Consumers see few benefits from low base rate

Consumers have seen very little benefit from the Bank of England holding its base rate at a record low of 0.5% for six months, a consumer advice site pointed out this week.

Interest rates on savings accounts have dropped, while rates on mortgages, credit cards, and personal loans have continued to rise, said Moneyfacts.co.uk.

Research by the site found interest rates on easy access savers have dropped to an average of 0.77%, compared to 0.98% six months ago.

Cash ISA rates have followed a similar path, dropping from a 1.76% average to 1.46% in six months.

Meanwhile, the average rate on a two year fixed-rate mortgage has risen from 4.84% to 5.15%, on personal loans has risen from 11.9% to 12.1%, and on credit cards has increased from 17.7% to 18.1%.

“Base rate has been at an all time low for six months now, but it appears that only providers are feeling any real benefit,” said Moneyfacts financial expert Michelle Slade.

“Borrowers looking for a new mortgage deal have been hardest hit, as lenders continue to look to repair their balance sheets through increased margins.”

However, she added that HSBC’s recent launch of a 1.99% fixed rate mortgage shows that things could be improving.

“The launch of the sub-2% HSBC deal will hopefully spur other lenders on to reduce rates and bring much needed competition back to the market,” she said.

“Consumers will be hoping that as more time passes competition will become an increasing factor and that they will be offered more attractive deals across all finance areas.”

Foreign exchange reserves

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

Source Wikipedia

Money Management Is the Critical Part of Forex Trading

Money management is one of the most important problems of new and even advanced forex traders. Almost everybody can find a good trading system that can be profitable but something that causes traders to lose and be negative at the end of the month, is lack of a proper money management strategy and discipline. Although money management is so important and critical, it is still very easy to follow.

Money management have several different aspects and stages and should be started from the very first stages of your live forex trading business which is opening your live trading account. We have a very simple rule that says “Never risk more than 2% of your money.” Most traders think that this rule should only be applied after having a live trading account and while they trade, but this is not true. This rule should be considered even when you want to open your live account. Lets say you have already practiced and demo traded enough and you feel confident enough to open your live account. And lets say you have a $20,000 saving. Would you open a $20,000 live account? Well, you can do that but what if you lose this money for any reason? For example your broker becomes bankrupt and closes the company and never pays your money back. Or you take a 20 lots position by mistake and you forget to set the stop loss. It goes against you for 100 pips and wipes out your account. You will not be able to start over, at least for a long time that you save some money. And this initial failure may have a bad impact on you and you may not think about forex trading anymore and you will lose the opportunity for good.

If $20,000 is the only money you have, you should open a $400 account, specially if that account will be your first live account. Or a $1000 account maximum, if you are confident enough that you have had enough practice and you know how to trade.

Therefore money management should be considered even before live trading and when you want to open your live account.

The second stage is when you want to choose the leverage of your account. Nowadays you can have even a 1:500 leverage but this leverage is too big for new traders and even experienced traders try to avoid it. A 1:200 leverage is acceptable. I do not want to talk about leverage in this article because this article has to be focused on money management but briefly, leverage is the facility that your broker gives you to enable you to manage bigger amount of money using a smaller amount of money. For example if a broker gives you a 1:1 leverage account, then when you want to buy 100,000 USD against Japanese Yen, you should have 100,000 USD in your account at least. But if a broker offers a 1:100 leverage, then you only need to have $1,000 to buy a 100,000 USD and so with a leverage of 1:500 you only need to have $200 to buy 100,000 USD.

So why having a big leverage like 1:500 is dangerous? Because you can trade a huge amount of money and if your trade goes against you, you lose all your money very easily. When you have a $400 account with a 1:500 leverage, if you buy 100,000 USD against JPY and it goes against you for 40 pips only, you will lose all your money and you can not trade anymore. Whereas if your account leverage was 1:100, you could buy maximum $20,000. If you trade $20,000 with a 40 pips stop loss and your trade hits your stop loss, you lose $80 but a 40 pips stop loss with a 100,000 USD position equals to $400. To risk $400, you should have a $20,000 account, not a $400 account because we are supposed to risk only 2% of our capital at any time, not 100% of it.

