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Finding Your Way Around Forex Trading

Table of Contents

How to Get Started in Forex

Forex Basics

A Popularity Contest

The Forex Market

Before You Begin

All About Trends

Multiple Time Frame strategy

Normal Trading Strategies

Flags and Filtering

Rounding Off

Interest Rate

The Boomerang Effect

Scoring Big Gains

A Level Playing Field

Summing it Up
 How to Get Started in Forex

How to Get Started in Forex

Basically, Forex, or currency market or foreign exchange market, is a market

wherein one currency is traded for another. Additionally, Forex is one of the

largest markets in the world. The goal of some participants in the Forex market

is to seek an exchange of a foreign currency for their own. A large part of the

market is made up of currency traders, who speculate movements in the

exchange rates, similar to others who speculate movements of stock prices.

Learning Forex

The investments placed on Forex markets normally deal with the four major

pairs, namely EUR/USD, USD/JPY, GBP/USD, and the USD/CHF. These pairs

are also considered as blue chips.

Additionally, the foreign exchange market is unique due to several aspects,

such as: the trading volumes, extreme market liquidity, the large amount and

variety of traders, geographical dispersion, 24-hour trading, the factors

affecting the exchange rates, and the low margins of profit with other fixed

income markets.

The exchange-traded foreign exchange future contracts were first introduced

in the year 1972 at the Chicago Mercantile Exchange. Future volumes of Forex

have grown rapidly in recent years, and accounts for about seven percent of

the total Forex market volume.

From Stocks to Forex

Most traders in the United States are involved in stock trading. Within that

environment, a trader who is following a trend for as long as possible would not

have any difficulty in making money. The stock market is also a very forgiving

market, which would bail out even poor traders. The only trick is to understand

the difference between the good and the lucky. There are several talented

traders who can falter when the conditions of trading become less then ideal.

Although both the stock and Forex markets involve risks, the latter is not

conducted on a regulated exchange, thus there are additional risks correlated

with Forex trading. However, traders previously involved in stock markets are

transferring to Forex markets due to a number of benefits.

One is the greater leverage. Forex trading provides greater leverage compared

to the traditional stock trading, which only allows traders to be in charge of

larger positions with smaller amounts of capital. Greater leverage allows an

individual to trade the same size positions that he or she might take with a

stock broker, while leaving him or her with more available capital to trade

more markets.

In Forex markets, there are no middlemen. When trading directly in Forex

markets, the only players are the dealer and the primary market maker, or the

trader and the buyer or seller of the currency pair; no extra parties are

involved. On the other hand, the stock market involves the trader, broker and

the exchange, who both charge commissions and fees.

Stock Market Headaches

There are a number of unpleasant events that a person must learn to deal with
in life. After a while, these problems are no longer considered as a burden but

instead a norm. As for traders, there are also unpleasant occasions that can be

considered as normal or a part of the job.

One of these problems is the partial fill. The partial fill is a normal incident in

stock trading. It occurs when a trader puts an order for a definite number of

shares and instead receives only a portion of the order. The market will not be

able to absorb an entire order if there are not enough shares available at a

defined price. This can be frustrating for the trader, especially if he or she

wants to pursue large orders. Still, this kind of event is considered as normal

for equity traders.

Slippage is another problem that futures and stock traders encounter every

day. By definition, slippage is the difference between the anticipated

transaction costs and the amount actually paid. Slippage tends to cut into the

traders profits and is a major headache for futures and stock traders.

Aside from those two, another hurdle that a trader must overcome is the

specialist. A specialist is an individual who controls all the trading activity of a

listed stock. More so, the specialist also controls the spread; he or she can
widen or narrow the spread at his of her discretion. Hence, the specialist can

either make your trade successful or make your life miserable.

The uptick rule is another frustrating obstacle that faces the success of an

equity trader. Stock traders can place a trade that will become profitable if the

stock rises whenever they wish. However, if they desire to place a trade that

will become profitable if the stock falls, the traders must go through several

machination processes that can be both costly and problematic.

Stock Market Headaches in Forex

Fortunately, the Forex market is less problematic compared to the stock

market. The currency market is considered as highly liquid or thick. This is the

reason why the partial fill headache evident in the stock market is extremely

rare for all but the largest traders in the foreign exchange market.

Additionally, the slippage is also rare in the Forex market. Several foreign

exchange market makers have a one slippage policy, thus giving currency

traders a superior degree of certainty regarding the price.

As for the specialist, there are no specialists in the foreign exchange market.

More so, the spread is often fixed in the currency market. This allows the

trader to another greater degree of certainty.

Lastly, the Forex market has no uptick rule. The trader can buy or sell at his or

her own will. Conversions, bullets or married puts are not required to be

purchased.

Forex Basics

Forex Basics

Whenever people travel outside their home country, there is good chance that

they have performed currency transactions. Travelers, in many cases, are

required to exchange their home country’s currency for the currency of the

country they are visiting. Much like the Forex market, there are two currencies

involved in such occasions but only one exchange rate.

The U.S. Dollar and the Canadian Dollar

Back in the year 2002, travelers would have received an estimated C$1.60 in

Canadian currency for every U.S. dollar. It is safe to say that the exchange rate

during that year for the U.S. dollar and Canadian dollar was about 1.60

Canadian dollars for each U.S. dollar.

Years that followed resulted in a dramatic change in the exchange rate and by

the year 2006, the rate had fallen to 1.10. This only means that a traveler from

the United States would only receive about C$1.10 in Canadian currency for

every U.S. dollar exchanged. The measurement of very small changes in this

exchange rate can be expressed using 1.1000. If so, the U.S. dollar

significantly depreciated against the Canadian dollar during the early part of

the twenty-first century.

Eventually, the rate of the Canadian dollar approached parity with the U.S.

dollar. U.S. citizens were also less likely to visit Canada, because if they did,

they were more likely to spend more than they would have in the past, when

the exchange rate was more favorable. On the other hand, travelers from

Canada were more likely to visit the United States, since their currency bought

more U.S. products than it had previously.

The U.S. dollar and the Euro

The rise of the Euro also created a similar situation to that of the Canadian

dollar. In 2002, 2003 and 2004, the Euro created dramatic gains against the

U.S. dollar. Additionally during those years, the value of the Euro rose from

US$0.85 to above US$1.35. Because of this movement in the exchange rates,

citizens from the United States found that vacationing in Europe became very

expensive. This kind of change caused a huge influx of shoppers from Europe

traveling to the United States, especially during the Christmas season.

There is no doubt that fortunes were made and lost on huge movements, such

as those mentioned. However, it is important to remember that even the

tiniest shift in the exchange rates can also result in substantial gains and

losses.

Understanding the Exchange Rate

An easy way to understand the exchange rate is to think of the base currency

as the number one. For instance, assume that the exchange rate for the
EUR/USD pair is 1.2904. Since the base currency is Euro, that is also the first

member of the pair. Thinking of Euro as the number one will only mean that

one Euro would be worth approximately $1.29 U.S. dollars.

