There are 2 primary methods of analyzing markets: technical analysis and fundamental analysis.

Technical analysis uses the historical price chart of a market to predict future price moves. Fundamental analysis looks at underlying characteristics of a market like news, balance sheets, and other financial reports. 

Which one should you use? Or should you use both?

Let's get into the details of each type of analysis, the benefits and downsides of each, and how to figure out what you should be using.

Technical Analysis

Technical analysis is basically the study of patterns on price charts.

The core belief behind technical analysis is that the behaviors of all of participants in a trading market can be seen in the price charts.

There are many types of technical analysis, but here are two of the most common methods.

Technical Analysis Examples

Support and Resistance

There are many types of technical analysis, but one of the most frequently used techniques is support and resistance.

Support and resistance are levels where price changed direction in the past, and could be an area where price reacts in the future. 

Support is a “floor” where price could turn and start heading back up.

Here's an example of a support level where price bounced off the support several times, before heading higher.

Obviously, the price will not always bounce off the support level. If the support level doesn't hold, then price is likely to go lower.

In this example, price initially bounced off the support level, but the level was broken and price headed lower.

The concept also works for resistance, which is a level above the current price action where price is likely to bounce and head down.

Here's an example of resistance on the GBPJPY chart.

Price headed down every time it hit the level.

Again, this won't always happen. But if price reacted to the level before, it's likely that it will react to it again in the future.

Although these support and resistance levels have been drawn as lines, they are more like zones. They exist between a range of prices, not at one specific price. 

Here's what it looks like on a chart.

I find it easier to draw a line, but keep in mind that price won't turn exactly at a line.

The best support and resistance levels are areas on a chart where there was a strong move away from the zone.

So you'll see big wicks on candles, or big filled candles.

To learn more about how to draw support and resistance levels correctly, read this tutorial.

Moving Averages

Another technical analysis method is to use indicators.

These are graphs that are overlayed on a chart and are created by performing mathematical calculations on price and/or trading volume. 

One of the most popular indicators is a moving average.

My favorite moving average is the exponential moving average.

Moving averages help traders visualize trends better and show how current price action relates to price action that happened in the past.

A popular moving average is the 200 simple moving average (SMA).

Here's an example of the 200 SMA on the GBPUSD chart.

As you can see, this currency pair is in a strong downtrend because it's way below the moving average.

This information is useful because it gives traders a clue as to where price could head next.

Generally speaking, when price is below the 200 SMA, it's weak, so it's more likely to go down. If it's above the 200 SMA, it's more likely to go up.

Obviously, price cannot go up or down forever.

But eventually, price will reverse or slow down enough so that the moving average will catch up to it and price will start closing above the moving average.

That can signal that the downtrend is over and there is now a bias to the long side.

Benefits of Technical Analysis

Traders like technical analysis because they can focus on the chart and not have to worry about how much to weigh fundamental factors in their trading decisions.

Let's look at trading cocoa commodity futures as an example.

If you're using fundamental analysis, you might analyze the cocoa market by looking at:

• The weather in cocoa producing countries
• How much each country produces
• How much each country has planted
• The cost to ship cocoa
• Taxes on cocoa
• How much cocoa companies are buying
• And more

So with all of the fundamental factors that can potentially affect the price of cocoa, which ones do you focus on?

Is the weather most important?

Should you focus more on cocoa production?

It's tough to know.

But if you use technical analysis alone, you just have to look at the chart and follow your technical trading strategy.

For example, some traders use the Golden/Death Cross trading method.

The trading method is simple.

Place a trade every time the moving averages cross over.

No fundamental analysis necessary.

Other traders like using the RSI indicator.

There are many different technical trading strategies out there.

Find one that meets your risk/reward criteria and backtest it to be sure it works.

That's another huge benefit to technical analysis. You can backtest trading strategies to see how they would have performed in the past.

Downsides of Technical Analysis

The biggest downside of technical analysis is that it doesn't take fundamental factors into account when making trading decisions.

