Although the “big players” still account for the majority of the daily turnover in forex, independent traders have also found their place in the market. Independent traders have today the same access to currency quotes and news as the big banks and institutions.Some traders think they can’t compete with the “big players” in the forex market: the large banks, large commercial companies, governments, central banks, insurance funds etc. The truth is, you don’t have to compete with these giants. Instead of trying to be ahead of them, you can trade along with them. And, most of the time, the “big players” are hit by the same breaking news or volatile market movements just like an independent trader would be. Interest rate changes by central banks, inflation and employment reports, natural disasters, almost all news are immediately available to both the “big players” and independent traders. Instead of fearing these large investors, you should read their analysis and forecasts, and try to jump in the same trades as they do. That being said, their forecasts are also wrong from to time. The market is large enough not to be much influenced by any specific bank or company.Let’s take a closer look at the “big players” in Forex.The Super BanksThe big banks account for the majority of the transacted volume. The amounts they transact between each other are huge, often hundreds of millions of dollars. The biggest players include Deutsche Bank, UBS, Citi, HSBC, Goldman Sachs and others. Unlike other market participants, banks have the little advantage that they can track their clients’ orders and determine possible buying and selling pressures on specific currencies. But, due to the size of the FX market ($5 trillion a day), one single bank can’t move the market and influence the prices. They have the same goal of making profit, just like a retail investor.Large commercial companiesLarge companies also participate in the foreign-exchange market. From small businesses to large multinational corporations, many companies need to exchange currencies from time to time. Unlike the other participants in forex, the intention of companies is not directly to make a profit trading currencies. Rather, the nature of their core business makes them buy and sell currencies. For example, a cheese producer from France selling his products in the United Kingdom, will receive British pounds for the sales. He will exchange the pounds to euros in France, not with the intention to profit on the currency moves. Indeed, large companies want to offset the risk from currency fluctuations, making their profit in overseas markets more predictable. To do so, they will hedge their receivables or fix the exchange rate with currency forward agreements.Governments and Central BanksThe role of governments and their central banks is an important one in the forex market. Central banks don’t trade currencies to make profits, but to facilitate their government’s monetary policies. The role of central banks in developed countries is usually to maintain a stable exchange rate through eliminating excess supply and demand for their national currency, and to target specific inflation rates and low unemployment rates. To achieve their goals, central banks hold reserve currencies which they buy or sell on the market to stabilize the national currency’s exchange rate, or they can change the key interest rates and influence supply and demand for the local currency. Central banks usually hold dollars as the reserve currency, but recently other currencies like euros or Japanese yens are also becoming increasingly popular. Traders should closely monitor any activities of central banks as they can have a large and long-lasting impact on the value of currencies. Governments play an indirect role in the forex market, mainly by the sheer volume of money that they are able to invest through public spending and investing. Government debts also play an important role for the value of national currencies, with higher debts usually having a negative impact on the currency.Individual Retail TradersThe forex market, combined with some knowledge and experience, can be very profitable for the individual retail trader. Many retail traders don’t even have a finance background, and are self-taught in forex. Many people with a technical background, like engineers, find forex exciting as they can establish their own strict rules and analyze the market from a technical perspective. To start trading forex, you don’t even need to make large initial deposits. The availability of trading on margin makes it possible to start trading with as little as $50, but opening much larger positions.
Trading is a game of probability. This means that every trader will be wrong sometimes. When a trade does go wrong, there are only two options: to accept the loss and liquidate your position, or go down with the ship.This is why using stop orders is so important. Many traders take profits quickly but also hold on to losing trades - it's simply human nature. We take profits because it feels good and we try to hide from the discomfort of defeat. A properly placed stop order takes care of this problem by acting as insurance against losing too much. In order to work properly, a stop must answer one question: At what price is your opinion wrong? In this article, we'll explore several approaches to determining stop placement that will help you to swallow your pride and keep your portfolio afloat. (For more insight, read Limiting Losses and Trailing-Stop Techniques.)Hard StopOne of the simplest stops is the hard stop, in which you simply place a stop a certain number of pips from your entry price. However, in many cases, having a hard stop in a dynamic market doesn't make much sense. Why would you place the same 20-pip stop in both a quiet market and one showing volatile market conditions? Similarly, why would you risk the same 80 pips in both quiet and volatile market conditions?To illustrate this point, let's compare placing a stop to buying insurance. The insurance that you pay is a result of the risk that you incur - whether it pertains to a car, home, life, etc. As a result, an overweight 60-year-old smoker with high cholesterol pays more for life insurance than a 30-year-old non-smoker with normal cholesterol levels because his risks (age, weight, smoking, cholesterol) make death a more likely possibility. If volatility (risk) is low, you do not need to pay as much for insurance. The same is true for stops - the amount of insurance you will need from your stop will vary with the overall risk in the market.ATR % Stop MethodThe ATR% stop method can be used by any type of trader because the width of the stop is determined by the percentage of average true range (ATR). ATR is a measure of volatility over a specified period of time. The most common length is 14, which is also a common length for oscillators such as the relative strength index (RSI) and stochastics. A higher ATR indicates a more volatile market, while a lower ATR indicates a less volatile market. By using a certain percentage of ATR, you ensure that your stop is dynamic and changes appropriately with market conditions.For example, for the first four months of 2006, the GBP/USD average daily range was around 110 to 140 pips. A day trader may want to use a 10% ATR stop - meaning that the stop is placed 10% x ATR pips from the entry price.In this instance, the stop would be anywhere from 11 to 14 pips from your entry price. A swing trader might use 50% or 100% of ATR as a stop. In May and June of 2006, daily ATR was anywhere from 150 to 180 pips. As such, the day trader with the 10% stop would have stops from entry of 15 to 18 pips while the swing trader with 50% stops would have stops of 75 to 90 pips from entry. Figure 1 It only makes sense that a trader account for the volatility with wider stops. How many times have you been stopped out in a volatile market, only to see the market reverse? Getting stopped out is part of trading. It will happen, but there is nothing worse than getting stopped out by random noise, only to see the market move in the direction that you had originally predicted.Multiple Day High/LowThe multiple day high/low method is best suited for swing traders and position traders.It is simple and enforces patience but can also present the trader with too much risk. For a long position, a stop would be placed at a pre-determined day's low. A popular parameter is two days. In this instance, a stop would be placed at the two-day low (or just below it). If we assume that a trader was long during the uptrend shown in Figure 2, the individual would likely exit the position at the circled candle because this was the first bar to break below its two-day low. As this example suggests, this method works well for trend traders as a trailing stop. Figure 2 This method may cause a trader to incur too much risk when they make a trade after a day that exhibits a large range. This outcome is shown in Figure 3, below. Figure 3 A trader who enters a position near the top of the large candle may have chosen a bad entry but, more importantly, that trader may not want to use the two-day low as a stop-loss strategy because (as seen in Figure 3) the risk can be significant.The best risk management is a good entry. In any case, it is best to avoid the multiple day high/low stop when entering a position just after a day with a large range. Longer term traders may want to use weeks or even months as their parameters for stop placement. A two-month low stop is an enormous stop, but it makes sense for the position trader who makes just a few trades per year.Closes Above/Below Price LevelsAnother useful method is setting stops on closes above or below specific price levels.There is no actual stop placed in the trading software - the trade is manually closed out after it closes above/below the specific level. The price levels used for the stop are often round numbers that end in 00 or 50. As in the multiple day high/low method, this technique requires patience because the trade can only be closed at the end of the day.When you set your stops on closes above or below certain price levels, there is no chance of being whipsawed out of the market by stop hunters. (Want to do some stop hunting of your own? Check out Stop Hunting With The Big Players.) The drawback here is that you can't quantify the exact risk and there is the chance that the market will break out below/above your price level, leaving you with a big loss. To combat the chances of this happening, you probably do not want to use this kind of stop ahead of a big news announcement. You should also avoid this method when trading very volatile pairs such as GBP/JPY. For example, on December 14, 2005, GBP/JPY opened at 212.36 and then fell all the way to 206.91 before closing at 208.10. A trader with a stop on a close below 210.00 could have lost a good deal of money. This is shown in Figure 4, below. Figure 4 Indicator StopThe indicator stop is a logical trailing stop method and can be used on any time frame. The idea is to make the market show you a sign of weakness (or strength, if short) before you get out. The main benefit of this stop is patience. You will not get shaken out of a trade because you have a trigger that takes you out of the market. Much like the other techniques described above, the drawback is risk. There is always a chance that the market will plummet during the period that it is crossing below your stop trigger. Over the long term, however, this method of exit makes more sense than trying to pick a top to exit your long or a bottom to exit your short. How many times have you exited a trade because RSI crossed below 70 only to see the uptrend continue while RSI oscillated around 70? In this example, we used the RSI to illustrate this method, but many other indicators can be used. The best indicators to use for a stop trigger are indexed indicators such as RSI, stochastics, rate of change or the commodity channel index. Figure 5 shows a GBP/USD hourly chart. Figure 5 SummaryIn order to use stops to your advantage, you must know what kind of trader you are and be aware of your weaknesses and strengths. For example, maybe you have great entry methods but have a problem exiting the trade too early. If so, you may want to work with an indicator stop. Every trader is different and, as a result, stop placement is not a one-size-fits-all endeavor. The key is to find the technique that fits your trading style - once you do, exiting failing trades should be smooth sailing.
