The anti-Martingale is exactly as the name suggests, the Martingale in reverse, and again it comes out of roulette ‘theory’ – any game where there’s roughly a 50/50 win/lose. Instead of doubling up on your lot size following a losing trade, you double on a successful trade. Continue the doubling and watch the money mount up.

First, with the antimartingale set-up you have to decide when you’re going to stop the madness – because there has to be a stop, the final take-profit from that round of trades or in this case, bets… else the inevitable loss will come. Commonly, 4 successive trades are used as a stop – so that’s 1/16 probability, with everything else equal….

There’s a few added complications with withdrawing a percentage of your equity at certain points in the chain, which is essentially scaling your winners, but that’s the basic scheme.

The plus side
Using this strategy, you have the potential to make a great return from a small starting stake. With all the odds against, as mentioned above. The only logic for applying the system might be in stocks during a sustained bullish market, where successful trades are as guaranteed as they’re ever likely to be.

The minus side
What you aren’t getting are the smaller successful trades, and these tend to be what keeps an account going. You’re committing to slowly and steadily wasting your account, with the possibility that you might get the occasional huge win. So that’s using your head…

In the UK, other indices, for example, Mortgage Approvals, the Halifax House Price Index m/m also play a major part in the fundamental strength of GBP.

Ripple Effect
Unlike the situation a couple of years ago, (when, as always in a bubble, people got a bit silly), home-builders aren’t going to be starting up unless they are fairly confident of the end market and actually selling the units when they’re built.

And it’s not just the construction industry – the ripple effect is all the growth that goes with a new house – household appliances, furnishings all have to be bought, which acts as a multiplier across the wider manufacturing economy – which the markets are going to take notice of… So while commodities such as lumber are maybe most directly affected by Housing data, the ripple effect follows all the way through the economic fundamentals to reach the forex market.

Forex News Indicator
As a news indicator, Housing Starts data are definitely to be kept a close eye on.
In the present circumstances, with volatile markets across the board and the general air of pessimism, for example, Housing Starts figures less disastrous than expected in the forecast will certainly move USD in its pairs – so worth looking out for…

But, as it so happens, unless you’ve been the first one to buy a very unpopular piece of software – a few other copies of this EA have been sold.

Let’s just run through this scenario:
20,000 trades get placed simultaneously – or 20,000 attempts are made to get the same trade placed. Online brokers do tend to notice these things, and so what happens, even if you do get filled, the spread rockets up, and there is nearly always comeback on it.

Mass produced EA’s tend to have a life-cycle – they work for a while, they produce a ROI, even 30% or thereabouts, and then they gradually start not working. They get updated, not quite so good, and the pips trail away, until you’re left with very little return on your investment.

Maybe if you’re keen to use an expert advisor, you could learn to write one yourself – it’s not the most complicated thing ever, (if you have done a bit of programming before). Then – and this is about the only way – you’ll know that you’re the only one placing the trades in that exact pattern.

Be a trader – don’t be one little sheep in a large flock….

Despite forecasts for a depreciation of the Dollar, many economists are now saying that the negative housing data released from the United States yesterday may actually bolster the USD.

Let’s state the effect in the simplest possible terms.

Bad news for the US economy, lower jobs, lower GDP, leads to lack of confidence
Which leads to a rush towards safe haven currencies…
Which leads to buying USD – because USD is in itself, considered a safe-haven currency…
So bad US news leads to USD going up.

This rush to a safe haven, any safe haven, after every news announcement is creating some weird effects. It flies in the face of logic, well, simple logic anyway – and is a sign of the present dominance of USD

No, I don’t know of any name for this upsidedown, wrong-way-round, echo, reverb effect – but it certainly ought to have a name…

It’s all about safe havens

The USD appears to be the safest investment, as traders are moving en masse to buy into the greenback.

Some people reckon that (if the entry point is right) currencies such as AUD or NZD might turn out to be the better safe havens during the present financial crisis – maybe… CHF has always had a lot to recommend it. And the irony is that while it certainly isn’t borne out with pair prices at their present levels, as a long-term safe haven, the US dollar might not turn out to be that safe a haven after all…

US Dollar dominance
This effect, whatever it’s called, is certainly a sign of the overwhelming domination of the forex trade by the US dollar. From memory, about 85% of the traded volume in the whole forex market, involves the dollar. Structurally, this is always going to bring problems in practice. Excessive dominance? Not for us to say – the situation is as it is, for as long as it stays that way…

If we were serious economists, interested in fundamental analysis for its own sake, the theory of market movements, etc. we probably ought to be worried – but we’re just common, vulgar forex traders, all we do is operate the system for what it is…

But what to call the actual effect? Any ideas?

