Looking for the best forex trading strategy? Your search is over. Here’s the best I’ve found in over 10 years of trading, trialling and researching…TOTALLY FREE!

FREE FOREX TRADING STRATEGIES

When it comes to selecting strategies to trade, you have the choice between buying one off-the-shelf or trawling the Internet for freebies. The trouble with free forex trading strategies is that they are usually worth about as much as you pay for them. They haven’t been tested, and there is little evidence of their reliability.

The strategies covered here on the other hand, are ones that either I or successful traders I know have used in a consistently profitable fashion…

N.B. not all of the following strategies are equal in all markets. Some perform better than others, and each individual trader will find some strategies more suitable for them to trade than others.

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#1: The Bladerunner Trade

The Bladerunner is an exceptionally good EMA crossover strategy, suitable across all timeframes and currency pairs. It is a trending strategy that tries to pick breakouts from a continuation and trade the retests.

#2: Daily Fibonacci Pivot Trade

Fibonacci Pivot Trades combine Fibonacci retracements and extensions with daily, weekly, monthly and even yearly pivots. The emphasis in the discussion here is on using these combinations with daily pivots only, but the idea can easily be extended to longer timeframes incorporating any combination of pivots.

#3: Bolly Band Bounce Trade

The Bolly Band Bounce Trade is perfect in a ranging market. Many traders use it in combination with confirming signals, to great effect. If Bollinger Bands appeal to you, this one is well worth a look.

#4: Forex Dual Stochastic Trade

The Dual Stochastic Trade users two stochastics – one slow and one fast – in combination to pick areas where price is trending but overextended in a short term retracement, and about to snap back into a continuation of the trend.

#5: Forex Overlapping Fibonacci Trade

Overlapping Fibonacci trades are the favourites of some traders I have known. If used on their own, their reliability can be a little lower than some of the other strategies, but if you use them in conjunction with appropriate confirming signals, they can be extremely accurate.

#6: London Hammer Trade

The extra volatility you get when London opens presents some unique opportunities. The London Hammer Trade is my take on an attempt to capitalise on these opportunities. Especially effective during the London session, it can be used at any time when price is likely to be taking off strongly in one direction, and possibly reversing from an area of support/resistance just as strongly.

#7: The Bladerunner Reversal

As mentioned above, the Bladerunner is a trend following strategy. The Bladerunner reversal just as effectively picks entries from situations where the trend reverses and price begins to trade on the other side of the EMA’s.

#8: The Pop ‘n’ Stop Trade

If you’ve ever tried to chase price when it bounds away to the upside, only to suffer the inevitable loss when it just as quickly reverses, you will want the secret of the pop and stop trade in your trader’s arsenal. There is a simple trick to determining whether or not price will continue in the direction of the breakout, and you must know it in order to profit from these situations.

#9: The Drop ‘n’ Stop Trade

The flip side of the pop and stop, this strategy trades savage breakouts to the downside.

#10: Trading The Forex Fractal

The forex fractal is not just a strategy but a concept of market fundamentals that you really need to know in order to understand what price is doing, why it is doing it, and who is making it move. This is the kind of inside info that took me years and many thousands of dollars to learn. It’s yours here for free, so make use of it ? There are also several sites on the net offering free strategies. The problem with most of these sites is, as mentioned above, they just give a brief description of each strategy, with little real proof that they work. Consequently, there is a need for greater research on your part before using any of those strategies in your actual trading. Once you have selected a strategy from one of these sources you will of course need to thoroughly back test and forward test it. The various processes for this are covered in Forex Strategy Testing There are also several commercial systems to consider. Since these are more comprehensive than the simple strategies presented above, and thereby fall into the definition of Forex Trading System, they are dealt with separately in the following section, Forex Trading Systems

Do you suffer anxiety every time you put on a new trade? Here’s the reason, and the solution…

How do you know how much to risk per trade? For that matter, how do you know if you even should be in any particular trade? Simple question, with a simple answer:

Get up and walk away!

The number one rule of negotiation is that you must be able to walk away from any position you adopt. For example, making an offer to buy a car or a house/anything really. If you know there are other buyers waiting in the wings, your offer has to be good enough to make the seller give the deal to you.

The number one rule of negotiation is that you must be able to walk away from any position you adopt…

CLICK TO TWEET

If you pitch an offer on the low side and the seller isn’t happy, they are likely to walk away and find another buyer without ever coming back to you with a counteroffer. So any offer that you do make – if what you’re trying to buy is important to you – has to be good.