Determining how much of a currency, stock or commodity to accumulate on a trade is an often overlooked aspect of trading. Traders frequently take a random position size; they may take more if they feel "really sure" about a trade, or they may take less if they feel leery. These are not valid ways to determine position size. A trader should also not take a set position size for all circumstances. Many traders take the same position size regardless of how the trade sets up, and this style of trading will likely lead to underperformance over the long run.What Affects Position SizeLet us look at how position size should actually be determined. The first thing we need to know before we can actually determine our position size is the stop level for the trade. Stops should not be set at random levels. A stop needs to be placed at a logical level, where it will tell the trader they were wrong about the direction of the trade. We do not want to place a stop where it could easily be triggered by normal movements in the market. (Learn more in 4 Factors That Shape Market Trends.)Once we have a stop level, we now know the risk. For example, if we know our stop is 50 pips (or assume 50 cents in stock or commodity) from our entry price, we can now start to determine our position size. The next thing we need to look at is the size of our account. If we have a small account, we should risk a maximum of 1-3% of our account on a trade. The percentage of the account we are willing to risk is often misunderstood, so let's look at a scenario.Assume a trader has a $5000 trading account. If the trader risks 1% of their account on a trade, that means the trader can lose $50 on a trade, which means they can take one mini lot for the trade described. If the trader's stop level is hit then the trader will have lost 50 pips on one mini lot, or $50. If the trader uses a 3% risk level, then he or she can lose $150 (which is 3% of their account), which means with a 50-pip stop level he or she can take 3 mini lots. If the trader is stopped out, they will have lost 50 pips on 3 mini lots, or $150. (Learn more about implementing appropriate stops in our article, A Logical Method Of Stop Placement.)In the stock markets, risking 1% of your account on the trade would mean a trader could take 100 shares with a stop level of 50 cents. If the stop is hit, this would mean $50, or 1% of the total account, was lost on the trade. The risk for the trade has been contained to a small percentage of the account and the position size optimized for that risk.Alternative Position-Sizing TechniquesFor larger accounts, there are some alternatives which can also be used to determine position size. A person trading a $500,000 or $1,000,000 account may not always wish to risk $5,000 or more (1% of $500,000) on each and every trade. They have many positions in the market, they may not actually employ all of their capital, or there may be liquidity concerns with large positions. Therefore a fixed-dollar stop can also be used. Let us assume a trader with an account of this size only wants to risk $1,000 on a trade. They can still use the method mentioned above. $1,000 is their chosen maximum stop (this is even less than 1% of the account capital). If the distance to their stop from the entry price is 50 pips, they can take 20 mini lots, or 2 standard lots.In the stock market they could take 2,000 shares with their stop being 50 cents away from their entry price. If the stop is hit, the trader will only have lost the $1,000 they determined they were willing to risk before they placed the trade.Daily Stop LevelsAnother option for active or full-time day traders is to use a daily stop level. A daily stop allows traders who need to make split-second judgments flexibility in their position sizing decisions. A daily stop means the trader sets a maximum amount of money they can lose in a day (or week, or month). If they lose this predetermined amount of capital, or more, they will immediately exit all positions and cease trading for the rest of the day, week or month). A trader using this method must have a track record of positive performance.For experienced traders, a daily stop loss can be roughly equal to their average daily profitability. For instance, if on average a trader makes $1,000/day, then they should set a daily stop loss which is close to this number. This means that a losing day will not wipe out profits from more than one average trading day. This method can also be adapted to reflect several days, a week or a month of trading results.For traders who have a have a history of profitable trading, or who are extremely active in trading throughout the day, the daily stop level allows them freedom to make decisions about position size on the fly throughout the day, and yet control their overall risk. Most traders using a daily stop will still limit risk to a very small percentage of their account on each trade by monitoring positions sizes and the exposure to risk a position is creating. (Read Would You Profit As A Day Trader? for more info.)A novice trader with little trading history may also adapt a method of the daily stop loss in conjunction with using proper position sizing - determined by the risk of the trade and their overall account balance.ConclusionDetermining the proper position size before a trade can have a very positive impact on our trading results. Position size is adjusted to reflect the risk involved in the trade. In order to achieve the correct position size, we must first know our stop level and the percentage or dollar amount of our account we are willing to risk on the trade. Once we have determined these, we can calculate our ideal position size. (Ready to quit your day job and become a full-time trader? These tips will help you determine your area of expertise. Read Quit Your Job To Trade Stocks?)
The GDP release remains the broadest and most comprehensive indicator available to assess a country’s economic condition. The Gross Domestic Product represents the sum of the market value of all finished goods and services during a specific period of time (usually one year), produced inside a country, regardless of the ownership of the resources. For example, all cars produced by Ford in Germany, are included in the German GDP, while all cars produced by Mercedes-Benz in Mexico, are included in the Mexican GDP.The U.S. GDP is reported quarterly by the Bureau of Economic Analysis, and contains data on personal income and consumption expenditures, corporate profits, national income and inflation.The number that traders watch the most, is the annualized growth rate of the GDP, reported quarterly. A growth rate higher than the forecast, means the economy is performing well and has a positive impact on the currency. A growth rate that didn’t meet the expectations, has a negative impact on the currency.How to Trade the GDP ReportBeing a quarterly release, most of the movements in the GDP are already anticipated by the market. GDP, as the most comprehensive indicator, is usually forecasted by some other indicators and priced into the market. There are 3 versions of GDP released a month apart – Advance, Preliminary, and Final. The Advance release is the earliest and thus tends to have the most impact on the currency market.Final GDP releases usually don’t have a big impact on the market. The reasons for this are primary the frequency of the reports – GDP reports are released quarterly. Other indicator already give an insight into what the GDP growth might be. These are so called “leading” indicators, like stock indices, retail sales, housing starts and money supply. These indicators anticipate the future state of the economy, and the final GDP report is therefore already priced in the market before the release. That being said, the advance GDP report, which is released approximately 2 months before the final release, has the most impact on the currency market. Personal consumption expenditures are the largest component of GDP, accounting for roughly two-thirds of total economic output. The GDP consists mostly of personal consumption and retail salesAs the chart in FIGURE 2 shows, pronounced declines in the year-over-year growth in consumer expenditures have preceded each of the six recessions in the United States since 1963. Traditionally, the first retrenchment occurs in purchases of big-ticket items, such as durable goods. So it is in that portion of consumer spending where you’ll find early warnings of economic downturns, and adequately anticipate the impact on the foreign exchange market. The GDP reports are the benchmark of economic activity, and traders use other indicators to anticipate movements in GDP. In other words, the level of GDP is usually the variable that other indicators attempt to forecast or emulate. GDP is also released on a quarterly basis, and the economic associations and relationships it points to aren’t as predictive as those expressed on a monthly or weekly basis.
