Three Golden Rules for Damage Control in Forex
Many people around the world are now looking to Forex as a safe haven in these shaky financial times in which the future is accompanied with a big question mark. The Forex market enjoys a unique benefit, as a result of its size, that it is not affected by the recession. Traders can continue to profit from their trades even in these troubling times.
However, new traders, upon encountering Forex websites, whether it is sites belonging to brokers, auto traders, or any other Forex service, are quickly overcome with excitement at the thought of becoming wealthy overnight. There is no shortage of Forex sites promising traders immediate wealth and taking advantage of their Forex newbie status.
Smart traders, before beginning to trade, should spend significant time reading articles bolstering their Forex education before risking any money. The information available to traders online is literally endless with thousands of articles uploaded daily, people sharing their trading experiences on various platforms, and tutorials popping up in every corner. As a trader, this is bound to overwhelm you, and most new traders will want to hear a few golden rules that they can use to begin trading.
I am not claiming that you will become a Forex expert after implementing these rules, but I do think that if you properly internalize these points and use them effectively in your trades, you can avoid the disaster most traders experience when trading with no prior knowledge. I have said this many times before, and I will continue to say it, Forex has huge potential, but the danger is just as great.
The following are three golden rules of Forex trading, that if implemented, will give traders a head start over their colleagues:
Do Not Depend on Luck : If you are looking to make Forex and intend it to be a serious endeavor, you need to show you are serious and make a plan. Don't jump in without a trading strategy and money management techniques in place. Remember that no matter how good you are or how much of a natural trader you think you are, you will lose, and you will lose more than once. The big question is, and this is what separates the boys from the men, how are you going to handle those losing trades? Are you going to be forced to close your account because of 5 bad trades? If the answer is yes, you are doing something wrong.
Let's stop talking philosophy and get down to the numbers. Imagine for a second that you have decided to open an account with $10,000. You can now choose how much of that capital you are going to risk per trade. Obviously, the higher the risk, the more potential for profit, hence the famous saying “No pain, no gain”.
So if you decide to risk 10% of your entire account on each trade, simple math dictates that after 10 bad trades, you will be closing up shop. Now imagine you did the same thing but risked only 5% of your account per trade. You just doubled your chances of making it, or cut the chances of a margin call in half.
However, money management is not only about preventing margin calls, it is also an important tool in ensuring continuous and steady profits. The Forex industry is always evolving and new tools are introduced daily. Even now, as I write this, almost all Forex trading platforms offer important and useful tools that you must take advantage of, if you want to succeed. Set up Stop Losses, do not let your losses go on forever. Implement Take Profits, I know it is hard to stop the trade when you are ahead, but that is exactly what you need to do if you want to stay ahead.
Bottom line is, when it comes to trading Forex, you do not want to rely on your human emotions or your hunch, you want to depend on a well thought out strategy that makes sense and was custom tailored to meet your personality and trading needs.
Implement Bullet One : OK this is not just a fake point to add more meat to the article, this is real and crucial for your Forex success. Let me explain. It is easy to plan your strategy, it is a lot harder to put it into action when in the moment, and the strategy is telling you to do something that is the exact opposite of what your heart is telling you to do.
Studies have shown that close to 60% of Forex failures can be attributed to this one factor. People do not stick to their plans. You need to understand that Forex and emotions do not, and must not mix. If you are an overly emotional person who tends to get excited quickly or have been known to make rash decision in high pressured situations, you need to step away and let your technique do its work. Do not let your emotion dictate your Forex decisions, this will be your downfall.
If you are finding that you are not sticking to your trading plan and it is not the emotions getting in your way, the only other possibility is your lack of confidence in the plan itself. You need to do your research and make sure the plan you intend on using fits you perfectly. It might take some time to find, and you might feel like you want to get in and trade already, but skipping this step will almost definitely lead to your ultimate failure. It might not happen right away, but if you have no strategy, and you are trading randomly, you will eventually join the 90% of traders that fail at the Forex game. Make a plan and stick to it, no matter what.
