Wednesday, November 18, 2009

Why Forex Trading




If you want to know why the Forex trading market is superiors to other investor options such as Equities or the futures market, then you can rest assure that you'll find the answer in this page.
The best way to clarify the advantages of the Forex market is through a real example. In 1929, the stock market collapsed, causing many people and businesses from around the world to go broke. This also happened when the high tech bubble burst. The fear of a market crash is a concern that constantly dwells in the minds of investors, both professional and beginner ones.
In the online Forex trading market, There is no way for the market to crash. If you have read about what is the Forex trading market, then you know that when you buy a certain currency, you are at the same time selling another currency. When some currencies' price false, others' price rise.
So this is the most important advantage of Forex day trading. Unlike other markets, where in some cases all traders lose money, with Forex trading there are always traders that make a profit, at any given time.

How do Forexx quotes work?


Reading a FOREX quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

When to Trade?


The question quite often comes up about when are the best times to trade? Everyone has their own ideas on what they think is the best time to trade, and quite often it depends on what type of system you are using. If you run a system that looks for trends, the best time for you would be different for a system looking for breakouts.

Rather than get into all that however (again just google "best forex trading times" for plenty of info on that) let's look at the best times to trade based on your experience instead.

A beginner, I would think, would be someone new to the forex markets, someone who has yet to fully develop their trading system, or, if they have, find it hard to maintain the discipline to stick to it no matter what. Some things that might identify a beginner trade could be:
Unaware of stop losses
Unsure of trend identification
Looking at one timeframe only (probably the 5M or 15M)
Quick to jump into a trade, slow to get out
Hazy on when to exit a profitable trade
Please don't think I am talking down to anyone, as some of the above applies to us all at times but these are things that I see encapsulate beginnner traders.

With those points in mind, the safest trading time would be one where:
The chances of big losses are low
You have time to think you trades through
There are some defineable trends to help you out in getting on the right side of the trade
Sharp, quick movements in the opposite direction to your trade aren't common
The markets can move so quickly, and any trade placed without a stop loss, is open to a sharp reversal and a big loss. Head out for a cup of tea, come back and your +10 could now be -50 by the time the kettle has boiled.

So when is the best time to trade based on the above? Well lets look it another way, what are the times where the above points are not met. My opinion? The opening of the different markets! There are three major markets to look out for, the Asian market, the European market and the US market. The opening and closing of these markets are often the most volatile, with sharp movements up and down with no apparent order quite often seen and many a beginner trader crying foul over a sharp reversal on their trade they have just been watching for the last hour.

Look at the above chart, this is a 15M chart from late last week of the EUR/USD. I have highlighted two areas, which is the opening of the European and US markets. Notice, how just before the opening of the price was slowly trending in one direction, but then, as the respective markets opened a sharp reversal sprung up in the opposite direction, taking with it many peoples profits I am sure, and spoiling many a traders tea. You find this espectially on the opening of Europe.

The best times for quiet, trending activity tends to be in the middle third of the trading sessions, the middle of the Asian session is a less volatile time, but can be too quiet for some. Approaching the opening of the European sessions, activity tends to pick up, but remember, be careful come opening time. I prefer the mid European session, but rarely get to trade it due to the time differences here in Australia, the mid US session can also be good but usually I am so buggered by that time, my decision making is shocking.

So pick what you prefer, if you are in it for a fast buck and don't care about making it a possible career, then opening and closing times can be right up your ally, but if you want to test out a system you are developing, look at the mid session times that suit you. Remember though news releases and data can effect everything, so always keep an eye out on the news anytime you trade.

Remember, this is not necessarily the most profitable time to trade in terms of pip movement, but while you are picking things up, minimising the chance of your account being wiped out is always a good idea.

I hope this helps someone, you can get the current times in the different areas by using this great little forex clock here. For my fellow countryfolk in Australia, below are the opening and closing times in AEST (thanks to aaron on Marketiva for these):

[AUS open 8:00am close 4:00pm]
[JYP open 10:00am close 6:00pm]
[EUR open 4:00pm close 12:00am]
[GBP open 5:00pm close 1:00am]
[USD open 10:00pm close 6:00am]

Ill leave it with a quote I read somewhere:

"Ametuers open the markets, professionals close them"

When To Exit


Welcome to another article, this time on when to exit a trade. When beginner traders start looking for that magic "make me a bucket load of cash" trading system, quite often the last thing thought about is their exit strategy. Usually the first and most important thing on a traders mind is when to enter a market, forgetting that you actually make bugger all money if you can't execute and exit as precisely as you entered.