The third place that you have to consider money management, is where you want to take a position. Again, we should not risk more than 2% of our capital. This rule should be applied to the positions we take too. This is the most important stage of money management, which is very easy to apply. You just need to consider it and not to ignore it. Now the question is how you can trade while you are not risking more than 2% of the money you have in your account (your account balance).

Before I answer this question and before I teach you how to calculate your positions in the way that you don’t risk more 2% with any trade, I want to tell you something which is even more important: Stop Loss

Let me tell you something frankly and seriously. If you don’t set a proper stop loss for your trades, if you hate setting stop loss and if you set stop loss but you move it when you see it is about to be triggered, you will never become a forex trader BECAUSE you lose all the money you have and you will not be able to trade anymore. Do yourself and your money a favor: Stay away from forex market if you don’t like to have stop loss for your trades. I can not emphasize on the importance of stop loss more than this.

Setting a proper stop loss for each trade, is a different story. Some traders always consider a constant number of pips for their stop loss positions but this is not correct. Stop loss value can be different from time frame to time frame, currency pair to current pair and trade setup to trade setup. Stop loss that I choose for a position which is taken based on a trade setup on daily chart, has to be much bigger than the stop loss I have, when I trade using a 15min chart. Accordingly the stop loss I have when I trade EUR-GBP is different than the stop loss I set for GBP-JPY.

How to set a proper stop loss (and target) is something that has to be discussed in a different article. I have already published an article about this subject: Where Is the Best Place for Stop Loss and Limit Orders?

Ok! Lets get back to our money management discussion. So the third stage of money management is when you want to take a position. The rule says never risk more than 2% of your capital in each trade. It means if you take a position and it goes against you and triggers your stop loss, you should only lose 2% of your account balance. For example if you have a $10,000 account, you should only risk $200 in each trade. No matter what position you take and how big your stop loss is in different positions. You should choose the “position size” in the way that if your stop loss becomes triggered in any position, you lose 2% of your account. For example if you find a trade setup on EUR-USD daily chart that has to have a 150 pips stop loss. This 150 pips should equal to $200. Accordingly, a 20 pips stop loss on 5min chart should also equals to $200 which is 2% of your account. Easy to understand so far, right? :)

Before I show you how you can calculate your position size, let me tell you another thing. If a position goes against you and you feel stressed out and you down on your knees and start praying and begging God to return the market and you can get out at breakeven, it means: You have traded with the money that you can not afford to lose and if you lose it, you will be in trouble. And you have taken too much risk in your trade and you have not followed money management rules. And you have not set a stop loss and your account is so close to become margin called. If you trade like this, you should know that this is not trading. It is something else. And if by any chance, market returns and you can get out at breakeven in one trade, you will be trapped in another trade and you will lose all your money. But if you follow money management rules and you don’t risk more than 2% of you money in each trade and you set a proper stop loss, when your stop loss becomes triggered you will say, “Well! this is part of the game too. Not all my positions are supposed to hit the target.”

Now I show you how easy it is to calculate your position size. Lets say you have a $10,000 account and you have found a trade setup with EUR-USD which has to have a 100 pips stop loss. This 100 pips stop loss should equal to 2% of your capital, based on money management rule that says you should not risk more than 2% of your capital in each trade.

2% of $10,000 is $200:

$10,000 x 0.02 = $200

Now tell me if 100 pips should equal to $200, what value each pip should have? That is right. Each pip should equal to $2:

$200 / 100 pips = $2

So to risk only 2% of your money in this trade, your position size (the amount of money that you trade) should be chosen in the way that each pip equals $2.

Now the question is how much EUR-USD you should trade if you want each pip to equal $2?

This question refers to pip value of each currency pair. One lot is 100,000 units of a currency in forex world. For example when you buy one lot EUR-USD, it means you have bought 100,000 Euro against USD. If you buy 0.1 lot EUR-USD, it means you have bought 10,000 Euro against USD and so on…

Each currency pair has a different pip value. Pip value can be calculated but you don’t have to learn how to do it because it is a little complicated with some currency pairs. Also, you don’t have to know the exact pip value of each currency pair to calculate your position size. You only need to know that one lot EUR-USD, GBP-USD, USD-JPY and USD-CHF has a $10 pip value (sometimes a little higher and sometimes a little lower). Pip value of one lot GBP-JPY, EUR-JPY, AUD-USD and USD-CAD is almost $10 too. EUR-GBP has the highest pip value among currency pairs. It is almost twice of the pip value of EUR-USD. And pip value of exotic currency pairs like USD-DKK, USD-SEK and USD-NOK is about 0.1 pip value of EUR-USD. Pip value of each current pair, changes with the price change but it doesn’t change too much to affect our position size calculation. For example pip value of one lot EUR-USD, sometimes is a little higher and sometimes a little lower than $10.