There are many different ways of looking at support and resistance, with few as compelling as the study of ‘psychological whole numbers.’ If you’ve been trading on charts for long enough, you’ve surely noticed the odd behavior that prices will have a tendency to exhibit when a ‘round’ number (prices such as .9900 or .9800 on AUDUSD) is seen. Below is a picture of the Aussie-Dollar’s recent struggle to get over the ‘parity’ level. As you may know, parity is the price of 1.0000 on AUDUSD; or to put it another way – this is when One Australian Dollar is worth One US Dollar. Things get weird at this exchange rate. As human beings, we have a tendency to value simplicity, and our own internal psychology plays a large role with the odd price behaviors that may be exhibited at these ‘psychological levels.’ Let’s walk through a simple example: If someone were to ask you how much you spent on your computer, you’d likely respond with an amount rounded to the nearest hundred (‘ah, about $800,’ or ‘I paid $900.’) Sure, you can give an exact answer like Six-hundred-and-thirty-nine dollars and ninety-six cents; but that doesn’t really make any sense. If I had asked the question, I probably don’t care about the $39.96; I just wanted a ballpark idea for how much you paid for the computer. Out of simplicity, most people (most of the time) will automatically round to the nearest whole number. This happens in trading too. Traders looking to sell the AUDUSD currency pair place a stop at an even 1.0000; not imagining that the price might come into play shortly thereafter. What are the whole numbers? Traders will often call these whole number intervals ‘double-zeros,’ as these prices are at even numbers such as 1.31000 on EURUSD, 1.57000 on GBPUSD or 132.00 on GBPJPY. The chart below will identify the ‘Double-Zero’s’ on the current EURUSD chart. Some traders will even take this a step further by looking at the number directly in the middle of these whole numbers or ‘the fifties.’ These levels, such as 1.31500 on EURUSD or 131.50 on GBPJPY can often come into play in the same manner as the ‘double-zeros.’ One look at any chart will notice that there will often be some element of congestion at these levels as prices move up or down. The chart below illustrates EURUSD with ‘double-zeros’ and ‘fifties’ denoted: Notice that many of the price swings on the above chart take place around one of these levels. This is why we want to incorporate these levels into our support and resistance studies. Now let’s look at the same chart, with some of these swings identified: This is why these prices can work so well as support and resistance. Because people (traders) watch, and care about these prices. Not every one of these prices are going to function as support or resistance, but enough do that these levels warrant the trader’s attention. Why do Psychological Levels Work? Psychological Support and Resistance often works because of the very fact that we looked at to start this article. As human beings, we value simplicity; we think in whole numbers – and often, when placing stops or limits, we use these prices. These stops and limits can massively alter order flow and price changes. Let’s use the EURUSD as a current example, as price recently made a large move down around the news and events of the European Debt Crisis. On the chart below, I’ve marked 3 strong inflections off of the 1.3000 neighborhood: Each time price approached 1.3000, the currency pair bounced back up. This can be explained for a few reasons. Perhaps traders saw the price of 1.3000 and thought ‘whoa, that is way too cheap. I’m going to buy some Euro’s.’ Or, more likely, as traders were opening short positions, they set profit targets at an even 1.3000, so that when that price was hit – they had a pending order to ‘buy to cover.’ This profit target order to close their position created demand in the market (they were buying to cover, and this buying interest is considered ‘demand’). After the first inflection, traders may not have been extremely bullish on the prospect of pushing price much lower than 1.3000. After all, this price has already been exhibited as support. In many ways, untested ‘psychological’ levels can be looked at like pivot points. An area where there may be some element of support or resistance, but unfortunately it is impossible to tell until after the fact. In general, round numbers such as 1.30000 on EURUSD or 1.0000 on AUDUSD or USDCAD will garner more attention than a more pedestrian level like 1.31000 on EURUSD; so many traders will often assign a higher degree of strength to the more rounded-intervals. Where traders can really find value with these levels is when prices may have resisted or been supported there in the past. This tells the trader that others are noticing and acting on those prices, and the potential for the ‘self-fulfilling prophecy’ of technical analysis may potentially be considered with more strength.
If there is one feeling that traders universally abhor, it would probably be the emotion derived from watching a losing trade turn deeper, and deeper against them.At this specific point in time – you are watching yourself getting poorer; the complete antithesis of why you trade.If the trade is left unchecked, things can get really ugly very fast. An overleveraged position can lead to an outsized loss; and as a position can move against you for an extended amount of time, these losses can irreparably damage futures. Prevention is the Best MedicineBy prevention, we don’t mean preventing taking trading losses altogether. That would be impossible. Rather, we refer to the fact that traders should do their best to prevent unmanageable trading situations and placing themselves in these precariously unfavorable scenarios.This is like a trader taking an overleveraged position, without a stop on the position – and after the trade moves against them they have to watch and decide how to react after they’ve already lost money; and are staring at the prospect of losing much more.We saw the effects of this phenomenon in the DailyFX Traits of Successful Traders series. The Number One Mistake that Forex Traders Make is the fact that they take such large losses and such small wins. The chart below will show the average gain v/s the average loss on some of the most popular currency pairs, as taken from The Number One Mistake that Forex Traders Make: So much so that these traders can even have a winning percentage of 60% and STILL be losing money as a whole.Many may think that this mistake is relegated to new traders. It is not. As a matter of fact, confidence can be a huge contributor to this conundrum.Confident traders, thinking they could successfully manage trades on the fly – might look to take a large position on what they feel to be an extraordinary opportunity.This trader has forgotten that nobody can tell the future, but this happens to all of us. We think we have an inside track and we want to take advantage of our opportunity.But before you know it, hope can turn to despair. And overconfident, experienced traders can suffer from lack of planning just as easily as a new trader.There is no reason to belabor the past if this has happened, or is happening to you. It’s happened to me, and it’s happened to most traders.The only way to fix it is to learn… and institute this in your trading plan.As David Rodriguez stated in The Number One Mistake that Forex Traders Make: 'Always trade with a stop.'Set your maximum loss on the outset of the trade, before you have any ‘skin in the game,’ so that you don’t have to ask yourself the dreaded questions of ‘when is enough,’ while you’ve already got a losing trade on your hands.AcceptanceSome traders might not consider losses on open positions as losses until the trade is already closed.Make no mistake about it – these are still losses. This money is no longer yours as the price that you previously paid is no longer trading in the current market.A floating loss is still a loss; it just hasn’t been realized yet.So if you do find yourself in a losing position with the question of ‘when should I stop the bleeding?’ you should first accept the fact that the loss on the position is an actual loss. It just hasn’t yet been realized as a loss, and you still have the chance to lose more.Set Your Line in the SandWhen looking at the equity on the account – taking into account floating gains and losses – you can then decide how much more you want to commit to this trading idea.In the DailyFX Trading Course, we advise keeping total risk to less than 5% of an accounts’ equity; so if a trader has equity of $10,000 in their account – they would attempt to keep losses below $500.Some traders will take this concept a step further, and allow themselves to diversify within this risk amount. So if a trader wants to be able to manage 4 trades at once, and keep total account risk to less than 5%, they can look to risk 1.25% of their account equity on 4 different trade ideas. Using the above trader with a $10,000 account, looking to keep total risk below $500 – they can place 4 different trades, risking $125 each. You can take your current account equity, and calculate the percentage of that equity that you want to further commit to this idea. Once you have that amount, you can place a stop on the trade so that if price moves that far against you – the bleeding will be stopped.
