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How To Trade

Opening Positions

How to Open a Position

A position is opened by either buying (placing a long trade) or selling (placing a short trade) on Forex, Spot Gold and Silver, Futures Oil and Gas and Futures Indices offered by Alpha Capital International.

The diagram below shows the “Buy” (long) and “Sell” (short) buttons that initiate a long or short position in the Meta Trader 4 platform.

Important: The investor, prior to hitting the Buy or Sell button, must remember to select the correct symbol he wants to trade e.g. in this example “USDJPY” and the “Volume” he wants to trade e.g. 0.3 lot, 1.0 lot 5.0 lot.

Note that the investor can place a stop loss or take profit at the same time to manage his risk – for more details on stop loss and take profit see below.

Buying / placing a long trade

The investor can open a trade by ‘buying’ or placing a ‘long’ trade on any of the instruments offered by Alpha Capital International. To make a profit the price of that instrument needs to increase

Selling / Placing a Short trade

The investor can open a trade by ‘selling’ or placing a ‘Short’ trade on any of the instruments offered by Alpha Capital International. To make a profit, the price of that instrument needs to fall.

Minimum Trade Size

The minimum trade size depends on the type of account.

Closing Positions

How to Close a Position

An investor can close an open position by either directly closing the open position or by placing a trade of an equal and opposite amount of the same instrument as the one outstanding open position.

The diagram below shows how to close directly an open position. Alternatively if the client wants to close an open position by placing a trade of an equal and opposite amount of the same instrument the investor should follow the instruction given in the previous section.

Selling / Placing a Short trade

An investor can close an open ‘long’ position by either ‘selling’ the open long position or by placing a ‘short’ trade of an equal and opposite amount as the one outstanding open long position. Closing a position will result in a profit or loss being realized on the investor’s account.

Buying / Placing a Long trade

An investor can close an open a ‘Short’ position by either ‘buying’ the open short position or placing a ‘long’ trade of an equal and opposite amount as the one outstanding open short position. Closing a position will result in a profit or loss being realized on the investor’s account.

Partial Closing of Positions

Investors may choose to close part of an open position by ‘selling’ or placing a ‘Short’ trade or ‘buying’ or placing a ‘Long’ trade of the same instrument (as above) for a lesser or greater amount. The difference between the two amounts (opening and closing trades) will result in the creation of a new open position.

Order Types

Instant Execution

  • Buy order
  • Sell Order
  • Close Order

Pending Order

 Stop Order

  • Buy Stop
  • Sell Stop

Limit Order

  • Buy Limit
  • Sell Limit

 Modify Order

All pending orders, as long as they have not been executed in the market, can be cancelled or modified by the investor. The investor may want to do this because for example his/her fundamental or technical analysis or simply the latest news in the market may alter his views on the direction of the market.

Buy Stop

Stop buy orders are useful when the investor believes e.g. with the help of technical or fundamental analysis that if the market reaches a certain level price which is above the current levels then it will go up.

With this type of order the investor places a stop buy on EURUSD at 1.3680 (currently say trading at 1.3610). Once the market hits 1.3680 the order is activated and the investor goes long EURUSD.

The investor will profit if the market price for EURUSD continues to go up.

Example:

Suppose you are looking to buy 1 Lot of EURUSD if the price shows that it wants to go up. Assume EURUSD is currently trading at 1.3780 and you believe that if the price rises to 1.3800 or higher there will be continued upward momentum. You place a Buy Stop Order @ 1.3800 on EURUSD.

Suppose EURUSD then proceeds to trade up to 1.3800. At that time, your order would become a Market Order to buy and your order would be filled at the market.

Sell Stop

Stop sell orders are useful when the investor believes e.g. with the help of technical or fundamental analysis that if the market reaches a certain level price which is below the current levels then it will go down.

With this type of order the investor places a stop sell on EURUSD at 1.3580 (currently say trading at 1.3610). Once the market hits 1.3580 the order is activated and the investor goes short EURUSD.

The investor will profit if the market price for EURUSD continues to go down.

Example:

Suppose you want to sell 1 Lot of EURUSD and you are worried that if the price falls a few more dollars that it will trigger the beginning of a much larger decline. Assume EURUSD is currently trading at 1.3780.

