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Through the years, the manner of investing has become a bit too complicated. In effect, various kinds of instruments for derivatives were devised. But if you will look at the history of investment closely, you will realize that derivatives are not a new concept. In fact, it has been existent for quite some time already.

Truth be told, it has been in various applications like in the industry of farming. This usually happens when there is a party that agrees to sell a certain product and another party agrees to buy that product for a definite price on a date that has been set. Most of the transactions before the establishment of organized markets are done through agreements like these wherein the only bond that matters is the one dictated by a simple handshake.

The kind of investment that gives leeway to individuals to sell or buy their options on a particular security is actually called the derivative. These derivatives are classified as investments wherein the investor has no asset that is underlying. Here, the investor actually makes a specific bet in connection with the direction that would be taken by the movement of the price.  From the result of the movement, the seller will know if he is going to make some profit out of it or not.

Instruments used for different types of derivative may vary. These include the following, but there are many more not included in the list: forward contracts, options, futures, and swaps. Derivatives are truly very useful but it also presents several risks. Generally, derivatives are considered as an alternative manner of participating in the activities in the market.

Many investors find it difficult to comprehend the idea behind derivatives. But the basic principles can be stated in the simplest terms possible. First, there are different kinds of instruments, each of which have certain counterparty. The counterparty is actually responsible for the movement on the other end of the trading. Each of the derivatives actually has an asset that is underlying. The value of the underlying asset is based upon the derivative’s risk, price, and structure of the basic term. In effect, the risk perceived on the part of the asset actually influences the risk perceived for the derivative.

Mr. Tim, A Senior Forex analyst from Admiralmarkets.ae, says “When it comes to pricing, you might realize that it is a very complicated undertaking. The derivative pricing may call for the need for a strike price”. Hence, the strike price refers to the specified price at which it can be actually exercised. When it comes to the fixed income derivatives, a call price might be existent. Here, the issuer can readily convert a derivative into a security.

At this point, you might be wondering why derivatives are used by investors. Usually, three reasons are commonly given: (1) to do a hedging of a certain position; (2) to increase the leverage; and (3) to effectively speculate the movement of a certain asset.

Finally, the derivatives can be sold or bought in two different ways. There are traders who prefer to do it over the counter. On the other hand, there are investors who do the trader barter style.

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If you want to make your technical analysis more reliable and accurate, there are three indicators that can make a difference for you; those are Moving Averages, Bollinger Bands and Parabolic SAR. Here in this article you will learn how to use Moving Averages and Bollinger Bands to generate reliable signals.

Moving Averages

Traders make use of moving averages in different ways; however, we will discuss only two most effective and easy ways to generate buy/sell signals with the help of Moving Averages.

Single Moving Average

A single moving average divides the trading area into two zones that are Bullish Zone and Bearish Zone. For this purpose, 200 Simple Moving Average (SMA) should be used. Every time when the price hits 200 SMA, it will most likely be bounced back.

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In down trend, 200 SMA acts as a Critical Support Level, whereas, in upward trend the same moving average acts as Critical Resistance Level. Traders tend to buy the pair on breakout through resistance and bounce back from the support level, while prefer selling on breakout through support level and bounce back from resistance.

Double Moving Average

Traders make use of double moving average or two moving averages to find a crossover. For this purpose, usually a faster moving average (50 SMA) is used in conjunction with slower moving average (200 SMA).

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A long position should be opened at a point when 50 SMA crosses and comes above 200 SMA. Conversely, a short position is preferred when 50 SMA crosses and comes below 200 SMA.

Bollinger Bands

Bollinger bands consist of three bands, upper Bollinger band, middle Bollinger band and lower Bollinger band. Middle Bollinger band is nothing but a 20 SMA, upper and lower Bollinger bands are of main significance.

A bullish reversal is expected every time when price hits lower Bollinger band, whereas a bearish reversal is expected when the price touches upper Bollinger band.

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In addition to potential reversal, Bollinger bands also show the level of volatility in the market. Market is less volatile when Bollinger bands are squeezed and vice versa.

It is pertinent that one should not rely solely on Bollinger bands for decision making, technical indicators are always effective when they are used in combination with other tools particularly trendline.

Parabolic SAR

SAR refers to “Stop And Reverse”, it is another one of famous technical indicators that predict possible reversal in price pattern. Traders tend to open buy position when Parabola SAR dots are below the price line, whereas selling is preferred when SAR dots are above the price line.

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In the end, it must be noted that all the technical indicators work fine when the market is trendy, they all fail to produce reliable signals in range-bound market. Similarly, market fundamentals must also be looked at closely because fundamentals are far more superior to technicals, that is the basic rule. This was a short summary of a few very useful technical indicators, hopefully it would work.