So there can be situations where the technical analysis alone can look good, but the fundamental analysis would rule out the trade entirely.

For example, there are companies that are losing a ton of money every year, but have a good looking chart.

If you only used technical analysis to make a trading decision, you would only see half of the picture.

You might buy the stock based soley on the technicals.

But if you studied the fundamentals, it would have been obvious that it was not a good buy, or it should have been a very short-term trade.

Now in all fairness, you could still make money by looking at the chart alone.

However, when you don't know the fundamentals behind price movements, it can also be harder to stay in a trade because you don't know if there is a long or short bias.

You can also be caught off guard by a change in the underlying characteristics of a company, commodity or cryptocurrency project.

Fundamental Analysis

The other type of market analysis is fundamental analysis.

This is when traders examine reports, statistics and factors outside of the price chart to make trading decisions.

Analysis of these data points can give traders clues as to where price will go next.

Benefits of Fundamental Analysis

Fundamental analysis helps you understand what's going on behind the scenes at a company, project, or in a particular market.

Traders utilizing fundamental analysis will examine things like:

• Balance sheets
• Imports and exports
• Competition
• Interest rates
• News
• Commitment of Traders Report
• Team members on a project
• And more

When you know a lot of detailed information about a company or market, you're more likely to stay in a winning trade longer and cut your losses short because you know the underlying events that can affect the price.

Fundamental analysis can also help you find good deals because there can be stocks or cryptocurrency projects that are undervalued.

The only way to figure out that they are undervalued is to understand the company or project, relative to others the in that niche.

Downsides of Fundamental Analysis

The hardest part about using fundamental analysis is getting the timing right. 

For example, if you're trading stocks, a company could have negative earnings for months before the price of the stock starts to go down.

Or a company could have an amazing product that's selling well, but the stock price doesn't go up.

This happens because there are 2 different market forces at play in trading/investing:

1. The trading market for the shares
2. The supply/demand for the product itself

The product the company makes could be selling well, but if people trading the shares do not see value in it, then the value of the stock will not go up.

On the flip side, traders could feel that a company better than it really is and buy the stock, causing the price to go up.

We see this a lot when groups promote a stock heavily and cause the price of the stock to go up a lot, even though the underlying fundamentals of the company do not warrant the increase in price.

As I mentioned before, it can be difficult to figure out which fundamental factors will actually affect the price of the asset.

Therefore, fundamental analysis is much more of and art than a science, compared to technical analysis.

The same concepts apply to any trading market.

Which is Better, Technical or Fundamental Analysis?

Overall, one analysis method is not better than the other.

You have to figure out which method, or combination of methods, is best for you. 

Trading is shades of gray. 

Many new traders believe that there are a handful of trading methods that are guaranteed to make money for anyone who follows the method.

In reality, every trader has to find the trading method that works with his or her personality, and the market they are trading. 

Some traders are better at following strict technical trading strategies.

Others are better at using only fundamental analysis.

Many traders use a combination of both analysis methods.

We all have a natural inclination to seeing the world in different ways.

It's like how some people are good at sports and others are good at music.

We will each be able to spot opportunities based our our natural talents and educational backgrounds.

So if anyone tells you that one is better than the other, remember that they are speaking from their personal experience.

It's an opinion.

Find out what works for you.

Can You Use Both at the Same Time?

Although there are some traders who only use one analysis method or the other, there are many others that use a combination of both methods.

For example, when analyzing a stock, you could use technical analysis to find opportunities to buy or sell, based on the stock's chart.

At the same time, you could examine fundamental factors like the balance sheet of the company, sales projections and the company's competition.

Many traders use fundamental analysis to identify good companies to buy, then wait for favorable technical analysis to place a trade.

Or they might identify weak companies that are overvalued and look to short the stock.

Some markets are more conducive to blending technical and fundamental analysis, while others are better analyzed with one or the other.

The bottom line is that you have to find out what works best for you and the market you're trading.