Use Leverage Responsibly : Anyone who has ever visited a Forex website of any kind, has undoubtedly seen the words leverage and margin thrown around. First thing's first, margin and leverage are not the same thing. Margin is your money and leverage is the broker's. For clarity and emphasis, I am going to repeat that, leverage is not your money, it belongs to the broker and you are for all intents and purposes, borrowing that money.
Another important and possibly detrimental point that traders must understand when it comes to leverage is that while it increases your chances for larger profits, it also magnifies your risk and can easily lead to the destruction of your account.
Just to clarify, using a 100:1 leverage means you can now trade 100 times more money than you could have before borrowing that money. What is also means is that you have multiplied the speed at which you will lose that money by 100 as well. Using a high leverage is literally giving up the control of your account to someone else, namely the broker.
If you are sure you will win the trade, which you cannot be, use high leverage, because your profits will be multiplied. If you are unsure of the outcome of the trade, use this dangerous resource responsibly. Think of leverage, as I have said before, as the speed at which you are driving. The higher the leverage, the faster you are going. The faster you are going, the more deadly a small mistake can be.
There are many more tips that can be given to someone who is testing out the Forex waters for the first time, but I think it is safe to say that if the above three pieces of advice are understood properly and implemented correctly, disaster can be avoided.
Of course, if you want to make it big in the market, you are going to need to learn how to analyze the market, understand the fundamentals, and process the various technical indicators used in the Forex trading arena. The most important thing to do, and these three tips will assist you in doing it, is damage control, because as I explained above, no one trades Forex without experiencing losses. You are going to fall, the important questions are, are you going to get back up and are you going to learn from your mistakes?
Learn the classic market cycles of accumulation, mark up, distribution and mark down so that you can time the market -consistently – and make steady profits any time. When you hear someone on TV say that “market timing” is impossible, they are wrong. Let me be the first to say that market timing is not only possible, but also profitable on a consistent basis. As a technical trader, your purpose is to find the best trades and to time your entry and exit points. After all, you can find the best trade in the world, but if it is not timed well, it may turn into a loss. Every stock or asset class goes through a classic market cycle. When you look at the chart of any stock or index, it moves in cycles. We are all going through a life cycle, and we are also in the autumn stage of the seasonal cycle. By observing cycles, we know what to expect next. This is true for stocks. If you noticed, all three were homebuilders and they have completed their market cycles which has ranged from 5 to 10 years. If you are a long-term investor or trader, your understanding of market cycles will greatly benefit you. Let’s talk about each stage and what is going on during each stage of the cycle:Stages of a Market Cycle* Accumulation Phase – This is the bottom (or near the bottom) of the market for a particular stock, sector, or general market. At this stage, prices do not move upward but rather stay within a neutral range. At this level, the smart money begins to buy up large blocks of shares to accumulate a large position for their portfolio. They are patient enough to be able to wait years, if needed, because it is difficult to determine how long a stock or sector will be in this stage. Regular individual retail investors do not even consider buying at this level because, in most cases, they have recently sold close to the lows. It is at this stage where you pick up the biggest discounted stocks. This is where long-term investors should be buying to realize the greatest long-term gains.* Mark Up Phase – This phase follows the Accumulation phase and the way to know if this phase is occurring is to see a stock or sector that has “broken out” of its neutral range. This means that it must break above the upper trend line of the neutral range. From this point on, you should see an obvious increase in volume. Most of the institutions and individuals who are aware of this early trend will jump on board and bring along significant buying power with them. Another way to tell if you’re in this stage is to see if we are forming higher lows and higher highs, confirming the start of a new uptrend. Toward the end of the mark up phase, you will see full market participation, meaning everyone from the shoe shiner to the cab driver will most likely have made an investment. This sets us up for the next phase:* Distribution Phase – This is the top of the market for a particular stock, sector, or general market. Supply overwhelms demand after the smart money sells their shares to the “greater fools” who buy at the top. Because there are no other buyers left to raise the price, a stock or sector cannot advance higher, and thus, will collapse under its own weight. The sentiment is extremely bullish. This phase is marked with extreme greed and fear. The best way to identify a top is through chart patterns, most notably, the head-and-shoulder and double top formations combined with breakdowns at the 200-day MA. This phase is usually marked by the greatest volume levels for a stock until we reach the Accumulation phase once again.