But how do these movements in the exchange rates translate to the Forex

traders bottom line? With trading a pair, like the EUR/USD, the U.S.-based

trader will note that the pair has a fixed value of $10 per pip. This is also true

for all pairs that have USD as the second currency. Hence, in any currency pair

containing USD as the second currency, a flattering movement in the exchange

rate of 10 pips will make a gain of $100; unfavorable movement of 10 pips

would cause a loss of $100. In the case of the EUR/USD pair, a gain or loss of

10 pips can happen easily since the pair moves about 100 pips each day on

average.

Terminologies in Trading

A non-trader or a beginner can get easily confused around traders, since they

mostly use their own language. This kind of language is easily synonymous to

a secret handshake, which would let others know that they are a member of

the group.
First trading terminology is going long. Whenever you hear this come out of a

traders mouth, it only means that he or she is placing a trade that will only be

profitable if there is an evident rise in the exchange rate. selling short, on the

other hand, means that the trader will be placing a trade that will only be

profitable if the exchange rate falls. Flat means that the trade is neither long

nor short. More so, the trader saying this has no open positions in the market.

Another trading term is the pip. By definition, the pip is the smallest increment

of price in Forex markets. It is also an acronym for the phrase percentage in

point. An example for this term would be when supposing the exchange rate

for a pair rises from 1.1000 to 1.1001. It is safe to say that the rate rose by one

pip.

Included within the trading terminologies are the major currencies, such as:

EUR for Euro, GBP for Great Britain pound, JPY for Japanese yen, USD for U.S.

dollar, CAD for Canadian dollar, CHF for Swiss franc, AUD for Australian dollar

and NZD for New Zealand dollar.

Nicknames are also used in trading. These are slang terms that several traders
like to use. Several examples of these nicknames are: cable or sterling for the

British pound, greenback or buck for the U.S. dollar, single currency for the

Euro, Swissy for the Swiss franc, kiwi for the New Zealand dollar, loonie for the

Canadian dollar, and Aussie for the Australian dollar.

A Popularity Contest

A Popularity Contest

For several years, more investors grew dissatisfied with the performance of

markets relying on domestic stocks. Because of this, began to venture into

other options for international investments. There are several opportunities for

foreign markets but foreign exchange trading is becoming the most popular.

One of the reasons why investors like Forex trades is quick trading with

minimum hassle.

Normally, access to this kind of market has been only open to hedge funds,

major corporations and several other institutional investors. Some of the

worlds major banks have been involved in foreign exchange markets for years.

Back then, the individual trader had no way to access Forex since there were

no methods of competing with the big boys on an even playing field.

The foreign exchange market was finally able to open its doors to retail clients

in the 1990’s. Makers of online Forex market even opened the gates and made

a fortune by breaking huge trading positions into small-sized chunks that

several individuals could buy and sell.

What this means is that individuals can now make trades alongside the largest

banks in the world. More so, they can even use the same strategies and

techniques that other professional traders use. The landscape of trading has

changed suddenly and traders obtained a new alternative to future and stock

markets.

The Big Money and Forex

The Forex market, or sometimes called FX, foreign exchange, currency

market, and global market, may seem like the newest player on the trading

world. However, it has been the choice of market for institutional investors and

global hedge funds for several years. The big money has always traded Forex

since the large size of the market permits these kinds of traders to enter and

exit large trades without making price alterations and upsetting the exchange

rates.
During the past few years, the popularity of foreign exchange has taken off.

The daily volume of Forex market is estimated at about $1.9 trillion and still

growing. This number is still unmatched by any kind of trading market

available in the world.

Moreover, traders in Forex have the capability to utilize remarkable leverage,

which can be bigger than 200-to-1. The leverage allows traders to expand their

trading positions and may also serve to amplify gains and losses. Due to the

superior leverage in Forex, the barriers for traders are very low. Traders in

Forex markets can open account with as little as a few hundred dollars.

Making Money in the Forex Market

Traders of currency basically place an effort to profit from the changes in

exchange rates. Since Forex markets have tremendous leverage, there is a

small chance that the change in the exchange rate can cause a large profit or

loss. Wealth can be made or lost rapidly in the Forex market; even a shift in the

exchange rate that is equivalent to a few hundredths of a penny can be

amplified into a significant loss or gain.

There are two kinds of traders in Forex markets: the technical and

fundamental traders. The technical traders main focus is on technical analysis.

Such analysis is mainly the study of charts and indicators. These kinds of

traders believe that all the pertinent information required to put a trade is

contained within a chart.

On the other hand, the fundamental traders employ fundamental analysis.

This can be loosely described as the study of economics, focusing on interest

rates. Such traders believe that the currencies will eventually gain or lose

strength depending on their economic strength and weakness and because of

the changes in monetary policy and interest rates.

Trading Currencies in Pairs

The subject of currency trading in pairs can be confusing for beginners at first.

Whenever an individual enters a currency trade, it entails two currencies.

However, even if there are two currencies involved in trading, there is only one

exchange rate. Thus, every transaction or trade involves two currencies and

one exchange rate.

The value of the currency itself does not change but its value relative to

another currency can change. For instance, a single dollar you may have today

would still be worth $1 dollar the next day; although, the value of that dollar

constantly fluctuates relative to other currencies. This is the main reason why

there is a need to trade currencies in pairs in the Forex market.

The 24-Hour Trading and Trading Sessions

Forex markets are synonymous to seamless and 24-hour trading markets;

there are no rigid schedules. The market allows traders to decide for

themselves when to trade regardless of the time of day. There are even

part-time traders, with full-time jobs, who can trade Forex. More so, wherever

the individual is located or whatever hours he or she keeps, the individual can

still trade in the Forex market.

Since the market is open 24 hours each day, no one can really tell when the

market opens and closes at a specific time of day. It is important for traders to

designate a particular time of day as a benchmark.

Several traders begin trading at 5:00 p.m. Eastern U.S. or New York time,

10:00 p.m. London time. Since the Forex market trades 24 hours, the trading

day also ends at the same mentioned times of the day.

During that time of the day, the three largest Forex trading centers, namely

the United States, Great Britain and Japan, are quiet. However, the New

Zealand and Australian dollars may witness some action during those hours.

The trading sessions for Asia starts a few hours later, at around 7:00 p.m.

Eastern U.S. time, London midnight time. For the European session, the

trading begins at around 3:00 a.m. Eastern U.S. time. Lastly, the U.S. session

starts at 8:00 a.m. New York time, which is halfway through the trading

session of London.

The Forex Market

The Forex Market -- Technical Analysis

Former equity traders and futures traders have chosen to trade in the Forex
markets. They have learned that the technical analysis works exceptionally

well in the foreign exchange markets. But how does this technical analysis

work? Technical analysis is merely the analysis of the movements of the past

price to aid predicting the movements of the future price. In most instances,

the trader, who uses technical analysis, is simply looking for the repetition of

past occurrences.

The Theory of Technical Analysis

Long-term movements in the Forex market are usually related with economic

cycles. These cycles tend to repeat themselves and can be predicted with a

reasonable degree of preciseness. The key is repetition since the entire

premise of technical analysis lies in utilizing historical price movement to

foretell future price movement.

Within the environment of the stock market, the fundamentals of one company

can change radically in a short period of time. This fact makes past stock prices

irrelevant in the prediction of the movement in the future. Moreover, there is

no predictable economic cycle in the life of a company on an individual stock.

