of lot size multiplied by number of lots.
Conclusion
In order to understand the investment strategy that is Forex Internet trading, it is important to first understand the terms involved. By learning the terminology, an investor can feel and sound ready to enter the world of Forex as a successful trader.
Market Direction: The ability to recognize strength or weakness in a trend is much more clearly visualized using candlestick formations. The main function of candlestick signals is identifying what investor sentiment was doing after the open. This becomes a bigger factor when evaluating the sustainability of an existing trend. Utilizing candlestick analysis creates a better analytical process for when to continue to hold or to start taking profits.
Many investors closeout positions too early. Why? Because the emotional strain of having a profit and worrying about whether that profit could turn into a loss becomes a psychological barrier. Candlestick analysis diminishes that fear dramatically. The basic premise of candlestick signals is that they identify when a change of investor sentiment has occurred. That process can be exploited when debating to hold or take profits. The lack of confirmed sell signals makes the trend the predominate factor. The simple logic is that if a trend is in progress, a definite sell signal is required to indicate the trend has come to an end. The lack of that signal implies that no change of investor sentiment has occurred in the trend.
Adding that analytical procedure to the evaluation of candlestick patterns greatly improves the investors' ability to continue to hold a position after good profits have already occurred. Again we use the illustration of the DRYS chart. After witnessing the consolidation stage, a double top and a double bottom, the next price move should have been anticipated. A simple wave 123 pattern was in the making. What was expected after the break out from wave 2? A price move along the same magnitude as wave one. Where there days where the time to take profits at occurred? Yes, but utilizing the simple rules applied to candlestick analysis made the continued holding of this position very profitable.
These simple rules consisted of although a candlestick sell signal occurred, they were never confirmed. The longer a price trend continues, the more compelling the sell signal needs to be. Secondly, the use of the tee-line came into play. The fact that a candlestick sell signal was not confirmed and the price never breached the tee line provided compelling evidence that the uptrend was still in progress. Our option trade, buying the DRYS July 40 calls near the break out of the $41 area at $3.20 made for a very profitable trade. The time factor, options expiration date, was the reason to take profits in the continuing uptrend. The closing price for these options was anywhere from $21-$22.
DRYS
Do all trades work the successfully? No, but most investors have a hard time taking advantage of successful trades. You are allowed to take small losses on bad trades. But cutting the profit potential of the good trades greatly diminishes option trading profit potential if those profits aren't allowed to run their full course. This is not difficult investing. Utilizing the information built into candlestick analysis keeps an investor from making the wrong decisions during a good trade.
Commodity Traders - The Candlestick Forum now has the ability for you to follow and participate in future and commodity trades that Mr. Bigalow establishes for his own account. The World Cup Trading Service makes this a practical service. If you do not have time to place trades based upon the Candlestick Forum recommendations, they will do it for you automatically. Expect to see much more commodity trading recommendations now that this service is in place.
August Live Cattle is an example of a trading thought process. The 50 day moving average was a viable support level. The small Kicker type signal off the 50 day moving average was a clear indication that the Bulls had stepped in at the support level. The next target is a test of the upper trendline. A breach of that level would start a strong wave three trend. Candlestick analysis is very effective when trading commodities, futures, and currencies. The outside influences are much less on these trading entities than individual stock prices.
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Good investing,
The Candlestick Forum Team
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