This can only be discovered through doing your research, backtesting and learning from successful traders.

What Kind of Analysis is More Useful for Day Traders?

Generally speaking, technical analysis is more useful for day traders. 

The reason is that fundamental factors have less of an effect on short-term price moves.

That said, there are few fundamental factors that can affect day traders.

For example, news announcements can move the markets dramatically, in a short period of time.

Many day traders will stay out of the markets before major news announcements, because of the volatility during these times.

But some of them will trade immediately after the announcement, based on what was expected before the announcement.

Final Thoughts

So that's the difference between fundamental and technical analysis.

One analysis method is not necessarily better than the other. It really depends on your personality and the market you're trading.

First, find the method that makes the most sense to you and matches your trading personality. You might want to use a mix of both.

Next, figure out which markets can be trading profitably with that analysis method.

Finally, always test your theories to see if they actually give you an advantage.

The post Fundamental vs Technical Analysis appeared first on Trading Heroes.

Forex lot sizes can be confusing when you're first starting out. But not to fear, this post will show you how they work.

Lot sizing is a little different in Forex, compared to other markets, but once you figure it out, it's actually quite simple.

I'll also show you why lot sizing is very important in trading and how to choose a broker based on the lot sizes they provide.

The Hierarchy of Success in Trading

Before I get started on lot sizes, it's important to understand why lot sizes are important. 

They are important because they are major element of risk management.

Success in trading is determined by prioritizing the following elements of trading…in this order of most to least important.

1. Trading Psychology
2. Risk Management
3. Trading Strategy

However, most beginning traders have a priority list that looks like this:

1. Trading System
2. Trading System
3. Trading System
4. Trading System
5. Trading Psychology/Risk Management

…and that's why most aspiring traders fail.

Risk management is much more important to your success than your trading strategy, so pay attention to your risk per trade and your lot sizes.

This video will explain how Forex lots work.

What is a Pip?

You'll need to understand the concept of pips in Forex to calculate risk, so I'll cover that briefly before we move on. If you understand this already, feel free to skip down to the next section.

There are basically 2 types of price quotes in commonly traded Forex pairs.

• Pairs with Japanese Yen in the pair
• Pairs without Japanese Yen in the pair

Yen pairs are quoted in 2 or 3 decimal places. The 2nd decimal is a full pip and the 3rd decimal is a pipette, or fraction of a pip. It's like a fraction of a cent in stock share prices.

Pairs that don't have Yen in them are quoted in 4 or 5 decimals. The 4th decimal is the full pip and the 5th decimal is the pipette.

Here are 2 examples of how you would calculate pips for each of the types of pairs.

Currency Units by Lot Size

Minimum lot sizes are easier to understand in other markets because it's usually 1.

Here are a few examples:

• 1 Share of stock
• 1 Futures contract
• 1 Options contract

But in Forex, there are some preset “packages” of lot size units.

These are the lot sizes that are available in Forex:

• Standard Lot: 100,000 currency units (lot size of 1 in MetaTrader)
• Mini Lot: 10,000 currency units (lot size of 0.1 in MetaTrader)
• Micro Lot: 1,000 currency units (lot size of 0.01 in MetaTrader)
• Nano Lot: 1 currency unit (lot size of 1 in TradingView/Oanda, not available in MetaTrader)

This is great in theory, but what does it mean in live trading? Well, it might be easier to think of lot size in terms of profit/loss per pip.

Keep in mind that the value per pip will vary by broker and currency pair. But I'll use the EURUSD as an example because the pip value is generally pretty similar across all brokers, and it's usually a nice round number.

• Standard Lot: $10/pip
• Mini Lot: $1/pip
• Micro Lot: $0.1/pip
• Nano Lot: $0.0001/pip

How to Figure Out Which Lot Size to Use

To find out the correct lot size to use on each, you can use a lot size calculator like this one. Most brokers have one available.

If you can't find a calculator on your broker's website, contact their support and they can point you in the right direction.

