A Quick Word Before We Start...
Forex Trading is like golf...
A lot of people do it – but only a select few can play
it with any kind of skill. Or consistency.
And,
like golf, it's a tough “game” at the best of times. Every shot counts – and
the landscape can be very unforgiving. And that's almost too simplistic
an example – golf may be difficult to master, but at least it's not a volatile
environment.
Forex is
volatile. Things can happen fast. You can lose your money – FAST.
Or – if you
know what you're doing, you can make money fast as well. It's just that
getting to that point can take literally years of diligent practice, training
and experience in general.
The bottom-line is that this isn't a
get-rich-quick strategy. Go join the latest MLM craze if you're looking for
“insta-wealth”.
Yes, some have made millions when
they started out with a mere pittance in capital outlay – solely from forex
trading. Maybe that will be your story. Statistically speaking, though, the
chances of that aren't too good. It's a rare few who've
developed a system capable of such – and stuck to it with the necessary
discipline to compound their profits over and over again in order to make
“real” money.
Why such a negative
outlook?
Isn't this kind of a dreary way to start out a
beginner's guide to trading Forex?
Yes, it is, actually. But it's important
that I paint an accurate, realistic picture in your mind so that you can
approach this like a calculated, profit-minded business-person who's focused on
averaging more profitable trades than losses.
Not a
cash-crazed opportunist who's only real concern is big houses, fancy cars,
private jets, etc. Now – that said – I think you'll be very excited
about what I have to say about realistic results from forex trading on
the next page...
There are hundreds of thousands of
factors at work at any given moment that affect the currency prices, and
getting into a trend before it starts and getting out before it tanks isn't
just a skill – it's a science.
And
normally, this would take you years of practice, losses and likely a lot of frustration
before you developed an accurate sense of how to identify or predict market
conditions confidently enough to profit from them consistently.
But the key word there is normally...
Thanks to today's technology (and good ol'
capitalism), the tables have turned. You can realistically make a
consistent profit every month from forex trading even if you're a total
and complete newbie.
How?
By using Forex
Trading Systems developed by successful traders. You simply follow
along and trade based on their pre-set conditions (if “A = B, then C”) - or let
their trading management programs trade for you. This is a new
development that's only been possible recently due to the
emergence of high-speed internet and trading software titles that are adaptable
to 3rd-party programs.
The good, reputable trading systems are
tested, backtested and re-tested continually to ensure that they're producing a
consistent win percentage. Meaning that you can literally know
nothing and still turn a profit if you follow a good system
letter by letter.
But a word of warning:
There's a lot
of hacks, scam-artists and “marketers turned forex traders” out there hawking
alleged trading systems, expert advisor programs and software that can
supposedly make money for you (while you sleep, of course). And obviously, many
have been suckered by the clever marketing and the results are
horrific, sometimes financially devastating..
Introduction
If you were wondering; forex trading is
nothing more than direct access trading of different types of foreign
currencies. In the past, foreign exchange trading was mostly limited
to large banks and institutional traders however; recent technological
advancements have made it so that small traders can also take advantage of the
many benefits of forex trading just by using the various online trading
platforms to trade
The currencies of the world are on a
floating exchange rate, and they are always traded in pairs Euro/Dollar,
Dollar/Yen, etc. About 85 percent of all daily transactions involve trading of
the major currencies.
Four major currency pairs are usually used
for investment purposes. They are: Euro against US dollar, US dollar against
Japanese yen, British pound against US dollar, and US dollar against Swiss
franc. Right now I will show you how they look in the trading market: EUR/USD,
USD/JPY, GBP/USD, and USD/CHF. As a note you should know that no dividends are
paid on currencies.
If you think one currency will appreciate
against another, you may exchange that second currency for the first one and be
able to stay in it. In case everything goes as you plan it, eventually you may
be able to make the opposite deal in that you may exchange this first currency
back for that other and then collect profits from it.
Transactions on the FOREX market are
performed by dealers at major banks or FOREX brokerage companies. FOREX is a
necessary part of the world wide market, so when you are sleeping in the
comfort of your bed, the dealers in Europe are trading currencies with their
Japanese counterparts.
Therefore, it
is reasonable for you to believe that the FOREX market is active 24 hours a day
and dealers at major institutions are working 24/7 in three different shifts.
Price movements on the FOREX market are
very smooth and without the gaps that you face almost every morning on the
stock market. The daily turnover on the FOREX market is somewhere around $1.2
trillion, so a new investor can enter and exit positions without any problems.
The fact is
that the FOREX market never stops, even on September 11, 2001 you could still
get your hands on two-side quotes on currencies. The currency market is the
largest and oldest financial market in the world. It is also called the foreign
exchange market, FX market for short. It is the biggest and most liquid market
in the world, and it is traded mostly through the 24 hour-a-day inter-bank currency
market.
When you compare them, you will see that
the currency futures market is only one per cent as big. Unlike the futures and
stock markets, trading currencies is not centered on an exchange. Trading moves
from major banking centers of the U.S. to Australia and New Zealand, to the Far
East, to Europe and finally back to the U.S. it is truly a full circle trading
game.
In the past, the forex inter-bank market
was not available to small speculators because of the large minimum transaction
sizes and strict financial requirements.
Banks, major currency dealers and
sometimes even very large speculator were the principal dealers. Only they were
able to take advantage of the currency market's fantastic liquidity and strong
trending nature of many of the world's primary currency exchange rates.
Today, foreign exchange market brokers are
able to break down the larger sized inter-bank units, and offer small traders
like you and me the opportunity to buy or sell any number of these smaller
units. These brokers give any size trader, including individual speculators or smaller companies, the option to
trade at the same rates and price movements as the big players who once
dominated the market.
As you can see, the foreign exchange
market has come a long way. Being successful at it can be intimidating and
difficult when you are new to the game. Let this be your comprehensive guide to
being successful in the forex market.
Why Trade FOREX?
The cash/spot
FOREX markets possess certain unique attributes that offer an unmatched
potential for profitable trading in any market condition or any stage of the
business cycle. It leaves one to wonder why bother? The answer to that is very
simple. It boasts:
A 24-hour market: A trader has the chance to take
advantage of all of the profitable market conditions at any time which
means that there is no waiting for the 'opening bell' like the exchange.
