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Forex trading is highly speculative in nature and can mean that currency prices can become extremely volatile. Forex trading is highly leveraged, since low margin requirements are normally required, an extremely high

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Finding Your Way Around Forex Trading

Table of Contents

How to Get Started in Forex

Forex Basics

A Popularity Contest

The Forex Market

Before You Begin

All About Trends

Multiple Time Frame Strategy

Normal Trading Strategies

Flags and Filtering

Rounding Off

Interest Rate

The Boomerang Effect

Scoring Big Gains

A Level Playing Field

Summing it Up






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

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

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

market is to seek an exchange of a foreign currency for their own use. A

large part of the market is made up of currency traders, who speculate

movements in the exchange rates, similar to others who speculate

movements of stock prices.

Learning Forex

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

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

are also considered as blue chips.

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

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




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

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

income markets.

The exchange-traded foreign exchange future contracts were first introduced

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

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

percent of the total Forex market volume.

From Stocks to Forex

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

environment, a trader who is following a trend for as long as possible would

not have any difficulty in making money. The stock market is also a very

forgiving market, which can bail out even poor traders. The only trick is to

understand the difference between the good and the lucky. There are

several talented traders and even they can falter when the conditions of

trading become less then ideal.




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

conducted on a regulated exchange, thus there are additional risks

correlated with Forex trading. However, many traders previously involved in

stock markets are transferring to Forex markets due to a number of

benefits.

One is the availability of greater leverage. Forex trading provides greater

leverage when compared to traditional stock trading, which only allows

traders to be leveraged and in charge of larger positions with smaller

amounts of capital. The availability of greater leverage in Forex allows an

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

stock broker, while leaving them with more available capital to trade more

markets.

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

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

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

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

and the exchange, all of which charge commissions and fees.




Stock Market Headaches

There are a number of unpleasant events that a person must learn to deal

with in life. After a while, these problems are no longer considered as a

burden but instead a norm. Likewise, for traders, there are also unpleasant

occasions that can be considered as normal or a part of the job.

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

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

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

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

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

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

for equity traders.

Slippage is another problem that futures and stock traders encounter every

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

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

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




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

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

a listed stock. More so, the specialist also controls the spread; he or she can

widen or narrow the spread at his of her discretion. Hence, the specialist can

either make your trade successful or make your life miserable.

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

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

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

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

several machination processes that can be both costly and problematic.

Stock Market Headaches in Forex

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

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

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

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




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

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

traders a superior degree of certainty regarding the price.

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

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

trader another greater degree of certainty.

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

or her own discretion. Conversions, bullets or married puts are not required

to be purchased.

Forex Basics

Forex Basics

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

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

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

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

currencies involved in such occasions but only one exchange rate.




The U.S. Dollar and the Canadian Dollar

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

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

exchange rate during that year for the U.S. dollar and Canadian dollar was

about 1.60 Canadian dollars for each U.S. dollar.

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

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

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

currency for every U.S. dollar exchanged. The measurement of very small

changes in this exchange rate can be expressed using 1.1000. If so, the U.S.

dollar significantly depreciated against the Canadian dollar during the early

part of the twenty-first century.

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

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

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

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




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

bought more U.S. products than it had previously.

The U.S. Dollar and the Euro

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

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

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

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

rates, citizens from the United States found that vacationing in Europe

became very expensive. This kind of shift caused a huge influx of shoppers

from Europe traveling to the United States, especially during the Christmas

season.

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

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

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

losses.




Understanding the Exchange Rate

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

currency as the number one. For instance, assume that the exchange rate

for the EUR/USD pair is 1.2904. Since the base currency is Euro, that is also

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

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

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

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

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

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

currency pair containing USD as the second currency, a flattering movement

in the exchange rate of 10 pips will make a gain of $100; unfavorable

movement of 10 pips would cause a loss of $100. In the case of the

EUR/USD pair, a gain or loss of 10 pips can happen easily since the pair

moves about 100 pips each day on average.

Terminologies in Trading




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

they mostly use their own language. This kind of language is easily

synonymous to a secret handshake, which would let others know that they

are a member of the group.

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

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

be profitable if there is a rise in the exchange rate. selling short, on the

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

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

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

market.

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

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

percentage in point. An example for this term would be when supposing the

exchange rate for a pair rises from 1.1000 to 1.1001. It is safe to say that

the rate rose by one pip.

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




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

U.S. dollar, CAD for Canadian dollar, CHF for Swiss franc, AUD for Australian

dollar and NZD for New Zealand dollar.

