Trading fiat and crypto-currencies involves an awful lot of simple and not so simple technical terms to learn. One of the most basic ones is the term “currency-pair” which comes from the fact that you always compare (and trade) a currency to another when you are talking about the “price” of it. That’s right, there is no such thing as trading the Dollar or Bitcoin or ETH in itself (let’s forget about the currency indices and more complex assets for now). You can, of course, be a holder of Dollars, Bitcoins, or ETH tokens, but to value and trade them, you need to have something to compare it to.
Now, this when it can get complicated and confusing for beginner investors and traders, as sometimes different people mean different things when they talk about the price of a currency. We will take a look at the basic conventions concerning both traditional and cryptocurrencies, and how to interpret the various currency pairs. For those who are already familiar with forex trading and international exchange rates, this article might seem too simplistic, but for those who are new to the field, it’s absolutely essential to understand the basic terms.
The Fiat Convention
Long-term chart of the EUR/USD, the most traded currency pair
In the fiat world, the most commonly used base currency is the US Dollar, the largest global reserve currency. It’s not only widely used to process international transactions but it’s also the guideline for valuing all the different international currencies. So, when someone says that the Euro is getting stronger, it usually means that it’s appreciating compared to the USD.
Now, this where it makes sense to introduce the term of currency pairs, as the Euro’s value against the Dollar is commonly referred to as the EUR/USD pair. The basic format for currency pairs is always this, a ratio of the three letter abbreviation of the currencies involved. We have to add that the major currencies are valued on several pairs against each other, as is the case with the Euro and the Great British Pound (EUR/GBP pair), the Japanese Yen (EUR/JPY pair) and so on.
Also, in some regions of the world, where another currency is dominant, that currency might serve as the common base for the local currency pairs (like the Euro in Europe). The convention usually involves only one way of calculating a pair, although it makes total sense to talk about the USD/EUR pair (and all the other inverse pairs) as well.
Conventions in The Crypto World
The cryptocurrency segment is growing exponentially, both in the capital involved and the number of currencies that are present. The valuing convention is much more fluid here than in the traditional Fiat world, which could lead to severe practical problems.
The basic currency of the crypto-world is Bitcoin, as most of the altcoins are valued in BTC-terms, although Ethereum is rapidly gaining ground, while the inherited Dollar-pairs are also widely used. We wouldn’t cast our vote for a future convention here, especially that having more pairs to trade and value coins is better for traders and investors alike. That said, we suggest always using pairs when discussing currencies, as it could save you and others from a lot of troubles.
The relative performance of the ETH/USD, the BTC/USD and the ETH/BTC pairs so far in 2017
The key element of using pairs in trading is to understand relative performance. As Bitcoin has exploded in value against the USD, altcoins generally followed it higher, and what’s more a lot of them (think Ethereum) have gained significant ground even on Bitcoin. Translating that to the language of pairs and the example of the ETH token, the ETH/USD pair has stellar gains this year and even the ETH/BTC pair is up several 100%s in 2017.
To be clear Ethereum provided way more profits for those who held it against the Dollar (or want to use it the fiat world), as Bitcoin itself surged compared to the USD. But, that doesn’t mean that holding ETH/BTC is a bad idea, just you have to know that you basically remove the Dollar (so the fiat world) from the equation, so the profits you bank will be entirely coming from Ethereum’s (or any other coins) relative performance compared to Bitcoin.
In the second part of the introduction, we will show you how to use currency pairs to your advantage in investing and trading. And if there is anything that’s not clear, please don’t hesitate and put it down in the comments below, so we can clear all doubts there or in the next article.
Why I Switched to Momentum Investing
After sticking to various reversal trading strategies for a while now, I have started to look more into momentum and trend when it comes to investing in stocks specifically. Some people may find the idea of momentum a bit strange to begin with, and it is only after watching individual stocks, while also keeping an eye on the movements of the overall market, that you rally understand its meaning.
Seasoned stock investors, especially those that adhere to value investing, are often skeptical towards the idea of buying a stock that has already increased in price. It basically goes against their instincts of buying low and selling high. However, as people start to understand the mechanics of it, they tend to change their opinion.