Highest liquidity: The FOREX market is the most liquid market
in the world. That means that a trader can enter or exit the market
whenever they want during almost any market condition minimal execution
barriers or risk and no daily trading limit.
High leverage: A leverage ratio of up to 400 is normal
when compared to a leverage ratio of 2 (50% margin requirement) in the
equity markets. Of course, this makes trading in the cash/spot forex market
awkward a swell because it makes the risk of the down side loss much higher in
the same way that it makes the profit potential on the upside much prettier.
Low
transaction cost:
The retail transaction cost (the bid/ask spread) is actually less than
0.1% (10 pips) under the normal market conditions. At larger dealers, the
spread could be less than 5 pips, and may expand a great deal in fast moving
markets.
Always a bull market: A trade in the FOREX market means selling
or buying one currency against another. In essence, a bull market or a
bear market for a currency is defined in terms of the outlook for value against
other currencies. If the outlook is positive, you get a bull market where a
trader profits by buying the currency against other currencies. However, if the
outlook is negative, we have a bull market for other currencies and a trader
profits being forced to selling the currency against other currencies.
In either case, there is always a bull market trading
opportunity for a trader.
Inter-bank market: The foundation of the FOREX market
consists of a global network of dealers that communicate and trade with
their clients through electronic networks and telephones. There are no
organized exchanges like in futures that are there to serve as a central
location to facilitate transactions the way the New York Stock Exchange serves
the equity markets.
The FOREX market actually works a lot like
the way the NASDAQ market in the United States operates, and because of this,
it is also referred to as an over the counter or OTC market.
No one can corner the market: The FOREX market is so large and has so
many participants that no single trader, even a central bank, can
control the market price for an extended period of time. Even when
interventions are conducted by mighty central banks are getting to be
increasingly ineffectual and short-lived. This means that central banks are
becoming less and less inclined to intervene to manipulate market prices.
It is Unregulated: The FOREX market is seen as an unregulated
market although the operations of major dealers like commercial banks in
money centers are regulated under the banking laws.
The daily
operations of retail FOREX brokerages are not regulated under any laws or
regulations that are specific to the FOREX market, and in fact, many of these
types of establishments in the United States do not even report to the Internal
Revenue Service.
The currency futures and options that are actually traded on
exchanges like Chicago
There are many different advantages to
trading forex instead of futures or stocks, such as:
1. Lower Margin
Just like futures and stock speculation, a
forex trader has the ability to control a large amount of the currency
basically by putting up a small amount of margin. However, the margin
requirements that are needed for trading futures are usually around 5% of the
full value of the holding, or 50% of the total value of the stocks, the margin
requirements for forex is about 1%. For example, margin required to trade
foreign exchange is $1000 for every $100,000.
What this
means is that trading forex, a currency trader's money can play with 5-times as
much value of product as a futures trader's, or 50 times more than a stock
trader's.
When you are trading on margin, this can
be a very profitable way to create an investment strategy, but it's important
that you take the time to understand the risks that are involved as well.
You should make sure that you fully
understand how your margin account is going to work. You will want to be sure
that you read the margin agreement between you and your clearing firm. You will
also want to talk to your account representative if you have any questions.
The positions that you have in your
account could be partially or completely liquidated on the chance that the
available margin in your account falls below a predetermined amount.
You may not actually get a margin call before your positions
are liquidated.
2. No Commission and No Exchange Fees
When you trade in futures, you have to pay
exchange and brokerage fees. Trading forex has the advantage of being
commission free. This is far better for you. Currency trading is a worldwide
inter-bank market that lets buyers to be matched with sellers in an instant.
Even though you do not have to pay a commission
charge to a broker to match the buyer up with the seller, the spread is usually
larger than it is when you are trading futures.
For example, if you are trading a Japanese
Yen/US Dollar pair, forex trade would have about a 3 point spread (worth $30).
Trading a JY futures trade would most likely have a spread of 1 point (worth
$10) but you would also be charged the broker's commission on top of that. This
price could be as low as $10 in-and-out for self-directed online trading, or as
high as $50 for full-service trading. It is however, all inclusive pricing
though.
You are going to have to compare both
online forex and your specific futures commission charge to see which
commission is the greater one.
3. Limited Risk and Guaranteed Stops
When you are trading futures, your risk
can be unlimited. For example, if you thought that the prices for Live Cattle
were going to continue their upward trend in December 2003, just before the
discovery of Mad Cow Disease found in US cattle.
The price for it after that fell
dramatically, which moved the limit down several days in a row. You would not
have been able to leave your position and this could have wiped out the entire
equity in your account as a result. As the price just kept on
4. Rollover of Positions
When futures contracts expire, you have to
plan ahead if you are going to rollover your trades. Forex positions expire
every two days and you need to rollover each trade just so that you can stay in
your position.
5. 24-Hour Marketplace
With futures,
you are generally limited to trading only during the few hours that each market
is open in any one day. If a major news story breaks out when the markets are
closed, you will not have a way of getting out of it until the market reopens,
which could be many hours away.
Forex, on the other hand, is a 24/5
market. The day begins in New York, and follows the sun around the globe
through Europe, Asia, Australia and back to the US again. You can trade any
time you like Monday-Friday.
6. Free market place
Foreign exchange is perhaps the largest
market in the world with an average daily volume of US$1.4 trillion. That is 46
times as large as all the futures markets put together! With the huge number of
people trading forex around the globe, it is very hard for even governments to
control the price of their own currency.
Forex trading is simply a great
alternative to futures and commodities trading. Unless you are a broker, you
will likely want to get some help in forex trading to help ensure that your
venture is successful. As with all trading, there are always some risks
involved, but if you follow this comprehensive to successful forex trading, the
whole process should be much easier. Let’s get started!
When it comes
to getting started in forex trading, there are quite a few things that you have
to consider first. The first thing that you need to do is to find and choose
the right broker to help you in making your trades.