Nicknames are also used in trading. These are slang terms that several

traders like to use. Several examples of these nicknames are: cable or

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

currency for the Euro, Swissy for the Swiss franc, kiwi for the New Zealand

dollar, loonie for the Canadian dollar, and Aussie for the Australian dollar.



Over the years, more and more investors grew dissatisfied with the

performance of markets relying on domestic stocks. Because of this they

began to venture into other options for international investments. There are

many available opportunities for investing in foreign markets but foreign

exchange trading is becoming one the most popular. The primary reason

why investors like Forex is that trades are quick and trading comes with

minimum hassles.




Previously access to this kind of market has only been available to hedge

funds, major corporations and other institutional investors. Some of the

worlds major banks have been involved in foreign exchange markets for

years. In the past the individual trader had no way to access Forex since

there were no methods of competing with the big boys on an even playing

field.

The foreign exchange market finally opened its doors to retail clients in the

1990’s. Makers of the online Forex market further opened the gates and

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

that several individuals could buy and sell.

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

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

and techniques that other professional traders utilize. The landscape of

Forex trading has changed dramatically and traders have obtained a new

alternative to future and stock markets.

The Big Money and Forex




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

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

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

and global hedge funds for many years. The big money investors have

always traded Forex since the large size of the market permits these kinds of

traders to enter and exit large trades without making price alterations and

upsetting the exchange rates.

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

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

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

available in the world.

Moreover, traders in Forex have the capability to utilize remarkable

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

expand their trading positions and may also serve to amplify gains and

losses. Due to the superior leverage in Forex, the barriers for traders are

very low. Traders in Forex markets can open account with as little as a few

hundred dollars.




Making Money in the Forex Market

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

exchange rates. Since Forex markets have tremendous leverage, a small

change in the exchange rate can create a large profit or loss. Wealth can be

made or lost rapidly in the Forex market; even a shift in the exchange rate

that is equivalent to a few hundredths of a penny can be amplified into a

significant loss or gain.

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

fundamental traders. The technical traders main focus is on technical

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

kinds of traders believe that all the pertinent information required to place a

trade is contained within a chart.

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

This can be loosely described as the study of economics with a particular

focus on interest rates. Such traders believe that the currencies will

eventually gain or lose strength depending on their economic strength and

weakness and because of the changes in monetary policy and interest rates.




Trading Currencies in Pairs

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

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

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

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

and one exchange rate.

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

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

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

dollar constantly fluctuates relative to other currencies. This is the main

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

The 24-Hour Trading and Trading Sessions

Forex markets are seamless and exist on a 24-hour trading market; there

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




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

traders, with full-time jobs, who can trade Forex. No matter wherever the

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

still trade in the Forex market.

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

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

to designate a particular time of day as a benchmark.

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

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

trading day also ends at the same time of the day.

During this period the three largest Forex trading centers, namely the United

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

Australian dollars may witness some serious action during those hours.

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

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




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

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

trading session of London.

The Forex Market

The Forex Market -- Technical Analysis

Many former equity traders and futures traders have chosen to trade in the

Forex markets. They have learned that technical analysis works

exceptionally well in the foreign exchange markets. But how does this

technical analysis work?

Technical analysis is merely utilizing the analysis of past price movements to

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

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

past cycles.

The Theory of Technical Analysis

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




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

reasonable degree of accuracy. The key is repetition since the entire premise

of technical analysis lies in utilizing historical price movement to foretell

future price movement.

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

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

stock prices irrelevant in the prediction of the movement in the future.

Moreover, there is no predictable economic cycle in the life of a company or

an individual stock. As a result, the technical analysis becomes a hit-or-miss

proposition in the stock market.

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

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

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

cycle easier to predict.

The Statistical Survey




It comes down to this, a survey performed in an even-handed and fair

manner will produce larger samples of information, which can produce more

accurate results. The larger size and liquidity of the foreign exchange

markets provide technical analysis with a greater sample of data from which

to draw. There are also more trades and more money changing hands in

Forex markets compared to any futures or stock market. In addition, the

Forex market contains several data points, thus making a statistical

sampling, like the technical analysis, more accurate.

Additionally, the vast liquidity present in the foreign exchange market makes

it much less likely that irrelevant players will upset the market and

momentarily skew technical indications, a situation which is common in

other liquid markets.