As a result, the technical analysis becomes a hit-or-miss proposition in the

stock market.

On the other hand, within the Forex market environment, the traders are

trading the economies of entire countries. The rudiments of these countries

adjust relatively slow, thus making the boom-bust nature of the economic

cycle easier to predict.

The Statistical Survey

Basically, a survey performed in an even-handed and fair manner will produce

larger samples of information, which can reveal more accurate results. The

larger size and liquidity of the foreign exchange market provides technical

analysis a greater sample of data from which to draw. There are also more

trades and much money changing hands in Forex markets compared to any

futures or stock market. The Forex market contains several data points, thus

making a statistical sampling, like the technical analysis, more accurate.

Additionally, the vast liquidity located in the foreign exchange market makes it

much less likely that irrelevant players will upset the market and momentarily
skew technical indications, which is common in liquid markets.

The Trend and the Fear of the Unknown

The main reason why traders, who like to follow trends, are drawn to the

currency market is due to the trends. Since currency pairs have a tendency to

create strong and persistent trends, the Forex market is relatively famous for

these trends. For instance, the Euro trended constantly superior against the

U.S. dollar over a three-year period. This uptrend also occurred during a time

when the United States was experiencing an economic weakness.

Knowing the popular trends can help overcome the fear of the unknown. It is

normal for an individual to have a fear of the unknown; this is also a typical

human behavior. Entering the Forex market, at first, can make someone think

of several concerns that might be weighing on his or her mind. These concerns

are common to traders who desire to experience the advantages of Forex, but

still reluctant to leave their comfort zone. If you are concerned about the

charts, it is important to realize that the charts used for Forex exchange rates

are not very different from the charts of other vehicles for trading, like

commodities or stocks.
The Trading Patterns and the Technical Indicators

The good news for experienced futures and equity traders is that nearly

everything that they already know about technical analysis can be applied to

the foreign exchange market. Charts used in Forex contain familiar patterns,

including the head and shoulders, double tops and bottoms and the

symmetrical and asymmetrical metrical triangles.

Traders in Forex use Bollinger bands, moving averages and MACD or moving

average convergence/divergence, which are the same indicators that futures

and equity traders use. There are also similar breakouts and pullbacks, ranges

and trends, and retracements and consolidations used.

Forex traders also use resistance and support levels in order to determine the

best location for entry and stop orders, similar to traders involved in stock and

futures markets. Also, the strategies involving trend lines and channels are

also popular in the Forex markets.

Before You Begin

Before You Get Started

Foreign exchange, or Forex, has been very visible in a number of business

profiles ever since small investors were given the chance to join in the realm of

currency exchange. Even though there is an evident presence of pressure and

rigors of a day job, several traders still aspire to enter and profit from foreign

exchange markets.

However, before starting any kind of trading, including those involved in Forex

markets, you should know what you are getting into: gains and losses. In

every venture, it is important to know the risks involved and the techniques in

stabilizing the possible outcome of every trading.

The Triple Threat Trader

Any trader who masters trading strategies and technical analysis can pinpoint

profitable entry and exit points. Mastering the fundamental analysis can help

one anticipate turning points in the markets when economies shift. More so,

the trader who understands the solid risk management can defend and protect
the account against loss in any trading arena. Any trader who masters all of

those three, namely the technical analysis, fundamental analysis and risk

management, is called the tripe threat trader.

Anyone can be the tripe threat trader. Firstly, it is important to learn genuine

techniques in detail, which can be utilized to successfully trade in the Forex

market. Learning to identify the current situation of the market, apply

appropriate strategies in trading, and adapt to alterations in the market can

help anyone master the technical analysis.

It is also important to be educated in fundamental analysis, though it can be

intimidating. What separates a good trader from the great one is the solid

realization of the fundamentals of the Forex market.

Risk management is one element that all traders, who are successful, share

together. Having good risk management knowledge can help evade troubles

and allow survival from the tough times and even gain valuable experience.

Acquiring Experience
Having a good trading education can help anyone in anticipating several things

that might occur in Forex; nevertheless, it does not provide experience.

Fortunately, gaining experience in trading the Forex market, without risking

money, can be done by using a practice or demonstration account. There are

several Forex market makers who offer such accounts and they often include

real-time charts, news feeds and price quotes. This is one advantage a

beginner can get nowadays. In the past, traders had to learn and make errors

using their real money.

An excellent method for potential Forex traders to familiarize themselves with

the market is the demo trading. It is recommended for a beginner to use a

demo account for at least several months before even making a shot at live

trading.

Aside from demo trading, mini accounts are also available, which helps

neophytes place live trades with minimal risks. These kinds of accounts can be

opened with as little as a few hundred dollars. Thus, they create one of the

lowest barriers to entry for any market for trading.

As for the transition, it is important to trade using a demo account for several

months before advancing on the mini account. Luck is never the same as a

successful trading; even if you turn profit on the demo account, but still

acquire too much risk during the process, that profit would not suffice for live

trading.

The Pair to Trade

If you are starting to trade Forex, it is necessary to begin with just one

currency pair. Moreover, an excellent way to start is with a pair that has a

narrow spread, like the EUR/USD pair. The spread of this pair is the difference

between the buy price and the sell price.

Additionally, the spread is considered as a formidable opponent, and there are

pairs that have wide spreads, which are suitable only for long-term trading.

Overcoming the spread can help you reach the point of the trade, called the

break-even. Thus, using a pair with a narrow spread can help achieve this

level.
Through the use of a demo account, begin with the EUR/USD pair and by the

time you feel comfortable with the way the pair moves, you can then branch

out and try the GBP/USD pair. The GBP/USD pair is similar to the EUR/USD pair

but with a better volatility.

Always remember that no two traders are exactly alike. The decision on

choosing the pair only relies on your personal style. However, any moment

when you test a new trading technique or currency pair, always remember to

do so with a demo account. Choosing the currency pair best suited for your

personality is an element of the learning process to become a Forex trader.

The Commodity Currencies

After knowing which pairs to trade, you can see if the USD/CAN is a pair that

you can enjoy trading. The relationship between this pair and the price of the

oil is strong, since the Canadian dollar often gains ground as the prices of

energy rise and falls when the energy prices weaken. Commodity currencies

are the currencies that share a strong relationship with the price of a

commodity, like oil.

There are several commodity currencies that you can explore. One is the

CAD/JYP, which has an even stronger relationship with the price of oil. Another

pair is the AUD/USD. The AUD or Australian dollar usually rises and falls along

with the price of gold. Such correlation is extremely useful to currency traders,

who frequently witness occurrences where the price of gold appears to lead the

Australian dollar.

All About Trends

All About Trends

Like some activities in our daily lives, we use techniques to cope with different

situations. Trading is very much the same. In trading the Forex market, there

are several techniques available and no one of these techniques will work all

the time. Techniques are designed to help a trader survive a specific condition

within the currency market. Thus, it is an important ability of the trader to cope

and adapt with any condition and be able to vary his or her own trading style

that suits a particular technique appropriate for a crisis.