* Mark Down Phase – Prices are in free fall and stocks are in full liquidation mode. This group is made up of people who held beyond the Distribution phase and did not sell, or those who bought at or near the top and refuse to sell at a loss. Either way, a loss will be incurred, and the size of it will be determined when an investor wishes to cut it. You should not be buying at this stage and those that try to find a bottom will be disappointed.Return to Accumulation PhasePhase StrategiesAccumulation PhaseInvestors: Cash » BuyTraders: Cover/ BuyMark Up PhaseInvestors: BuyTraders: BuyDistribution PhaseInvestors: Sell » CashTraders: Sell/ ShortMark Down PhaseInvestors: CashTraders: ShortSentiment CycleIn addition to the actual price cycle, there is also a sentiment cycle which accompanies each stock, sector, or overall market. Here is the general range of emotions that follow (each chart is different, so this model is not exact for every situation): You may have found yourself within each of these emotional phases. Now that you know what to expect for each cycle, you’ll have to harness your emotional involvement and separate it from your trading activities. You are your own worst enemy because emotions give room for destructive impulse trading. By understanding each cycle and what emotions follow, you’ll be better prepared. By now, you understand why high flying stocks crash to their lowest levels. Market cycles are a normal and necessary function in balancing the financial markets and restoring equilibrium to the forces of supply and demand. You are now positioned to take advantage of every market cycle for every stock and every sector in the future. Take a look at 3-year charts for TRA, CROX, and MON for additional examples of full-length charts.
The international currency market operates 24 hours a day, 5 days a week, excluding public holidays when all banks are closed. In each time zone there are establishments, selling or buying currency during their working hours. Thus in fact, we can hardly single out a daily trading session on Forex, however, we can distinguish weekly trading. Conditionally, Forex is divided into four regional markets: Australia, Asia, Europe and America. During the working day Forex activity is gradually moving from one financial center to another. The uniqueness of Forex trading sessions lies in the fact that when one continent falls asleep, the other one wakes up, in this way the currency market is functioning 24 hours a day. Find out the table of trading sessions on Forex (MSK): Area City Summer time Winter time Australia, Oceania Wellington, Sydney 0:00 – 08:00 01:00 – 09:00 00:00 – 08:00 01:00 – 09:00 Asia Tokyo Singapore Hong Kong 04:00 – 12:00 04:00 – 12:00 05:00 – 13:00 03:00 – 11:00 04:00 – 12:00 04:00 – 12:00 Europe Frankfurt Zürich Paris London 09:00 – 17:00 09:00 – 17:00 09:00 – 17:00 10:00 – 18:00 09:00 – 17:00 09:00 – 17:00 09:00 – 17:00 10:00 – 18:00 United States New York Chicago 16:00 – 24:00 17:00 – 01:00 16:00 – 24:00 17:00 – 01:00 In fact, trading on Forex continues even on weekends and public holidays, for example, during New Year holidays the trading goes on between banks of Muslim countries, where January 1 is not celebrated. Unofficially, Forex is working even on weekends, however, the market activity is very low then. In order to achieve better efficiency in trading, and to plan trading rationally, you have to understand accurately the way the market operates, which means to know when the rates start their movement, when trading sessions open, when the market activity is expected to be low. Regional markets have peculiarities regarding activity during the day: Far East During trading session in Asia the following deals are the most active ones: USD vs JPY, USD vs EUR, EUR vs USD, and USD vs AUD. The currency rates' volatility is insignificant, however, sometimes the activity of currency pairs, especially of USDJPY is at its peak. More often the dynamics is significant, when the Bank of Japan carries out currency market interventions. During the trading session in the Far East it is night or morning in Moscow. Before noon it is possible to work with Tokyo in Moscow, after noon – with Singapore. Western Europe At 10:00 MSK, the market starts operating in the financial centers of Northern Europe – Zürich, Frankfurt am Main, Paris and Luxembourg. However, strong movement of the U.S. dollar versus other currencies starts after 11:00 MSK, when London opens. As a rule, you can observe high activity for 3-4 hours, and then dealers of the European banks leave for lunch break and activity lowers slightly. North America Trading gets lively when the session starts in New York (16:00 MSK). American banks open and traders from Europe return after lunch. Around 20:00 MSK the European market closes, then the American banks are able to cause abrupt fluctuations of the U.S. dollar rate versus other currencies. All in all, the sessions in the United States and in Asia are the most aggressive ones, however, the largest volume of operations is conducted during the European trading session. The trading sessions in New Zealand and Australia are considered as the calmest ones.