The Trend and the Fear of the Unknown

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

currency market is due to the prevalence of trends in Forex. Since currency

pairs have a tendency to create strong and persistent trends, the Forex

market is relatively famous for these trends. For instance, the Euro trended




constantly superior against the U.S. dollar over a three-year period. This

uptrend also occurred during a time when the United States was

experiencing a period of economic weakness.

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

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

human behavior. Entering the Forex market can create several concerns that

may weigh your mind. These concerns are common to traders who desire to

experience the advantages of Forex, but are still reluctant to leave their

comfort zone.

If you are concerned about charts, it is important to realize that the charts

used for Forex exchange rates are not very different from the charts of other

vehicles for trading, like commodities or stocks.

The Trading Patterns and the Technical Indicators

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

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




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

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

symmetrical and asymmetrical metrical triangles.

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

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

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

ranges and trends, and retracements and consolidations used.

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

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

stock and futures markets. Also, the strategies involving trend lines and

channels are also popular in the Forex markets.

Before You Begin

Before You Get Started

Foreign exchange, or Forex, has been in the forefront of possible business

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

of currency exchange. Even though there is always the presence of pressure




and the rigors of a day job, many traders still aspire to enter and profit from

foreign exchange markets.

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

markets, you should know what you are getting into; you will enjoy gains

and suffer losses. In every venture, it is important to know the risks involved

and the techniques to use in order to stabilze the possible outcome of every

trade.

The Triple Threat Trader

Any trader who masters trading strategies and technical analysis can

pinpoint profitable entry and exit points. Mastering the fundamentals of

analysis can help one anticipate turning points in the markets when

economies shift. More so, the trader who understands solid risk

management can defend and protect their account against loss in any

trading climate. A trader that masters all skills, namely technical analysis,

fundamental analysis and risk management, is called the tripe threat trader.




Anyone can become the tripe threat trader. It is important to learn tried and

true techniques which can be utilized to successfully trade in the Forex

market. Learning to identify the current situation and trends of the market,

apply the appropriate strategies for trading, and adapt to changes in the

market can help anyone master the technical analysis.

It is also important to be fully educated in fundamental analysis although it

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

solid realization of the fundamentals of the Forex market.

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

Having good risk management fundamentals can help you to evade trouble

and allow you to survive even in the tough times and even gain valuable

experience while doing it.

Acquiring Experience

Having a good trading education can help anyone to anticipate some of the

situations that may occur in Forex; none the less it does not provide




experience. Fortunately, gaining experience in trading the Forex market,

without risking money, can be done by enlisting a practice or demonstration

account. There are several Forex market makers who offer such accounts

and they often include real-time charts, news feeds and price quotes. This is

one opportunity a beginner can now enjoy. In the past traders had to learn

and make errors using their real money.

An excellent method for potential Forex traders to familiarize themselves

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

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

trading.

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

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

be opened with as little as a few hundred dollars. They create one of the

lowest barriers to entry for any type market for trading.

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

several months before advancing on to the mini account. Being lucky is not

the same as being successful in trading. Even if you turn profit on the demo




account, but still exposed yourself to too much risk that profit probably

would not be maintained for long when you are live trading.

The Pair to Trade

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

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

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

difference between the buy price and the sell price.

Additionally, the spread is considered as a formidable obstacle, and there

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

trading. Overcoming the spread can help you to reach the point in the trade,

called the break-even. Thus, using a pair with a narrow spread can help

achieve this level much quicker.

When using the demo account, begin with the EUR/USD pair and after you

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

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




pair but with a higher volatility.

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

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

want to test a new trading technique or currency pair always remember to

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

your personality is part of the learning process in becoming a Forex trader.

The Commodity Currencies

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

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

the oil is similar because the Canadian dollar often gains ground as the price

of energy rises and falls when energy prices weaken. Commodity currencies

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

commodity, like oil.

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

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




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

falls along with the price of gold. Such a correlation is extremely useful to

currency traders who frequently observe situations where the price of gold

appears to lead the Australian dollar.

All About Trends

All About Trends

Like some activities in our daily lives we often employ techniques to cope

with different situations. Trading is very much the same. In trading the

Forex market, there are numerous techniques available and no one of these

techniques will work all the time. Techniques are designed to help a trader

survive a specific condition within the currency market. It is an important

ability for the trader to cope and adapt to any circumstance and be able to

vary his or her own trading style using the particular technique appropriate

for a specific crisis.

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

wherein the currency pairs bounce between support and resistance;

Trending, wherein the pairs have a definite direction; and Consolidating,

wherein the currency pairs are cornered in a narrow and tightening area.