You place a Sell Stop Order @ 1.3750 on EURUSD. Suppose EURUSD then proceeds to trade down to 1.3750. At that time, your order would become a Market Order to sell and your order would be filled at the market price.

 Buy Limit

 

Limit buy orders are useful when the investor believes e.g. with the help of technical or fundamental analysis that if the market reaches a certain level price which is below the current levels then it will go up.

With this type of order the investor places a limit buy on EURUSD at 1.3580 (currently say trading at 1.3610). Once the market hits 1.3580 the order is activated and the investor goes long EURUSD.

The investor will profit if the market price for EURUSD goes back up again.

Example:

Suppose you want to Buy 1 Lot of EURUSD, and it is currently trading at 1.3780. You would like to buy the EURUSD if the price drops to 1.3750 or less, as you feel the EURUSD current price of 1.380 is slightly overvalued.

You place a Buy Limit Order @ 1.3750 on 1 Lot of EURUSD. Now suppose the price trades down to 1.3750 then your order would then be bought at the market price.

Sell Limit

Limit sell orders are useful when the investor believes e.g. with the help of technical or fundamental analysis that if the market reaches a certain level price which is above the current levels then it will go down.

With this type of order the investor places a limit sell on EURUSD at 1.3680 (currently say trading at 1.3610). Once the market hits 1.3680 the order is activated and the investor goes short EURUSD.

The investor will profit if the market price for EURUSD goes back down again.

Example:

Suppose you want to sell 1 Lot of EURUSD, and it is currently trading at 1.3780. You would like to sell the EURUSD and take your profits if the EURUSD price reaches 1.3800, as you feel the EURUSD price is not going to go much higher than 1.3800.

You place a Sell Limit Order @ 1.3800 on EURUSD. Now suppose the price trades up to 1.3800 then your order would then be sold at the market price.

Stop Loss (SL)

Stop Loss is used for minimizing losses if the price of the underlying instrument has started to move in an unprofitable direction. If the security price reaches this level, the position will be closed automatically. Stop Loss orders can only be executed for an open position but not for pending orders.

Take Profit (TP)

Take Profit order is intended for gaining the profit when the security price has reached a certain level. Execution of this order results in closing of the position. Take Profit orders can only be executed for an open position but not for pending orders.

Trailing Stop Orders

Trailing stop orders are another type of Stop Loss pending order. Stop Loss is intended for reducing of losses where the symbol price moves in an unprofitable direction. If the position becomes profitable it pays for the client to shift (or keep shifting) the Stop Loss to a break-even level. This process can be automated in the MT4 – this automation is knows as Trailing Stop. This tool is especially useful when price changes strongly in the same direction or when it is impossible to watch the market continuously for some reason.

To set the trailing stop, one has to execute the open position. The client has to select the desirable value of distance between the Stop Loss level and the current price in the list opened. Only one trailing stop can be set for each open position.

After the above actions have been performed, at incoming of new quotes, the system automatically checks whether the open position is profitable. As soon as profit in points becomes equal to or higher than the specified level, command to place the Stop Loss order will be given automatically. The order level is set at the specified distance from the current price. Further, if the price changes in the more profitable direction, trailing stop will make the Stop Loss level follow the price automatically, but if profitability of the position falls, the order will not be modified anymore. Thus, the profit of the trade position is fixed automatically.

Trading Strategies

Speculation

Trade your own view and benefit from rising and falling markets.

Arbitrage

Trade on pricing differences between two or more instruments to make a risk free profit.

Hedging

  • Reduce the risk exposure of your share portfolio by taking a short CFD position.
  • Flexibility combined with the ability to trade as little as a single share provides an accurate and cost effective way to hedge an existing stock portfolio.
  • Losses in your physical portfolio can be offset against CFDs profits for tax purposes and vice versa.

Sector Trading

  • Allows you to take an overall view on a group of stocks without having to trade each stock individually. E.g. Finance sector, Energy sector or Telecoms sector.
  • Strip out the exposure of various sectors when trading indices. E.g. Long UK100, short UK Banks
  • Hedge a group of existing stock positions with one easy trade. E.g. Long Vodafone, MM02 and Cable & Wireless, short UK Telecoms.