When you are choosing a Broker you need to
know that there are many FOREX brokers to choose from, just as in any other
market. Here are some things that you need to look for in making your choice:
Low Spreads
The spread, which is calculated in pips,
is the difference between the price at which a currency can be bought and the
price at which it can be sold at any specific point in time. FOREX brokers
don't charge a commission, so this difference is how they are going to make
money
When you are
comparing brokers, you will find that the difference in spreads in FOREX is as
large as the difference in commissions in the stock arena. What this means is
that lower spreads will save you money and therefore, look for a broker that
offers low spreads.
Quality of the Institution
Unlike equity brokers, FOREX brokers are
usually attached to large banks or lending institutions because of the large
amounts of capital that is required. Also, FOREX brokers should be registered
with the Futures Commission Merchant (FCM) as well as regulated by the
Commodity Futures Trading Commission (CFTC).
You can find this and other financial
information and statistics about a FOREX brokerage on the company’s website or
the website of its parent company. You will want to make sure that your broker
is backed by a reliable institution.
FOREX brokers offer many different trading
platforms for their clients just like brokers in other markets do. These
different trading platforms often show real-time charts, technical analysis
tools, real-time news and data, and even support for the various trading
systems.
Before you commit to any one broker in
specific, you will need to be sure to request free trials so that you can test
their different trading platforms. Brokers usually provide technical as well as
fundamental commentaries, economic calendars, and other research as a means of
assisting you. Basically, you will want to find a broker who will give you
everything that you need to succeed.
A Variety of Leverage Options
Leverage is a
key necessity in FOREX trading because the price deviations (the sources of
profit) are just set at mere fractions of a cent. Leverage, which is expressed
as a ratio between total capitals that is available to actual capital, which is
the amount of money a broker will lend you for trading.
For
example, when you have a ratio of 100:1, this means that your broker would lend
you $100 for every $1 of actual capital. Many brokerage firms will offer you as much as 250:1.
Of course, you need to remember that lower
leverage also means lower risk of a margin call, but it also means that you
will get a lower bang for your buck (and vice-versa). Basically if you have
limited capital, you need to make sure that your broker offers high leverage.
If capital is not a problem, you can rest
assured that any broker that has a wide variety of leverage options should
suffice. A variety of options lets you vary the amount of risk you are willing
to take. For example, less leverage (and therefore less risk) may be preferable
if you are dealing with highly volatile (exotic) currency pairs.
Account Types
Many brokers will offer you two or more
types of accounts. The smallest account is known as a mini account and it
requires you to trade with a minimum of maybe $300.
This offers you a high amount of leverage
(which you need in order to make money with so little initial capital). The
standard account allows you to trade at a variety of different leverages, but
it also requires a minimum initial capital of $2,000 to get you started.
Lastly, there
are premium accounts, which often require significant amounts of capital to get
you started. It also lets you use different amounts of leverage and often offer
additional tools and services. You will need to make sure that the broker you
choose has the right leverage, tools, and services that are relevant to the amount
of capital that you are able to work with.
Brokers That You Need to Avoid
Just like there are brokers that you want,
there are also brokers that you will want to stay away from. For example
brokers who are prone to prematurely buying or selling near preset points
(commonly referred to as sniping and hunting) are trifling things that are
committed by brokers who only seek to increase profits.
Obviously, no broker would actually admit
to doing this, but there are ways to know if a broker has committed this
offense.
Unfortunately,
the only way that you can really determine which brokers do this and which
brokers don't is to talk to fellow traders. There is no actual list or
organization that reports this kind of activity. The point here is that you
have to talk to others in person or visit online discussion forums to find out
who is an honest broker.
Strict Margin Rules
When
you are trading with borrowed money, your broker should have a say in how much
risk you are able to take. With this in mind, your broker can buy or sell at
its discretion, which can be a really bad thing for you.
Let's just say that you have a margin
account, and your position takes a headlong nosedive before it begins to
rebound to all-time highs. Even if you have enough cash to cover it, some
brokers will liquidate your position on a margin call at that low. This action
on their part can cost you dearly. You talk to others in person or visit online
discussion forums to find out who the honest brokers are.
Signing up for
a FOREX account is a great deal like getting an equity account. The only major
difference is that, for FOREX accounts, you are obligated to sign a margin
agreement.
This agreement basically says that you are trading with
borrowed money, and,
because of
this the brokerage firm has the right to interfere with your trades in order to
protect its interests. Once you sign up, all you have to do is fund your
account and you'll be ready to trade right away.
Technical analysis and fundamental analysis are the two basic
areas of strategy in the FOREX market which is the exact same as in the equity
markets. However, technical analysis is by far the most common strategy
that is used by individual FOREX traders. Here is a brief overview of
both forms of analysis and how they directly apply to forex trading:
Fundamental Analysis
If you think it's hard enough to value one
company, you should try valuing a whole country instead. Fundamental analysis
in the forex market is often an extremely difficult one, and it's usually used
only as a means to predict long-term trends. However it is important to mention
that some traders do trade short term strictly on news releases. There are a
lot of different fundamental indicators of the currency values released at many
different times. Here are a few of them to get you started:
·
Non-farm Payrolls
·
Purchasing Managers Index (PMI)
·
Consumer Price Index (CPI)
·
Retail Sales
·
Durable Goods
You need to know that these reports are
not the only fundamental factors that you have to watch. There are also quite a
variety of meetings where you can get some quotes and commentary that can
affect markets just as much as any report. These meetings are often brought out
to discuss any interest rates, inflation, and other issues that have the
ability to affect currency values.
Even changes in how things are worded when addressing
certain issues such as the Federal Reserve chairman's comments on interest rates; can
cause a volatile market. Two important meetings that you have to watch out for
are the Federal Open Market Committee and Humphrey Hawkins Hearings.
Just by
reading the reports and examining the commentary, it can help FOREX fundamental
analysts to get a better understanding of any and all long-term market trends
and also to allow short-term traders to be able to profit from extraordinary
happenings. If you do decide to follow a fundamental strategy, you will want to
be sure to keep an economic calendar handy at all times so you know when these
reports are released. Your broker may also be able to provide you with
real-time access to this kind of information.
Technical Analysis
Just like their counterparts in the equity
markets, technical analysts of the FOREX trading market analyze price trends.
