The Forex Chronicles

Archives for July 2018

EUR/USD Trading Update For July 2018

by Leave a Comment

Lower Volatility in Summer

All of the major currency pairs tend to see a large reduction in volatility during the summer months, with smaller price moves every day, and the EUR/USD pair is no exception.

If you look at the average true range of this particular pair (using the ATR indicator), you will see that it has dropped to around 65 points right now at the end of July 2018, which makes it fairly hard to trade for any short-term traders.

Narrow Price Range

As well as having small price moves, it has also been trading in a narrow, sideways price range with no clear direction.

The 20, 50 and 100-day EMAs are all very close together and the Bollinger Bands are also very narrow, which helps to confirm this narrow trading range.

More importantly, if you draw two trendlines joining the highs and lows of the recent trading range, as shown in bold in the price chart below, you can see that the price is trading is an ever decreasing trading range, which is often the pre-cursor to a major breakout.

EURUSD 31 July 2018

Potential Trading Opportunity

Subsequently, this represents a possible trading opportunity because if the price breaks strongly upwards or downwards (and closes outside this range and outside the Bollinger Bands on the daily chart), this is potentially a good time to open a new position and capitalize from this breakout.

(Disclaimer: These are just my own thoughts and ideas, and it doesn’t represent financial advice in any way. Please do your own research before opening any positions.)

A Word of Warning

Trades like these are often very profitable because everything is in place for a strong breakout (narrow EMAs, narrow Bollinger Bands, trading within trendlines, etc), but you have to be careful during the summer months because volumes are lower and sometimes these breakouts don’t have the momentum to be sustained for very long.

It will be interesting to see what happens anyway because the price has to break out of this ever decreasing price range very soon, and so there could potentially be a big move upwards or downwards in the coming weeks if there is some momentum behind this breakout.

Cryptocurrency Trading is Just About to Become More Expensive

by Leave a Comment

The Popularity of Cryptocurrency Trading

Many people from all over the world have made life-changing sums of money from buying Bitcoin several years ago when it was a fraction of the price that it is today, and people are still purchasing Bitcoin and other cryptocurrencies right now in the hope of making 2, 5 or even 10 times their investment back.

However it is not just investors who are looking to profit from cryptocurrencies because there are many traders who are choosing to trade these markets using conventional spread bets and CFDs.

The benefit of this is that traders can choose to open long positions and short positions, and because they can trade on margin, they don’t need to actually own any of the cryptocurrencies that they wish to trade.

New 50% Margin Rate for Cryptocurrency Traders

50 Percent ImageThe bad news for traders based in Europe is that they are now going to need more capital in their trading accounts in order to trade these cryptocurrencies.

As I discussed in my last blog post, the ESMA are introducing new margin rules in order to protect traders and investors, and in the case of cryptocurrencies, the new margin rate has been increased to 50%.

This could potentially create problems for a lot of short and medium-term traders because they may well need to deposit more capital just to cover their positions, and to enable them to open new positions when trading these markets.

To give you an idea of how much capital you will need to trade cryptocurrencies, let me give you some examples of how much you would need to open a relatively small long position on Bitcoin and Ethereum, two of the most popular markets, based on today’s prices.

Margin Requirement Examples

Bitcoin – £1 long at 8250, margin = 8250 x £1 x 50% = £4125

Ethereum – £10 long at 481, margin = 481 x £10 x 50% = £2405

So as you can see, it is going to be hard for smaller traders to trade these instruments in the future because the margin requirements are now going to be a lot higher.

However it is easy to see why the ESMA have increased the margin requirements because cryptocurrencies in particular are exceptionally risky, and it is certainly possible for people to lose all of their money in some worse-case scenarios.

Bitcoin Update – Now Over $8000

by Leave a Comment

What Has Caused Bitcoin To Surge Higher?

If you have been watching the price of Bitcoin closely over recent months, you will know that it hasn’t really moved a great deal, and has predominantly been trading in a sideways trading pattern for a number of weeks.