At the same time, you can’t appear to be desperate to close the deal, or else the seller knows they have you at their mercy. So you figure out a price that stands a good chance of getting the sale without breaking your bank account. And if you miss out on the sale the psychological effect is not devastating, because you have carefully chosen the parameters of your offer beforehand, and are prepared to walk away from the deal if it doesn’t work out.

How does this relate to trading?

When you put a trade on, your mindset must be that this particular trade is irrelevant. You have to feel that way about every trade you put on. Any single trade is simply one of an endless stream that you will execute by way of your trading system, and the outcome of this individual trade is essentially meaningless.

So you figure out an amount that is not going to break your trading account if you lose, and that will result in a satisfactory gain if you win. But the bottom line remains the same whether you are buying a house or putting on a trade: you must be able to walk away from the result if it doesn’t pan out. In fact, you must be able to walk away once you have made the offer, and let fate take its course.

Which brings me to a suggestion for those traders who put on a trade and then immediately begin to feel all kinds of anxiety about the potential outcome. You know the feelings I’m talking about, we’ve all experienced them: your heart starts thumping, you break into a slight sweat, you start to fidget with the things on your desk, you stand up, look out the window, come back, sit down, check the price action again, wonder if you should move your stop or take the trade off now etc etc etc.

Walk-Away-Trading

Break the obsessive screen watching nature of your trading and free yourself from its anxiety…

My suggestion is simple: once you’ve put the trade on, get up and walk away from your trading station. Don’t even bother to switch to another screen in an attempt to divert your attention from the trade; we all know that doesn’t work. Get up, walk away and do something else, anything: go outside, get a drink, talk to your dog etc.

When you mention this to some traders they put up an endless array of reasons why it can’t be done, or that it is a foolish way to trade. But the truth is, if you’ve figured out your parameters for trade entry and trade management ahead of time, there is really nothing to stop you from putting on the trade and then going and doing something else.

You can have some sort of expert advisor trail your stop if you think that’s necessary (personally, I have had abandoned the practice), and of course you should have your stop loss and take profit levels in the market at the time you entered the trade. (If you haven’t made arrangements for your stop loss to be trailed automatically, you can always come back after a suitable interval to check if you should do it now. Just don’t let that become an invitation to sit down and become glued to your screen again.)

So, really, having put on a trade, what else is there to do? More importantly, what else can you do?

The answer is obvious. Once we are in a trade it’s like we’re on a rollercoaster after it’s tipped over that first hill and plunged to the bottom. All you can do is hang on and hope for a good result, based on your calculation of the risks involved ?

If you find yourself sweating over trades once you’ve put them on, I heartily recommend you try this practice. You may not do it all the time, and you may not need to do it forever. But I personally found it of great use at a certain stage in my own trading. It had the effect of a circuit breaker for the anxiety I always felt just after I put on a trade.

And as a closing comment, one that answers the question “How Much Do You Risk per Trade in Forex?”, you risk an amount so small that you CAN walk away from the trade once you have entered it. If you cannot get up and walk away, you are risking too much!

Traders often perceive risk as a one-dimensional beast but it has two horns…

Trader Risk Tightrope Walker

There is a risk management models to suit every trader. You should never feel as if you’re walking a tight rope with respect to risk, much less performing daredevil feats…

When we talk about risk in trading what comes to mind? Most traders will immediately think along the lines of how much of their money is at risk on any one particular trade.

The other kind of risk for the forex trader is how much money you have exposed to the entire market at any one time.

For example, if you risk $1000 on a trade in a $10,000 account, the nominal risk on the actual trade is $1000. In reality, due to the fact that the broker could go bust at any time or some other disaster occur, your risk is actually $10,000 – the entire amount of the account.

There is also another element to the concept of risk that you as a trader may not be aware of or may not consider on a day-to-day basis.

This relates to the way your total trading account is spread across different brokers’ accounts.

If you just put all of your money into the one forex trading account with a single broker based on the research you have done into which forex broker is the best fit for you, it can be easy to forget the fact that the total risk you are taking on a moment by moment basis in that account is the entire amount of the account itself.

This is because the brokerage can go bust, cease trading, have their licence to trade frozen by a regulatory authority etc etc etc. This has happened several times over the years with usually disastrous consequences for those who have “put all their eggs in the one basket” i.e. put all their money with that one broker. This is in effect a Black Swan risk for traders.

