Countries that are net importers import more from international producers than they export to international clients. Net importers run a trade deficit. This is due to the fact that they purchase more foreign goods than they sell to the international market.

In order to purchase these international goods, importers must sell their domestic currency and buy a foreign currency. This causes the value of the domestic currency to fall. As an example, let us look at Japan, which is an export-driven economy which usually runs a trade surplus. Japan exports more goods to international clients than they import from international producers. This creates international demand to buy the JPY in order for international clients to purchase Japanese products.

Clearly a change in the balance of payments from one country to another has a direct effect on currency levels. Therefore, it is important for traders to keep abreast of economic data relating to this balance and understand the implications of changes in the balance of payments. JPY has appreciated despite economic weakness. Capital flows measure the net amount of a currency that is purchased or sold for capital investments.

The key concept behind capital flows is balance. For instance, a country can have either a positive or negative capital flow. A positive capital flow balance implies that investments coming into a country from foreign sources exceed the investments that are leaving that country for foreign sources. This demand causes the value of that currency to increase because a foreign investor must change his currency into the domestic currency where he is depositing his money. A negative capital flow balance indicates that investments leaving a country for foreign sources exceed investments coming into a country from foreign sources.

This is because the investor must sell his local currency to buy the domestic currency where he is depositing his money. Countries that offer the highest return on investment through high interest rates, economic growth, and growth in domestic financial markets tend to attract the most foreign capital.

These countries maintain a positive capital flow. This increases the demand for this currency, and causes its value to appreciate. As an example, let us take a booming economy in the United Kingdom and a sluggish economy in the United States.

In the UK, the stock market is performing very well, while in the United States there is a shortage of investment opportunities. US residents sell their US dollars and buy British Pounds to take advantage of a booming British economy. Written by Dailyfx.

Trade Balance The Trade Balance figure is a measure of net exports minus net imports. Connected with both of the above is the concept of Trade Flows and Capital flows. Trade Flows Trade flows are the buying and selling of goods and services between countries. Capital Flows Capital flows represent money sent from overseas in order to invest in foreign markets.

Many times, a sell side dealer will base some of their risk management around their order book. For example, if there are large sell orders above the current exchange rate, a dealer could use those levels as potential resistance. Many traders will use forex order flow analysis to help with the direction of their traders and confirmation that the market is moving in a specific direction.

If there is order flow in the direction of a move as the market is technically breaking out, a dealer could jump on to a trade that is moving. While the order flow book is extremely valuable, there will be times when it will not work as customers are aware of how an order flow can benefit a dealer.

A hedge fund might decide to enter a position with one dealer and exit that position with another. While these scenarios might incur additional credit use, it can be unwound a few days later, making it so neither dealer understands exactly what their customer was doing.

For example, is a bank does a large trade with a corporate treasurer, they understand that the trade was not geared to generate revenue. Dealers will at times have overlapping order flow as a customer decides to trade in a cross pair.

While dealers have cross pair trades, most of the liquidity is in the major currency pairs. In this instance, it is important that traders within the same sell side shop communicate their order flow to one another.

Most sell side financial corporations that deal in the forex markets have a couple of dealers per location per currency pair. There is usually a primary and secondary dealer. Most of the time the order book is passed around the globe. For currencies that are generally only liquid in a specific time zone the order book is generally not passed.

Forex dealers attempt to capture gains by purchasing a currency pair on the bid and selling the pair on the offer. The volume of order flow is difficult to gauge if you are not a currency dealer. Most dealers have access to over the counter dealing platforms such as Electronic Broking Services EBS and Thomson Reuters Dealing. This allows them to create internal order flow indicators. If you are a retail client you will not be able to evaluate this order flow process but can find a different mechanism for gauging flow.

Currency market volume is hard to measure, but you can measure the volume seen in futures and ETFs as well as the options on these products. Volume in the futures markets describes the total trading activity in a specific contract. Futures contracts on currency pairs can be very liquid and arbitraged by dealers to make sure their values are identical to the value in the OTC market. If the volume is increasing at a specific level and time, it can be used just as the dealer uses the deal flow.

The difference is you cannot see it in advance, you must determine if the volume pushed a currency pair higher or halted its progress once the volume is transacted. You can also use volume in tandem with open interest to measure sentiment.

Open interest describes the total number of contracts that are open. This number is updated at the end of a trading session while volume is generally updated during a trading session.

If volume is greater than open interest, you know the trade is new. If it is less than open interest it is hard to determine if the trade is new or an unwind of a position. Generally rising volume and rising open interest is a confirmation of a new position where rising volume and falling open interest is the liquidation of a prior position. When there is unusual activity in the options market, this could be the case. If this occurs as the market pushes through support or resistance, there is likely a chance that there was substantial order flow at a specific level.

The capital markets are an auction market and the forex market is the largest auction market in the world. Daily buyers and seller come to the market to exchange at the best bid and best offer available.

Each transaction that occurs, requires a buyer for every seller. When buyers lower their bid price and sellers lower their offering price for a transaction to take place, the price of the security in question must move lower.

The opposite can be said when buyers raise their bid and sellers raise their offering price. A market that is not an auction market is a negotiated market. In a negotiated market a broker would contact buyers and sellers and discuss with them buying and selling prices. You see this all the time in real-estate where you would typically need to have a broker find a seller to negotiate a sale.