Understanding these conditions begins by knowing that during range-bound

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

when the market is experiencing consolidating or trending periods, range-

bound techniques are inappropriate.

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

for what specific condition is to realize that markets constantly change.

Sooner or later a pair that is currently trending would begin to move into a

consolidation phase or in a range. Traders must be nimble and have the

capacity to adapt to this kind of changing environment by using the right

strategy at the right time.

Importance of Being Objective

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

and encounter success right from the start. However, there is an unfortunate

side to this kind of initial success. The trader has the tendency to continue

using that same trading technique even though the market has clearly

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




specific technique should be avoided since the results can be devastating.

If this happens to a trader you are advised to remain objective and

understand that short-term success is not the ultimate goal. Luck can be

enjoyed by anyone but it does not last for long. It is important to know that

the markets are not static and it is up to the trader to learn and cope with

the changes.

Starting With a Tendency

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

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

such as when the currency market tends to run in a long and strong trend.

Another example would be the markets’ tendency to look for support or

resistance at large round numbers. This tendency is often called the

psychological tendency and can happen in any trading market. There is also

another situation where the market often has the tendency for a strong

breakout to occur immediately following a tight consolidation. The trader can

use these tendencies and make them a foundation from which to build an

effective strategy.




An authentic tendency can often be identified by astute observation. For

instance a round number support and resistance point can occur when

people often set their stops and exits right at round numbers.

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

trade and there are others who rarely analyze as to where they wish to place

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

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

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

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

foreign exchange markets.

Applying Trends

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

market is trending, it has clearly preferred direction. Traders can assume

that this trend will continue since history dictates that in the currency

market trends can last for several years. If the trader is able to get on the

right side of the trend they might have the opportunity to enjoy a




considerable gain.

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

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

the currency pair moves in the proper direction the traders defensive stop is

less likely to be executed.

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

price has the tendency to return to the entry point. For this reason this kind

of pair has no real direction. A situation such as this makes it hard for

traders to hold on to their positions and may even force them to make quick

exits.

The Trending Market

Traders can use several techniques to determine whether a market is

trending. One method is to use moving averages, also known as proper

order of moving averages.




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

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

direction. High readings can indicate strong trends.

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

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

the general direction of currency pair.

The Formation of Trends

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

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

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

years. More so the strength and weakness of an economy runs in a cycle

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

cycles undergo, including the expansion, prosperity, contraction and

recession, in that order.

The economic strength and weakness usually reflect in the currency. Since




currency markets involve matching two currencies against one another,

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

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

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

tempting to apply and deduce the point at which the trend will reverse. This

is exactly the behavior that traders should avoid. While it is possible to gain

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

stacking the odds against himself.

Multiple Time Frame Strategy

Using a Multiple Time Frame Strategy with Forex

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

to form trends in an assortment of time frames. Trends within the Forex

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

themselves with these trends can improve their chances for success.

Why Does Multiple Time Frame Strategy Works




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

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

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

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

lows.

This technique can also be utilized for shorter time frames. For example

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

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

When playing the role of a trend trader your main objective is to use the

trend to your own advantage. If the currency pair is in a downtrend you

should only look for short entries and ignore any opportunity to go long.

Likewise if the pair is rallying you must find your entry point and locate a

greater resistance level for your exit.

The Tops and Bottoms

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




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

overly concerned with achieving the ultimate entry point; they desire to sell

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

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

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

well as Forex. Any trader who tries to achieve buying at the bottom and

selling at the top is simply attempting to get lucky.

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

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

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

for the enhanced probability of the success that patience grants.

The Entry Signal and Stop Placement

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

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

can enter short within the vicinity or point at which the Relative Strength




Index is no longer providing an overbought reading; this should also be the

point when the exchange rate begins to drop.

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

market an to indicate if the market is over sold or over bought. Additionally,

it provides the trader an indication as to which way the market is going.

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

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

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

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

rate could rally further. If the pair trades above the stop point it is advised

not to hold on to it as it could be breaking out to the upside. The stop should

be placed at a point where the trader will be taken out of the trade if a new

high is reached.

Knowing When to Stay Out

If the currency pair is rising up from support, the trader should not enter a




long trade and then try to gain from a possible bounce. In a multiple time

frame strategy, the main focus is to trade only in the direction of the trend

and to disallow trades that go against the trend.

This does not mean that the trades going against the trend are never

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

constantly fights against the trend on steady basis will have difficulty in

finding success as opposed to someone that follows the trend.