Also remember that in this situation you don’t even have to put on a trade to be at risk. It is something that each and every one of us should be aware of at all times.

So, obviously it’s best to spread your account across several brokerage firms. This may be a little inconvenient depending on your style of trading and level of comfort with the idea of managing more than one account at the same time. However, it is extremely important to do this if you are putting a lot of money into the market.

A third consideration relates to the amount of money you actually have to trade with. Let me explain by asking a question: what is the maximum amount of money that you could afford to lose in trading, in total? If you say have $100,000 in savings but you are only prepared to lose $20,000 before you give up trading as a bad joke, then obviously the answer is $20,000.

So in the first risk model you would open a single account with $20,000 in it; in the second risk model you might open two different brokerage accounts with $10,000 each in them. In the second risk model you have halved your total broker risk at any one time.

But there is a further way to fine tune this.

The answer is don’t put all of your $20,000 into brokers accounts, and simply leverage up your individual trades to give the effect of trading on a $20,000 account.

So let’s say we only put $5000 into each of two accounts. Now our total broker risk at any one time is $5000, half of what it was in the improved second risk model to begin with.

Of course, in order to achieve the same profit potential you would have to be effectively doubling your risk per trade from what you would have done in the first scenario.

All of this needs to be taken into account as you build your risk management model, but it is important to remember that any money you have in the market is permanently at risk of being wiped out at any time…

So, there are strategies for withholding a certain amount of your trading account in a “buffer account” outside the marketplace, for example in a bank account. Not that even those are 100% risk free of course, but that’s another story…

To read more about advanced trading concepts return to Forex University

Trading multiple strategies can make for a robust approach if each individual strategy/system supports its partners in the stable…

Complementary Forex Systems: Align Your Strategies

Combine your forex strategies into a whole where one balances the other and a common vein running through each is identified and aligned

All traders should really attempt to to find (and refine and continually adapt) the one approach to trading that “fits them like skin!” This means that you should find an approach to trading the forex market that allows you to go about your life in a relaxed fashion, as unaware of the ups and downs of trading as you are of the very skin you walk about in.

I guess it’s a roundabout way of saying you need to be perfectly at home with, and comfortable in your chosen approach to trading.

This doesn’t mean to say that you should always trade only the one single strategy, or even system.

Many styles of trading such as automated trading, where the trader relies on a forex robot to do the trading for them, naturally lend themselves to using several strategies combined, in this case several forex robots.

The reason for this is to build robustness into your trading approach/system. Mixing a couple of different strategies can give you a system that adapts to the fluctuations and changes in the market place. In this way you are compensated for periods of bad performance from one strategy with periods of good performance from another, for example.

This brings us to the observation that there are two types of complementary system, and one is definitely better than the other.

The first complementary system combines one or more strategies that behave in different ways in reaction to the same set of marketplace circumstances.

Complementary Forex Systems: combining elements into a cohesive whole

The classic elements of earth, air, fire and water forming a unified world: an analogy for combining individual strategies into complementary forex systems

The second complementary system combines one or more strategies that behave in different ways at all times, they retain their different trading styles no matter what the prevailing conditions are.

An example of the first type of complementary system would be one strategy buying in reaction to a certain set of circumstances and another selling in reaction to those same circumstances.

So we might have a forex robot that buys when a currency breaks out to the upside, and another forex robot that sells when that currency breaks out to the upside.

You can see the problem with this approach: you are likely to lose on one strategy and win on the other almost all the time, resulting in a complementary system that at best breaks even, and most likely loses.

An example of the second type of complementary forex systems is where you are running two strategies simultaneously, one a scalping strategy and the other a swing trading strategy.

In this situation, any given set of market triggers is unlikely to cause both strategies to react in opposite ways at the same time. For example, if price reaches a double top the swing trading strategy may enter a sell order, and the scalping strategy may enter many small sell orders as price begins to fall away from the double top.

If you have found a single strategy that suits you perfectly then the above discussion may not be all that relevant. If however you are tempted to trade one or more strategies at the same time, bear in mind this subtle difference, as it enables you to build a complementary system that works, as opposed to one that goes nowhere or even worse, loses.

To read more about advanced trading concepts return to Forex University

Understand the concept of probability to know your chances of survival given your chosen trading systems…

Probability in Trading: The Roulette Wheel

Know what your chances are before you enter the casino

This article is not meant to be the definitive one on the subject of probability, which is so large and in-depth as to be beyond the scope of a simple web page.

