In
today's lesson, we will be taking a look at commodities and how they relate to
commodity currencies.
What is a commodity currency?
What is a commodity currency?
In
this crazy trading universe we call the Forex, a commodity currency is a
currency whose country's exports are largely comprised of raw materials
(precious metals, oil, agriculture, etc.).
There
are dozens of countries that fit this description, but the most actively traded
currencies are the New Zealand Dollar, Australian Dollar, and the Canadian
Dollar. Because their currencies are all called dollars, they are also known as
the commodity dollars or "Comdolls" for short.
These
three currencies are among the major currency pairs, which mean they have great
liquidity and volatility for active trading.
How do commodities affect commodity currencies?
Raw
materials compose such a large portion of these countries exports, a rise in
commodity prices can possibly lead to a rise in the value of a country's
currency, and vice versa.
Let's
take a look at the major commodity currencies and see how much their movement
correlates to certain commodities...
Currency Crosses
After
going through the School of Pipsology and doing a little demo trading, there’s
probably one thing you’ve noticed about trading currencies – it’s all about the
US Dollar! Or is it?
Well,
with central banks across the world holding trillions in USD reserves,
commodities priced in the Greenback, and other major financial transactions
passing through the dollar daily, it pretty much IS all about the dollar.
In
general, approximately 90% of all transactions in the almost US$2 trillion
daily traded Foreign Exchange market involves the dollar. Wow!
Also,
in your demo trading, I’m sure you’ve noticed that no matter what major pair
you trade (i.e. EURUSD, AUDUSD, USDCHF, etc.) that US news pretty much
dominates the movement regardless of data releases from anywhere else. So, why
look at anything else besides the major currency pairs
Well,
serious trading opportunities can be found by following the other major
currencies with currency crosses, especially if you want to avoid the
unpredictable volatility that US dollar can bring.
Hopefully,
this lesson will open up your outlook on Crosses and give you basic
understanding on how to analyze them.
What is a Currency-Cross?
Basically,
a currency-cross is any currency pair in which the US Dollar is neither the
base nor counter currency. For example, GBPJPY, EURJPY, EURCAD, and AUDNZD are
all considered currency crosses.
Bollinger Bands
Congratulations
on making it to the 5th grade! Each time you make it to the next grade you
continue to add more and more tools to your trader’s toolbox. “What’s a
trader’s toolbox?” you say… Simple! Your trader’s toolbox is what you
will use to “build” your trading account. The more tools (education) you
have in your trader’s toolbox (YOUR BRAIN), the easier it will be for you to
build.
So for
this lesson, as you learn each of these indicators, think of them as a new tool
that you can add to that toolbox of yours. You might not necessarily use all of
these tools, but it’s always nice to have the option, right? Now, enough about
tools already! Let’s get started!
Bollinger Bands
Bollinger
bands are used to measure a market’s volatility. Basically, this little
tool tells us whether the market is quiet or whether the market is LOUD!
When the market is quiet, the bands contract; and when the market is LOUD, the
bands expand. Notice on the chart below that when the price was quiet, the
bands were close together, but when the price moved up, the bands spread
apart.
Bollinger Bands
Congratulations
on making it to the 5th grade! Each time you make it to the next grade you
continue to add more and more tools to your trader’s toolbox. “What’s a
trader’s toolbox?” you say… Simple! Your trader’s toolbox is what you
will use to “build” your trading account. The more tools (education) you
have in your trader’s toolbox (YOUR BRAIN), the easier it will be for you to
build.
So for
this lesson, as you learn each of these indicators, think of them as a new tool
that you can add to that toolbox of yours. You might not necessarily use all of
these tools, but it’s always nice to have the option, right? Now, enough about
tools already! Let’s get started!
Bollinger Bands
Bollinger
bands are used to measure a market’s volatility. Basically, this little
tool tells us whether the market is quiet or whether the market is LOUD!
When the market is quiet, the bands contract; and when the market is LOUD, the
bands expand. Notice on the chart below that when the price was quiet, the
bands were close together, but when the price moved up, the bands spread
apart.
Bollinger Squeeze
The
Bollinger squeeze is pretty self explanatory. When the bands “squeeze”
together, it usually means that a breakout is going to occur. If the
candles start to break out above the top band, then the move will usually
continue to go up. If the candles start to break out below the lower
band, then the move will usually continue to go down.
Looking
at the chart above, you can see the bands squeezing together. The price
has just started to break out of the top band. Based on this information,
where do you think the price will go?
If you
said up, you are correct! This is how a typical Bollinger Squeeze works.
This strategy is designed for you to catch a move as early as possible. Setups
like these don’t occur everyday, but you can probably spot them a few times a
week if you are looking at a 15 minute chart.
So now
you know what Bollinger Bands are, and you know how to use them. There are many
other things you can do with Bollinger Bands, but these are the 2 most common
strategies associated with them. So now you can put this in your trader’s
toolbox, and we can move on to the next indicator.