When a trader properly uses the multiple time frame strategy they have the

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

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

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

another opportunity for short entry.

Normal Trading Strategies

How To Use Normal (Non-trending) Trading Strategies

In the foreign exchange market there is no doubt that fortunes can be made

from following trends. However often the market fails to cooperate. The




trader must be able to develop solid techniques for times when the market is

not trending. This can be accomplished around specific tendencies that are

most common to the currency market.

The Key Indicator

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

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

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

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

compared to the other mentioned indicators which are merely equations or

formulas that are applied to the price.

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

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

stochastic oscillators are used to measure the difference between the current

price and the recent prices in order to determine if the pair is overbought or

oversold.




Technically, the Forex market does not have a price per se and instead,

there is an exchange rate. The rate allows the traders to compare two

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

exchange rate in currency trading.

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

resistance. The support happens when buyers continuously step in at a

particular price. On the other hand, when sellers repeatedly execute at a

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

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

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

The Intraday Breakouts

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

breakouts, it is important them to remember to utilize every advantage

possible. Traders normally search for situations where the odds are in their

favor, and then take the necessary course of action.




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

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

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

above support or fall back below resistance.

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

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

breakouts.

The Triangles

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

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

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

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

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

of the diagonal resistance and the horizontal support.

The Trend Filter




Traders can increase their edge and take it to the next level. More so,

traders can also gain a further edge by checking the direction of the

currency pair preceding the information of the triangle pattern, when trading

ascending or descending triangles. This is for the reason that it is not

abnormal for a currency pair to trend in one direction, then consolidates and

then resume trending in the same direction. The pair trending in the same

direction prior to the formation of the triangle pattern can only cause the

trade to become all the more compelling.

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

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

must do this in order to reduce false breakouts from happening and enhance

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

again integrating the trend into your techniques.

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

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

hammered by their actions.




The Time-Of-Day Filter

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

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

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

dependable if it happens on low volume.

Within a high-volume environment, the move is deemed more significant

since the players are placing large amounts of capital to work. On the other

hand, an order that normally would not have a significant impact on the

exchange rates but does have the ability to move the market can occure

within a low-volume environment.

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

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

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

volume is light and the move tends to be succinct.

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




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

there are certainly times of the day when large volumes are generated.

Flags And Filtering

About Flags And Filtering Entries

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

price fall rapidly, then consolidates, and then continues its fall. In between

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

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

indicating that the exchange rate will continue to move in its previous

direction is referred to as the continuation pattern.

The Flags

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

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

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

Flags are usually found on intraday and short-term charts.




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

thrust. Whether the move is an advance or decline does not matter. What

does matter is the velocity of the move. This sharp burst generates a long

candle or even a series of long candles on a short-term chart; this is also

known as the flagpole.

Flag formations are also found in continuation patterns, which means that

the most likely end point of the consolidation will be a breakout in the similar

direction as the flagpole. Generally, flags contain two parallel lines sloping

away from the direction of the flagpole.

The Filtering Entries

Impatient traders often opt to enter when the price clears the upper line of

the flag instead of waiting for the price to reach the right entry point. This is

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

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

reason to assume that the trade should be successful. However, by waiting

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




10 percent of the flag, traders can filter out a poorer entry point that would

have been disastrous.

The Volatility Cycle

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

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

event is best described in a situation when the market is trending. The Forex

market often trends and the participants have a definite opinion regarding

the direction of the trade.

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

visible with options trading. Traders in this type of market write put and call

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

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

the tendency to be bigger when the markets are volatile.

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

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




reduced premium. This concept is also known as selling volatility. This kind

of cycle in volatility can also be observed in the foreign exchange market.

Moving the Market through Perception

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

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

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

and the price must move to reflect this change of opinion.

After a trend has continued for a while the pair will achieve a certain point

where the market participants feel that the exchange rate is valued fairly.

When this happens there will come a point when the bears and the bulls

reach an temporary agreement that a currency pair is reasonably priced.

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

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

new information will be introduced into the market. Then the perception of

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




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

indicators. The exchange rate will break out of its narrow period of

consolidation and run until the price achieves a new level where the bulls

and bears can once again agree. Such a temporary break can be caused by

an unexpected news events.

Rounding Off

About Rounding Off

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

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

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

numbers play a major role.

The Reason Behind the Interest in Round Numbers

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

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




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

was greeted with celebration because it was a significant milestone.