Please note – I’ve said USD throughout this – not USA, necessarily…

8 levels, 4 of resistance, 4 of support, are produced, using High, Low and Close data for a preceding time period.

R4 = (H – L) x 1.1 / 2 + C
R3 = (H – L) x 1.1 / 4 + C
R2 = (H – L) x 1.1 / 6 + C
R1 = (H – L) x 1.1 / 12 + C

S1 = C – (H – L) x 1.1 / 12
S2 = C – (H – L) x 1.1 / 6
S3 = C – (H – L) x 1.1 / 4
S4 = C – (H – L) x 1.1 / 2

(There are other recipes for the coefficients to be found…)

Usage
The critical levels are the L3 and L4 levels. The standard method is to expect reversal if the price reaches an L3 level, support or resistance. This is then considered a signal to make a trade against the prevailing trend – keeping the L4 level as a stop-loss.

In addition, or alternatively, crossing an L4 level can be used as a signal for definite breakout – therefore going with the trend. The difficulty here is where to place stops…?

Totally unconvinced of their value, and included for the sake of completeness – if you’ve found a system to make Camarilla pivot points work, do let us know…

Positive
A positive balance of trade = exports higher than imports. Exports good – money coming into an economy, a trade surplus.

Negative
The opposite of this is a trade deficit, or trade gap – more goods are being imported the exported. Imports bad – money going out an economy to pay for them.

Balance of trade has historically been a critical issue in the Japanese economy, which is heavily based on exports. The financial management of the economy is geared towards stimulating exports wherever possible – keeping the value of the Yen low, low interest rates etc. – so JPY tends to be more sensitive to good/bad balance of trade figures than other currencies – on average…

Japan is a good example of a mature economy and these always tend to run a trade surplus – other examples include Germany and Canada, (sometimes unfairly referred to as stagnant economies), running generally at a lower expectation of growth. But the strong growth economies eg. United States, Australia run regular trade deficits, simply to fuel this growth.

When it comes to pure economic theory – as usual, economists are divided. Some say that trade deficits have to be tackled as they will inevitably bring an economy down, others say it’s a necessary evil to stimulate some growth, and a few even reckon a trade deficit matters not at all…

The markets, however – and it’s always the markets we’re interested in when it comes to forex trading – will tend to go classic picture, trade surplus good, trade deficit bad.

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ETFs, exchange-traded funds, grew out of the older style, mutual funds or unit trusts.

Since ETFs trade on the market, investors can use the same trading tools as they can with a conventional stock, for example, limit orders, stop-loss orders, margin/leverage, selling short, and no restriction on lot size.

ETFs retain the valuation feature of a unit trust, which can be purchased/redeemed at the end of each day for its net value – but you’re not limited to trading at the close price. An ETF is continually priced through market trading hours and so intra-day trading becomes possible. (Not something that ever went on with unit trusts or mutual funds).

Commodity ETFs invest in commodities, such as the precious metals and commodity futures. Among the first commodity ETFs were gold exchange-traded funds, which have been widely offered in recent years. There’s also currency ETFs…

Currency ETFs
Rydex launched the first ever currency ETF, called the Euro Currency Trust (NYSE: FXE) in 2005.
See the diagram top right for its recent progress – don’t forget, you can go short, so there’s always ticks to be made. Since then, they’ve launched a series of funds tracking all major currencies under their brand CurrencyShares.

Deutsche Bank offers the EONIA Index on the Frankfurt exchange, which tracks the euro – and also the Sterling and US Dollar Money Market ETFs in London – LSE: XGBP and LSE: XUSD respectively.

Currency ETFs will always suit some investors better than others – if you don’t fancy the cut-and-thrust of spot retail forex trading, they can be good option to explore.

We’ve added to a pivot point calculator to our free tools section – at the moment, just for standard (floor) pivot points – the more exotic formulae, De Mark pivots, the Camarilla system, will be following shortly.

There’s 2 ways of using pivot points.

1. Overall market trend analysis: – if the price crosses above the pivot point level, then it’s fair to say the market is in a bullish phase. And vice-versa, price breaks the pivot point level to the downside = bearish.

2. As entry/exit signals: – since the theory is that pivot points are likely support/resistance levels, these can be used as limits on trades placed – eg a conditional order to buy/sell if the price breaks through a given level of resistance/support. Similarly, likely exit points for placing stops- stop-loss orders, or even, just maybe, take profit…

And here’s a nice enough example. GPB/USD 30-min chart – the currency pair becoming range-bound, candlesticks shortening and then breakout – here, to the downside.