There are three main scenarios that a trader will find themselves thinking of their exit:
A trade has moved as expected and they are in profit
A trade has moved opposite to what they expected, and they are in loss
A trade is dancing around the neutral zone of their trade
At first glance, you would think the easiest scenario of the three to exit under is number 1, i.e. when you are in profit, after all you are "cashing in" so how hard can it be. In fact, in reality all three can be as hard as each other. The reason?, like most things with trading, it comes to emotion. Below I have added the underlying emotions that might stop you closing a trade under these three scenarios:
A trade has moved as expected and they are in profit (GREED)
A trade has moved opposite to what they expected, and they are in loss (OPTIMISM)
A trade and dancing around the neutral zone of the trade (FEAR)
Let's look at them one by one.

Cannot close a profitable trade (Greed)

Everyone fights greed every day in life, always "wanting" rather than sticking to what you actually "need". It is part of a materialistic modern day culture that most of us are subject to. Trading is no different, and it is usually greed that can turn a nice logical, well planned and profitable trade into a losing one. When this happens, a trader reacts two ways, one, they are distraught at themselves for letting it all get away, or two, they tell themselves "well I was right with my prediction, the market just had it in for me".

Think of this, you set up a trade, monitor the setup closely, wait for the exact time to enter a trade, calculate your stop loss, your order is hit and you are in the trade. The price action moves beautifully, moving quickly towards your scantily thought about target (if you set one), and the sense of delight sends your brain into overdrive, working out the profits, imagining the ferrari soon to be in the drive-way, wondering if 2000 pips has ever been done in one day. This is when you know you are in some trouble, this is when greed has started to set in, you remove your profit target thinking "let's see how long this goes", you don't move your stop loss, cause you don't even contemplate that it might reverse, and you "go for the ride".

A common saying is "cut your losses, and let your profits run" (or something like that ;)), and it is a very good theory that should be followed. However, how do you ride your profits, without risking a reversal that you will undoubtedly put down to "a correction that will soon move back my way".

Personally I look at it this way:

Move your stop loss to break even or better as soon as is logically possible without risking being whipsawed out, that will ensure you will not lose money on the trade, ease the stress, and bring peace to the world (ok maybe not that). I take the view of never let a winning trade turn into a losing one so at least lock in 1 pip if it makes you feel better.
If the move was stronger that you anticipated, and you had a 20 pip profit target. Remove your profit target, and move your stop loss to the profit target as soon as possible. What you effectively have done is close your trade (because your stop loss is at your original target) and you are letting your profits run at the same time, two for the price of one, bargain!
Continue to follow the trade with your stop loss, and remember, 20 pips was your target, be satisfied with whatever you can get after that, but don't take any less. You can use one of the many trailing stop techniques to do this or look at the parabolic SAR indicator.
Cannot close a losing trade (Optimism)

I was tempted to use the word "Dillusion" for this one but felt perhaps that is a little harsh, you know the deal, you enter a trade, you set a 25 pip stop loss, the trade moves the wrong way and you are -20 on the trade, you look at the chart again frantically, and optimistically think "Oh of course ... I should have set the stop loss beyond that resistance level from the year 1967, what was I thinking" and you change your stop loss, making it -35. The price continues to move in the wrong direction, and you either cop a -35 pip loss instead of -20, or you remove your stop loss all together and spend the next week driving everyone nuts asking "will the EUR/USD go up?" to every trader in the chat room.

... Some may say, that they removed their stop loss and eventually, their -100 pips turned into +10, so there .. stick that up your jumper ...


What you do when you move a stop loss further away from entry, is completely change the ratio of the trade you entered. What was originally a 2:1 trade, i.e. your potential gain was twice as large as your potential loss, becomes a 1:1 trade, which is just asking for a margin call very quickly.

My advice on this? NEVER NEVER (I think that is pretty clear) move a stop loss further away from your entry, you can move it closer or break even if you wish, as this improves your risk/reward ratio, but never away. Some may say, that they removed their stop loss and eventually, their -100 pips turned into +10, so there .. stick that up your jumper ... the only problem is, that while they waited the week out waiting for the price to turn around (sometimes it never does .. look at the USD/JPY at the moment) they have tied up the entire margin, meaning they are locked out of many many more potentially profitable trades. So while you might end the week at +10, in the meantime other trades cut their losses at -20, entered 15 more trades in the week, and finished +100 for the week and at the same time learnt a hell of a lot more.

How to become a currency trader


If you are anything like me, you probably imagine that it is difficult to become a foreign currency trader. Perhaps there are rules, regulations and other hoops that have to be jumped through. Maybe you need large amounts of cash in order to get started.

No.


Becoming a Forex currency trader is incredibly simple!

Get A Demo Account
As I beginner I'd suggest you sign up with Oanda. Not only do they have a good reputation but they offer other advantages for a beginning trader as well:
  • You can sign up for a live account with very little initial capital.