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

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

however, had little to show for it.

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

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

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

was entranced by the 10,000 figure.

There are some scientists who believe that human beings generated a

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

fingers. More so, we began to interpret things in terms of factors of 10.

The Effectiveness of Round Numbers

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




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

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

several traders placed buy orders for that stock at $40 per share, since they

believe that the stock is a bargain at that price, the stock will encounter a

large pool of buy orders. When these orders are activated, they can unleash

an incredible amount of buying power. When buyers are more aggressive or

outnumber sellers, the price will surely rise.

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

orders have accumulated at that level. Traders refer to this as the

psychological support level since it is not entirely based on any prior price

action.

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

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

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

part of the human nature to be attracted to round numbers. Therefore, the

event can occur in any market traded by humans.

Round Numbers in Forex




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

instance, back in the early part of 2005, the USD/CAD currency pair found

support repeatedly at 1.2000. Another is in early 2006, when the EUR/USD

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

such round numbers as entry points were rewarded handsomely.

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

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

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

tendency into consideration when creating their strategy.

The First Bounce is The Best

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

because the first bounce off of the round number support or resistance is

normally the best bounce and so traders desire to be certain that they are

seeing the first bounce. On the other hand longer time frames cannot also

be used for this kind of strategy since they can hide multiple bounces within

a single candle.




Every time the exchange rate achieves the round number orders are

normally executed and the pool of orders that produces that level of support

and resistance is diminished. Once the total of orders remaining is no longer

large enough to effect the exchange rate it is not unusual for the level of

support or resistance to break out.

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

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

valuable. The traders can also trade subsequent bounces as well, though the

first bounce always has the greatest potential.

Interest Rate

Interest Rate

The ultimate traders dream is to enter a trade and turn a profit even though

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

money off their trades, even though the market is seemingly uncooperative.

Although it may seem farfetched to those who are unfamiliar with the

methods of Forex market that is exactly how the hedge funds, banks and

other institutional traders play the Forex game.




The Interest Rate Differentials

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

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

determined by the nations central bank or the nations that use the currency.

For instance, the Federal Reserve sets the U.S. interest rates, while the

interest rate for France, Germany and other nations of the European

Monetary Union are determined by the European Central Bank.

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

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

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

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

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

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

foreign exchange market. The trader who is long on the higher yielding of

the pair collects interest on the trade.




In contrast the trader who is short on the higher yielding of the pair is

required to pay the interest. The amount of the interest that the trader

either pays or collects is based on the interest rate differential. This factor is

described as the difference in the interest rates between the two currencies.

How Does the Interest Rate Differential Works

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

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

1.0 percent for the XYZ currency.

Thus ABC yields higher than the other. Traders who are long ABC and short

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

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

order to collect the interest.

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

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




the higher-yielding currency seek to collect interest every day, given that

they hold the currency pair.

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

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

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

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

over time.

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

the higher-yielding currency. Normally traders would leave this strategy

when it becomes evident that the interest rate differential will stop growing

or become smaller in the future.

Changing the Differentials

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

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

currency ABC and short currency XYZ.




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

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

When the bank takes this course of action the interest rate of ABC rises from

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

3.25 percent.

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

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

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

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

percent.

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

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

enough traders tempted to go long on ABC and sell short on XYZ this event

will create a positive pressure on ABC and negative on XYZ. Thus, the

currency pair will begin to rise.

Collecting the Interest




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

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

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

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

the trader an additional edge.

In this type of situation the trader who is on the other side of the trade must

pay the interest day by day regardless of the direction of the trades

movement. The trader who is short on the higher-yielding currency is

required to regain the interest lost in order to break even.

The Boomerang Effect

What is the Boomerang Effect?

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

the trading day. There usually are a number of hours starting after the

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

session volumes tend to be smaller. Although the New Zealand and

Australian Forex markets are full swing during this time of day the entire

volume tends to be relatively slim.




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

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

During these periods currency pairs have the tendency to drift and any

movement in the market should be viewed as highly suspicious.

Fading of the False Breakouts

During these hours breakouts that occur are infamously unreliable since they

almost always occur on very low volume. Also using a trending technique is

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

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

retrace themselves a trader can create a strategy that is designed to

capitalize on false breakout events through fading or trading against them.

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

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

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

strategy involving an interest rate arbitrage this kind of short-term trade is

not designed to collect interest.