1. People are born traders. While it is true that certain personal characteristics make it easier to trade, no one is born a trader. One of the main themes of the Market Wizards books written by Jack Schwager is that almost none of the market wizards was successful from the start. They all worked hard at it.2. You have to have a high IQ to trade. Just not true. In some ways, an above average IQ may be a hindrance. Trading is a human performance activity where strong intellectual abilities are unnecessary.3. Top traders are successful because they have the "right trading personality." There is no such thing as the "right trading personality." Researches have been unable to find a strong correlation between personality type and trading success. It is important, however, to understand your personal characteristics and how they may help and hinder your trading.4. Trading is easy. It sure looks that way, doesn't it? Just draw a few lines on the chart, watch your indicators, and follow the price bars. The truth is that trading is a difficult business to master. It involves different skill sets and abilities from what are needed in most other professions and careers. The trader must understand his or her personal strengths and limitations and develop specific skills to deal with the mental and emotional demands of trading. The later skills are the most difficult to develop and the most overlooked.5. You must be tough, hard charging, and fearless to be successful. That's more media hype than anything else. It glorifies a strong ego, which is a detriment in trading. The most successful traders I know quietly do their research, study the charts, and patiently wait for the right moment. They strive to keep their ego out of their trading.6. You must trade without emotions. If you are human, that's impossible. More importantly, when you understand your emotions you will realize they are assets, not liabilities. The real keys are: 1) to be aware of how your emotions interact with and influence your trading, and 2) to develop the skills needed to trade with them.7. Top traders are usually right about the market. Top traders have many, many scratch and losing trades. Top traders are at the top because they exercise good risk control, limit the amount of loss from any given trade, and have developed a psychological edge that allows them to be unfazed by small loosing trades. Most of their trading consists of modest profits and very small losses. When conditions are right, they step up size and let the profitable trades run.8. Paper trading is useless-it's not a real trade without money behind it. If you aren't paper trading, you are doing yourself a disservice. You should always be paper trading your trading ideas. Why limit your education and experience by the amount of capital you have? Paper trading keeps you sharp; you learn the conditions under which your trading ideas work best. Where else can you get such vital education at so little cost?9. Master the technical skills and you will be successful. This is where most traders spend the vast majority of their time, but it's only part of the picture. You also have to learn important performance skills. Traders should spend as much-if not more-time learning to develop their psychological edge as they do in developing their technical trading edge.10. Trading is stressful. It certainly can be stressful, and it certainly is stressful for many. It doesn't have to be. Successful traders have a certain mind-set. They put little importance on any given trade. Their focus is on the long haul. They know that if they attend to the aspects of trading that are within their control (i.e., trade selection, entry, risk control, and trade management) the profits will take care of themselves.
Article Summary: Forex liquidity is confusing to the new trader. How can a market be seemingly volatile and liquid at the same time? This article will be a primer to understanding just that.As one gets started in forex trading, one of the first benefits they’re likely to hear is how much liquidity the FX Market offers over other markets. The latest figures are roughly $4 Trillion in daily volume as per the Bank of International Settlements. But what does that mean to you and your trading?Why Should You Care About Liquidity?Ask anyone during the 2008 credit crisis who was trying to sell their home what are the benefits of liquidity? Or maybe a stock trader who is on the wrong side of a trade when it’s been announced that the stock they’re shorting is rumored to be acquired by a much larger company at a premium in afterhours trading. These people were at a financial stronghold because they could not exit their trade when they wanted to and were subject to illiquid conditions in the market.Liquidity by definition is the ability of a valued item to be transferred into currency on demand. When you’re trading currencies or Foreign Exchange, you’re trading a market that is by itself, liquid. However, you are trading based on the available liquidity of financial institutions who get you in or out of the trade of your choosing.What are the Signs of Liquidity & Illiquidity?From a trader’s point of view, an illiquid market will have chaotic moves or gaps because the level of buying or selling volume at any one moment can vary greatly. A highly liquid market is also known as a deep market or a smooth market and price action is also smooth. Most traders need and should require a liquid market because it is very hard to manage risk if you’re on the wrong side of a big move in an illiquid market.Learn Forex: Illiquid Vs. Liquid MarketFTSE 100 Index - Equity Markets Are Prone to Gaps Forex Has Many Liquidity Providers Around The Clock A market that trades 24 hours a day like the forex market is considered more liquid because you can enter or exit a trade at your discretion. A market that only trades for a fraction of the day like the US Equity market or Futures Exchange would be condensed a thinner market because price can jump at the open if overnight news comes out against the crowd’s expectations.Are There Gaps When Trading Forex?Gaps in Forex vary compared to other markets. However, price gaps can occur in Forex if an interest rate announcement or other high impact news announcement comes out against expectations. Also, gaps can occur at the week’s opening on Sunday afternoon in the US if there is a news announcement over the weekend but overall, gaps in Forex are usually less than a %0.50 of a currency’s value and orders can be sent in for execution whenever the market is open and you’ll be filled as soon as the liquidity provider has a price for you.Different Times of Day Offer Varying Amounts of LiquidityIf you’re a short term trader or scalper, you should be aware of how liquidity in Forex varies through the trading day. There are less active hours like the Asian Session that is often range bound and easier to trade from a speculation point of view. The major moving market sessions such as the London session and US session are more prone to breakouts and larger percentile moves on the day.The time of day that you’re likely to see the biggest moves are the US Morning Session because it overlaps with the European / London Session which alone accounts for roughly 50 %+ of total daily global volume. The US session alone accounts for around 20% and in the US Afternoon, you will often see a sharp drop off in aggressive moves except for when the Federal Open Market Committee (FOMC) comes out with a surprise announcement which is but a few times a month.Closing ThoughtsIf you’re new to the forex market or maybe you’re coming over from a less liquid market, you’ll be pleasantly surprised by the liquidity. You’ll be able to trade around the clock and the liquidity that provides smooth price actions makes for good technical analysis. Whatever your back ground, building a trading plan in this market can conform to you and your availability much better than most markets.