It is intended to give a few extremely important examples of probability that any forex trader should be aware of, in order to minimise risk in their trading.

Many people – and it seems, most traders – think they understand probability, at least on a basic level…

For example, in my home town (Melbourne, Australia) summer weather is reasonably predictable: a series of increasingly warm days leading up to an almost unbearably hot day which crashes into a storm and its following cold spell.

Perhaps I’m jaundiced from having lived here so long, but most Melburnians seem to agree. So it stands to reason that if we have just had three or four increasingly warm days in a row, we could expect there to be a cool or cold change coming in the next few days. As it turns out, this is how it usually happens.

This is a rather simplistic notion of the idea of probability however. It certainly doesn’t translate very well to the idea of probability in trading, which is much more mathematically aligned.

Probability in Trading: The Coin Toss

The coin toss: the simplest and probably best illustration of probability in trading forex

The type of probability we refer to in trading markets is best illustrated by the common example of tossing a coin.Any toss is equally likely to result in either a head or tail. We therefore compute the probability for either result as being 50%.So if we toss the coin a hundred times we can reasonably expect there to be somewhere near fifty heads and fifty tails in the total result.The variation from 50 in fact can quite commonly go down to 40 or even lower. But if we were to repeat the experiment 100 times i.e. 100 series of 100 coin tosses, the actual result would be a lot closer to 50/50.

This introduces one of the major laws of probability,The Law of Large Numbers. This states that the larger the sample of coin tosses, the closer we can expect the actual result to match the expected result.

We use this law in backtesting trading systems: the more iterations of a test, the more accurate our results.

Probability is also involved in calculating Expected Value. This is the calculation of how much we expect to either win or lose from each trade taken by a given trading system. It’s based on the numerical probability of the number of times the system wins combined with the size of each win. Go to How Much Money Do I Need to Trade for a full explanation.

You’ve probably heard the title “A Random Walk down Wall Street”. The Random Walk referred to here is also based on probability. The probability in this case is a 50%, or coin toss event. If we set out on a walk and walk one block north, then flip a coin to decide whether we will next walk a further block north or head back south one block, we are illustrating the concept of the random walk.

There are some fascinating results from this. Given an infinitely long walk – one in which we go on forever walking one block and flipping a coin to see which direction we will walk in next – the probability that we will eventually return to where we started from is 100%. In other words, we will always return to our point of origin at some point.

Paradoxically, the chances of us at some stage being one hundred blocks from our point of origin is also 100%!

You may ask what is the point of stating these facts? I give them because traders often make the mistake of thinking that a trading system with a small probability of winning more than it loses can be traded profitably.

The simple fact is that you should base a system’s worth on its Expected Value, nothing else. The concept of Gamblers Ruin may drive the point home.

Gamblers Ruin is a variation of Random Walk. Suppose a gambler starts with $1000. Each bet they place is for $100. If the probability that they win is 50% – as in flipping a coin – then there is a 100% probability that they will eventually lose all of their money! They will give all of their $1000 to the casino if they play for long enough, just as the walker in the random walk eventually gets to be one hundred blocks from home at some stage.

Some other facts regarding probability that you may like to know if you are considering using a system with a very slight edge:

What is the probability of flipping a coin two hundred times and encountering at least one string of six or more heads or tails in a row?

Answer = 96%

What is the probability of having at least one string of five heads or tails in a row?

Answer = 99.9%!

Don’t forget those strings of heads and tails translate to strings of losers in any trading system that wins around 50% of the time. So if you trade such a system, it’s important to be prepared for such streaks of losses, they are inevitable!

The last example is perhaps the most startling of all…

Suppose you are gambling on a roulette wheel. You know you have an almost even chance of either red or black coming up (the double zero and triple zero, which result in a win to the bank, mean you have slightly less than 50% chance, which is the casino’s edge).Further suppose that the wheel has just been spun ten times and every time the ball has landed on black. Would you be tempted to put your money on red for the next spin of the wheel?And if it also came up black, would you be even more tempted to back red again, reasoning that “odds are that red must come up soon!”?If you would be so tempted, perhaps you would like to know the record for the number of consecutive reds on a roulette wheel in a casino?    

Probability in Trading: The Lotto Ball

The answer?

If you took the hint from the Lotto ball, you maybe guessed the answer: the record number of consecutive reds is 34! Which I’m sure you agree is food for thought!