Don’t worry. You don’t have to memorize them. I will give you a calculator at the end of this article that can easily calculates your position size. I will also give you a pip value calculator. But before that, I just want to make sure that you understand how to calculate your position size manually.

Back to our question, how much EUR-USD you should trade that each pip equals $2:

It is now very easy to answer. Each pip equals $10 when you trade one lot EUR-USD. So you should trade 0.2 lot if you want each pip of your position to equal $2. It can be calculated through a simple equation:

Forex Money Management

What if you had a 100,000 USD account and you had found a EUR-USD trade setup which its stop loss had to be 200 pips?

Now you can answer it right away: 2% of a 100,000 USD account is $2,000. When a 200 pips stop loss has to equal $2000, each pip value will be $10:

$2000 / 200 = $10

So the pip value of your trade should be $10 and your position should be a one lot position.

Another example: If you had a $20,000 account and you had found a EUR-GBP trade setup with a 90 pips stop loss, how much your position would have to be not to risk more than 2% of your capital?

Answer: 2% of a $20,000 account is $400. When a 90 pips stop loss should equal $400, the pip value of your position should be $4.4:

$400 / 90 = $4.4

One lot EUR-GBP has a $20 pip value. So you should take a 0.22 lot position:

$4.4 / $20 = 0.22 lot

Now that you have learned to calculate your position size, you can use the below position size calculator, whenever you want to take a position. It saves you some time.

How to Use Pivot Points in Forex and Stock Trading?

I already knew that some traders use nothing but Pivot Points to trade but I had never used it because I had been stuck to my own trading system(s). This weekend I spent some time to research about Pivot Points and see how others use this indicator for their intraday trading and I found it really useful to have the Pivot Points on your charts even if we have a different trading system.

Most traders who use Pivot Points are intraday traders. I mean Pivot Points can be used mainly for intraday trading.

What are the Pivot Points?

Pivot Points or Pivot Levels are nothing but some support and resistance levels that you can calculate and plot on your charts very easily. Some platforms support Pivot Points but if you use a platform that doesn’t support it, you can easily calculate and plot them.

Pivot Levels are calculated using three types of information from the previous trading day:

* High price
* Low price
* Close price

Even in forex market which is a 24 hours market we have high, low and close price for each day. The easiest way to find the high, low and close price of the previous day is checking the previous day candlestick in the daily chart. Each candlestick in the daily chart takes 24 hours to become completed and then the next candlestick comes. So if you want to trade today which is - for example - Feb 3th, you need to check the Feb 2th candlestick in the daily chart and find the high, low and close price.

If you don’t know what high, low and close prices can be found in a candlestick, please read my candlestick article:
The Language of Japanese CandleSticks - The Only Real Time Indicators

So the Pivot Points that should be used for today trading are plotted using the high, low and close price of the previous day. You can plot the Pivot Points (levels) on smaller time frames like one hour or five minutes chart. Pivot Levels tell you that when and how the price will reverse and change the direction.

Like all other indicators and signals, Pivot Points is a not 100% guaranteed indicator and sometimes they don’t work but as I explained at the beginning of this article, it is good to have them on your charts even if your trading system is not based on the Pivot Points.

The first and most important Pivot level is the Pivot Point which is the average of the high, low and close price of the previous day:

Pivot Point = ( Yesterday High + Yesterday Close + Yesterday Low )/3

Then we have Resistance 1 and Support 1 or R1 and S1:

Resistance 1 = ( Pivot Point x 2 ) - Yesterday Low

Support 1 = ( Pivot Point x 2 ) - Yesterday High

Pivot Point, R1 and S1 are the most important Pivot Levels but we can also calculate the Resistance 2 and Support 2 or R2 and S2.