Trading is difficult. The goal of this article is not to make trading seem less difficult; but rather to highlight the fact that many new traders can often-times become their own worst enemies, making trading even more difficult than it already is. To illustrate how this can happen, try to think back to the last time that you were very angry; the last time that you were really mad about something.Then think about what caused you to be mad.Then think about what you did, and how you felt after you first became mad.For many, when they became mad they lost control to some degree; as in – they weren’t able to draw upon their highest of mental faculties to ‘fix’ what was making them upset. This is a trait that can often hinder us from accomplishing our goals.For traders, this issue can be very problematic.Imagine you’ve just taken a trade ahead of Non-Farm Payrolls, with the expectation that if the reported number is higher than forecasts, you will see the price of the EURUSD increase very quickly; enabling you to make a hearty short-term profit.NFP comes, and just as you had hoped – the number beats forecasts. But for some reason, price goes down!You think back to all of the analysis you had performed, all the reasons that EURUSD should be going up – and the more you think, the further price falls.As you see the red stacking up on your losing position; emotions begin to take over. These are often the same emotions we feel if we had just been in a shocking accident, or a fight with another person.This is the Fight-or-flight instinct, and we have it for a reason.In psychology circles, the fight-or-flight instinct is often regarded as being a key part of the human psyche; built to protect us in times of stress.The theory states that when a person encounters stress, their brain quickly makes calculations (so quick that the person doesn’t even notice) to make a determination as to how that stress should be handle.In some situations, when the mind deems the situation as too stressful to attempt to manage – we run.In other situations, in which the mind feels as though we can make an impact with our actions – we fight.This is often why we do or say things we regret when we fight with each other; in some cases, it really is out of our control.This is the fight-or-flight instinct; always part of every one of us constantly seeking to protect us in times of stress.In trading, we can get quite a bit of stress. When a position begins to turn against us, that's when we begin to feel it. The red arrows on the chart accompany all the fears of failure that rush through our brains in nanoseconds.As the loss continues to stack against us, that stress becomes more and more profound; making the concept of taking action even more intimidating.And this is precisely how our fight-or-flight instinct can negatively affect us in trades, as we allow ourselves to make decisions in extremely stressful states that, often-times, don't do us any favors.The decisions we make in these situations are often called ‘knee-jerk reactions,’ or ‘on-the-fly decisions,’ depending on how they turn out. Bad trades are often reactions, while good trades are often decisions.Professional traders usually don’t want to take the chance that a rash decision will damage their account; or said another way – they want to make sure one knee-jerk reaction doesn’t ruin their entire career. They often go through much practice, and many trades in an attempt to soften this emotional reaction to the stress of an open trade. Below are some of the ways that can help traders do this.Plan your successOne of the things that professional traders do to ensure discipline during these trying times is to plan out their approach. The old adage ‘Failing to plan is planning to fail,’ can really hold true in financial markets.As traders, there isn’t just one way of being profitable. There are many strategies, and approaches that can help traders accomplish their goals. But whatever is going to work for that person is often going to be a defined and systematic approach; rather than one based on ‘hunches.’Planning each trade, and planning how you want to react in each situation that takes place in those trades can greatly help a new traders manage the emotions that come with speculation.In the DailyFX Education group, we get to work with many new traders. One of themes we’ve noticed with those new traders that are successful is the usage of a Trading Plan.The differences between new traders using a trading plan, and those not using a trading plan were shocking: So shocking that we wanted to produce resources so that any and every trader interested in writing a trading plan would have everything they need.I wrote an article outlining many of the areas of the trading plan that traders may want to pay focus to.Compiling a trading plan is the first step to attack the emotions of trading, but unfortunately the trading plan will not completely obviate the effects of these emotions. Below are a few ways that traders will often attempt to mitigate this damage.See how others handle the stressIn the DailyFX series, Traits of Successful traders – David Rodriguez, Tim Shea, and Jeremy Wagner set out to discover what separated those who were successful from those who had failed in the Forex market, and the research was shocking.In the Number One Mistake Forex Traders Make, David Rodriguez found that, shockingly, retail traders were right MORE often than they were wrong; meaning that they were actually on the right side of the trade more often than not.But what was even more shocking was the fact that, in many cases, traders were taking losses TWICE that of the gain that they were making IF they were right.The unsustainability of this type of plan should be obvious. If we’re losing 2 dollars for every time that we are wrong, and only making 1 dollar for every time that we are right, we must be right AT LEAST twice for every one time we are wrong.And that doesn’t even include spread, or slippage, or any other costs that may come about.If we utilize this style of money management, we often need to be right 3 times for every one time that we are wrong; a 75% success rate.Most professionals don’t want to expect themselves to be able to pick the right side of the trade for more than 3 out of 4 times.And keep in mind, for every one loser that cancels out two winners. So if a trader using the above scenario happens to get surprised – well, now they’ve taken a loss.Needless to say, this is a scenario that many traders have a difficult, if not impossible time digging themselves out of.The thesis of the Number One Mistake Forex Traders Make is:Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.Employ loss limitsThis may have special importance to scalpers and day traders, but the Loss Limit has been used for years in an effort to prevent a bad day becoming even worse.After losing trades, we often feel negativity. After many losing trades, this negativity can often build; reinforced by the thought that ‘its about time I finally win a trade.’I can not even begin to count the number of new traders that have come to me, regretfully, after blowing an account on one currency pair in a single trading session simply because they were chasing prices.What usually happens with these folks is that after placing a few losing trades, and getting nowhere really fast, they increase the trade size.While there is the chance that the trade might work out for you, the fact of the matter is that you are making quick, short-term decisions about future price movements.The DailyFX Education team places a heavy importance on Money Management, and as we’ve worked with so many new traders we realized the necessity of loss limits.In the DailyFX Education Course we offer a full module on Money Management, with a full profile and set of rules for new traders to use.One of the key elements of our Money Management curriculum is the 5% rule; meaning that on any one trade we will not risk more than 5% of our account.This rule is in place to ensure that one bad day doesn’t end (or cause irreparable damage to) our trading careers.Lower your leverageOne of the easiest ways to decrease the emotional affect of your trades is to lower your trade size.Don’t believe me? Remember how it felt the last time you placed a demo trade? It probably didn’t garner much of an emotional affect at all, as there was no financial risk on the trade.Increasing the trade size, or velocity, will often increase these stress levels as traders are allowing each individual trade to carry to great of an impact to their trading account.Let me explain.Imagine a trader opens an account with $10,000 dollars.Our trader first places a trade for a $10,000 lot on EURUSD.As the trade moves at $1 a pip, the trader sees moderate fluctuations in the account. Three hundred twenty dollars was put up for margin, and our trader watches their usable margin of $9680 fluctuate by ten cents-per-pip.Now imagine that same trader places a trade for $300,000 in the same currency pair.Now our trader has to put up $9600 for margin – leaving them with only $400 in usable margin.And now the trade is moving at $30 per pip.After the trade moves against our trader only 14 pips, the usable margin is exhausted, and the trade is closed automatically as a margin call.The trader is forced to take a loss; they don’t even have the chance of seeing price come back and pull the trade into profitable territory.In this case, the new trader has simply put themselves in a position in which the odds of success were simply not in their favor. Lowering the leverage can greatly help diminish the risk of such events happening in the future.
As with virtually any trading scenario, we must first determine the direction that we need to trade the pair for the greatest likelihood of success.By looking at the 4 hour chart of the GBPUSD below, there are several reasons we know that we want to go long (buy) the pair. Price action is above the 200 Simple Moving Average and is pulling away from it; the pair has been making higher highs and higher lows (green lines) which indicates an uptrend; and, at the time of this chart, the GBP was the strongest currency and the USD was one of the weaker currencies.All these point to a buying opportunity. But when do we enter the trade?Let’s take a look at the trendline… We can see that price action has come in contact with trendline support at several points...note the blue boxes. (Since price has tested and respected the trendline at more than three points we know that our trendline is valid.)Our entry strategy to buy this pair using trendline support will be to wait for price to trade down to the trendline…into the “Buy Zone”. If price trades into the Buy Zone and stalls and a candle does not close below trendline support, just as in our “blue box examples” , we can take a long position on the pair with our stop just below the trendline or just below the lowest wick that penetrates the trendline.The trader could exit the trade if price reaches resistance, the previous high, or by employing a simple 1:2 Risk Reward Ratio.Now let’s take a look at a 4 hour chart of the USDCHF for selling against Trendline Resistance in a downtrend… This trading scenario will be virtually the opposite of what we did in the previous buy example.We want to sell this pair as it has been making lower lows (red lines) and lower highs; price action is below the 200 SMA and pulling away from it; and, at the time of this chart, the USD was weak and the CHF was strong.Again, price action has tested our resistance line at several points (the blue boxes) so we know the trendline to be valid. In this example we would wait for price to trade up to trendline resistance in the Sell Zone. As long as a candle does not close above the trendline, we would sell the pair with a stop just above the trendline or just above the highest wick to penetrate the trendline.The trade could be closed should price reach the previous low or we could use a 1:2 Risk Reward Ratio to exit the trade.
First and foremost a trader should determine the direction that the market has been taking the pair over time…the longer term trend. Once that is determined, the trader can then look for entry signals in the direction of that trend as that will be the direction that offers the greater likelihood of success.As we look at our 4 hour chart of the EURJPY below, we can see that the pair is in an uptrend (has a bullish bias) as price is trading above the 200 Simple Moving Average and, at the time of this chart, the EUR was stronger than the JPY. So, if the pair is in an uptrend (bullish bias), we would want to look for candlesticks and candlestick patterns that demonstrate a potential for a bullish reversal. That would be a reversal by price action back in the direction of the trend.On the chart above we would be looking at the Hammer Candlesticks, Doji, Bullish Engulfing pattern and the Morning Star pattern for that bullish reversal signal. When we see these candlesticks and patterns forming at the end of a retracement, a support level, this is a “tip” the price action may very well reverse back in the direction of the overall trend. Again, nothing in trading is a certainty but these patterns can provide us with a trading edge, the tip that we are looking for.What if the pair is in a downtrend?On the chart above I have also included some of the patterns that we would look for that would indicate that price action may be reversing to the downside after a reversal (pullback) to a level of resistance. Those patterns would be the Shooting Star, Bearish Engulfing, Doji, Evening Star and the Spinning Top.While in most cases on this chart price action did reverse to the downside after these patterns showed up on the chart, the higher probability trade will still exist in the direction of the trend.While it is not necessary to discard your indicator of choice in favor of candlestick patterns, using these patterns in conjunction with your indicator, be it MACD, Stochastics, RSI, etc., can provide an additional tip when it comes to looking for a pair to reverse its direction.