Bollinger bands are a measure of market volatility – in simple terms, when there’s a trend on, or when the price is zigzagging with no clear outcome, the upper and lower bands expand away from each other. When the price settles down (becomes range-bound) the bands begin to come together and that’s the Bollinger squeeze. It’s as if there’s a constriction and the price has to pop out – one way or the other.

How to take advantage of a Bollinger Squeeze
We know there’s an increased probability of imminent breakout – because that’s the way markets, forex, stocks, whatever, tend to work – but which way? That’s the point – it’s not possible to say, just by looking at the Bollinger squeeze and without other information, whether the breakout is going to be bullish or bearish.

So, if your trading platform allows, you might investigate pending, conditional, orders – covering either option. OCO orders – one cancels other can also be the way to go, if you have the option – two orders, where if one is filled, the other order is cancelled. You’ll also be keeping an even closer eye on possible market reaction to news events.

When to pull the trigger?
Of course, the other question is how long the squeeze is going to last before there’s a breakout. Don’t just guess on a trade and click one off immediately, just because you’ve seen the Bollinger squeeze come on. It may be 5 time periods, it may be 30.

Cause and Effect
Indeed, just because there’s a squeeze, there’s no absolute proof there’s going to be a breakout, ever - that would be falling into the trap of thinking that an indicator creates a market – it’s the other way round.

There’s more information about Bollinger bands, and if you ever feel like going through the theory attached, it’s all here.

There’s quite a few people who trade on the retail forex market every day, who watch their charts go up and down, click on their trades, but only have the very vaguest idea of what’s happening in the big wide world out there. Here’s the very simple version – how the retail forex market works in relation to the world of the big players, banks, institutions, the people we love…

Two quick points to clarify first (which you may well know already).

1. Watching pairs go up and down – you aren’t seeing ‘the forex market’ – you’re seeing your chosen broker’s version of that market. Which is a completely different thing.
2. Liquidity. If you buy something, there must be someone willing and able to sell you it first – the stuff has to a) exist and b) be owned, even if it is a fairly notional ownership at times. Otherwise, no forex deal.

The Interbank Level
The top level of the fx market is known as the Interbank level. It’s not a centralised exchange, in the same way as stocks usually will have an exchange, with intermediate brokers entering the market on behalf of clients – the Interbank level is essentially a collection of bids and offers existing at any one time in order to make potential currency transactions.

So how do they know? How do they communicate?

EBS/ICAP & Reuters
The Interbank market is held together, mainly, by 2 large communication systems, Electronic Broking Services (EBS) currently owned by ICAP, and the snappily-named Reuters Dealing 3000 Spot Matching (also known as Reuters D2).

EBS is used predominantly for the various EUR, USD, JPY and CHF crosses, while Reuters D2 concentrates on the GBP, and commonwealth currencies AUD, NZD crosses – it’s just the way they work.

With these systems, a participating bank can see the immediate, spot, prices that other Interbank members are prepared to make transactions on.

The Internal Level
The next level of the market exists within each bank – given the supply and demand for individual currencies, they’ll juggle balances around, between branches say, between accounts in currencies other than their home currency (whatever that happens to be), and over-the-counter. Transact business with a bank in this way, and you just have take or leave what they offer in terms of a deal.

A few US citizens, just a few, don’t get out and about very often, and might find it amusing to get on down to their local mainstreet bank and ask about changing some currency – and when you find out the commission + spread they operate on over the counter, will probably feel a bit happier about 4 pip spreads…

Retail Forex market
And this is where the retail forex market comes in. Your online broker, whoever they are, will have a deal set up with one of the Interbank players (usually it’s only one, occasionally more). What the online forex broker (strictly, they’re forex dealers) needs is immediate liquidity to cushion moves either way and keep their overall position under some kind of control. Ultimately, the bank will be hedging these positions built up via EBS.

The brokers aren’t getting the same deal as if they were on the Interbank level directly, but they’re getting something closer to it. They will, firstly, match up their internal orders from us guys – one says buy, another says sell, and the broker must collect on the spread – then, secondly, if things get too far out of balance, the broker has access to their liquidity provider to secure any overexposure in the position.

So essentially, although going down through the various tiers the transaction terms get worse, flexibility does increase – allowing us smaller guys and gals to trade without commission, in nonstandard lot sizes and higher leverage than otherwise possible (if you think this last is a good thing)…

There’s another twist to the spot forex market – dealing via Electronic Communications Networks, or ECNs, which we’ll look at shortly.