Resistance 2 = Pivot Point + ( Yesterday High - Yesterday Low )

Support 2 = Pivot Point - ( Yesterday High - Yesterday Low )

So we will have 5 horizontal lines on our chart:

Resistance 2
Resistance 1
Pivot Point
Support 1
Support 2

These are the levels that the price may show reactions to them during the day.

Now let me show you the 5min chart that the Pivot Levels are calculated and plotted on it. I have chosen the 29 January 2008 high, low and close price to plot the Pivot Levels for the next day (30 January 2008) on the EUR-USD five minutes charts.

Here is the 29 January 2008 high, low and close prices:

High = 1.4787
Low = 1.4737
Close = 1.4787

and here is the calculated Pivot Points according to the above formulas:

R2 = 1.4820
R1 = 1.4804
Pivot Point = 1.4770
S1 = 1.4754
S2 = 1.4720

and here is the plotted levels on the 5min chart:



As you see it is very easy to calculate and plot the Pivot levels.

Now lets see how the price reacted when it reached any of the Pivot levels. To do that I will show you the 30th January chart with a higher magnification and will change the candlestick chart to a line chart for more simplification.

Follow the blue ovals and numbers on the below chart and read my explanations.



1- This is the beginning of the day. The price starts moving under the Pivot Level (1.4770) and goes a little down.
2- Then the it goes up to retest the Pivot Level (1.4770) as a resistance. As you see here the Pivot Level works as a strong resistance and the price can not break up and so it goes down.
3- The price is stopped almost by the S1 level (1.4754).
4- Then goes up to retest the Pivot Level and this time succeeds to break up the Pivot Level.
5- Then it goes down to retest the broken Pivot Level as a support but fails and goes up.
6- It tests the R1 level and break it up.
7- It goes down to retest the broken R1 but fails and goes up.
8- It goes down to retest the R1 and goes up and goes down immediately and completes the triple top pattern, retests, breaks down the R1 and goes down.
9- It is stopped almost by the Pivot Point as a support. It goes up and down around that level and then …
10- Goes up to retest the R1, fails once, goes down and then goes up to retest, breaks up the R1 level and goes up.
11- It doesn’t show any reaction to the R2 level and goes much higher.
12- It goes down to retest the R2. This time R2 works as a support and the price shows a reaction to it. It fails to break down the R2 and bounces up and the day is finished.

Now you can plot the Pivot points for the next day (31 January) using the high, low and close price of the 30 January and this process can be repeated day after day.

see how the price went up and down between the Pivot Level and Resistance 1 on 31 January:



As you see, the Pivot Levels are important and sometimes the price shows strong reactions to them.

How to trade using the Pivot (Points) Levels?

The main Pivot Level is the most important level [( Yesterday High + Yesterday Close + Yesterday Low )/3] . In a trading day, if the price opens under this level, it means the price has a stronger tendency to go down and Bears are stronger. So we can take a short (sell) position. If the price opens above the Pivot Level, it means Bulls are stronger and we can take a long (buy) position. All other levels may work as support and resistance and so we have to be careful when the price reaches them.

As you see at the above chart (31 January 2008), the price is opened a little above the Pivot Point while it had already started going up. It goes up as high as the R1 level and then goes down. Those who use Pivot Levels to trade, would go long at the beginning of the day but for me it will be a little different.

For me, the Pivot Levels will be considered as the potential support/resistance levels and I will not take any position just because the price is opened below or above the main Pivot Level. I use my technical analysis, find patterns and pennants and will have an eye on the Pivot Levels to close my trades on time before I lose my profit. I consider this rule that if the price is opened above the main Pivot Level, it may go up and visa versa. Then I wait for a breakout and will take the proper position.

For example at the above example, I would consider that the price was opened above the Pivot Level and it had a stronger tendency to go up. Then I would wait for the price to break up the wedge and then I would go long. Then I would have an eye on it and as soon as it showed some reactions to the R1 level, I would fix my profit. So Pivot Points are just some help. They don’t generate buy/sell signals.

I hope you enjoyed this article and learned something from it. Please use the below comment submission form to let me know if you need anything to be explained more.