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If you are serious about forex trading, then you should go through this article very carefully as we are going to discuss a very important, often overlooked, point pertaining to trading. As you know the charts are the basis for any kind of technical analysis in the forex trading, so even a minor flaw in the information offered by the charts could ruin the entire analysis.

There are some brokers whose charts offer six daily candles per week (the sixth one is an unnecessary 5-hour Sunday candle) instead of the standard charts comprising of 5 daily candles a week (based on the New York closing). For example, look at the following EUR/USD chart; the sixth candle (Sunday bar) is highlighted by an arrow.

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The sixth (Sunday) candle could have a major impact on the formation of the Monday candle. For instance, have a look at the following NZD/USD chart;

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You can clearly observe that due to the unnecessary Sunday candle, the 6-day chart could not generate the bearish pin bar reversal candle unlike the New York close based 5-day chart. This is the reason why seasoned traders always use and recommend the New York 5-Day Forex Charts.

We all know that the naked price movement and formation of candles are the basis for price action trading which is believed to be the most successful and widely used trading mechanism, so it becomes very crucial to have access to the accurate and reliable data. In addition to the candlestick pattern, the 6-day chart can also cause miscalculation of Fibonacci levels, moving averages or swing levels. The non-standard chart can prove even more disastrous if a trader makes use of scalping, hedging or some other high risk strategies because the loss, due to inaccurate analysis, will be far higher as compared to the intraday or small scale trading.

Many traders and institutions nowadays are automating their trading strategies. Keeping in view the recent advancement in technology, it is believed that after 5-10 years a pretty high percentage of the forex transactions will be executed by the robots. Charts are the primary source of information for robots and Expert Advisors (EAs), hence the undesirable consequences or losses due to the usage of 6-day nonstandard charts may be even higher in the automated trading because the robots don’t have ability to analyze or think; they just implement the predefined strategies.

Unfortunately there is no way to transform the 6-day chart to the standard 5-day chart so you will need to join a broker which offers 5-day New York close charts. There are only a few brokers in the forex industry that offer the standard charting package based on the New York close, so while opening a trading account it is always recommended to make sure that the broker offers the desirable charts besides some other features such as exact execution, minimum slippage, low spreads, reasonable leverage, low commissions and all the major assets for trading.

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Day trading is believed to be the best trading style to generate quick profits through forex trading. Traders use a number of day trading strategies to make money, here in this article we are going to discuss the mother of all such strategies which may also be referred as the Holy Grail of Day Trading Strategies. This strategy is basically a combination of different price action tools that include candlestick pattern, horizontal support/resistance, Fibonacci levels and trendlines.

3 Steps

The strategy comprises of the following steps;

  • Identification of Trend with the help of Swing Analysis
  • Horizontal Support/Resistance Area
  • Valid Reversal Candles

Let’s discuss each one by one.

Swing Analysis

The first step is to identify the trend. Swing analysis is the best price action method to determine the current price trend.

Price of an asset moves in the form of waves. The highest level in any wave is called the “Swing High” of the wave while the lowest level of any wave is termed as the “Swing Low” of the wave.

The ongoing trend would be considered bullish if the price printed a Higher High and Higher Low in the precious wave as demonstrated in the following EURUSD chart.

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Similarly, if the price printed a Lower Low and Lower High in the previous wave then the trend would be called bearish. Remember this is the most crucial step of the strategy, if the trend is bullish then only long (buy) trade opportunities will be considered and vice versa. More details about swing analysis may be found in this course.

Horizontal Support/Resistance

Once the trend has been identified, now the next step is to find out major support and resistance levels. This can be done through horizontal S/R analysis. Horizontal support/resistance levels are the points that changed the price direction somewhere in the past. For instance, consider the following chart; you can observe that the USDCHF price faced rejection near horizontal resistance as marked by the red lines. If the price approaches this resistance again in future, then the area will again act as horizontal resistance level.

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Horizontal S/R analysis is considered one of the best price action methods to calculate support and resistance levels.

Reversal Candle

Once the trend has been identified, then the next step is to find out potential trading opportunities. Reversal candles such as pin bars, engulfing candles, dojis and shooting stars etc. provide good trading opportunities by signaling a change or continuity in the ongoing trend. Price action traders tend to enter a buy trade every time a bullish reversal candle i.e. bullish engulfing bar, bullish pin bar or hammer is emerged near key support area within bullish trend and vice versa.

Conclusion

The strategy explained above is believed to be one of the best day trading price action strategies because of its effectiveness. The strategy may be made more effective by using good risk/reward ratios. If you are still confused or have any question about this trading strategy then we suggest going through the financial trading course by Shaw Academy.

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