In trading, there are three basic types of conditions, such as: Range-bound,

wherein the currency pairs bounce between support and resistance; Trending,

wherein the pairs have a definite direction; and Consolidating, wherein the
currency pairs are cornered in a narrow and tightening area.

Understanding these types simply begins by knowing that during range-bound

or consolidating markets, trending techniques are not applicable. More so,

when the market is experiencing consolidating or trending periods,

range-bound techniques are inappropriate.

The key factor, which can help a trader know which technique can be used for

what condition is to know that markets change. Normally, a pair that is

currently trending would begin to move into a consolidation phase or in a

range, sooner or later. Traders must be nimble and have the capacity to adapt

to this kind of changing environment by using the right strategy at the right

time.

Importance of Being Objective

When a trader first starts using new techniques for trading, he might be lucky

enough to encounter success right from the start. However, there is an

unfortunate side to this kind on initial success. The trader has the tendency to
continue using that same trading technique, even though the market has

clearly altered and the technique is no longer applicable. Falling in love with a

technique should be avoided since the result can be devastating.

If this happens to a trader, it is advised to remain objective and understand

that while short-term success in not common, it is surely not the ultimate goal.

Luck can be brought to anyone but it does not last for long. It is important to

know that the markets are not static and it is up to the trader to distinguish and

cope with the changes.

Starting With a Tendency

Market tendency is the core component of every good trading strategy. By

observing a market for a long period of time, there are noticeable tendencies,

like when the currency market tends to shape long and strong trends. Another

instance would be the markets tendency to look for support or resistance at

large round numbers; this kind of tendency is called the psychological

tendency, which can happen at any trading market. There is also another

situation where the market has the tendency for a strong breakout to occur

instantly following a tight consolidation. The trader can use these tendencies
and make them the foundation from which to create a strategy.

An authentic tendency can be identified by reason. For instance, a round

number support and resistance occur when people often locate their entries,

stops and exits right at round numbers.

The truth of the matter is, not all traders consult a chart before putting a trade,

and there are some who have very general thoughts as to where they wish to

place their orders. These kinds of traders often place entry, stop and exit

orders at round numbers and the orders assemble at these levels. When this

happens, the round numbers frequently correspond with the key levels of

support and resistance in the futures and equity markets, as well as in the

foreign exchange markets.

Applying Trends

Traders can utilize trends to their own benefit. For example, when the market

is trending, it has preferred a clear direction. Traders can assume that this

trend continues, since history dictates that in the currency market, trends can
last for several years. If the trader is able to get on the right side of the trend,

he or she might have the opportunity to enjoy considerable gain.

It is easier and profitable for traders to allow their winning trades to run in a

trending market, since the exchange rate has a clear direction. For as long as

the currency pair moves in the direction, the traders defensive stop is less

likely to be prompted.

Conversely, with the case of the sideways or range-bound currency pair, the

price has the tendency to return to the entry point, for such a reason that this

kind of pair has no real direction. This kind of situation makes it hard for

traders to hold on to their positions and even forces them to be quick regarding

exits.

The Trending Market

Traders can use several techniques to determine whether a market is trending.

One method is to use moving averages, also known as proper order of moving

averages.
Another method is by using the ADX or Average Directional Index indicator.

This indicator states the strength of the trend without regard to the trends

direction; high readings can indicate strong trends.

A trend line is also used to determine if a trend is in effect. Simply, the trend

line is a line drawn beneath an uptrend, or above a downtrend, and specifies

the general direction of currency pair.

The Formation of Trends

The reason why trends form is because of the economic cycles. In Forex

markets, traders trade economies of an entire nation. Normally, when the

economy of a country is either strong or weak, it remains that way for years.

More so, the strength and weakness of an economy runs in a cycle that is

measured in years. There are four stages that traditional business cycles

undergo, including the expansion, prosperity, contraction and recession,

respectively.
Moreover, the economic strength and weakness usually reflect in the currency.

Since currency markets involve matching two currencies against one another,

situations can arise wherein one currency is stronger than the other in the pair,

thus resulting in a trend, which can last for months or years.

It is a rule for a trend-following trader to not fight the trend. It may be

tempting to apply and deduce the point at which the trend will undo though

this is exactly what traders should avoid. While it is possible to gain on a

countertrend move, a trader who always trades in this manner is stacking the

odds against himself.

Multiple Time Frame strategy

Using a Multiple Time Frame Strategy with Forex

One of the most dependable features of the currency market is its tendency to

form trends in an assortment of time frames. Trends with the Forex market can

linger for weeks, month or even years and traders who support themselves

with these trends can improve their chances for success.

Why Does Multiple Time Frame Strategy Works

The multiple time frame strategy allows the traders to trade only in the

direction of the overall trend. Additionally, it requires the trades to be placed

only after the price has pulled back to a favorable entry point. In short, the

strategy does not allow the traders to enter long at the highs or short at the

lows.

The technique can also be utilized for shorter time frames. Like for example,

when the active day trader can use the four-hour chart for long-term reference

and a 15-minute chart for short-term reference.

By performing a role of a trend trader, your main objective is to use the trend

to your own advantage. If the currency pair is in a downtrend, you should look

only for short entries and ignore any opportunity to go long. More so in the

same instance, if the pair is rallying, you must find your entry point and locate

a greater resistance level.

The Tops and Bottoms

If the trader waits for the oscillator to turn before entry, he will not be able to

enter at the absolute peak. There are several traders who seem to be

excessively concerned with achieving the ultimate entry point; they desire to

sell short at the peak and proceed long at the absolute bottom.

The problem in choosing tops and bottoms is that it is a dangerous game. No

one can really foretell the peaks and valleys in stocks, options, futures, as well

as Forex. Any trader who tries to achieve this is simply attempting to get lucky.

If the trader waits for the momentum to turn, he or she has no chance of

entering at the very top or bottom which is fine. Always remember that an

experienced trader is willing to sacrifice a portion of the move, in exchange for

the enhanced probability of success that patience grants.

The Entry Signal and Stop Placement

To know when to enter your short trade, it is important to refer as the

exchange rate slides and the RSI descends from overbought levels. The trader

can enter short within the vicinity or point at which the Relative Strength Index
is no longer providing an overbought reading; this should also be the point

when the exchange rate drops.

RSI or Relative Strength Index is used to measure the activity of the market as

to whether it is over sold or over bought. Additionally, it provides the trader an

indication as to which way the market is going.

Placing the stop is also important and must be immediately applied in order to

gain protection from any adverse movement. The trader must know how to

stop at a certain point, again by referencing the RSI. It is important for the

trader to consider the possibility, that after his or her entry, the exchange rate

could rally further. If the pair trades above the stop point, it is advised not to

hold on to it, as it could only be breaking out to the upside. And so, the stop

should be placed in a location where the trader will be taken out of the trade if

a new high is reached.

Knowing When to Stay Out

If the currency pair is rising up from support, the trader should not enter a long
trade and try to gain from a possible bounce. In a multiple time frame strategy,

the main focus is to trade only in the direction of the trend and to disallow

trades that go against the trend.

It does not mean that the trades going against the trend are never profitable

because anything can occur in an individual trade. A trader who fights against

the trend on a steady basis will only have difficulty in finding success, as

opposed to some who follows the trend.