Understanding probability will really help you get a grip on reviewing prospective trading strategies and systems. The bottom line is: concentrate on Expected Value and do your Backtesting over the largest sample of data that you can.

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Anyone observing forex price action will note a certain peculiarity in behaviour; only some will understand the dangers to their trading…

Live forex charts: their sinuous nature may confuse the unwary trader

The sinuous nature of forex chart action under direction of market liquidity presents a subtle psychological trap

You have probably seen the way forex charts will appear to expand and contract as you scroll them laterally.

This is because varying degrees of volatility result in the candlesticks themselves contracting and expanding as price action cools down and heats up respectively.

Most traders are so used to this pattern of behaviour in charting packages that they hardly give it a second thought as they go about their trading.

This can be a bit of a trap for the following reason: a price action signal may escape their notice depending on the level of volatility when it occurs.

As ever, examples will help to paint a clearer picture:

Live forex charts: illustration 1

In the frame above (shown on a five-minute chart as are the following examples) trading has just commenced for the day in Asia. Price action has been trending down overnight and seems to have found support at the round figure of 1.0400. Price has formed a nice rejection hammer at the 20 EMA, presenting an otherwise perfect setup for a Bladerunner entry.

Would you have taken this trade? If you had been worried by the level of support and passed on the opportunity a little while later the chart would have looked like this:

Live forex charts: illustration 2

Price has now formed further rejections signals at the 20 EMA, signaled by the first white ellipse, and then finally broken below the 1.0400 level and closed with a heavy candle down (second white ellipse). This presents another opportunity for entry.

However, the cautious would point out that price is still trending relatively sideways and that the shape of the chart itself presents currently as a channel.

As further time elapses the following screen presents itself:

Live forex charts: illustration 3

If you haven’t entered by now the bearish engulfing pattern indicated by the white circle represents your last opportunity to board the train! Price has now retested the round figure and failed at that level convincingly with a perfect forex candle pattern for confirmation.

The shape of the chart is now undergoing change also, as price breaks out of the channel. However, this may not be apparent to the trader with their eyes fixed on current price action. You would need to be scanning to the left of the chart to pick up the fact that price is at the start of a further move down.

Once more, the chart is changing shape and if you get stuck only watching the current shape it has formed over the past several bars you could be missing an important opportunity. This is confirmed in the following chart frame:

Live forex charts: illustration 4

The trade has now well and truly played out. A trader watching to the left of the charts, who noted the big move down overnight and the fact that price was now channeling in early morning trade, and to have further noted the breakout from that price channel shape, would have been rewarded by their diligence.

The following two charts illustrate further the aspect of how live charts change shape as they progress across the screen from left to right:

Live forex charts: illustration 5

In the example above we see price rejecting very convincingly (from a weekly pivot level, incidentally) and crossing over the 20 EMA to present further opportunities for Bladerunner entries to the upside.

It is apparent, scanning this chart from left to right of the screen, that the price rejection has been a significant one.

Now have a look at the same chart several hours later:

Live forex charts: illustration 6

As price has progressed across the screen and eventually broken lower than the significant price rejection level the chart has changed appearance once more. Notice how the rejection level does not appear to be as significant as in the previous drawing of this chart.

Live forex charts: getting the shape right is important!

Having the wrong idea about the shape our trade is in can set us up for disappointment when the mirror of the market ultimately shows us reality ?

The actual mechanics of price charts changing shape as they progress may seem a little obvious, but awareness of this mechanism will reward the conscious trader.

By keeping an eye on the overall chart’s shape indicated by price action to the far left of the screen, and by being aware of how price action is panning out on higher time frames, we are much more in tune with evolving price action.

This hopefully allows us to get into moves early, and not miss moves that we otherwise might have.

A further thing to be aware of with respect to forex chart shape is that when price action looks extremely volatile and choppy over the course of several bars, it may in fact represent relatively stable price action within a comparatively narrow channel when looked at from the bigger picture of the overall chart shape.

In this situation, as the chart progresses and price breaks out of the channel what seemed volatile price behaviour at the time will be seen to have been in fact rather docile, sideways trending price action instead.

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It’s not about the pips, and certainly not about the dollars. Learning to accurately measure your success or failure in each trade is essential to survival…

Forex Pip 1

Don’t get fooled into thinking the forex pip is the building block of trade measurement; it isn’t!

You’ve no doubt heard or read the boasts of supposedly successful traders talking about how much they made yesterday, last week or last month or whatever.