The only real difference between technical analysis in FOREX and technical
analysis in equities is the time frame that is involved in that FOREX markets are
open 24 hours a day.
Because of this, some forms of technical
analysis that factor in time have to be modified so that they can work with the
24 hour FOREX market. Some of the most common forms of technical analysis used
in FOREX are:
·
The Elliott Waves
·
Fibonacci studies
·
Parabolic SAR
·
Pivot points
A lot of technical analysts have a
tendency to combine technical studies to make more accurate predictions on your
behalf. (The most common method for them is combining the Fibonacci studies
with Elliott Waves.) Others prefer to create trading systems in
an effort to repeatedly locate similar buying and selling conditions.
Using a
profitable trading system with a demo account for a few weeks is a great way to
get an accurate “feel” for Forex Trading – without risking any of your own
money!
Most successful traders will develop a
strategy and perfect it over a specific period of time. Some people will focus
on one particular study or calculation, while still some others use broad
spectrum analysis as a means of determining their trades. Most experts
would likely suggest that you try using a combination of both fundamental and
technical analysis, with which you can make long-term projections and also
determine entry and exit points. Of course, in the end, it is the
individual trader who has to decide what works best for him.
When you are ready to get started in the
FOREX market, you should open a demo account
and paper trade so that you can practice
until you can make a consistent profit. Many
people who fail have a tendency to jump into the FOREX market and quickly
lose a lot of money because of a lack of experience. It is important to take
your time and learn to trade properly before you start committing capital.
You also need
to be able to trade without emotion. You can’t keep track of all
stop-loss points if you don't have the ability to execute them on time. You
must always set your stop-loss and take-profit points to execute automatically,
and don't change them unless you absolutely have to. Make your decisions and
stick to them. Otherwise you will drive yourself (and your brokers)
crazy.
You should also realize that you need to
follow the trends. If you go against the trend, you are just messing with your
money because the FOREX market tends to trend more often than anything else and
you will have a higher chance of success in trading with the trend.
The FOREX market is the largest market in
the world, and every day people are becoming increasingly interested in it. But
before you begin trading, make sure your broker meets certain criteria, and
take the time to find a trading strategy that works for you.
Forex is always priced in pairs between two different types of
currencies. When you make a trade, you have to buy one currency and sell
another at the same time. If you want to exit the trade, you must buy/sell the
opposite position. For example, when you think the price of the Euro is going
to rise against the US Dollar. In order for you to enter a trade, you will have
to buy Euros and sell US Dollars.
If you want to leave the trade, you will
have to sell Euros and buy back US Dollars. You will be hoping that you were
right in your guess and that the exchange rate for EU/USD has actually risen,
which means that you will get more Euros back than when you bought them, which
is how you will make a profit.
These days just about every forex broker
is claiming to have the tightest spreads in the industry. But marketing does
have the ability to be deceiving. The topic of spreads in the forex spot
market is very complicated and often not easy to understand. However, nothing
affects your trading profitability more.
Spreads are the biggest factor in your trading profits next to
skill.
First of all in order to understand the
spread, you need to know what it is. A spread is the difference between the ask
price (the price you buy at) and the bid price (the price you sell at) that is
quoted in the pips. If the quote between EUR/USD at a given moment is 1.2222/4,
then the spread equals 2 pips. If the quote is 1.22225/40, then the spread is
going to equal 1.5 pips.
The spread is how brokers make their
money. Wider spreads
will result in a higher asking price and a lower bid price. The
consequence to this is that you have to pay more when you buy and get less when
you sell, which makes it more difficult to realize a profit
Brokers
generally don’t earn the full spread, especially when they hedge client
positions. The spread helps to compensate for the market maker for taking on
risk from the time it starts a client trade to when the broker's net exposure
is hedged (which could possibly be at a different price).
Spreads are
important because they affect the return on your trading strategy in a big way.
As a trader, your sole interest is buying low and selling high (like futures
and commodities trading). Wider spreads means buying higher and having to sell
lower. A half-pip lower spread doesn't necessarily sound like much, but it can
easily mean the difference between a profitable trading strategy and one that
isn’t profitable.
The tighter the spread is the better
things are going to be for you. However tight spreads are only meaningful when they are
paired up with good execution. Quality of execution will decide whether you
actually receive tight spreads. A good example of this is when your screen
shows a tight spread, but your trade is filled a few pips to your disadvantage
or is mysteriously rejected.
When this occurs repeatedly, it means that
your broker is showing tight spreads but is effectively delivering wider
spreads. Rejected trades, delayed execution, slipping, and stop-hunting are
strategies that some brokers use to get rid of the promise of tight spreads.
Spreads should always be considered in
conjunction with depth of book. Oddly enough, when it comes to economies of
scale, forex doesn't even act like most other markets. On the inter-bank
market, for example; the larger the ticket size, the larger the spread is. So
when you see a 1-pip spread on an ECN platform, you have to wonder if that
spread valid for a $2M, $5M or $10M trade, which it probably isn’t. In many
cases, the tight spread that is offered applies only to a capped trade sizes
that are very inadequate for most of the common trading strategies.
Spread policies change a great deal from broker to broker, and
the policies are often
difficult to
see through. This certainly makes comparing brokers much more difficult. Some
brokers actually offer fixed spreads that are guaranteed to remain the same regardless
of market liquidity. But since fixed spreads are traditionally higher than
average variable spreads, you are paying an insurance premium during most of
the trading day so that you can get protection from short-term volatility.
Other brokers offer traders variable
spreads depending on market liquidity. Spreads are tighter when there is good
market liquidity but they will widen as liquidity dries up. When it comes to
choosing between fixed and variable rates, the choice depends on your
individual trading pattern. If you trade primarily on news announcements that
you hear, you may be better off with fixed spreads. But only if quality of
execution is good.
Some brokers
have different spreads for different clients based on their accounts. For
example; those clients that have larger accounts or those who make larger
trades may receive tighter spreads, while the clients that are referred by an
introducing broker might receive wider spreads in order to cover the costs of
the referral. Some offer the same spreads to everyone.