However just when it appeared that people were starting to lose interest in Bitcoin and other cryptocurrencies, the price suddenly surged higher, going from just under $5800 to around $8300, suggesting that people are becoming more bullish about the future prospects of Bitcoin once again.

It is not immediately obvious why positive sentiment has returned, but this article from Fxstreet.com, suggests that it could be due to a number of factors, such as Google and Facebook easing the pressure on cryptocurrencies, calls for easier regulation, interest from institutions and a move towards a Bitcoin ETF.

How Could You Have Profited From This Price Swing?

From a trading point of view, not many people would have predicted that we would see such a strong move above $8000 in such a short space of time, but there were definitely opportunities to make money from this latest breakout.

That’s because as I pointed out in a recent blog post that discussed Bitcoin’s lack of volatility, it was trading in a sideways trading range for a long time. So you just needed to be patient and wait for the price to break upwards or downwards with momentum.

Indeed there were actually two opportunities to make money because the price broke downwards just days after my last post, falling 10% in one weekend. Therefore if you had entered a short position after this strong price move, or entered a short position after waiting for a small rebound, you could have made up to 1000 times your stake because the price of Bitcoin subsequently fell another $1000 in the following days and weeks.

With this latest move, the Bollinger Bands were very close together once again, as indeed were the EMAs that I like to use, which indicated a sideways trading range and hinted that a possible breakout was imminent in the future, and this subsequently occurred on 17 July when the price broke strongly out of this narrow range to close at $7315. This would have been a good point to enter a long position because the price has already moved around $1000 higher.

Bitcoin Price Chart - 25 July 2018

Closing Comments

Of course it is easy to be wise after the event, and it would be very easy to sit here and claim that I profited from both of these breakouts, but that wasn’t the case at all because I have never traded Bitcoin or any other cryptocurrencies.

Nevertheless, I have profited from similar breakouts on other markets, and just wanted to point out that these breakouts seem to be just as profitable on Bitcoin as they are on all these other markets.

In fact they are probably even more profitable because when the price of Bitcoin starts to rise or fall, it seems to gather momentum really quickly and will often move at least $1000 each time, and sometimes a lot more.

So it may be worth keeping an eye out for these profitable breakout opportunities in the future because when the price starts to trade in a very narrow trading range with tightly packed Bollinger Bands and exponential moving averages, it is often followed by a significant breakout either upwards or downwards.

A Guide To The New ESMA Margin Rules

by Leave a Comment

Overview of the New Rules

The European Securities and Markets Authority (ESMA) really shook up the CFD and spread betting industries earlier this year when they announced that stricter new leverage rules were being introduced in 2018.

These rules are actually designed to protect traders from racking up big losses, particularly inexperienced traders who are likely to over-leverage themselves, because it will no longer be possible to lose more money than you have in your trading account.

Binary options will also be banned in Europe, which will help to eradicate all of the scam binary brokers that are cropping up on the internet, and will once again prevent inexperienced traders from losing money.

These two new rules will be welcomed by many people within the industry, but the ESMA are also increasing the margin rates for all markets, which is not such welcome news because this will have a major impact on every trader who likes to use CFDs (and spread bets) to trade the markets.

New ESMA Margin Rules (From 1 August 2018)

The new margin rates for Contracts for Difference (CFDs) are as follows:

  • 30:1 for major currency pairs
  • 20:1 for non-major currency pairs, gold and major indices
  • 10:1 for commodities (exc. gold) and non-major indices
  • 5:1 for individual stocks
  • 2:1 for cryptocurrencies

To put this into some kind of context, you can take a look at IG’s margin rates before and after these new rules were introduced to see how much of an impact they are likely to have:

IG New Margin Rates From 1 August

Examples

Anyone with a large trading account of say £100,000 is unlikely to be affected too much if they already use a sensible size stake per trade, but it is those people who have a more modest trading account who will be affected a lot more.

That’s because if you were to open a £2 long position on Shell (RDSB) at 2700p (equivalent to buying £5400 worth of shares), you will now require £1080 margin instead of £405, which is a big difference.