The traders can integrate a defense against interest rate charges by

choosing to enter orders just after 17:00 Eastern time. This would normally

link to 22:00 GMT during standard hours or 21:00 GMT during Daylight

Saving Time. Either way, the time of day for this kind of trade will constantly

be just after 17:00 Eastern U.S. time.

The Strategy Used

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

The method is to enter both a sell order above the market to fade a move

higher and enter a buy order underneath the market to trade against a

move lower. In both of these cases the traders assume that any movement

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

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

have the ability to move the market under normal circumstances. Also since

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

ability to generate market movement because of thin trading

circumstances.




How to Set the Parameters

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

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

thus creating a ratio of 1:1 for the trade.

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

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

another currency pair the parameters should be altered and adjusted to

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

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

EUR/USD pair.

This kind of strategy is designed for quick profits thus it is perfect for the

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

making it ideal for short-term trading.

Entering the Trade




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

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

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

1.2598. Additionally they must place a buy order 15 pips below the open at

about 1.2568.

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

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

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

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

real volume enters the market. At this point the strategy that fades

breakouts would be inappropriate.

Scoring Big Gains

How to Score Big Gains

A trading neophyte does not have the experience which allows them to

anticipate and avoid trouble. This type of trader is more likely a prime

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

goals to be in tune with the trader’s experience. A first-time trader must not




have aspirations of doubling his or her account overnight.

Although big gains are possible it is more important not to expect everything

to fall into place overnight. Always start with an easily achievable goal and

once the first obstacle has been reached move on to the next one, and then

the next.

Setting the Goal Properly

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

trading. Because the rewards of trading can be fantastic it is easy to get

excited and lose concentration and objectivity concerning trading.

Excitement can cloud good judgment and often leads to unrealistic

expectations. In trading participants are required to keep themselves free of

emotion in order to achieve clear and rational decisions.

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

and often do what is not advisable. These traders enter the market with high

expectations and are usually quickly annihilated. Always note that more




traders fail than succeed and the rate of failure is highest among new

traders. Thus when entering the currency market or any trading vehicle it is

important to have a commonsense method for setting goals.

Traders must rid themselves of unrealistic expectations. Even though you

have read about these incredible gains in books, watched them on the

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

that you can do it too. In time you will note that a good trader rarely talks

about their gains.

Breaking down the Goals

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

break it down into small, more achievable pieces.

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

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

percent monthly return an aggressive target a no would be a sure reply.

What they do not realize is that if the trader that has the capacity to




increase the value of an account by just 6 percent each month on a constant

basis can achieve an annual gain of approximately 100 percent.

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

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

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

doing so until the calculation is enough for the entire years worth of results

or for twelve months. Isn’t compounding wonderful!

Consistency

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

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

percent return every month. It is advisable to begin with a relatively easy

target, and gradually work your way to the next level.

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

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

pressure on the trader which is good since trading itself is stressful enough.




You don’t need any extra pressure.

By achieving a goal of just 1 percent each month you would be well ahead of

most traders. Although a monthly goal of 2 percent may not be inspiring, if

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

percent. Additionally by achieving that goal you will have outperformed most

hedge and mutual funds.

When you have achieved your modest goal for three months in a row you

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

from 2 percent to 3 percent and so on. Also, do not rush things and

remember that as you gain experience and confidence from achieving your

goal you will continue to become a better trader in the future.

After the Goal is reached

Once the trader has achieved their goal it does not necessarily mean that it

is the end of the story. Now you must take precautions in order to

safeguard your gains.




However if you find yourself encountering problems or not meeting your

objectives it may mean that your goals are too aggressive. Take a shot at an

easier target and if things get really tough stop live trading and switch to a

demo account until you are able to regain your footing.

A Level Playing Field

Creating a Level Playing Field

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

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

trying to make 10 pips on each trade instead of earning 100 pips on one.

This kind of attitude may seem to be sensible, however, the trader seeking

to triumph by playing it safe is in fact making his life more difficult.

Evening out the Odds

The world of Forex trading is much like playing roulette. The zero slot

represents the spread and the odds are forever going to be to the advantage

of the house, which in Forex trading is the market maker. Similarly




additional zero slots lower the roulette players chances of success, every

additional pip in the spread can also lessen the chances of success for the

trader.

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

over it. It is determined by the market maker alone. However, in the world

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

field, thereby improving their chances of success in trading. This can be

done by using exits and stops, longer time frames, and trying for larger

gains.

Do the Math

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

which is a very common spread in the Forex market. If the trader just wants

to gain 10 pip it is understood that he or she can lose the spread upon

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

actually requires the exchange rate to move 13 pips in their favor in order to

make their 10 pip spread.