Problems can come up when you are trying
to learn about a company's spread policy because this information, along with
information on trade execution and order-book depth is rather difficult to get.
Because of this, many traders get caught up in all of the promises they hear,
and take a broker's words at face value. This can be dangerous. The only
real way to find out is to try out various brokers or talk to those who
have.
There is no
doubt that trading requires more than a few quick tips for success. You need
experience, fortitude, capital and, above all, a solid
trading system.
However, for
the average beginner and those who perhaps are losing their focus because of
significant draw-downs, keeping things simple can help to introduce much needed
focus into your trading.
To that end, here are some tips that you
can use for trading that can help you get a handle on these exciting markets:
1. Never add to a position that is losing.
2. Always determine a stop and a profit
objective before you start entering a trade. Place stops that are based on market information, and not your
account balance. If a "proper" stop is too expensive, it isn’t
worth it to make the trade.
3. Remember the power of a position. You
should never make a market judgment when you have a position.
4. Your decision to exit a trade means that
you are able to perceive changing circumstances. You shouldn’t think you can pick a price,
exit at the market.
5. In a Bull market, you never want to sell a
dull market, in Bear market, you should certainly never buy a dull market.
6. There are times, due to a lack of
liquidity, or excessive volatility, when you should not trade at all.
7. Trading systems that work in an up market
may not work in a down market. It is good to know this and remember it.
8. There are at least three types of markets
like up trending, range bound, and down trading, and you should have a
different trading strategy for each.
9. Up market and down market patterns are
ALWAYS there, and it is only that one is always more dominant. In an up market, for example, it is very
easy to take sell signal after sell signal, only to be stopped
repeatedly. Select trades that move along with the trend.
10. A buy signal that fails is really just a
sell signal. A sell signal that fails is a buy signal.
11. It's always easier to enter a losing trade.
12. During the blowout stage of the market, up
or down, the risk managers are usually issuing margin call position liquidation
orders. They don't
generally check the screen for overbought or oversold; they just keep
issuing liquidation orders. It is best to make sure that you don't stand in the
way.
13. It’s good to be superstitious; in that you shouldn’t trade if something bothers you.
13. It’s good to be superstitious; in that you shouldn’t trade if something bothers you.
14. Buy the news that you hear, sell the factual news.
15. News is only important when the market
doesn't react in the direction of the news.
16. It helps for you to read today's paper
tomorrow. When you read
yesterday's paper each day with the knowledge of what the market already
did, it will remind you
that what happened yesterday has nothing
to do with what will happen today.
17. You should never enter a new trade in the
direction of a gap. Never let the market make you make a trade.
18. The first and last tick are always the
most expensive. Get in late and out early.
19. When everyone else is in, it's time for you to get out.
20. Never trade when you are sick.
21. You should only change your unit of
trading under a plan of attained goals. You should also have a plan for reducing size when your
trading is cold or market volume is down.
22. Confidence is a bad thing. Remember, you really don't know anything
unless you are a broker. You need to expect the unexpected. Always know
your position and exit your trade immediately whenever you feel uneasy.
23. Measure yourself by profitable consecutive days and not by
individual trades.
24. The best way to break a streak of consecutive loses is to not
trade for a day.
25. Don't stop trading when you’re on a
'winning streak'. At
the same time, however, stick to your stop-loss rules and
money-management strategy, and don't think that luck has anything to do with
it. Your trading system may simply be having an optimal time-period.
26. Don't turn three losing trades in a row
into six in a row. When
you’re off, turn off the screen, do something else. Sticking in when you
are loosing is just silly.
27. Scalpers reduce the number of variables
effecting market risk by being in a position only for a few seconds. Day
traders reduce market risk by being in trades for minutes.
28. If you convert a scalp or day trade into a
position trade, technically you did not consider the risks of the trade
properly.
29. You should not worry about a missed
opportunity. There
is always another one just around the corner.
30. If you look for secrets in the market you
will only find things that no one cares about. It is better to use the tools, which will
be covered in the next section.
31. Never ask for someone else's opinion, they
probably did not do as much homework as you did anyways.
32. When the market is going up, you should
say it aloud. When the market is going down, you want to say that aloud too. The reason for this is that you’d be amazed
at how hard it is to say what is literally going on in front of you when your
mind is full of preconceived opinions.
33. Successful day trading requires
flexibility. You
have to do your homework so that you can understand the full potential
for both sides of the market. This will allow you to make your trades based on
what the market is doing at the time of the trade.
34. Here is a quote that would be good for you
to remember: “When you wake up, your instincts are wrong.”
35. When you make a mistake of discipline,
whine like a fool to anyone that will listen. Any errors that are made in discipline are
mistakes you will keep on making for
many years.
Wearing ashes and sack cloth may help you to extend the time before you do it
again.
36. If you whined or got fidgety while you
read this list, then you share two obvious characteristics with many other
traders:
A. You have traded long enough to recognize
that you (not the market) make mistakes, and you try to overcome them.
B. This fact is awkward, you have become part
of the market and you can never leave. No matter where life takes you, you will
always check the market and you will also always want to continue being a part
of it.
1.
For
small accounts ($25,000 and under), like I said before you need to trade with
the trend. Many
beginners look for trades that flow in any direction. While forex
trading easily permits bi-directional trading, trading in the direction of the
trend improves your odds over the long run.
2.
You
should have at least two accounts. One real account and the other a demo account. Learning
doesn't stop when trading real dollars begins. Keep the demo account and use it
to test any alternative trades etc. For example, you can shadow your real
trades with identical ones in your demo account, but you will want to widen
your stops in the demo in an effort to see if you're being too conservative.
3. You have to stop looking for leading indicators because there
aren't any.
While some firms make a lot of money
selling software that predicts the future, the reality is that if those
products really worked, they wouldn't be telling you about it.
4. Examine the daily charts, the four-hour charts and one-hour
charts are
there to
assist you in timing your trades. While you are trading at 30- and 15-minute time increments, it
takes a great deal of dexterity.
5.
Don't
trade the time frame that is offered. Trade the pattern instead. Reversal patterns, hesitation
patterns and breakout patterns show up a lot. Learn to look for the pattern in
any time frame.