Similarly, if you were to open a £2 long position on the GBP/USD pair at 1.3100 (shown as 13100), you will now need to have £873 in your account just to cover the margin, instead of the £131 that would have been required previously.

The opportunity to make big profits from cryptocurrencies are also going to be limited due to the new 50% margin rate. That’s because if you wanted to open a long position on Bitcoin at say 7500, you would need to have at least £3750 in your account just to cover the margin on a £1 long position.

So hopefully you can now see why so many CFD and spread betting traders are worried about these new changes. If you want to open multiple positions on several different markets, you will now require a lot more margin to do so.

The Impact of These New Rules

Despite the fact that many traders will be unhappy with these new margin rates, the new rules seem to be having a positive effect so far.

Capital.com introduced these new rates from 1 June, and the performance of their new traders improved as a direct result of these changes:

“Comparing their performance against published industry performance levels and historic client performance reveals that users who traded using the lower leverage limits traded more successfully and were significantly less likely to face a margin call. The proportion of users facing a margin call within the first 15 days of trading fell from approximately 30 per cent in the months before Capital.com introduced the ESMA limits, to just 5 per cent in June. The size of the average loss fell by over 80 per cent.”

(read the full article here)

Final Thoughts

So even though many of us have become accustomed to trading the markets with generous leverage, we now have no option but to accept the new margin rates, adjust our trading accordingly, and either lower our risk per trade or add more capital to our accounts to cover the extra margin.

It is not ideal by any means, but if it prevents new and inexperienced traders, as well as some more experienced traders from losing more money than they can afford to lose, it can only be a good thing.

Brexit Continues To Create Uncertainty For GBP/USD Pair

by Leave a Comment

Brexit Problems

When the British public voted in favour of leaving the European Union back in June 2016, it caused shockwaves throughout the UK and the rest of Europe.

David Cameron obviously didn’t expect that more than 50% of the British public would vote to leave Europe, and I don’t think many other people did either, but it has happened and has actually resulted in one big mess.

Teresa May’s Conservative government is clinging on to power, with many arguments and disagreements continuing to rumble on within her own party, and now there is a fresh crisis after David Davis, the Brexit secretary who was essentially responsible for delivering Brexit, resigned in protest at her soft Brexit plans.

How Has Brexit Affected the GBP/USD Pair?

When the result of the referendum was announced just over two years ago, the impact that it had on the British pound was clear to see because it basically plummeted against all of the major currencies almost immediately.

Prior to the referendum, the GBP/USD, for example, was trading between 1.4 and 1.5, but following the vote it dropped to 1.3 within days, and continued to fall in the following months, dropping to around the 1.2 level at one point.

Since then, this pair has bounced back quite a lot, and was actually trading between 1.4 and 1.43 earlier this year, but because there is still so much uncertainty surrounding Brexit, it is now trading back in the 1.30s once again.

GBP/USD Price Chart Post-Brexit

The Major Problem

The major problem is that nobody really knows what is going to happen. No-one really knows if we will get a soft Brexit or a hard Brexit, both of which will affect the movement of the GBP/USD pair in different ways.

Indeed there is still a small chance that Brexit won’t actually happen at all because of the ongoing disagreements within the Conservative party.

Furthermore, if there is a snap election and Jeremy Corbyn’s Labour party gets voted in, we could well see a second referendum, and potentially an entirely different result, in which case the GBP/USD would almost certainly rocket higher as a result.

Future Direction of the GBP/USD Pair

As a result of all this uncertainty, the GBP/USD continues to trade in a sideways trading range with no clear direction, and this is likely to continue for the near future until we get a clearer idea of the Brexit exit deal.

So whilst there will always be opportunities to make money from short-term trading, it might be a good idea to remain on the sidelines for the foreseeable future if you are considering taking a long-term position on the GBP/USD pair.

There is always a chance that the price will surge higher or lower whenever there is a major development in the ongoing Brexit saga.

Plus with the government being plunged into crisis after crisis, there is the potential for some big price swings in the coming weeks and months, which could easily result in some big losses if you are caught on the wrong side.