In order to calculate the correct lot size, enter the information about your trade. In the margin field, enter the maximum risk that you want to take on this trade.

Remember that Oanda uses nano lots, so the number of units will be a little different than if you used a calculator that was built for MetaTrader or another trading platform. Use the table in the previous section to convert nano lots to mini, micro or standard lots.

For example, let's say that you have a $10,000 account and you want to risk 1% on a trade, which is a $100 of risk per trade.

Your calculator will look like this:

Since Oanda uses nano lots, the maximum trade size is 4,244 nano lots or 4 micro lots, if you round down. If you choose to round up, then you would take the trade with 5 micro lots.

Herein lies the issue with brokers that do not use nano lots. 

When a broker only offers mini or micro lots, then  you have to round up or round down. This means that you will be risking more or less than is optimal for your account.

Over time, this can have a detrimental effect on your account because you aren't risking a consistent amount per trade. So some winning trades won't make up for the losing trades.

How to Choose a Broker Based on Lot Size

Choosing a broker based on the lot size that they offer is pretty easy. Start by calculating how much money you'll be risking per trade. 

For example, if you have a $1,000 account and you want to risk only 1% per trade, then you'll be risking $10 per trade. Now go back to the pip value list in the previous section and how many pips that would be for the EURUSD, for each of the lot sizes.

This example would be as follows:

• Standard lot: $10 (risk per trade) / $10 (pip value) = 1 pip of risk
• Mini lot: $10 (risk per trade) / $1 (pip value) = 10 pips of risk
• Micro lot: $10 (risk per trade) / $0.1 (pip value) = 100 pips of risk
• Nano lot: $10 (risk per trade) / $$0.0001 (pip value) = 100,000 pips of risk

Then figure out the maximum number of pips you'll be risking on your trades. If you're day trading and only going to be risking 100 pips or less, then you could potentially get away with a micro lot account.

But if you will be risking more than 100 pips, then it's better to go with a nano lot account.

However, if you have a bigger account, like $100,000, then a micro lot account is probably a good size to trade.

You'll have to make your decisions on which lot size is right for you, but knowing the right lot size before your first trade will get you started on the right foot. 

First-In First-Out and Hedging

There are a couple of other terms that you may hear, in relation to lot sizes and entering trades in Forex. They can be a little confusing when you're first starting out, so I want to make you aware of them.

First-In First-Out (FIFO)

In non-US brokers, you can enter and exit positions as you please. This is the way that it should be.

However, if you have a US based account, you'll have to exit your trades in the order that you entered them. 

So let's say that you enter 2 Japanese Yen trades as follows:

• Trade 1: Long 2 mini lots
• Trade 2: Long 1 mini lot

If you have to follow the FIFO rules, then you would have to exit trade 1 before you exit trade 2. Some US brokers will also blend your trades, so you'll only see an average of the 2 trades, not 2 separate trades.

I'm not a fan of FIFO, but there are ways around it. You can read this post on how to do it.

Hedging

Hedging is when your broker allows you to hold both long and short positions in the same trading account.

Again, US based accounts cannot do this, but traders in the rest of the work can. There is a way around it, but some traders may not need it.

Final Thoughts on Forex Lot Sizes

Lot sizes are an important component of risk management. Understanding how your broker and trading style affect the lot you use is one of the first things that you should learn in trading.

If you use the correct amount of risk per trade, you'll be able to stick around longer and figure out the trading game. Use too much risk and you'll blow out your account and be forced onto the sidelines.

Take a few minutes to figure out your ideal lot size right now. 

The post Forex Lot Sizes Explained (Complete Beginner’s Guide) appeared first on Trading Heroes.

In this post, I'll explain how the carry trade works in Forex trading, the risks and the benefits. I'll also show you how to backtest it, if this is something that you're interested in trading.

The Carry Trade Explained

A carry trade is when you borrow a currency that has a low interest rate, then use that money to buy another currency that pays a higher interest rate.

You make money on the difference between the interest rates.