When a trader properly uses the multiple time frame strategy, he or she has

the capacity to see the exchange rate rising. This kind of trader would not also

be tempted to go long and battle against the odds. The correct attitude for

trading should be to allow the exchange rate to rise and hope that it creates

another opportunity for short entry.

Normal Trading Strategies

How To Use Normal (Non-trending) Trading Strategies

In the foreign exchange market, it is no doubt that fortunes can be made from

trends. However, it is not always the case when the market cooperates. The
trader must be able to develop solid techniques for times when the market is

not trending. Doing so can be done around specific tendencies that are most

common to the currency market.

The Key Indicator

In Forex trading, there are several indicators that people use, including the RSI

or relative strength index, the exponential moving averages of EMAs, and the

Bollinger bands. However, there is another indicator that stands above the

rest, which is the price. It has always been the ultimate indicator, compared to

other mentioned indicators who are merely equations of formulas that are

applied to the price.

A good example is the moving average because it encompasses the average

price of the trading vehicle over a selected period of time. The RSI or stochastic

oscillators are used to measure the difference between the current price and

the recent prices in order to determine if the pair is overbought or oversold.

Technically, the Forex market does not have a price per se and instead, there
is an exchange rate. The rate allows the traders to compare two currencies in

one equation. Thus, the price is only another term for exchange rate in

currency trading.

There are two elements correlated with the price: the support and the

resistance. The support happens when the buyer continuously steps in at a

particular price. On the other hand, when the seller repeatedly steps in at a

specific price, this is known as the resistance. The support and resistance can

be metaphorically referred to as the floor and the ceiling, respectively. If the

price can bounce from the support, it can also fall from the resistance.

The Intraday Breakouts

When the trader is participating in any kind of trading, like the intraday

breakouts, it is important for him or her to remember to use every type of

advantage possible. Traders normally search for situations wherein the odds

are in their favor, and then take the necessary course of action.

There are several instances of false breakouts in all types of trading,

regardless of the trading vehicle. The false breakout only occurs when the

price appears to break below support or above resistance, only to rise back

above support or fall back below resistance.

There are negative effects of false breakouts and in order to reduce them, and

improve the chances of success, it is important to apply intraday breakouts.

The Triangles

Triangles, in trading, can either be ascending or descending. They can create

great intraday breakout opportunities, due to their pattern, which creates a

directional partiality for the currency pair. Firstly, the ascending triangle is

formed by the combination of diagonal support and horizontal resistance. On

the other hand, the descending triangle is formed through the combination of

the diagonal resistance and the horizontal support.

The Trend Filter

Traders can increase their edge and take it to the next level. More so, traders
can also gain a further edge by checking the direction of the currency pair

preceding the information of the triangle pattern, when trading ascending or

descending triangles. This is for the reason that it is not abnormal for a

currency pair to trend in one direction, then consolidates and then resume

trending in the same direction. The pair trending in the same direction prior to

the formation of the triangle pattern can only cause the trade to become all the

more compelling.

In trading, when you notice that the pair has been trending steadily heavier, it

is important to use the power of this trend to your own advantage. You must do

this in order to reduce false breakouts from happening and enhance your

chances of success. Through filtering the breakout trades, you are again

integrating the trend into your techniques.

Remember that the general rule for the trade is always to trade with the trend

and never fight it. Traders who fight against the trends often get disappointed

with their actions.

The Time-Of-Day Filter

The time of day is anther edge that traders can utilize when trading intraday

breakouts. In trading, there is a saying stating that a breakout is believed to be

significant if it happens on high volume, and is considered less dependable if it

happens on low volume.

Within a high-volume environment, the move is deemed real since the players

are placing significant amounts of capital work. On the other hand, order that

normally would not have a significant impact on the exchange rates but have

the ability to move markets are included within a low-volume environment.

If the trader applies buying or selling pressure at the right moment, the

institutional traders can cause pools of orders to be implemented, thus

generating commissions. However, this is easier to accomplish when the

volume is light and the move tends to be succinct.

While traders do not have the capacity to easily access precise volume figures,

the trading is not equally liquid at all time of the day. Additionally, there are

certainly times of the day when large volumes are generated.

 Flags and Filtering

Talk About Flags And Filtering Entries

In Forex markets, there is a situation when the traders often witness the price

fall rapidly, then consolidate, and then continue its fall. In between these two

falls is a period of rest, also known as consolidation. A currency pair

consolidates its gains or losses before moving on. A rest period indicating that

the exchange rate will continue to move in its previous direction is referred to

as the continuation pattern.

The Flags

Flags, as well as pennants, are short-term continuation patterns. After the

formation of the flags, the exchange rate has the tendency to resume its

movements in the same direction as it was preceding the consolidation. Flags

are usually found on intraday and short-term charts.

In the case of the flags, the preliminary move is a sharp, sudden directional

thrust. Even if the move is an advance or decline, it does not matter. What
matters is the velocity of the move. The sharp burst generates a long candle or

even a series of long candles on a short-term chart; this is also known as the

flagpole.

Flag formations are also in continuation patterns, which mean that the most

likely decision of the consolidation will be a breakout in the similar direction as

the flagpole. Generally, flags contain two parallel lines sloping away from the

direction of the flagpole.

The Filtering Entries

There are impatient traders who opt to enter when the price clears the upper

line of the flag, instead of waiting for the price to reach the right entry point.

This is absolutely a mistake. Normally, if the exchange rate escapes from the

formation of the flag but fails to clear the top of the flagpole, there is no reason

to assume that the trade should be triumphant. However, by waiting for the

exchange rate to clear the top of the pattern by an amount equal to 10 percent

of the flag, traders can filter out a poorer entry that would have been

disastrous.
The Volatility Cycle

It is not unusual for volatility to run in cycles. Usually, periods of high volatility

are followed by periods of low volatility. An explanation for this event is best

described in a situation when the market is trending. Forex market often

trends and the participants have a definite opinion regarding the direction of

the trade.

The cycle can be observed in any trading market though it is most closely

distinguished with options trading. Traders in this kind of market write put and

call contracts during times of high volatility in order collect the cost of the

contract, or the premium. Premiums that are attached to the contracts have

the tendency to be fatter when the markets are volatile.

The option writer then assumes that the volatility will go back to normal levels

in the future. This would allow him to buy back the contracts at a reduced

premium. This concept is also known as selling volatility. This kind of cycle in

volatility can also be observed in the foreign exchange market.

Moving the Market through Perception

Traders show a strong preference for one currency over another, when a

currency pair begins to trend. When strong trends happen, the market is

volatile due to the price movement. The perception of value has altered and

the price must move to reflect this change of opinion.

When the time comes that the trend has continued for a while, the pair will

achieve a certain point where the participants feel that the exchange rate is

valued fairly. More so, there will come a point when the bears and the bulls

reach an agreement, temporarily, that a currency pair is reasonably priced.

This period of rest or consolidation will eventually come to an end. The bulls

and the bears may have attained a temporary agreement, but eventually new

information will be introduced into the market. Hence, the perception of the

value of the currency pair will modify as this news is absorbed.