  • You can execute trades of just about any arbitrary (small) size.
Of course, you can start with a free demo account before getting a live account. Just about everyone will recommend you do so, including me. However, at some point you need to trade with real money to learn about the psychological aspects of trading.

So, that's what I did. I started with $100 in my account and was off to the markets. Sweet, I'm a forex trader!

Learning To Trade Foreign Exchange
If you have a demo account, enter some trades. See what happens. Then, after the results come in, search for information about what happened. You'll find some helpful advice in blogs, such as mine, as well as various tutorial and forum sites. I would suggest that you buy a book or two on forex trading, technical analysis and perhaps something concerning the attributes of successful traders.

However, with a few dollars on the table, I realize that now the more difficult process starts. Now that I have a few dollars on the table I'm ready to start learning the lessons of the trade. Frankly, I won't be able to trade realistically if I am not actually risking my own money, so I have to do it this way. Of course, for most people, $100 is not a big enough sum of money to be a hardship if lost anyway.

So, I'm just blathering because the markets are currently closed for their regular weekend respite. I'm sitting in a precarious position because I have some open trades on my account and there is no telling what shape the market will be in when Sunday evening rolls around. I may be lucky and end up way ahead or I may be unlucky and lose my initial $100 payment. Another potential lesson is looming...

Oh, I should mention, these days Forex trading with a reputable company is quite safe. While there are large risks and large rewards, my risks are essentially limited to the capital that I have put into my account. With wise strategies I can limit risks further, but as a beginner it is comforting to know that I can't lose more than I let sit in my account no matter how foolish a beginner mistake I might make.

UPDATE:

I should stress that you could lose all the capital you put in your account, so do not start out with a large account with the idea that you will only conduct small trades. At the very least, create some sub-accounts and keep the majority of your capital out of harms way until you have blown up your play money account, learned a few lessons, and know how to protect your capital.

A Winning Forex Trading Philosophy


I'm starting to believe that being successful trading Forex has more to do with your philosophy than anything else.

You cannot trade based on how much money you want to make. You cannot trade based on how much money you need to make. This means that you can't push money into the market, desperately searching for opportunity, risking a large portion of your net asset value in the process.

You must trade lightly.

When you trade lightly, you simply let the market give you the returns that it is willing to relinquish to you. Quite simply, it is not a process of taking.

If you can change your mindset it will give you a lot of peace compared to the level of stress that many generate. Dip your toes into the market, following your strategy, with a level of investment that simply cannot begin to raise your blood pressure.

A little bit of market wisdom, developed with experience, combined with an appropriate philosophy will generate profits. I know that this is difficult to consider or even believe in today's rational calculating world, but the only way to win is to not fight the market. It is way too big for you.

Stop trying to generate winning positions and simply let the market give them to you.

Getting A forex Education


How many of us in the Forex market simply jumped in the market and started trading? I know that was my path. I tossed a few dollars in an account and figured losing it would be a paid lesson in how the markets work.

I can't say that this hasn't been a valuable path. I've learned some good lessons along the way:

  • it's important to let go of losses early so you have enough capital to sink your teeth into an opportunity that does work.
  • No indicator or strategy has all the answers -- stop looking for the holy grail of trading
  • The market can easily whipsaw you to tears if you aren't careful
  • If you place close stops they will often be taken out before the market goes your way
Really, the list of anecdotal learning is endless and difficult to put into words. However, I recognize that this isn't enough to make me a successful trader, though from time to time I'm starting to taste success. It's finally time for me to bite the bullet and learn more about trading.

No, don't worry, I'm not going to buy some stupid multi-thousand dollar Forex training course. That would be stupid. Forex trading is very related to trading in general and there is no shortage of information on either subject. To make a long story short I've purchased four books recently:
  • Currency Trading for Dummies
  • Swing Trading for Dummies
  • The 10 Essentials of Forex Trading
  • Technical Analysis for Dummies
All of these were available at a nearby bookstore -- so I didn't have to order something online and wait for delivery.

More importantly, let me list the credentials of the authors of the above books. Respectively, they are:
  • Mark Gallant: Chairman and founder, GAIN Capital Group. Brian Dolan: Chief currency strategist, FOREX.com
  • Omar Bassal, Head of Asset Management, NBK Capital
  • Jared Marinez, FXCHIEF and founder of The Market Traders Institute, Inc.
  • Barbara Rockefeller, International economist and trader
My advice? Never, ever, fail to look for the ideas of experts. Even if you don't agree with everything they say, which is appropriate, they should be able to increase your understanding and improve your own thinking.

I've had some days with a NAV appreciation of 10%, 20% or more. I'd like to have a lot more days like that... and I don't think that online sources created for the purpose of flogging affiliate commissions will do that for me.