Japanese candlesticks are a popular charting technique used by many traders. Today, we are looking at the shooting star reversal pattern which is a popular Japanese candlestick formation and how to apply it towards the FX market.What Does a Shooting Star Look Like? (the shooting star is the red candle at the high point above)A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the candle.Additionally, the closing price should be lower than the opening price creating a red candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.Trading the Shooting StarTrading this reversal pattern is fairly simple. First, the implication is for lower prices therefore we want to look for entries to short. Since the prices were previously rejected at the high of the shooting star, we will establish our stop loss about 10-20 pips above the high of the said candlestick.The entry can take place in a couple of manners. First, a trader could simply enter on the open of the next candle. Or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, we can trade a retest of the wick.Retests of the wick tend to occur when the wick is longer than normal. Oftentimes, prices will come back and retrace upward a portion of the long wick. A trader recognizing this might wait to enter around the middle of the wick rather than enter immediately after the shooting star candle forms. This means the trader is entering a short trade at a higher price and with a tighter stop loss reducing risk.Regardless of the entry mechanism, the stop loss will remain the same which is about 10-20 pips above the shooting star candle.Regarding profit targets, we teach in our courses to take profit at least twice the distance as your stop loss. So if your stop loss is about 90 pips, then look for at least 180 pips of profit potential. This means we are establishing a 1-to-2 risk-to-reward ratio which falls in line with the Traits of Successful Traders research.Trading the AUDJPY Shooting StarOn Friday, November 2, the AUDJPY produced a shooting star reversal pattern on the daily chart. What makes this set up appealing is that it forms near 2 other levels of horizontal resistance.1. Purple horizontal line which coincides with the previous high on August 20, 2012 and October 25, 2012. This resistance line is near 83.60.2. The 61.8% retracement level of the March 19, 2012 to June 1, 2012 down trend crosses near 83.23. (blue horizontal line)Therefore, a strong resistance zone is created. As prices approached this resistance zone, the buyers stopped buying and the sellers started selling which left a shooting star candle pattern in its wake. Since the AUDJPY has been trading in a range between 79.70 and 83.50, consider an entry to short near the top of the range near 83.15 with a stop loss just above the shooting star high near 84.05.We’ll look to take profits near the bottom of the range at 80.15. This means we are risking 90 pips for a potential reward of 300 pips. This yields a 1-to-3 risk to reward ratio.
Article Summary: Diagonal patterns are simple technical patterns that offer tight zones of entry and exit. Many times, the risk-to-reward ratio of the diagonal pattern will better than the 1-to-2 ratio that we suggest in our forex courses.Diagonal patterns are one of my favorite patterns to trade because the method to trade them is fairly straight forward and you can identify clear risk and reward parameters. This piece will outline what a bullish diagonal looks like and how you set your entry and exit parameters for the potential trade.The Anatomy of a Bullish Diagonal The ideal diagonal would consist of five waves. Each wave of the three waves to the downside would be smaller than the previous alternating wave. The alternating waves of the 5 wave move are waves 1, 3, and 5.For example, wave 5 would be smaller in length than wave 3. Wave 3 would be smaller in length than wave 1. So wave 3 would be smaller in length than wave 1.When you connect waves 2 and 4 with a trend line and connect waves 1 and 3 with a trend line, then you will notice a triangular type of drawing (see grey lines). This becomes the basis of the bullish diagonal pattern.This pattern tends to fool trend traders because it continues to produce lower highs and lower lows. Trend traders would see this as a bearish trend. However, there are a couple of clues that can tip us off that the trend is likely to correct or possibly reverse.1. Measure the waves – In the idealized pattern above, see how wave 5 is shorter than wave 3 while wave 3 is shorter than wave 1. This indicates the trend lower doesn’t have the strength it used to. Each subsequent push lower in price travels less distance than the previous leg. The trend has moved too far and too fast to the downside and is likely to correct upward.2. Look for simple indicator divergence – determine if divergence is showing up in the formation of wave 5. Divergence is another clue of a tiring trend and momentum is slowing to the downside. Absent a healthy correction to the upside, this pattern is losing momentum and at risk of a sharp move up.Another key point to consider is distinguishing the difference between an ending diagonal and a triangle. Triangles tend to move sideways as they consolidate a prior move. Diagonals tend to be directional.For example, see how both grey lines in the idealized chart above are both pointed down? This is what I mean by both lines are directional. You’ll see both trend lines point in the same direction in a diagonal. A triangle will see both trend lines pointed in different directions.Learn Forex: Ending Diagonal Trade Set Up As you can see in the above example, prices in the EURUSD were towards the end of an exhaustive move to the downside. Prices kept pushing lower and creating lower highs and lower lows. Trend traders may see that type of price action and jump into the trend to the downside. However, the length of wave 5 is less than the length of wave 3, and the length of wave 3 is smaller than wave 1 tipping us off that the trend is certainly slowing. Additionally, the RSI oscillator is flashing divergence as price reaches lower lows yet the oscillator fails to confirm lower lows.Trading the DiagonalAs wave 5 is taking shape or shortly after it is completed, we can begin setting up our trade.1. Draw a trend line connecting the top of wave 2 and the top of wave 42. Enter on a break above this trend line as a break indicates a high probability the low of wave 5 is in place3. Place your stop loss just below the swing low of wave 54. Place your limit to take profit at the beginning of wave 1Many times, because the pattern is losing momentum to the downside, when prices finally turn bullish, it can be a swift correction to the upside.As you can see from the chart above, the risk-to-reward ratio on this trade would have been about 1-to-3 which is many times better than the 1-to-2 risk-to-reward ratio we discuss in our DailyFX Education courses.Remember, this is simply a pattern to follow with buy and sell rules. Not all patterns and not all trades work out to be a winning trade. Therefore, it is important to be responsible to your account and use prudent risk management techniques such as trading in small sizes risking a small portion of your account. We suggest risking less than 5% of your account on ALL open trades.Good luck with your trading!
There has been much said about the psychology of trading and the necessity that we manage our emotions with every gain and loss. Emotions tend to rise to the surface during times of uncertainty as we are faced with an unexpected situation or crisis. How would we feel to win the state lottery worth over $100 million? It is easy to say, we would feel very surprised and in fact ecstatic. On the other hand, how would the average person feel to lose their life savings in an investment of some type? Most would assume he/she would feel pretty horrible. These emotions should not come into play as we trade our accounts. Speculating in the financial markets should be approached with the same planning, research, and discipline in its execution, as a small business owner spends each day making decisions in order to improve revenues, and reduce risk. It would be absurd for a business owner to fall into panic during the first or second slow day of sales. We would logically expect that entrepreneur to simply review the mission statement and ensure each one of his/her actions has this mission statement and long term business plan in mind. Let’s take a look at a current trade set up on the AUD/CAD daily chart below: The AUD/CAD is in a clear uptrend and we can see the clear break above the 1.0200 area which is represented by the horizontal line. Prices are now testing the previous resistance zone from the opposite side. We might look for the 1.0200 area to act as support as past resistance usually acts as future support. This has been confirmed with price action finding support near the 1.0200 area during the past few sessions. With prices currently at 1.0233 we might place an entry order at 1.0225 with a stop at 1.0175, risking 50 pips in the trade. We might place a limit at 1.0375, so we are risking 50 pips to make 150 pips for a 1:3 risk to reward ratio.This is a trade set up. That is all. This is one of several thousand trades that I am going to make during my trading career. The results of this one single trade do not matter at all. The trade may or may not work out, but that has absolutely nothing to do with my analysis. One of the most common mistakes I see in newer traders is that they put too much emphasis on the current trade. They live and breathe for that trade. Again, we have to treat trading like running a business. It is a numbers game. With a consistent approach and a respect for risk we should decrease the importance of the current trade and think of it in terms of the long haul. In other words, we should trade to trade tomorrow.