We understand that this is a perfectly natural question, especially for newer traders. Unfortunately, it is difficult to answer. To a degree, we believe it depends on the person who is doing the asking. With that in mind, let's have a look at some of the key points relating to this subject…TimeLearning to trade the markets requires a substantial time investment. Do not underestimate this.One trader may have three hours each day that they're able to devote to the charts, while another may only have an hour. The more time you invest, the quicker you're likely to see results. However, it does not always work out this way. Having a mentor with a proven track record will highly likely help speed up this process.Using your time effectively is also key. Spending thirty minutes reading about some trader whine and bitch about how trading is not possible is NOT effective time management. Focus on learning methods that have stood the test of time. Of course, this will take some research, but it's time very well spent if you ask us.Having the right mindsetHaving the right mindset for trading takes time to develop. Trading is an incredibly solitary venture, and without the correct psychology you'll find trading terribly frustrating and will likely fail to ever make consistent profits.Before you invest time in this venture, it's wise to consider whether trading is a good fit, as this business really is unlike any other. Mull over the following questions and try to give yourself honest answers:1. When every bone in your body is telling you not to be, can you demonstrate patience?2. Are you usually a disciplined person? There's constant temptation in the market. So, having the discipline to stick to a trading plan is paramount.3. Can you handle losing money? This may seem a stupid question since let's be honest there are few individuals on the planet who enjoy losing money. Nonetheless, when operating in the markets, losses are a part of the business. Expecting each and every trade to be a winner is NOT something you can do. Well, you can, but it will likely end with you going insane and throwing your monitor out of the window. This is where thinking in probabilities helps a lot!So much to considerEveryone is unique and learns at different rates. With this, we believe it is almost impossible to definitively answer how long it'll take for any one person to reach consistency. Anyone who is telling you otherwise is either trying to lure you into buying something, or, quite frankly, doesn't know what they're talking about.Therefore, the best answer to this question, in our opinion, is quite simply: 'it depends'. 'Depends on what?' We hear you asking. Well, many things… For example, some people are just better wired to deal with the stresses of trading. Being a naturally patient and disciplined individual is going to benefit you in your trading journey. Someone who rushes into things and lacks discipline may find trading a challenging endeavour. That doesn't mean that those who struggle will not become consistently profitable traders, it just means that it might take a little more time.Let's keep in mind that trading, at least in our opinion, has no destination. There is no finish line here! It is actually a continual learning process.With that in mind, especially in the earlier stages of one's journey, focusing more on the PROCESS of trading, rather than the result is advisable. If the process is correct, the results will undoubtedly follow.Learning to trade the markets is an incredibly difficult feat to accomplish. Friends of ours who have traded the market for many years reported that, on average, it took them over 7 years to reach a level they were satisfied with. Of course, this doesn't mean that it will take you that long!