Never catch a falling knife
An unwritten law in any market is that a trend tends to continue. Hence, if a stock has been moving up three straight months, it is more likely that it will continue to move up for a fourth month instead of turning down. A “cheap” stock can always become cheaper and an “expensive” stock can always become more expensive. These are well-known principles that explain the basics behind why momentum and trend trading works, and it is the idea behind old cliché’s like “never catch a falling knife” and “cut your losses, let your profits run.”
Over time, however, any financial asset has a tendency to revert to its mean. As such, when a trend has been overextended, a reversal in price can be expected to follow. This is the idea behind reversal trading. However, it is important to understand that it can take a while for this to happen, and you may very well get wiped out in the process.
The trend is your friend
The concept of buying stocks on their way up makes a lot of sense from this perspective, as you are then buying something that the market is starting to like, which is about to be valued higher. Trying to catch the falling knives is simply to risky from a risk:reward perspective, and in my opinion it should be avoided altogether. Why would you buy a stock that is falling when you instead can buy it at its way up?
Still, there are situations that arise in the grey areas, where a stock seems to have gone so low that it can do nothing but go up again. It may be tempting to give it a try, but remember that this is an extremely difficult thing to do, and the stock may just as well continue its steady decline. When the stock finally turns, there will still be plenty of time for you to jump on the bandwagon.
Mining companies, some companies within the maritime shipping industry, and the entire Japanese stock market are all examples of great bargains from a value standpoint, where the investor would sometimes have to wait for decades to earn his initial investment back. Don’t fall into this trap by picking stocks that are still falling and appear “cheap.” Don’t try to outsmart the market.
Combining momentum with value
In my opinion, a killer long-term strategy in the stock market is to combine sound value-investing principles with momentum. In other words, you should look for undervalued companies that have been badly beaten up for years, and that are just starting to turn. Oftentimes, this is where the greatest potential is and I believe it is one of the best ways to beat the index over the long term.
We can find two examples of how well value investing with momentum works in the US after the stock market crashes in the mid-70s and the 2008 financial crisis. Following these two events, only value investing yielded a clearly higher return than value combined with momentum.
However, if you were a value investor before the crash started, chances are you would get wiped out before the market finally turned. If, on the other hand, you were a value investor with momentum as one of your criteria for holding, you would automatically get rid of all the stocks that were in decline, and instead buy them again after the crash was over.
Because of this, momentum indicators like the MACD can be of great help when making these investment decisions. When combined with value-principles, you have a killer approach to long-term success in the stock market. I’m definitely looking more into crafting a robust investment strategy based on this for myself, and I will come back and share more specifics on potential strategies later.
Featured image from Pixabay.
Trading 101: Intro to Forex Trading
When you are first getting introduced to the world of forex trading, things can seem a bit overwhelming. There is so much information available online, but very little of it is aimed at beginners who may not be familiar with the terms and concepts they refer to. In this article we will cover the basics of forex trading, explain the most important terminology, and tell you how you can get started trading forex for yourself.
To start off, let’s define some terms. Forex stands for “Foreign exchange” and is the name often used for this market where traders can buy one currency by paying with another currency. Other names used for this is the “FX market” or the “currency market.”
A pip, often referred to as “point in price”, is simply the smallest price move that is possible in a given currency, also known as a basis point. Forex traders often talk about their gains and losses in terms of pips instead of percentages or monetary values.
Long/short are confusing terms that often get tossed around by forex traders as well as other traders. To put it simply, long means that you are buying an asset and will make a profit if that asset goes up in price. Short, on the other hand, means that you are trying to make a profit from declining prices. The way it works is that you sell an asset that is borrowed from another market participant. After the price has dropped, you can then buy back the asset in the market for a lower price than you sold it for, and thus make a profit.
Stop-loss is the level a trader decides on where he would like to exit his trade if it is not working out for him. In other words, it is the maximum loss the trader is willing to take on one particular trade. Alternatively, a stop-loss order can be used to secure a profit on a profitable trade in case the market turns.