When you first start out in forex trading these impressive claims have the twin effect of making you feel inferior and putting you in awe of the people making them.

If you are in this position now rest assured that you needn’t feel that way.

First off, the really successful traders never boast. They just don’t need to. They are comfortable with who they are.

Secondly, when you have a close look at the claims very few of them stand up to scrutiny.

This is almost always because of the manner in which the vaunted success is measured. All told, there are four main ways of measuring the success of any individual trade or set of trades. Let’s look at those four now.

The first measurement is the most ridiculous: it’s when a trader talks about how many dollars or euros or substitute-any-currency-you-like they have made. The claim is ridiculous for two reasons:

Because what may be a large amount of money to them may be peanuts to you, or vice versa

Because it doesn’t tell you how much of their account they put at risk in order to make those dollars. For example, if they made a thousand dollars yesterday on a trade but their risk in the trade based on where their stop loss was set amounted to five thousand dollars, that’s a very, very poor trade and nothing to be proud of. It’s even worse when you discover that they did not set a stop loss, because in that case obviously their risk was only limited by the size of their account!

The second measurement is probably the most common: Forex Pips. “I had a fantastic day yesterday, I made over three hundred pips” you’ll hear it said. But once more, we have no inkling of how much was at risk in making those three hundred pips. If it was on a single trade and the risk was one hundred pips, that’s a good trade by anybody’s standard. But if they had to risk a thousand pips in order to make those three hundred, it’s obviously a different story.

It becomes even murkier when you do know how much they risked but they are talking about a basket of trades. “I took twenty trades last week and made over three hundred pips, with an average risk of fifty pips per trade”. Now you have to do the maths: twenty trades at fifty pips risk per trade equals one thousand pips. Again, on scrutiny the profit doesn’t seem so great.

Some traders take it a step further and use the third measurement of trade success: Percentages. So a trader will talk about having made 5% on their account in a single trade. This gives perhaps a little clearer picture but has the same shortcoming as the previous methods, in that it doesn’t equate risk to reward. Once more, if they made 5% on their account by putting a total of 10% at risk it was not such a great trade after all.

This brings us to the fourth and ultimate measure of trade success: Units. When using this concept we are directly measuring Return as a fraction of Risk. Simply put, one Unit equates to one measure of risk. Let me explain.

I have a trading account of one thousand dollars. I decide never to risk more than a certain amount, let’s say 1% of that account – ten dollars – in any single trade. I call this amount risked a single Unit, or Position. So, if I make twenty trades over a given period of time, I have risked twenty units of my account:

20×10 dollars equals $200 risked, or 20 units risked. Now I can say that for every ten dollars I make in return, I have profited one unit. So if I made $500 my real profit is:

500 divided by 10 dollars equals 50 units. A good result based on the 20 units risked.

Forex Pip 2

Learn to think as a battlefield commander: how many units do you risk for the possible gain?

Using this process of measurement we know immediately how well a trader has done. If they say “I made two units on that trade” we know it has been a good trade for them, based on the fact that they have made twice the amount they risked.

Contrast this with the situation where they say I made “I made 2% on that trade”. Here we don’t know how well they did unless we know what percentage they risked on the trade.

I urge all traders to think in terms of units risked and units profited. It is the cleanest and most accurate method I have encountered of realistically measuring success in trading.

To read more about advanced trading concepts click the following link to return to Forex University

Often known as the Bank of International Settlements, the BIS plays a central role in international money flows…

The Bank of International Settlements is the global banker for the world’s central banks

The BIS is the global banker for the world’s central banks

According to the homepage of the Bank for International Settlements, the mission of the BIS is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

Essentially the Bank for International Settlements is the central banker of all the world’s central banks. Its domain is limited to this upper echelon of the banking sector.

The BIS was created in 1930 as the international body responsible for overseeing the war reparations to be made by Germany after World War I.

Since then its role has expanded to where it is now one of the pre-eminent bodies governing international finances, along with the International Monetary Fund (IMF).

Broadly speaking its goals are to promote and maintain international financial stability, along with ensuring international monetary flows essential to trade and the general running of the world economy.