6.
If
you have the right amount of money, trading two lots is safer than just trading
one. Trading three
lots is safer than two etc. Trading is a big pile of emotions, technical
analysis and money management. One lot alone makes it difficult to weigh these
elements in deciding to enter or exit.
7.
Extreme
trading can be the most conservative trading when you think about it. Trading at the extremes increases the odds
that you have chosen the right direction.
8.
You
should fully check the Big Five the dollar/yen, euro/dollar, Swiss franc/
dollar, euro/yen and pound/dollar before you decide to take a position in any
one of them. There
might be something obvious that you’ve missed.
9. Follow the Upside Down Rule. If you can turn a chart upside down and it
still looks the same, avoid it all together.
10. Don't keep count of your profits in your
first 20 trades. Keep track of the percentage of wins instead. Once you know you can pick direction,
profits can be increased with multi-plot trading and by using variations in
your stops. In other words, now is the time to get serious about your personal
money management.
Forex Trading-- Rules of Thumb
In this section we will be covering the few important rules
that should never be broken in trading. If you can apply these rules
consistently, and with the right amount of discipline, you will be well on the
way to being a profitable trader. The following are rules that can
significantly improve your chances of success if they are understood,
practiced, and implemented consistently in your trading. These rules have been
learned the hard way, mostly through trial-and-error, and the inevitable
mistakes that everyone makes when they start a trading business.
Set up and Implement specific goals and objectives
Few
things are more important to your trading success than having set specific
goals and objectives for what you are trying to achieve. It is amazing to me
how often we hit our targets, meet our objectives, and reach our goals best
when we speak aloud and write them down.
For any business to be successful it must
have measurable objectives that you are actually able to achievable. In
trading, the primary objective is obviously to make money, but it is important
to have other objectives that are not strictly cash-related.
We must always remember that reward and
risk go hand-in-hand in trading and that we can’t expect to achieve high
returns without planning and bracing for high risk (draw-downs).
Your objectives and goals have to be very
specific to you, but they must also include the following characteristics if
they are going to be useful
• Be measurable in accordance to completion and timeframe
involved
• Be realistic and achievable
• Be worth the time and effort involved
• Be positive
As an example, here are some actual
objectives (Please bear in mind that this is only a partial list):
• Create 2 new positive-expectancy trading systems each and every
year
• Seek to make less errors implementing your trading systems each
year
• Work to achieve a return to maximum draw-down ratio of 1.5:1
• Take 2 weeks vacation from trading during each year
You should
also note that only one of them is meant to be about making money, and that has
a measurable objective that is very similar to a draw-down, and it is not
guaranteed. If you know what you are trying to gain in your trading, and when
you are trying to achieve it, the whole of your efforts will be more focused on
meeting your objectives.
This also helps to guide you to only pay
attention to things you really want to achieve with your time and resources
that you have available. This will also give you a way that you can effectively
measure the success and progress of your trading strategy.
Generally traders who have well-defined objectives
will be much more successful than those that do not have pre-defined goals.
Consistency and discipline
In
order for you to be able to realize the full potential of your trading systems
it is very important that you take every trading entry, adjust every stop, and
close out every trade when your pre-defined trading system says you should.
This takes an extreme amount of confidence
in your trading systems, good and reliable technology, and the unwavering
discipline to stick to your trading plan no matter what happens.
The good thing
about have an underlying assumption about being consistent and disciplined is
that you have a pre-defined plan for every situation that you may face in your
trading, so that you know how you are defining what being consistent really
means. Your plan needs to include at least the following items in it if it is
going to be successful
• All of your trading rules for entering, adding to, and getting
out of your positions
• What you are planning to do if your
trading computer, internet connection, broker, power, telephone etc. fails to
be of any real use or break down
• What you will do if for some reason you are unable to trade
• What you will do if you lose a certain percentage of your
account
• What you will do if all the markets are
closed and you can’t get out of your current positions
Unless you write down the answers to all
these scenarios, you cannot be properly consistent and disciplined in your
approach to trading and if you lose money you will not know if it is because
you didn’t follow your plan, your plan is incomplete, your systems do not work,
or if it is because you are simply going through a losing period.
Let your profits run
This rule is
undoubtedly the key to being a successful trader. It is in these three simple
words however that are easier said than done. When we get a profitable trade
going it is our natural fear of losing the unrealized cash starts and we truly
want to close it out now and quit while we are ahead.
Most trading actually consists of long
periods of small winners and losers, that is quickly followed by a few huge
winners that make the difference between overall
profitability
and simply breaking even or even losing thanks to the trading
costs(commissions, spread, and slippage).
It is our
ability to let the huge winners become huge. This is what determines how we
will perform overall during the course of the year. The key here is in letting
a winning streak run is to have trailing stops that are generally outside the
daily noise of the market so that they are not so tight as to get stopped out
during ‘normal’ trading process.
This means that you need to be prepared to
give up a relatively large portion of a winning trade’s open profit and it is
also the thing that makes this so hard to implement. In fact, we should be
adding to a winner and widening stops rather than trying to figure out how
tight our stops can be to capture the largest amount of profit.
The trade has
already shown you if it intends to be a winner, and the chances are it is a
low-risk idea if you were to add to the position now rather than ‘strangle it’
with stops that are too tight.
It
is very important that your management rules leave room for large winning
trades, and that the rules are pre-defined and understood before you place the
trade in the first place. This will allow you to stick to your rules when you
do get the big winner.
Cut your losses short
This is actually the sister rule to the
one mentioned above, and is usually just as difficult to do (even if it is very
easy to define). In the same way that profitability comes from a few large
winning trades, capital preservation so comes from avoiding the few large
losers that the market will see fit to send you each year.
Setting a maximum loss point before you
enter the trade so you know ahead of time approximately how much you are
risking on this position is pretty straight up.
You just have to have an exit price that
tells you that your trade is a losing one you should exit before it gets any
bigger. Because of gaps at the open, or limit moves in futures we can never be
100% sure that we can get out with our maximum loss, but simply having the
rules, and always sticking to them will save us from the nasty trades that just
keep on going against our position until we have lost more than many winning
trades can make back.