Talking Points:* Sentiment helps decipher traders feelings towards an asset* SSI shows net positioning on currency pairs* Changes in sentiment provide insight into trends, and market reversalsSSI (Speculative Sentiment Index) is a proprietary tool to display retail positioning in real-time to display retail-market sentiment. Once a trader understands how SSI works and how to read the sentiment data, it can then be worked in to any existing trading strategy.So today we will examine what sentiment is and how you can analyze sentiment through SSI data. Market SentimentMarket sentiment in its most basic definition, defines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude sentiment can become negative.While sentiment is not unique to the Forex market, it can be directly translated to currency pairs. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment. The graph above shows sentiment in action. Going back to November of last year sentiment has been negative on the GBPUSD, however prices have continued trending higher. Sentiment has recently become even more extreme as the majority of traders in this case are attempting to pick a top on the GBPUSD.Now that you are more familiar with sentiment, let’s look how we can analyze sentiment in the Forex market. SSISSI is a ratio that gives us a picture of trader sentiment. SSI reveals trader positioning by determining if there are more positions net long than short, and if so by how much. Above we can see the current SSI ratios posted on DailyFX.com.If clients are net short a currency pair SSI will be negative, and if clients are net long the number will be positive. As mentioned above, the more extreme the SSI reading becomes, the more credence the information should be given.Using our example again with the GBPUSD, the last reading on SSI was -8.15. This ratio means that trader’s positions are net short at a rate over 8 to 1 when compared to all open buying interest. This can be interpreted again as traders attempting to position themselves for a possible turn in the market. Contrarian investors knowing this can look to open new long GBPUSD positions back in the direction of the prevailing trend. Changes in SSILastly, traders should also be aware of changes in sentiment. Changes in sentiment can be used to decipher whether trends are set to continue, pause or even reverse. In the event that sentiment is at an extreme, a reduction in net open interest can signal that a trend is winding down. Likewise if a pair with neutral sentiment begins changing rapidly, in one specific direction, this can signal a potential change in market direction.
Traders combat a variety of emotions on a daily basis. Most emotions when trading are unavoidable simply due to the fact that we are human! If we fail to deal with these emotions effectively, it can lead to catastrophic results in our trading. Today we are going to specifically look at the impacts of greed and the frustrations of missing a trade and specific measures we can take to avoid this from happening.Missing out on a trade can be extremely frustrating and a position that most of us have experienced at one time or another. Primarily this frustration is based in greed as we busily consume ourselves with the pips we “would have made”. By giving into this emotion we often forget that our trading accounts are still intact and we have other market opportunities available. For most traders, if this feeling of greed goes unnoticed it may elicit a response of revenge, in order to “get even” with the market. More often than not this response results in disaster, as a trader may consider taking bad trades not in line with their trading plan or increasing their leverage to quickly makeup for a missed opportunity.Below we can see a daily graph of the AUDUSD daily chart. Let’s look at the two ways this scenario can be avoided, if price breaks above new highs at .7778 on the graph. Price AlertsThe first way to help overcome the fear of missing out on a trade is to use price alerts. This is a great tool when you want to see how prices react when they reach an important technical level, such as a support/resistance line, Fibonacci level, or Donchian Channel. Price alerts can be set as audio alerts, or messages through the trading platform or even email!Entry OrdersUsing Entry orders with a breakout strategy is another great way to avoid the feeling that you have missed out on a trade. Entry orders allow us to set a specific price in the market where we wish to execute a preset trading plan. This way, we get to enter into the market on our own terms when the price we select becomes available for trading. Creating an Entry order is an easy process. Select the pair, whether you want to sell or buy and that rate at which you want to do so. You can click the advanced tab to input stops and limits.Regardless of the method you choose, both price alerts and Entry orders can help traders avoid the fear of missing a trade. When a specific price is reached in the market we will either be notified or ready to execute a preset strategy through pending entry orders. Through this process, what was once seen as a roadblock to our trading success can now be effectively turned into an opportunity!
One of the toughest tasks given to traders is spotting price reversals. There are a variety of tools at the disposal of technical Forex traders for the job, but more often than not it is a candlestick pattern that provides the first clues to a market turn. Candlestick patterns are a great way to begin your trading analysis as they are a direct interpretation of price action. With this in mind, today we will focus on spotting and trading one of the markets most clear cut reversal signals using the bullish morning star pattern. What is a bullish morning star pattern?A bullishmorning star pattern is a candle pattern established at the end of an extended downtrend. The pattern itself is pictured above,and it should be noted that the bullish morning star is comprised of three different candles. The first candle should depict a continuation of the established down trend. The second candle will show the slowing of bearish momentum. Price will make one final attempt at lower lows here, with the candle closing near its open price. Dojis and hammer candles are often found in this position.The third candle in the bullish morning star pattern is the actual reversal signal. An extended blue candle should be seen in this position beginning a new swing in bullish momentum. Ideally this should be a bullish engulfing candle with its high extend well above the high of the previouscandle. This strong surge in price depicts fresh buying pressure on the pair with bearish traders exiting the market. The greater the advance of this secondary candle declines, the stronger the reversal signal is considered. Uses in TradingThe great thing about the bullish morning star pattern is the fact that once you can identify it, you can immediately apply it to your trading. In the graph above we can see the pattern in action on a GBPNZD daily chart. From April 13th through May 24th of this year the GBPNZD rallied as much as 1883 pips. This rally was preceded with a bullish morning star giving us our first opportunity to consider trading a reversal and establishing buying opportunities.Traders often select to trade a breakout strategy in reversing markets. In a breakout scenario the high of the first candle of the pattern can be used as an area of resistance. Entry orders to buy can be set at this point as the pair begins to trade to higher highs. Also it is not uncommon to see traders use this analysis in conjuncture with an oscillator. Market orders can be placed in the direction of the new trend when indicators such as RSI show momentum returning from oversold levels. Regardless of the method chosen, traders should consider placing a stop order under the second candle low. In the event that a reversal fails and a lower low is made traders will want to exit their buy positions.