Technical Analysis for Forex

What is Technical Analysis?

  • Study of historical price action, primarily through the use of charts, for the purpose of forecasting future price direction.
  • Freely tradable mass-market instruments will exhibit definable trends and patterns that continually repeat.
  • By recognizing these trends and patterns the chartist is able to make informed judgments on the future roadmap.

Why Technical Analysis?

  • Support, resistance, trends and chart patterns provide clear defined risk/reward parameters to assist in money management
  • High probability set ups using a combination of different analytical techniques
  • Clear methodology for identifying trades, entry and exit points by determining trends, sideways markets and reversals.
  • Pictorial format easier to interpret
  • Flexibility, Adaptability and Timing
  • Growing popularity and acceptance of the merits of technical analysis

Technical versus Fundamentals?

  • Fundamental data is subjective, lagging indicators which are subject to revision
  • Prices lead known fundamentals by gradually discounting/factoring in economic data. Buy the rumor, sell the fact
  • Strong trends will often override economic data
  • Market positioning
  • Sentiment as a contrary indicator
  • How measure marker extremes of greed and fear
  • A mixed or hybrid approach

Basic Types of Charts

Bar Chart

Candlestick Chart

Line Chart

Reading the Markets

Define UPTREND and DOWNTREND

UPTREND is a succession of higher highs and higher pullback lows. The rising base (higher lows) is the important side to follow in an uptrend.

DOWNTREND is a succession of new lower lows and lower highs. The lower tops (descending res) are the important side to follow in a downtrend.

Trends are easier to spot and have longer time duration than most corrections. Therefore, the risk/reward and probability ratios favor buying dips in up trends and selling rallies in downtrends.

Trends, Trend lines & Corrections

Trend lines are formed when at least 3 peaks or troughs can be joined, representing a uniform rate of decline/rise over time.

A trend line break does not in itself denote a change in trend

The significance of a trend line break depends on the duration of the trend, number of touching points, pitch of trend and the prevailing chart pattern

A channel is formed when the peaks and troughs both form a uniform rate of decline/rise

Support and Resistance

How do we determine support and resistance?

  • Peaks and troughs in uptrends/downtrends
  • Clusters of previous price activity
  • Major Tops and Bottoms
  • Trend lines and Channels
  • Psychological levels
  • Fibonacci levels

Other Types of Charts

SMA (simple moving average)

A simple moving average is calculated by adding the security’s prices for the most recent “n” time periods and then dividing by “n.” To illustrate, adding the closing prices of a security for most recent 15 days and then dividing by 15 would result in a 15-day moving average. On a chart, this calculation is done for each period in the chart.

EMA (exponential moving average)

An exponential moving average differs slightly from a simple moving average in that it gives extra weight to more recent price data. This allows investors to track and respond much more quickly to recent price trends that might take more time to appear on an SMA. The formula for an EMA is: EMA = price today * K + EMA yest * (1-K) where K = 2 / (N+1).

Bollinger Bands

Bollinger Bands are a type of envelope plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting — widening during volatile markets and contracting during calmer periods.

Momentum

It may also be useful in identifying overbought and oversold conditions when the Momentum becomes extremely strong or weak.

MACD (moving average convergence / divergence)

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. MACD is represented as the difference between two exponential moving averages. A second EMA, referred to as the “signal” (or “trigger”) line, is plotted on top of the MACD to indicate buy/sell opportunities.

RSI (relative strength indicator)

RSI can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in RSI may indicate a false breakout. RSI is also used to identify overbought and oversold conditions when the RSI value reaches extreme highs or lows. This indicator automatically changes the colour of the RSI plot when it exceeds either of the levels specified in the inputs BuyZone and SellZone. Horizontal reference lines are also plotted at these levels as visual aids.

Fast Stochastic

Stochastic can help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in Stochastic may indicate a false breakout. Stochastic are also used to identify overbought and oversold conditions when the Stochastic reach extreme highs or lows.

Slow Stochastic

The Fast Stochastic will provide more signals than the Slow Stochastic, although some analysts prefer the Slow Stochastic, believing it is less prone to whipsaws.