Normally, the catalysts for this alteration of opinion are the economic

indicators. Exchange rate breaking out of its narrow period of consolidation

and run until the price achieves a new area, where the bulls and bears are once

again able to reach a temporary break can be caused by unexpected news

events.

Rounding Off

About Rounding Off

We perform rounding off numbers in our daily activities, be it going to the

market, considering the temperature, or buying a piece of property. All of us

are drawn to round numbers or those that end in zero. In trading, round

numbers have a major role to play.

The Reason Behind the Interest in Round Numbers

The Dow Jones Industrial Average approached the 10,000 mark for the first

time in March of the year 1999. The event included index testing investors for

approximately two weeks before finally closing above 10,000. This event was

greeted with elaboration because it was a significant milestone.

Seven years later, the extensively tracked index was trading at an estimated

11,000. The investors who frenzied during the peak of the Dow 10,000,

however, had little to show for it.

Back then, the success of Dow was highly publicized and filled the front pages

of newspapers and magazines. Channels for financial news ran four-hour

television specials advertising the event. At the time, the whole market was

absorbed on the figure.

There are some scientists who believe that human beings generated a numeric

system called “base-10” because we are born with 10 toes and 10 fingers.

More so, we began to believe in terms of factors of 10.

The Effectiveness of Round Numbers

Traders and investors have a strong tendency to put orders that coincide with

round numbers. For example, an analyst may have said that he would buy a

specific stock if it falls to a specific amount, for instance $40. If several traders

placed buy orders for that stock at $40 per share, since they believe that the
stock is a bargain at that price, the stock will encounter a large pool of buy

orders. When these orders are activated, they can unleash an incredible

amount of buying power. When buyers are more aggressive or outnumber

sellers, the price will surely rise.

Basically, the buyers have generated a support level at $40, since several

orders have accumulated at that level. Traders call this as the psychological

support, since it is not entirely based on any prior price action.

This phenomenon is real and normally happens in all forms of trading,

especially in the Forex market. The reason why commodities, currencies and

stocks are all subject to round number phenomenon is because it is a part of

the human nature to be attracted to round numbers. Therefore, the event can

occur in any market traded by humans.

Round Numbers in Forex

There is a profound influence of round numbers in the Forex market. For

instance, back in the early part of 2005, the USD/CAD currency pair found
support repeatedly at 1.2000. Another is in early 2006, when the EUR/USD

buyers stepped in repeatedly within the vicinity of 1.2700. Traders who use

such round numbers as entry points were rewarded handsomely.

A pool of large orders can generate an attractive target since banks can earn

commissions when their customers orders are implemented. More so, since

the orders tend to congregate at round numbers, the trader can take this

tendency into consideration when creating his or her strategy.

The First Bounce is The Best

For a day trading strategy, time frames will be strangely short. This is because

the first bounce off of round number support or resistance is normally the best

bounce, and so traders desire to be certain that they are seeing the first

bounce. On the other hand, longer time frames cannot also be used for this

kind of strategy since they can hide multiple bounces within a single candle.

Every moment the exchange rate achieves the round number, orders are

normally executed, and the pool of orders that produces the level of support
and resistance is diminished. Once the total of orders remaining is no longer

enough to repel the exchange rate, it is not odd for the level of support and

resistance to break, sooner or later.

This is why it is very essential for the traders to trade the first bounce off of the

round number, since it is at this point that the pool of orders is most valuable.

The traders can also trade subsequent bounces as well, though the first bounce

always has the greatest potential.

Interest Rate

Interest Rate

Getting something extra without the added cost can be a nice change

sometimes. The ultimate traders dream is to enter a trade and turn a profit

even though the currency pair does not budge. There are others who desire to

make money off their trades, even though the market is seemingly

uncooperative. This would surely make trading a lot easier. Although it may

seem farfetched to those who are unfamiliar with the methods of Forex

market, that is exactly how the hedge funds, banks and other institutional

traders play the Forex game.

The Interest Rate Differentials

The heart of this technique lies on the interest rate arbitrage and in the reality

that every currency has a matching rate of interest. The rate is determined by

the nations central bank or the nations that use the currency. For instance, the

Federal Reserve sets the U.S. interest rates, while the interest rate for France,

Germany and other nations of the European Monetary Union are determined

by the European Central Bank.

In the Forex market, currencies trade in pairs and each currency has an

equivalent interest rate. For these reasons, there are two different rates on

interest for every pair involved. Generally, a disparity exists between the

rates, and so in most cases, one currency yields higher than the other.

Large institutional traders seek to exploit this kind of edge. Additionally, the

trader can be long one currency and short one currency in every foreign

exchange market. The trader who is long, the higher yielding of the pair

collects interest on the trade.

In contrast, the trader who is short, the higher yielding of the pair is required

to pay the interest. The amount of the interest that the trader either pays or

collects is based on the interest rate differential. This factor is described as the

difference in the interest rates between the two currencies.

How Does the Interest Rate Differential Works

Suppose that a certain trade is placed in the imaginary currency pair, say

ABC/XYZ. The rate of interest for the ABC currency is 4.0 percent, while 1.0

percent for the XYZ currency.

Hence, the ABC yields higher than the other. Traders who are long ABC and

short XYZ will collect 3.0 percent in interest, which is the differential between

ABC and XYZ. Note that the trader must be long the higher-yielding currency in

order to collect the interest.

However, traders who are long XYZ and short ABC must therefore pay the

same 3.0 percent in interest rate differential. Arbitrage traders who are long

the higher-yielding currency seek to collect interest every day, given that they
hold the currency pair.

For starters, this might seem at bit simple. However, there is more to this

strategy than merely matching up a currency that is yielding high against a

currency that is yielding low. Traders utilize this strategy when they are able to

identify a situation where the interest rate differential is likely to expand over

time.

Such event would result in an even greater payoff for the trader who is long the

higher-yielding currency. Normally, traders would leave the strategy when it

becomes evident that the interest rate differential will stop growing or become

smaller in the future.

Changing the Differentials

By using the previous example provided, assume that the traders are trading

currency pair ABC/XYZ, and they are collecting interest since they are long

currency ABC and short currency XYZ.

If there is a strong economy for ABC, the central bank handling the currency is

likely to raise the interest rates to control inflation and contain growth. When

the bank takes a course of action, the interest rate of ABC rises from 4.0

percent to 4.25 percent, thus causing the differential from 3.0 percent to 3.25

percent.

Similarly, if there is an apparent weakness in the economy of XYZ, its central

bank is likely to lower the interest rates in order to encourage demand and

promote growth. The interest rate for the currency will be lowered from 1.0

percent to 0.75 percent, thus the differential would have grown to 3.5 percent.

The traders, who are encouraged by the growing interest rate differential, go

long ABC and sell short XYZ to collect the extra interest. If there are enough

traders tempted to go long ABC and sell short XYZ, this event will create a

positive pressure on ABC and negative on XYZ. Thus, the currency pair will

begin to rise.

Collecting the Interest

There is an advantage to this technique, which is the ability to turn a profit in

spite of whether the trade moves in the preferred direction. For instance, if the

trade maintains its flatness for several months, the trader can still come out

ahead given that he or she collects interest. Moreover, this will provide the

trader an exceptional edge.