If you have a losing position that is at
your maximum loss point, you should just get out right away. You can’t hope
that it will turn around for as it isn’t common sense.
Being that trades are either winners or
losers, and this one is shouting ‘Loser’ at you, the chances that it will turn
around and become a large winner is decidedly small.
Why would you
want to risk any more money on a trade that has already shown itself to be a
loser when you could simply close it out (accept the loss) and move on. This
will leave you in a much better place financially and mentally, than holding on
to your position and hoping it will go back your way.
Even if it did do this, the mental energy
and negative feelings from holding the losing position are just not worth it.
this is why you should always stick to your rules and exit a position if it
hits your stop point.
Never add to a losing trade
One of the few trade management rules that
you should never break is ‘Never add to a losing trade’. Trades are split into
winners and losers, and if a trade is a loser, the chances of it turning right
around and becoming a winner are too small for you to want to risk more money
on. If it actually is a winner disguised as a loser, why not wait until it
shows it is a winner before you add to it.
If you do this you will notice that nearly every time the trade
ends up hitting your
stop loss and does not change direction. Sometimes the trade
turns around before it hits your stop and becomes a winner and you can count
yourself very lucky if it does.
Sometimes
the trade hits your stop loss and then turns around and becomes a winner and
you can count yourself unlucky. Whatever happens, it is never worth adding to a
loser, hoping that it will eventually be a winner. The odds of success are just
too low to risk more capital in addition to the initial risk.
Don’t take too much risk
One of the most devastating mistakes that
any trader can make is in risking too much of their capital on a single trade.
One thing is certain in trading and that is if you lose all your capital you
are out of the game indefinitely. Why should you risk so much when you could be
prevented from continuing.
There is a useful saying in poker than going
all-in works every time but once. It is the same thing in trading. If you risk
all of your account on every trade it only takes one loser to wipe you out, so
you will be out of the game at some point as it is only a question of time.
In general,
you should only risk 1-3% of the available capital allocated to a system on any
individual trade. This is calculated using the size and, the difference between
our entry price and our maximum stop price, and the amount of capital that is
allocated to the system.
With these things combined we are almost
certain never to lose all of our trading capital. In fact, the chance of us
hitting our maximum drawdown for the year is extremely low.
All trades that you make should be of a
size that almost seems pointless to your future fortune. If you are worried
about the size of a trade then it is too big and you should use a lower amount
immediately.
Remember that longevity in any trading
market is the key to making money by trading. You should trade slowly over a
long time with minimal risk, is always preferable to rapidly with too much
risk.
Only trade positive expectancy systems
If you have a
positive expectancy trading system, the only factors that will decide how much
money you will make per year are the number of trades the system actually
makes, how much capital you allocate to the system, and how accurately you use
the trading signals.
If you do not know whether your trading
system is positive expectancy then it makes no sense for you to be trading it
in the first place. Expectancy is calculated using the profit or loss on each
trade; divided by the initial risk, and then taking the average of this number
of a series of trades. Systems that have positive expectancy will make money
most of the time and those with negative expectancy will lose money.
Successful traders only trade systems when
the odds of success are in their favor so that they know that making money is
the final result of accurately implementing the system and not just pure luck.
You will want to minimize all of you trading business costs
Some trading systems can offer you only
marginal profitability, and trading implementation costs (commission, spread,
and slippage) can be the difference between making a profit and making a loss.
With the simple availability of modern
electronic brokers, and fully-automated trade processing and execution, it is
definitely worth the effort in looking for a very low cost way to implement
your trading system.
High commission, wide spreads, and large amounts of slippage
can be lowered
drastically and easily by carefully choosing the right broker. This can be the difference between
a system being useable or not. Paying too much for trade implementation is a
way to lose money that you can actually avoid.
Analytics tools
For those just starting out, we recommend Easy Forex
as a broker/platform due to their relatively affordable spreads and fee
structure.
Educate yourself
In order for you to be able to compete at
the highest level in the trading business and be a successful player, you must
be well-educated about what you are doing. Being well-educated means that you
have thoroughly researched and tested your trading ideas and know why your
trading system worked in the past and is still working.
It means that you understand all the
technology and applications that your system needs to perform with accuracy. It
means understanding your goal and objectives and how trading will help you
achieve them. It means understanding yourself and how your personality will
affect your results.
In order to succeed as a forex trader, you
really need to become an expert in your own trading business to understand how
it the dots are all connected, when it is broken, and how it can be improved.
This takes commitment, hard work, dedication, and more hard work.
Avoid trading scared money
No one ever made any money trading when
they had to do it to pay their bills at the end of the month. Having a
requirement to make a certain amount of dollars per month or you will be
financially in trouble is the best way I know to completely mess up all trading
discipline, rules, objectives, and leads faster than you’d expect to disaster.
Trading is about taking a reasonable amount of risk in order to
achieve a good reward.
The markets
and how and when they give up their profits is nothing that you can control.
You should never trade if you need the money to pay bills. Do not trade if your
business and personal expenses are not covered by another income stream or cash
reserve. This is how hasty decisions are made.
Dealing with your losses
One of the
most important rules of Forex trading is to keep your losses as small as
possible. With small Forex trading losses, you can outlast those times when the
market moves against you, and be well positioned for when the trend turns
around.
The one proven method to keeping your
losses small is to set your maximum loss before you even open a Forex trading
position.
The maximum
loss is the greatest amount of capital that you are comfortable losing on any
one trade. With your maximum loss set as a small percentage of your Forex
trading effort, a string of losses won’t stop you from trading for any
particular amount of time. Unlike the 95% of Forex traders out there who lose
money because they haven’t implemented wise money management rules to their
Forex trading system, you will be ok with this money management rule.
To use as an example- If I had a Forex
trading float of $2000, and I began trading with $200 a trade, it would be
reasonable for me to experience three losses in a row. This would reduce my
Forex trading capital to $800. It would then be decided that they’re going to
bet $400 on the next trade because they think they have a higher chance of
winning after having lost three times already.
If that trader did bet $200 dollars on the
next trade because they thought they were going to win, their capital could be
reduced to $500 dollars. The chances of making money now are practically nil
because I would need to make 150% on the next trade just to break even. If the
maximum loss had been determined, and stuck to, they would not be in this
position.