“Greed has cost me more than anything else.”“How can I control greed??? That has been my number 1 problem.”The above two quotes came from emails sent to me from two different traders. I am sure many of us can identify with these sentiments. In the early days of my trading I know I could certainly identify with them! Human nature being what it is, feelings of this type have been felt by virtually all traders at some time or another.Indeed, the desire to make more and then even more yet is very compelling.Greed can influence us to enter trades that we never should have entered in the first place. It can make us stay in losing trades too long as well as make us stay in winning trades too long. Greed also plays a big part when we take on too large of a position on a trade in the hopes of reaping huge profits. All in all, it has a truly negative influence on traders.Here are some ideas that, if put into play, I believe you will find yourself better able to cope with greed.Have a Trading PlanBy having a clear trading plan that is written out, we know exactly what we are looking for in terms of an entry. Don’t compromise. Wait for the precise entry as laid out in the plan itself. Let the market come to you rather than you chasing the market in fear of missing a trade.The trading plan will also denote the size of the trade you will make along with how you will determine the placement of stops and limits.By knowing all of these aspects of the trade ahead of time, and sticking to them, you will be less likely to make decisions (oftentimes governed by greed) on the fly. Since we let the trade come to us initially, we start out on our terms. By knowing the size of the trade that we will make (money management) and how much we will risk (stop) and where we will exit the trade (limit), we will go into the trade with a greater level of confidence.Think of this plan as a blueprint for your trade. Just as a builder would never even consider building a house without a blueprint, as a trader we do not want to enter a trade without our “blueprint” in hand.Employ the Principles of Money Management on Every TradeWhen it comes to Money Management, or the lack thereof, this is an area where greed can really kick in. Traders are very often tempted to put larger amounts of their trading account at risk in the hope of reaping greater gains. They try to do too much (attain outsized profits) with too little (the size of their trading account). This is particularly true when they see a trade that to them looks like a “sure thing”.(Sidebar: There is no such thing as a sure thing.)As traders we never know when entering a trade if it is ultimately going to be a winner or a loser. As such, in order to protect our trading account, we have to treat each trade as though it is going to be a loser. Just like in driving, we never know if this is going to be the day that we are going to have an accident. Consequently, we must always be on guard.I am sure you have heard of the term “defensive driving”. Think of good money management as “defensive trading”.So we do not get swept away with greed when trading, we need to have an absolute, irrevocable ceiling on the amount of our account that we can place at risk of loss at any one time. The percentage of risk that we recommend is a maximum of 5%. This means that no matter how many positions we have open, if each of those positions were stopped out for a loss, the total loss would not exceed 5% of our trading account.The next component of Money Management is the Risk Reward Ratio. We recommend a RRR of at least 1:2. This means that if we risk losing 75 pips (our stop) on a trade, would we look to gain 150 pips (our limit) on the trade.By adhering to these parameters, the 5% rule and the setting of our stops and limits as described, greed can no longer influence our trade. We have put the trade guidelines in place and nothing, NOTHING can shake us from them.Leave the Trade AloneLastly, after the trade has executed with stops and limits in place, leave it alone!! Just let the trade play itself out according to the original parameters you put into place prior to being in the trade when emotions were non-existent.Think about it…Before you were in the trade, when you were looking at the charts, checking trends, support and resistance levels, fundamentals and the like, you were totally without emotion. The plans that were put together while in that state of mind were based on facts. Once the trade is entered, however, emotions (greed) can shift into high gear. Making changes to a fact-based, unemotional trading plan based on moment to moment emotional shifts is not a prudent way to trade.Managing and dealing with greed is not something that will be resolved over the next one or two trades. However, by being conscious of how greed can negatively influence your trading and implementing the above as part of your trading regimen, you will be taking positive steps toward the goal of “greed free” trading.
Many FX traders get confused about which fundamental news releases to focus on when making a trading decision. I suggest to these traders to follow news releases that potentially impact the currency’s interest rate. This article will explain why the interest rate movements are important to the value of the currency.Each currency carries with it an interest rate. This is almost like a barometer of that economy’s strength or weakness.As a nation’s economy strengthens over time, prices tend to rise as the consumers are able to spend more of their income. The more we make, the better our vacations can be, and the greater amount of goods and services we are able to consume. This creates a loop where more money chases roughly the same amount of goods which can lead to higher prices for those goods. The rise in prices is called inflation.If inflation is allowed to run rampant, our money will lose much of its buying power, and ordinary items such as a loaf of bread may one day rise to unbelievably high prices such as a hundred dollars per loaf. It sounds like an unlikely far-fetched scenario but this is exactly what occurs in nations with very high inflation rates, such as Zimbabwe. To stop this danger before it emerges the central bank steps in and raises interest rates in order to stem inflationary pressures before they get out of control.Higher interest rates make borrowed money more expensive, which in turn dissuades consumers from buying new homes, using credit cards, and taking on any additional debts. More expensive money also discourages corporations from expansion, as so much business is done on credit, from which interest is always charged.Eventually, higher rates will take their toll as economies slow down, until a point where the Central Bank will begin to lower interest rates. This time, the reduction in rates is to encourage economic growth and expansion. The Central Bank has a delicate balance of trying to foster growth while at the same time keeping inflation low.A side effect of high interest rates is that foreign investors desire to invest in that country. The logic is identical to that behind any investment. The investor seeks the highest returns possible.By increasing interest rates, the returns available to those who invest in that country increase. Consequently, there is an increased demand for that currency as investors invest where the interest rates are higher.Countries that offer the highest return on investment through high interest rates, economic growth, and growth in domestic financial markets tend to attract the most foreign capital. If a country's stock market is doing well and they offer a high interest rate, foreign investors are likely to send capital to that country. This increases the demand for the country’s currency, and causes the currency’s value to rise.As you can see, it is not just the rate itself that is important. The direction of the interest rate can act as a good proxy for demand for the currency. The direction of the interest rate is obtained through the central bank’s language in the statement that accompanying their target rate decision.The accompanying statement is analyzed word-for-word for any signs of what the central bank may do at the next meeting. Remember, the interest rate decision itself tends to be less important than the expectations for future interest rate moves.High and increasing rates at the beginning of an economic expansion can generate growth and value in a currency. On the other hand, low and lowering rates may represent a country experiencing difficult economic conditions which is reflective in a reduction of the currency value.The Widening Interest Rate DifferentialIn early 2009, the worldwide economy was bottoming out as the United States credit freeze began to thaw. The Fed kept U.S. interest rates at all-time lows while the Reserve Bank of Australia began their process of increasing their target benchmark rate. Since this was in the beginning of an economic expansion, foreign investors into Australian companies needed Australian Dollars to make their investment. Additionally, FX traders began buying the AUDUSD currency pair in anticipation of this demand for the Australian Dollar. Those traders were rewarded as the AUDUSD exchange rate began a 30 cent rise while earning an additional daily dividend from 2009 through 2011. One mini lot trade of 10,000 units of currency would have yielded over $3,000 plus interest.
Any trading strategy is incomplete without Forex Money Management. It is not only about knowing the ins and outs of which currencies to trade and identify the entry and exit signals, it is also about manage the resources and integrating money management into the trading plan. It is essential for a trader to meticulously position size, margin, recent profits and losses and any contingency plans before foraying into the market. Based on money management strategy, diversification, martingale and anti-martingale strategy and high return strategy, the various strategies for Forex Money Management are formulated for approaching money management. Most of them rely on the calculation of core equity which is the starting balance minus the money used in open positions. If the starting balance is $10,000 and you have $1000 in open positions, your core equity is $9000. It is imperative that as a trader you need to adjust the dollar amount of your risk, with the rise and fall of the core equity. If the core equity level falls, you can lower your risk amount, while you can also raise the risk level as your core equity rises. Just as on a profit of $8000, the core equity can rise to $18,000. Similarly, on limiting risk to $800, the core equity will fall to $8000. Experts opine that as you enter a position, it is advisable to try to limit risk to 1% to 3% of each trade. This reiterates the fact that, on trading a standard FOREX lot of $100,000, your risk should be limited between $1000 and $3000. Forex Money Management is all about calculated risks at the right time and protecting your assets. It is imperative to understand that when placing options, and buying them; it is wise to get plenty of time on your side. Although, traders are known to identify trade direction, however, most fail to stay with trades simply because they cannot implement their money management correctly. A few mistakes traders usually make and tips to overcome them and increase prosperity. - Most traders fail to understand the standard deviation of price, as it helps them to stay guard against it and its unpredictability. It further helps you to understand where to place stops in places for risk control, although you may gain nothing. - The leverage is essential as it is common to have stops outside of random unpredictability. However, the market also requires space to breathe, only possible with wider stops and lower leverage. - Risk control and an obvious stop are possible only if you trade valid breakouts, leading consequently to trade success. Moreover, you can also cut your trading frequency, by trading no more than once a month but make solid gains. - However, while enjoying profits, it is also important to bring the stop to close, to prevent losses by random unpredictability. These calculated risks will help you continue big trends and keep your stop well back. - It is always wise to have buy options open if you want to deal with unpredictability and get staying power.