When comparing this kind of situation to the trader who is on the other side of

the trade, he or she must pay the interest day by day, even if the trade moves

in the preferred direction or not. The trader who is short the higher-yielding

currency is required to regain the interest lost to break even.

The Boomerang Effect

What is the Boomerang Effect?

The Forex market also has the tendency to be very quiet at certain times of the

trading day. There is an evident stretch of a number of hours, starting after the

United States Forex session ends and prior to the beginning of the Asian

session, which also tends to be very low in volume. Although the New Zealand

and Australian Forex markets are full of life during this time of day, the entire

volume is relatively slim.

The reason behind this is the inactivity of the three biggest Forex traders,

namely Great Britain, United States and Japan, during this time of day. Under

these situations, the currency pairs have the tendency to drift, and any

movement in the market becomes highly suspicious.

Fading of the False Breakouts

During these hours, breakouts that happen are infamously unreliable since

they almost always occur on very low volume. More so, a trending technique is

also inappropriate due to the lack of direction from the market. Since any

movements that occur at this time of day are undependable and likely to

retrace, the traders can create a strategy that is designed to capitalize on false

breakout events through fading or trading against them.

This specific time of day is also considered as the beginning of the Forex

trading day. Due to this fact, it is also the same time that a number of market

makers choose to charge or credit interest. Nevertheless, unlike a strategy

involving an interest rate arbitrage, this kind of short-term trade is not

designed to collect interest.

The traders can integrate a defense against interest rate charges by choose to

enter order just after 17:00 Eastern time. This would normally link to 22:00

GMT during standard hours or 21:00 GMT during Daylight Saving Time. Either

way, the time of day for this kind of trade will constantly be just after 17:00

Eastern U.S. time.

The Strategy Used

This kind of strategy is exclusively designed for the EUR/USD currency pair.

The agenda is to enter or sell order above the market to fade a move higher

and enter a buy order underneath the market to trade against a move lower, at

the same time. In both of these cases, the traders assume that any movement

in whichever direction is false and the exchange is likely to retrace.

Such a directional move can be caused by a large order, which would not have

the ability to move the market under normal situations. More so, since the

volume is extremely low during this time of day, the orders have the ability to

generate market movement under thin trading circumstances.

How to Set the Parameters

The buy order will be situated 15 pips below the opening price, while the sell

order at 15 pips above. The traders stop will also be located 15 pips away, thus

creating a ratio of 1:1 for the trade.

Fixed-pip parameters can be set, since this kind of trade is only for the

EUR/USD currency pair. However, if the trader attempts to use this technique

on another currency pair, the parameters should be altered and adjusted to

account for the difference in volatility. Additionally, the trader is also required

to consider the kind of spread for most currencies, which is wider than the

EUR/USD pair.

This kind of strategy is designed for quick profits, hence perfect for the

EUR/USD pair. This currency pair tends to consist of a narrow spread, making

it ideal for short-term trading.

Entering the Trade

Entering a trade can be done by considering an example when the opening

price on a five-minute EUR/USD chart is 1.2593, at 17:00 Eastern U.S. time.

The traders must place order 15 pips above the opening price at about 1.2598.

Additionally, he must place a buy order 15 pips below the open at about

1.2568.

If the trader does not execute the trade within two hours, he or she must

cancel both the orders. During that point, there is no valid reason for placing

the trade since the Asian markets are starting to wake up and the volume and

volatility are about to increase. Moves are more likely to be authentic, when

real volume enters the market. In this instance, the strategy that fades

breakouts would be inappropriate.

Scoring Big Gains

How to Score Big Gains

A trading neophyte does not have the experience which allows him or her to

anticipate and avoid trouble. This kind of trader is more likely the prime

candidate to do damage to his or her own account. It is very important for the

goals to be in tune with where the trader stands as a trader. The first-time

trader must not have an aspiration of doubling his or her account overnight.
Although big gains are possible, it is important not to expect everything to fall

into place overnight. Always start with an easily achievable goal and once the

first obstacle has been conquered, move on to the next one, and then the next.

Setting the Goal Properly

It is not unusual for traders to get excited when they first get involved with

trading. Since the rewards of trading are fantastic, it is easy to get excited and

lose concentration and objectivity concerning trading. Basically, excitement

clouds the better judgment and most often leads to unrealistic expectations. In

trading, participants are required to keep themselves free of emotion in order

to achieve clear and rational decisions.

There are traders who are exceedingly trying to change their lives overnight

and often do what is not advised. Traders enter the market with high

expectations and are quickly annihilated. Always note that more traders fail

than succeed, and the rate of failure is high among new traders. Thus when

entering the currency market or any trading vehicle, it is important to have a

commonsense method for setting goals.

Basically, traders must rid themselves with unrealistic expectations. Even

though you have read these expectations in books, watched them on the

television or heard them from a friend, it does not necessarily mean that you

can do it too. In time, the trader will realize that a good trader rarely talks

about his or her gain.

Breaking down the Goals

An excellent way to attain great results is to take an ambitious goal and break

it down into small, more achievable pieces.

When traders are asked if an annual gain of 100 percent is an aggressive goal,

they would surely say yes. However, when asked if a consistent 6 percent

monthly return an aggressive target, a no would be a sure reply. What they do

not know is that if the trader has the capacity to increase the value of the

account by just 6 percent each month on a constant basis, he or she can

achieve an annual gain of approximately 100 percent.

The calculation works by starting with a base number of 100 for the account,

then multiplying it by 1.06, which is the 6 percent gain. This would end in the

first months result of 106. Next multiply the result by 1.06 and keep doing so

until the calculation is enough for the entire years worth of results or for twelve

months.

Consistency

Consistency is the key. It is not hard to attain a six percent return in any given

month though it is considerably harder to achieve a minimum of 6 percent

return every month. It is advised to begin with a relatively easy target, and

gradually work your way to the next level.

Instead of starting out with a goal of 6 percent per month, try starting with a

monthly goal of just 1 to 2 percent. Such goal is unlikely to place pressure on

the trader, which is essentially good, since trading is stressful enough without

any extra pressure.

By achieving a goal of just 1 percent each month, you would be well ahead of
most traders. Although a monthly goal of 2 percent may not be inspiring, if

done consistently, can help you achieve an annual gain, which is just shy of 27

percent. Additionally, achieving that goal will only prove that you have

outperformed most hedge and mutual funds.

In case you have achieved your modest goal for three months in a row, you can

then raise the goal to the next level: from 1 percent to 2 percent, or from 2

percent to 3 percent and so on. Also, do not rush things and remember that

you can gain experience and confidence from this goal, which can even make

you a better trader in the future than you are now.

After the Goal is reached

Once the trader has achieved his or her goal, it does not necessarily mean that

it is the end of all trading; instead he or she must take precautions in order to

safeguard his or her gains.

However, in case you ask yourself why you encounter problems or do not meet

your objectives, it may be for the fact that the goals are too aggressive. Take
a shot at an easier target and if things get really hard, stop live trading and

switch to a demo account, until the time comes when you can regain your

footing.