In order to see the interest rates for each currency, you can look at any up-to-date list of central bank interest rates.

Here's a good one from FXStreet.

For example, if you did a carry trade where you borrowed Swiss Francs and bought US Dollars, you would be making money on the interest (also known as rollover) because the interest rate of the Federal Reserve is higher than the interest rate of the Swiss National Bank.

How much would you make, you ask?

Well, you can just jump over to a rollover calculator and figure it out. Most brokers have one.

This is an example from Oanda.

So if you went long a standard lot of 100,000 currency units of USD/CHF and held it for 24 hours, you would make $6.16 in interest.

One important thing to note is that the interest rates listed on the Oanda website are different from the actual central bank interest rates.

This is because all brokers reduce the interest rate on both sides as a transaction cost. It's like the spread on a trade.

Check with your broker to see their rates because it could be very different from the central bank rates. 

But it sounds like easy money, right? You just sit around on the beach and collect the interest…like a bank.

That's what some websites would like you to believe.

But it's not really that easy.

Here's why…

Is the Carry Trade Safe?

I cringe whenever I see websites mention that the carry trade is low-risk.

It's not.

You can actually get into a lot of trouble with the carry trade, especially if you are leveraged.

When I interviewed professional Forex trader Kim Krompass, she mentioned that her first big blowup happened when she was only doing carry trades.

The reason it's not safe is because although your interest rate is risk free, there is still position risk in your trade.

Let's say that you went long USD/CHF, like in the example above…

…then this happened.

That's about 1,800 pips in a matter of a few hours. If you were long a standard lot (100,000 units), you would have been down approximately $22,000 during that move. 

At $6.16 per day in interest, it would take you almost 10 years to make up that loss.

As you can see, the carry trade is far from risk-free. 

However, if you manage your risk properly and enter the market at a good spot, it can be possible to build up a nice interest-bearing position, while minimizing your position risk.

If you want to learn how I do this, check out my Zen8 trading method.

Now that you understand how the carry trade works, I'll answer a few commonly asked questions about this trade.

What is Positive Carry?

Positive carry means that you are making money on the interest rate differential between the two currencies you are trading. Negative carry means that you are losing interest on the trade.

Remember that positive carry should never be an excuse to stay in a losing trade.

Always consider your position profit or loss first. 

Who Should Worry About Negative Carry?

If you are a day trader or trade short-term, then you probably don't have to worry about negative carry. However, if you are a position trader and will hold your position for months or even years, then rollover needs to be considered because the interest can add up.

What is the Japanese Yen Carry Trade?

The Yen carry trade refers to a trade where you borrow Japanese Yen and buy higher interest rate currencies like the US Dollar. This trade was popular in the early 2000s. It's said that many Japanese housewives used it as a way to invest their family's money during a time of zero interest rates in Japan.

Should I Trade the Turkish Lira?

At this point, you're probably looking at the interest rates of central banks around the world and trying to figure out the biggest spread. Naturally, the Turkish Lira stands out because at the time that this blog post was first written, the Lira has an interest rate of 24%.

Well, it's high for a reason…

Countries with higher interest rates are generally less stable. Therefore, they also have larger position risk because big moves can happen suddenly, liquidity is lower and spreads are wider. 

Here are examples of countries with higher rates:

• Russia: 7.75%
• Mexico: 8.25%
• Egypt: 14.75%
• India: 6.25%

Even though it's tempting to trade these currencies, the risk isn't worth the reward. Stay with the major central banks, the carry trade is risky enough.

Final Thoughts on the Carry Trade

So that's how the carry trade works. Now that you understand the benefits and downsides I hope you can use this information in your trading.

The carry trade isn't for everyone. But if you manage the risks, it's another trading strategy that you can add to your arsenal.

As always, be sure to backtest the carry trade before ever trading it live.

If you have any questions about the carry trade, leave them in the comments below.

The post How Does the Carry Trade Work? appeared first on Trading Heroes.