In negotiated markets, which many times are opaque, it can be difficult to determine fair value. Order flow is less important in the short run to negotiated markets. Futures trading on the other hand, will provide traders with sufficient volume to determine a fair price. The auction itself can relay a world of information to you if you know how to interpret the information the auction is providing. Consider this about a verbal auction; if the action is slow the auctioneer will be speaking slowly and his voice might be monotone.

When the action heats up, the auctioneer will be speaking quickly and trying to generate additional interest. Futures markets are similar and when volume picks up, the market is telling you something. There are a few technical volume indicators that can be used to help evaluate buying and selling pressure. The on-Balance Volume indicator is one of the best. The indicator is geared to using volume to find divergence patterns.

For example, if prices are moving higher on weak volume, you will know that the move is not confirmed.

The forex market is like a fickle minded person. It never seems to have a fixed decision. It would make decisions rashly based on whims and change its mind the next second.

If you have been looking at the forex chart for quite some time, you would notice this behavior. Price would be moving up one period and then suddenly drop back down. It would stagnate and contract, then it would suddenly reverse.

It would break through significant levels only to reverse again. This volatile market behavior seems impossible to predict. Only those who can understand the behavior of this fickle minded market can conquer it. Only traders who can understand how the market flows could make significant and consistent profits from the market. Hot Pips Market Flow Forex Trading Strategy is a simple strategy that helps traders understand the flow of the market.

It helps traders identify and confirm if the market has already reversed or not. It trades on trend reversals yet acts on the confirmation of a reliable custom technical indicator in order to identify the exact entry point. Hot Pips is a custom technical indicator used by traders to identify trend direction and trend reversals. It is a trend following oscillator which identifies specific trend reversal points. The Hot Pips indicator displays bars that oscillate around zero on a separate indicator window.

It displays red bars and deep sky-blue bars. Positive bars generally indicate a bullish bias, while negative bars generally indicate a bearish bias. Although the indicator can be used to identify trend bias, it could also be used to identify probable trend reversals based on an overextended price condition, either an oversold or overbought market. If the both bars are positive and are far from the midline, which is zero, the market might already be overbought.

If the both bars are negative and far from the midline, then the market might already be oversold. In an overbought condition, if the red bars crosses below the deep sky-blue bars, the market might already be starting to reverse. On the other hand, in an oversold condition, if the red bars crosses above the deep sky-blue bars, the market might also be reversing to the upside.

The indicator also plots a lime bar to represent the difference between the red and deep sky-blue bars. If the red bar is above the deep sky-blue bar, the lime line would be positive. If the red bars are below the deep sky-blue bars, then the lime line would be negative. This simplifies the process of identifying probable trend reversals coming from an overextended price condition.

The crossing of the lime bars from negative to positive could be taken as a bullish reversal signal, while the crossing of the lime bars from positive to negative could be used as a bearish reversal signal. The indicator also plots an arrow pointing the direction of the trend reversal on the bars where the lime line crosses the midpoint. This simplifies identifying trend reversals even further.

This trading strategy is a simple trend reversal strategy which trades based on the trend reversal signals coming from the Hot Pips indicator. To trade this strategy, simply look for overbought or oversold price conditions based on the distance of the Hot Pips bars from the midline. Then, we wait for the red bar to cross the deep sky-blue bars hooking back to the midline.

This would also be the crossing of the lime bars over the midpoint. This would also trigger the indicator to plot an arrow pointing the direction of the trend reversal. Take the trade as soon as this signal occurs. This trading strategy works well in confirming trend reversals coming from overbought or oversold price conditions. However, this strategy should not be used independently as an entry signal.

It should be used only on supply and demand zones in order to confirm the trend reversal. Forex Trading Strategies Installation Instructions Hot Pips Market Flow Forex Trading Strategy is a combination of Metatrader 4 MT4 indicator s and template. The essence of this forex strategy is to transform the accumulated history data and trading signals.

Hot Pips Market Flow Forex Trading Strategy provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye. Based on this information, traders can assume further price movement and adjust this strategy accordingly. Click Here for Step-By-Step XM Broker Account Opening Guide.

Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform. Get Download Access. Save my name, email, and website in this browser for the next time I comment. Sign in. your username. your password. Forgot your password? Get help. Password recovery. your email. Home Forex Strategies Hot Pips Market Flow Forex Trading Strategy.

Forex Strategies. Table of Contents 1 Hot Pips Indicator 2 Trading Strategy 2. RELATED ARTICLES MORE FROM AUTHOR. Carter Quantitative Estimation Forex Trading Strategy. Zigzag Supply and Demand Forex Trading Strategy.

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Trading order flow allows a dealer to see the specific price where a trade will hit the market along with the volume of that trade. Forex dealers attempt to capture gains by purchasing a currency pair on the bid and selling the pair on the offer. Often called a " pip ". However, CFD trading is usually short term in nature, due to overnight charges and risks associated with leverage if compared to traditional trading. Top 10 MT4 Indicators That Works Free Download September 25, This is due to the fact that they sell more goods to the international market than they purchase from the international market.

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