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

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

method on how traders can determine the odds of success or failure.

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

of 7 pips. This is because that a loss of 3 pips is acquired automatically upon

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

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

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

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

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

Therefore the odds of the success in this example are 1.857:1. This goes to

show that trying to make money trading for small gains is very difficult.

However, traders can improve the odds of any trade by utilizing good

strategies and solid risk management.

Changing the Equation




The traders can rearrange the odds in order to have a better chance to win

at currency trading by expanding the playing field. If the trader isaiming for

larger gains the spread becomes less a less integral part of the trade.

Once again let’s assume a spread of 3 pips only this time the trader will be

hoping to gain 100 pips instead of just 10 pips. To turn a profit of 100 pips,

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

favor, thus 100+3=103.

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

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

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

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

The odds are better because they are closer to 50-50. However if the trader

is using good trading techniques and risk management they can further

reduce these slightly negative odds.




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

field is larger the odds of success also improve significantly. So that traders

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

trades longer and consequently enter trades less frequently.

Reason Why Not Everybody Does It

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

does it. Here are a couple of possible answers. First, these traders do not

understand that they are stacking the odds against themselves. Second,

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

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

they believed it to be. Each trader has his or her own concept of trading or

even what they would like trading to be. Although it is ideal for trading to

provide people with riches through minimal effort trading strategies are not

often suited for the ideal - they should be applied to the real trading world.

Summing It Up

Summing it Up




Fixating on the percentage of winning trades versus losing ones is similar to

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

instead you need to be prepared to lose a few battles along the way. More

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

to avoid the creation of a large loss. Many trading fiascos begin with the

unwillingness of the trader to accept a loss.

The Amateurs And The Professionals

The ultimate judgment of your performance record as a trader will come

down to whether your results are due to your outstanding decision making

or from taking excessive risks. For example there are two traders both with

starting equity of $50,000. The first trader was able to double the initial

investment, thus resulting in a 100 percent gain, although he suffered a

drawdown of 50 percent along the way. The second trader rose only to

$60,000, which is only a gain about 20 percent, but his worst drawdown was

only at 2 percent of the accounts value.

Although the first trader had the larger return he is an accident waiting to




happen. Any trader who is willing to lose 50 percent is also an excellent

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

hold on to his losing trades or even add to them. This is normally a signal of

failure in trading the currency market.

The trader who can be considered superior is the second trader. This is

because he was able to attain considerable gains with minimal drawdown.

The Good Trade And The Winning Trade

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

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

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

the attitude that for as long as the trade wins it does not matter what rules

were broken during the process.

The truth is, winning trades are not always good trades and vice versa. It is

still possible to perform everything incorrectly and still achieve a triumphant

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




lose on the trade.

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

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

trading by the result but rather on whether the process followed proper

protocols. If done correctly but still not profitable at least you will be able to

resolve that the problem lies not with the execution but with the plan.

Importance of Proper Execution

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

Unfortunately this is the main area where most traders go wrong. Since they

desire to succeed they make a plan and then randomly change due to lack of

discipline. When failure occurs the blame is immediately placed on the plan.

In fact, the error is not with the plan but with the execution.

When a trader moves from one technique to the next they have no way of

knowing if their plan actually works. When you successfully follow a plan it is

important to do everything that can be done to reinforce that behavior




despite the consequences of the outcome.

Also never congratulate yourself for a successful trade outcome that came

about from an ignored plan or was unplanned at all. Instead, consider

yourself lucky and realize that it might be impossible for you to succeed in

this manner over the long term.

Taking Responsibility for the Actions

Many traders like to place blame. They would like people to think that their

unfortunate trading records are due to exploitation on the part of the market

makers, institutions, or other outside influence.

Although dodging blame may be effective in dealing with other aspects of

life, like work, it is not conducive to performing well in trading. Deflecting

blame only causes traders to remain the same place and leaves no

opportunity for change. Additionally by accepting that the fault lies with

someone else there is no need for learning and growth.




Always remember to accept responsibility for every trade that you place. If

you are very open in taking credit for the winning trades then you should

also be able to accept blame for any losing trades as well. Those individuals

who always fail to take responsibility for their own actions, or trades, have

the tendency not to succeed in the Forex market, or any trading

environment what so ever.

Good luck with your trading. Remember the old adage. Make a solid plan.

Plan your work and then work your plan. If you do you will succeed.

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