Rather than regurgitate here what others have done far better, I offer the following links for those who wish to take their study of the BIS a step further:

BIS Homepage

Investopedia BIS Introduction

Investopedia BIS In Detail

How can we use the Bank for International Settlements as traders? They publish reports on the world economy on a regular basis and conduct ongoing research with respect to the state of International finances. Specifically, the following publications and reports are interesting and informative and will give you a good backdrop to view the current market against:

The Bank for International Settlements building in Basel, Switzerland

The BIS building in Basel, Switzerland

Their Annual Report

Their Quarterly Review

Most importantly, the BIS publishers the results of a global central bank survey it coordinates and conducts every 3 years. The most recent survey was published in December 2010.

The survey covers the foreign exchange market and over-the-counter derivatives markets. This will give the trader an excellent macro overview of the current forex market with respect to prevailing sentiment and developing trends.

All the research above is available for public viewing on the BIS website at the following links:

BIS Reports

and

Triennual Fx Global Market Survey

Admittedly, a lot of the data is somewhat dry and detailed, but it is easy to read and glean the facts that you personally find pertinent. As a free, authoritative resource, the BIS site takes some beating. All traders at some stage in their forex trading career should familiarise themselves with the contents of this site.

There is a lot to learn in advanced trading subjects, and if you still have appetite for more click the following link to return to Forex University

The cot charts forex medium and long term traders employ give a unique insight into where the market is heading for all traders…

Cot charts and horse racing: inside information…

Forex COT Charts & Horse Racing: know who the big punters are backing to increase your own chances…

Question: if you went to a race track where you knew certain of the races were rigged in favour of the big punters, and you were given an opportunity to know which races had been set up in favour of which horses….

…. would you take advantage of this insider information or not?

Well, if you did you would likely be engaging in an illegal activity.

But what if there was another kind of race track where you were legally given a heads up on which way the big dogs were betting? It would make sense for you to it least be aware of this information, yes?

As it turns out, in the forex market you actually do have such an opportunity. It’s called the Commitments of Traders (COT) report. Released by the Commodity Futures Trading Commission (CFTC) every Friday at 3:30 EST, the report details the positions of the major players in the markets on the preceding Tuesday. All of the major forex currencies are covered, as well as a host of commodities, gold, silver and so on.

The report splits the holdings of participants in the selected market into 3 groups: the Commercials, the Speculators, and the Small Traders (sometimes referred to as the “dumb money” for their habit of often being on the wrong side of the next major price move!)

The Commercials refers to the group of extremely large traders who are actively involved in the provision of the commodity, currency etc in the marketplace, or they have contracted to take future delivery of the underlying instrument.

The Speculators represent the group of very large traders who have no interest in the underlying commodity or instrument itself, but are only involved in trading the market in order to make a profit on the actual trading.

The Small Traders are similar to the Speculators except that their position sizes are as you would guess, much smaller than the Speculators.

The power of the COT report lies in the fact that taken together, the positions of the participants represents the overwhelming bulk of interest or trade in the associated instrument. It is therefore argued that, knowing the positions of the major players, we can deduce which way price will run next.

The most often cited example is when the commercials’ and speculators’ positions are at opposite extremes. In this situation something has to give, as both the major buyers and the major sellers are fully committed to their current position and therefore cannot profit without exiting their trades in the opposite direction. An example will help here…

The following chart is from a very cheap but excellent COT subscription service (COT futures.com, link below). Note the scale across the bottom of the chart. This refers to the weeks of offset from January 1 in the current year.

You can see an example (around the 25 weeks mark) of when the commercials and speculators were at opposite extremes on the AUDUSD. Shortly thereafter both sides reversed to the opposite extremes. This coincided with a sharp reversal in fortune for the AUDUSD as the commercials liquidated positions and the speculators went long, resulting in the AUDUSD rising in price.

Cot Charts Forex: an example depicting the AUDUSD

The cot report is powerful information, but like many things in the market it is open to interpretation. If you are going to incorporate it into your trading you would be well advised to do further research. As usual the Internet is full of conflicting and confusing information regarding forex cot charts.

Over the years I have researched the various resources. The following represent the ones that I have found to be simple to understand, cheap, and should give you all you need. They have been involved in provision of data and training for many years now. Please note that I am not in any way affiliated with these businesses, the links are provided for your information only:

Floyd Upperman & Associates

COT futures.com

Timing Charts.com

I highly commend a study of the forex cot reports to any trader. Even if you decide not to incorporate this information into your own trading, it is something that you really need to be aware of.

Another source of data that can help traders with regards to the macro view in the forex market is the Bank for International Settlements (BIS). Click to go to the Bank for International Settlements (BIS)