In this case, the reason for failure was
because the trader risked too much money, and didn’t apply good money
management to the play.
Remember, the goal here is to keep our losses as small as
possible while also making sure that we open a large enough position to
capitalize on profits and minimize losses. With your money management rules in
place, in your Forex trading system, you will always be able to do this.
Forex Trading Tools
When it comes to getting started with
forex trading, the tools that you should get will certainly make learning and
executing your trading efforts a great deal easier. Just like you would
calculator before you bought a house, there are special tools that you can use
when trading forex as well.
Below you will find a list and
descriptions of some of the popular tools that are used to help you make your
trading experience easier. They are listed in terms of what they do as well.
Let’s look at these right now
Automatic Execution tool
The Advanz
Auto4X platform helps to take your Trade Station strategy signals and also
automates their execution to Gain Capital’s trading platform. Advanz Auto4X is
designed so that it can be powerful, flexible and accurate so as to meet the
needs of various complex institutional trading departments.
It is also designed to be simple and
efficient for an individual trader. Advanz Auto4X also helps to support the
execution of a variety of different strategies working on any number of time
frames to all of the Forex crosses that are made available for trading.
Elliott Wave This is considered by most experienced traders to be the
purest
form for getting technical analysis because Elliott
Wave analysis measures investor
psychology. The Wave reveals that mass psychological swings during a natural
sequence, which creates specific and measurable patterns.
This
actually offers you daily technical analysis and trading
recommendations that are based on sophisticated trading
K.B. Advisory Ltd
. system strategies and was developed by
Keith Black. It boasts
a
successful 3 year track record of performance.
(Technical Research
Limited)
TRL is a
Specialist Foreign Exchange Forecasting Service that can help you with
forecasting and trading analysis in the global foreign exchange markets.
Technical Research Limited is rated the No. 1 FX Advisory Service by customers
in 39 different countries around the world.
This program is very powerful, and offers
you real-time analysis for market professionals who are looking for:
1. An edge with decision making support
2. Top performing market models
3. To spend less $$ on real-time data and exchange feeds
4. Standard, and simple graphical trading support
5.
Visual
representation of risk to the traders managing it.
(International
Financing Review)
IFR Forex
Watch gives you real-time technical analysis of the FX spot and options
markets. It gives you analysts in London, New York, Boston, San Francisco,
Singapore and Sydney. Few can actually match the depth and variety that this
program offers. IFR specializes in sifting through the vast array of
information that clutters up current market participants, and boiling it down
into its bare essentials.
Global Market Research provides price
forecasting and is a proven performance-based Trade Strategies for the FX
market trader. You should check out the daily newsletter, FX Technicals and
intraday updates and analysis, through the
Global Market Web or directly to your
e-mail. Research
This is a resource for a well-connected
market professional that has been trading and writing about markets for nearly
20 years. You can capitalize off of his experience and his analysis, especially
technical analysis, to get a real trader's take on current market action.
4CAST gives you key market information and
analysis to market participants worldwide, including central banks. It also has
an on-line service that gives you fundamental, political, strategic and
technical analysis 24 hours a day.
ForexTRM is the only forex charting
service that pairs 18 world and regional currencies and tracks them every day.
This means ForexTRM lets you to trade any one of the 18 currencies against any
of the other 17. It uses its unique trademarked Sigma Bands and Hurst Cycle
Analysis to correctly identify:
·
Overbought/sold forex markets
·
Where trading risk is at its lowest point
in time
·
Which currency pairs are ready to trade
There is also an ALERTS Newsletter that
you can get free of charge.The Market Vu Show is the number one
program for traders and active investors to use today. It lets you interact on
your pc in real time as your host Market Vu and the famous Vu Team bring you
live market action from the Global Forex Markets. It lets you watch
professional traders and share ideas. You can also:
·
Get Real Time Detailed Charts from the Vu
Team
·
Get
LIVE Trade Setups, Entries, Stops and Profit Targets
·
Get Free Access for FX Account Holders
Get
After Hours Education and Seminars
The Forex Edge is an instructional CD that
tries to give Forex traders the unique tools that may just give them an
advantage
to the rest of the field. It will show you
how to identify unique formations and how to structure your own indicators and
generate your own signals.
Here are a few more tools that you should check around for:
·
Rate History Tool
·
Converter
·
EuroConverter
·
Conversion List
·
Risk Probability Calculator
·
Investment Risks (VaR)
·
Forex Pivot Point Calculator
·
Pip USD value Calculator
As you can
see, the buying and selling of currencies is necessary as it supports trade
between countries in today's global marketplace and, as the major world
currencies often work against one another, will continue to be. There is so
much money to be made from currency transactions.
The major
players in the market today are buying and selling in single deals and they are
often running into many millions of dollars. The smaller players (as usual),
like the brokerage houses and individual brokers, are often trading in single
deals that consist of as little as one hundred thousand dollars.
Nowadays, you can join this market and,
providing you take the time to learn everything that there is to know of the
currency markets and have a little bit of capital to invest, you can have a
great time and earn a very reasonable income from your trading efforts when you
do it online.
As you have learned here you will not be
able to trade on your own and will need to use a broker, but many brokers will
allow you to open an account online and start trading with anywhere between
$250 and $1,000. Many of them will let you try a free demo just to let you get
the hang of it.
FOREX trading is not for everybody but its
major advantage is that it is a highly liquid market that does not involve the
commission payments and paperwork which many people find a problem like with
other forms of trading. It is, however, a technical market and you should
not try it unless you are absolutely ready to take the time to learn the
basic principles that make up this currency market and become competent in the
use of some of the tools at your disposal.
It is not necessary to become an expert in
these markets to profit from them. With a little time and effort you can quite
easily gain enough of an understanding of the
The other factor here is using a trading
system that actually works – without that, you're better off going to Vegas.
This guide has
given you all of the knowledge you need to make money if you really want to.
All you have to do is follow the advice mentioned here and do your research.
Next thing you know, you will be earning steady income from the forex trading
market in no time at all!
