Simple Forex System Trading

Monthly chart, huh?  This would require mid to long term commitment, strict money management, and patience.  However, the reward can be huge and the method is very simple.  It does not require any complicated indicators or hours and hours of analysis or drawing lines and lines on the chart.  So here are a few questions one must answer before taking a position based on a monthly chart.

1. Buy or Sell?
2. How many pips can possibly go against the trade?
3. Based on the answer from #2, what is the dollar amount that can be put at risk?
4. Based on the answers from #2 and #3, calculate the trading lot or unit size.
5. What is the take-profit target?
6. What is the estimated time frame to hold this position?
7. What is the swap?  Meaning by taking this position, how much interest can be earned or should be paid per day?
8. Based on the answer from #7, if paying interest daily, what is the cost per month?
9. Based on the answers from # 6 and #8, what are the total estimated costs by holding this position?

I am thinking to sell AUD/USD in the near future because the pair has been hanging around the 0.91 level for some time.  So here are my answers to the above questions.

1. Sell
2. 1000 pips (Assuming I sell at 0.93, and I think the pair can possibly go beyond parity with the dollar due to unpredicted political reasons or the possibility that the U.S. economy continues to worsen.)
3. My risk tolerance is $500
4. The lot size is 0.05, or 5000 units.  I trade with Oanda.  It uses units.  I used this tool to calculate the lot size.
5. 0.80
6. 3 months
7. Paying 56 cents per day
8. I’ll be paying approximately $17 a month of interest.  I used this tool on Oanda to calculate the interest.
9. The estimated cost will be 17 x 3 = $51.

Price of GBP/USD closed above the cloud at 6 PM GMT.  Placed a buy order at 1.4808 with a take-profit target at 1.4888, and a stop-loss below the cloud at 1.4750.  Carried the trade over the weekend because British Pound remained above the cloud but did not hit the take-profit target by the Friday close.

The strength of the Pound continued.  Finally, the target was hit  at 5:15 AM GMT.

I recently started to look into the Alligator indicator and found that it could be a fairly simple indicator to use to trade Forex.  First, if you are not familiar with the indicator, here is a good introduction.  I applied the indicator on different currency pairs.  After some observation, I think EUR/JPY and GBP/JPY can yield more profitable trades from this indicator.

I prefer to trade more conservatively meaning that we wait for a trend is set up and the price retraces back to the support or resistance level before we open a position.  Perhaps, it is easier to illustrate the idea on a chart.

So above is an hourly chart between 5/18 and 6/3.  7 trades could take place.  5 of them could be profitable.  2 of them were losses.  Not a bad indicator to use after all.

Another good month for us.  We hit our target, 3 wins, for the month by the 10th.  Here are the details.

5/2    1
5/3    1
5/4    -1
5/5    no trade
5/6    1
5/9    1
=========

Total  +3

Since currencies are always traded in pairs, we are always buying one currency and selling another at the same time.  For example, if I long EUR/JPY, it means I am buying Euro and selling Japanese Yen.  Therefore, I will receive interest from Euro but at the same time, I must pay interest on Yen.  Swap in Forex means that we have to pay interest on the loan, but also receive interest on the currency we are holding.  If we are receiving more interest than what we are paying, the account will be credited for the difference, and vice versa.

Brokers calculate swap differently.  Some do it on a daily basis, normally at 4 pm Eastern, when New York closes.  So if you have an open position at the time, your account will either be credited or debited depending on the currency pairs you long or short.  Even if the position is opened 5 minutes before 4 pm Eastern, the brokers will pay or charge you the whole day worth of interest, and triple the amount on Wednesdays to make up for Saturday and Sunday when there is no trading.

Oanda, however, calculates the swap amount the second you long or short a currency pair.  It does not matter if a position is held past over 4 pm Eastern, when the position is closed, the swap will be credited or debited from your account based on how long the position is held.

An excellent month for us in April.  We hit the target of 3 wins.  6% gain for the month.  Can’t wait till May comes around.

4/1    no trade
4/4    -1
4/5    1
4/6    1
4/7    1
4/8    1
============

Total:  + 3

The Forex Market

The most traded currency pairs by Forex traders and investors are:

EUR/USD: Euro against Dollar

GBP/USD: British Pound against Dollar

USD/JPY: Dollar against Japanese Yen

USD/CHF: Dollar against Swiss franc

AUD/USD: Australian Dollar against Dollar

USD/CAD: Dollar against Canadian dollar

When a trader buys, also known as goes long, the Euro, he or she is buying the Euro (EUR) and selling the Dollar (USD).  When a trader sells, also known as goes short, the Australian Dollar (AUD), he or she is selling the Australian Dollar (AUD) and buying the Dollar (USD).

How to Read Quotes

When the EUR/USD quote is 1.3545, it means that 1 Euro can buy $1.3545 US dollars.

When the USD/CAD quote is 1.0700, it means that 1 US Dollar can buy 1.0700 Canadian Dollars.

When the USD/JPY quote is 93.55, it means that 1 US Dollar can buy 93.55 Japanese Yens.

Bid/Ask Spread

Currencies pairs are usually quoted with a bid and ask price.  Banks and brokers are profiting from the difference between the bid and the ask prices.  The bid is the price you are willing to sell to a bank or a broker.  The ask is the price you are willing to buy from a bank or a broker.

When the EUR/USD quote is 1.3610 /12

The bid price is 1.3610.  This is the price you sell to a bank or a broker.

The ask price is 1.3612.  This is the price you buy from a bank or a broker.

A Pip

A pip is the minimum incremental move a currency pair can make.

When EUR/USD moves from 1.3610 to 1.3655, it means that the pair moves 45 pips (13655 - 13610 = 45).

When USD/JPY moves from 90.05 to 93.10, the pair moves 305 pips (9310 - 9005 = 305).

Margin Trading

Currency trading does not require the full deposit of the amount traded.  You are only required a percentage of the deposit for the amount you would like to trade.  This required amount is known as margin.

When the leverage is 400:1, it means that you require only 1/400 or .25% in balance to open a position.  When the leverage is 100:1, the amount needed to open a position is 1/100 or 1 %.

Trading Sizes

A standard lot size in the Forex market is $100,000 USD.

When the leverage is 100:1, the required margin to open a standard lot is $1,000 ($100,000 x 1%).

A mini lot size is $10,000 USD.

When the leverage is 400:1, the required margin to open a mini lot is $25 ($10,000 x .25%).

Margin Call

A margin call occurs when the balance of the trading account falls below the maintenance margin.

For example, a trader has $1000 in the account.  The leverage he uses is 100:1.  The required margin to maintain a open position is 1/100 or 1%.

He buys a mini lot of USD / CAD.  The amount of money needed to maintain this open trade is $100 ($10,000 x 1%).  He will receive a margin call when the trade goes against him and the loss exceeds $900.  Normally, when the account balance gets close to the minimum required margin, the broker will send out alerts to the trader about the possible margin call.  Once the account balance falls below the minimum required margin, the broker can liquidate all trades to stop the account from going into negative balance.

It’s been volatile in this month’s trading.  There were several double whammies but surprisingly, I ended up with 2 wins.  That’s about 4% gain for the month.  One thing to note though.  These are actual trading results coming from the Oanda account.  I also set up test trades in the Interbank FX demo account.  For the same trades in the Interbank FX demo account, it would be 2 losses.  Therefore, spread does make a big difference.

3/1    1
3/2    -2
3/3    No trade
3/4    1
3/7    0
3/8    -2
3/9    2
3/10    1
3/11    1
===========

Total  + 2