A Level Playing Field

Creating a Level Playing Field

It is not a lie to say that trading can be difficult. However, in an effort to make

it easier, other traders often resort to taking quick exits sometimes by trying to

make 10 pips on each trade instead of earning 100 pips on one. This kind of

attitude may seem to be sensible. Moreover, the trader seeks to triumph by

playing it safe, which would look like a commendable trait in world of trading.

However, instead of making things easier, the trader is in fact making his life

more difficult.

Evening out the Odds

The world of Forex trading is much like the European roulette. The zero

pockets represent the spread and the odds are forever going to be at least

somewhat supportive of the house, which in Forex is the market maker.

Similar to when each additional zero packets lower the players chances of

success, every additional pip in the spread can also lessen the chances of

success of the trader.

The house always determines the spread and the traders have no control over

it; it is only determined by the market maker alone. However, in the world of

foreign exchange trading, the traders can increase the size of the playing field,

thereby improving their chances of success in trading. This can be done by

using exits and stops, longer time frames, and trying for larger gains.

Do the Math

Assume that a trader is trading a currency pair that has a 3-pip spread, which

is also a very common size of the spread in the Forex market. If the trader just

wants to gain 10 pips, it is understood that he or she can lose the spread upon

entering the trade. And so, in order to turn a profit of 10 pips, the trader

actually requires the exchange rate to move 13 pips in his or her favor, thus 10

plus 3 equals 13.

Knowing what is required to create a winning trade can help traders know what

would have to happen to create an equivalent loss. This is also the method on

how traders can determine the odds of success or failure.

To create a loss of 10 pips, the trader would only require an adverse move of

7 pips. This is for the reason that a loss of 3 pips is acquired automatically upon

entering the trade, again due to the 3-pip spread.

It was also determined that the trader needs a positive move of 13 pips in

order to gain 10 pips, but a move of just 7 pips can result in an equivalent of 10

pips. The so-called raw odds of the 10-pip win versus the 10-pip loss for such

a trade can be expressed by: 13/7=1.857:1.

As such, the odds of the success in this example are 1.857:1. This only shows

that trying to make money trading for small gains is difficult, not to mention

that the playing field is too small. However, traders can improve the odds of

any trade by utilizing good strategies and solid risk management.

Changing the Equation

The traders can rearrange the odds, in order to attain a better chance to win at

currency trading, by making the playing field larger. If the traders are aiming

for larger gains, the spread becomes less essential part of the trade.

Once again, suppose a spread of 3 pips, only this time the trader will be hoping

to gain 100 pips as a replacement for just 10 pips. To turn a profit of 100 pips,

the trader actually needs the exchange rate to move 103 pips in his or her

favor, thus 100+3=103.

More so, to generate a loss of 100 pips, the trader would need an adverse

move of only 97 pips since a loss of 3 pips is incurred instantly upon trade

entry. The raw odds for this situation, which is a 100-pip win against a 100-pip

loss, can be expressed by: 103/97=1.06:1.

Noticeably, the odds are better because they are close to 50-50. However, if

the trader is using good trading techniques and risk management, he or she

can overcome these slightly negative odds.

The point of changing the equation is to understand that when the playing field

is larger, the odds of success also improve significantly. More so, traders who

are trying to achieve greater gains have the tendency to hold their trades

longer and consequently enter trades less frequently.

Reason Why Not Everybody Does It

Though the prospect of trading for larger gains is favorable, not everybody

does it. There are a couple of possible answers: first, these traders do not

understand that they are stacking the odds against themselves; and second,

they have damaging predetermined notions about the nature of trading itself.

The problem that most traders encounter is that trading is not always what

they believe it to be. Each trader has his or her own concept of trading, or even

what he or she likes trading to be. Although it is ideal for trading to provide

people with riches through minimal effort, trading strategies are not suited for

the ideal - they should be applied in the real trading world.

Summing it Up

Summing it Up
Being fixed on the percentage of winning trades versus losing ones is similar to

a disease and it cannot be easily cured. In trading, not all battles are won and

instead you should be willing to lose a few battles along the way. More

accurately, as a trader, you should be willing to deal with small losses in order

to avoid the creation of a large loss. A number of trading fiascos begin in the

unwillingness of the trader to accept a loss.

The Amateurs and the Professionals

In the judging of your performance record as a trader, an institutional

investment company will first agree on whether your results are due to your

outstanding decision making or from excessive risks. Take this for example;

there are two traders both with starting equity of $50,000. The first trader was

able to double the initial investment, thus resulting in a 100 percent gain,

although he suffered a drawdown of 50 percent along the way. On the other

hand, the second trader rose only to $60,000, which is only a gain about 20

percent, but his worst drawdown was only at 2 percent of the accounts value.

Although the first trader had the larger return, he is an accident waiting to
happen. Any trader who is willing to lose 50 percent is also an excellent

candidate to lose the account. Probably, the first trader was trying to hold on to

his losing trades, or even adds to them, which is normally a signal of failure in

trading the currency market.

The trader who can be considered superior is the second trader, since he was

able to attain considerable gains with minimal drawdown. Generally, the

institution would want to know just how much money can the second trader

could comfortably trade.

The Good Trade and the Winning Trade

In trading, it is important to always remember that the ends do not justify the

means. This only means that the outcome of the trade does not automatically

justify the method used to achieve that outcome. There are traders who take

the attitude that for as long as the trade wins, there is a good reason no matter

what rules were broken during the process.

The truth is, winning trades are not always good trades and vice versa. It is still
possible to perform everything incorrect and still achieve a triumphant result

on a specific trade, just as it is possible to do everything right and still lose the

trade.

Remember that, as a trader, it is important to strive to be a good trader

instead of a lucky one, since anyone can be lucky. More so, do not judge the

trading on any particular result, but rather on whether the process followed

proper protocols. If done correctly but still not trading successfully, at least

you will be able to resolve that the problem lies not with the execution but with

the plan.

Importance of Proper Execution

Take note that any good plan is useless without being executed properly.

Unfortunately, this is one area where most traders go wrong. Since they desire

to succeed, they make a plan and then randomly change it probably due to lack

of discipline. When failure occurs, the blame goes on the plan. In fact, the error

is not with the plan but with the execution.

When a trader moves from one technique to the next, most of the time, they

have no way of knowing if their plan actually works. When you successfully

followed a plan properly, it is important to do everything that can be done to

reinforce that behavior, despite the consequences of the outcome.

Also, never congratulate yourself for a successful trade outcome that came

from an ignored plan or unplanned at all. Instead, consider yourself lucky and

realize that it might be impossible for you to succeed in this manner again, in

the long run.

Taking Responsibility for the Actions

Several traders like to place blame. They would have people think that their

unfortunate trading records are due to exploitation on the part of the market

makers, institutions, or other outside influence.

Although dodging blame may be effective in dealing with other aspects of life,

like work, it is not conducive in performing good trading. Deflecting blame only

causes traders to remain the same and leave no space for change.
Additionally, by accepting that the fault lies with someone else, there is no

need for learning and growth.

Always remember to accept responsibility for every trade that you place. If you

are very open in taking credit for the winning trades, then you should also be

able to accept blame for any losing trades as well. Those individuals who

always fail to take responsibility for their own actions, or trades, have the

tendency not to succeed in the Forex market, or any trading environment for

that matter.

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