Leverage is the practice of taking a larger position in the market than your trading account size would otherwise allow. Basically you are borrowing money from your broker in order to boost your buying power in the market. Leverage offered in the forex market is often in the range of 200-400:1
Spread, also known as bid-ask spread, is the difference between the buying and selling price of an asset in the market. The broker will offer you to buy a currency at a slightly higher price than they will let you sell that currency. This is where brokers make most of their money, and it is important to compare spreads when choosing a forex broker.
Since the forex market works by participants buying one currency with another currency, the price of a currency must always be quoted in another currency. For example, when you see that EUR/USD is trading at 1.20, it means that you need 1.20 US dollar to buy 1 euro.
The worlds largest market
The forex market is known as the largest of the world’s financial markets. Approximately $5 trillion changes hands in the forex market every day, far surpassing the global stock markets and commodities markets.
It is important to understand that the trading activity that retail traders (traders like you and me) account for is just a small, but rapidly growing, share of the total activity in the forex market.
Fundamental or Technical Analysis
When you are deciding to become a trader, you also need to decide on what type of trader you want to be. Broadly speaking, there are three types of traders; fundamental traders, technical traders, or a combination of the two.
Fundamentals take into account news, valuation, interest rates, etc. when trying to determine what price a currency pair “should” be trading at.
Technicals, on the other hand, focus strictly on what the price of the currency pair is doing. Technical traders study and analyze price charts to try to determine the future direction of the price.
Majors and Minors
Forex traders often talk about majors and minors when referring to currencies. Majors is a list of the most actively traded currency pairs in the world, and it consists of these pairs:
- EUR/USD: The euro and the US dollar.
- USD/JPY: The US dollar and the Japanese yen.
- GBP/USD: The British pound and the US dollar.
- USD/CHF: The US dollar and the Swiss franc.
Forex majors often have the lowest spreads in the forex market and they are also among the most liquid instruments you can trade in the financial markets.
Forex minors is a list of the next most actively traded currencies. This list includes currencies such as the British pound (GBP), Canadian dollar (CAD, aka “Loonie”), Australian dollar (AUD, aka “Aussie”), and New Zealand dollar (NZD, aka “Kiwi”).
Lastly, there are the exotic currency pairs. These include the remaining currencies from European countries outside the Eurozone (NOK, SEK, DKK) and smaller yet important Asian currencies like the Singapore dollar (SGD) and Hong Kong dollar (HKD). The exotics have less trading activity and the spreads are usually higher than for the majors and minors.
Benefits of Forex Trading vs. Stock Trading
A benefit of trading in the forex market rather than the stock market is that the forex market is trading 24 hours a day, from Monday morning in Australia until Friday evening in North America. The great thing about the market being open 24 hours is that there are no overnight “gaps” like you can find in the stock market.
A gap simply means that the market opens at another price in the morning than it closed the night before. For traders, gaps are considered a big risk, since the trader cannot control what is happening with his trade while the market is closed.
A market that is open 24/5, like the forex market is, opens up great opportunities for medium-term traders (swing traders) to for example take positions during the beginning of the week and exit those same positions before the week is over. That way, the trader takes no risk over the weekend when the market is closed.
Additionally, the forex market is much more liquid than most stocks, and it’s easy to find technical and fundamental analysis of this market everywhere on the Internet.
Choose a Forex Broker
Once you have decided to give forex trading a try, you need to choose a good broker that you trust with your money. This is the first, but still a critical step, on your way to become a successful trader. Pay particularly close attention to regulation, withdrawal policies, spreads, and trading platforms offered when choosing your broker. Fore more on this, read our earlier article on how to choose a forex broker.
Featured image from Pixabay.
Trading 101: Moving Averages and Moving Average Strategies
What are Moving Averages?
Moving Averages are among the most popular trend indicators in Technical Analysis. They provide a simple, yet powerful visualization of the ongoing trends in an asset. They are used for a wide variety of reasons, primarily for trend following and reversal strategies.
Simply put moving averages are connected points calculated for every day (or whatever the timeframe is). The calculation itself is simple; you take a given number of previous days and calculate their average. Of course, you don’t have to do the calculations yourself. All basic charting software and trading platforms do the math for you and plot the moving average (or up to dozens of averages for that matter) on the chart of the asset.
How to Interpret Moving Averages?
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