I get a lot of questions regarding currency trading, forex trading, and forex trading tactics. They have a notion about it that is either overly “optimistic” or, at the other extreme, they perceive it as “something truly terrible and impossible” since they hear all sorts of rumors. I’ll discuss the components of effective forex trading systems and methods, how currency trading works, the dangers involved, and the difficulties faced by traders. Even if you know nothing at all about it, money, or economics, if you’re inquisitive, keep reading.
A review of the essentials
I won’t go over everything since it was already discussed in a previous article and is well covered on many other websites. I’ll simply quickly review what happened. You DO need to desire to study and “understand what is going on” at least a minimum to generate sustained gains over the long term, even if you DO NOT need to be a financial expert or a skilled economist to trade currencies.
First off, trading currencies CAN bring you money, and quite a deal of it at that. On average, 90% of retail forex traders lose money. For the greatest and most risk-tolerant among them, however, roughly 5% earn fair profits and another 5% make phenomenal gains month after month, often to the tune of 10% and even 20% monthly returns (yes, you read that correctly, there is no error). This is factual and verifiable; it is NOT hype, a rumor, or an exaggeration.
When trading currencies, you purchase and sell “pairs” using the notation xxxyyy, where xxx denotes one currency and yyy denotes the other, such as usdcad, eurusd, or gbpaud. By depositing funds with a forex broker, you may purchase and sell currency pairs. This is done via the broker. With ALL other markets dwarfed by multiple orders of magnitude, the “Foreign Exchange” market, or “Forex,” is by FAR the biggest financial market in the world. Choose a reputed broker, like Oanda, since there are honest and reliable brokers as well as unstable ones. Theoretically, the broker earns money from the “spread” — the difference between the prices at which he buys and sells currencies to you and me — much like the area where travelers change their money at the airport, but on a much greater scale.
In practice, most brokers also have a trading desk, and the traders of the broker try to make money by trading against their own clients by taking the other side of their clients’ trades and hoping that the clients will lose, on average (which obviously is true, based on statistics), which is similar to a casino: you are “betting” against the house, so there are some things you need to be aware of like “stop hunting” and other issues (we’ll cover that). Keep in mind that trade is a zero-sum game (or even a negative sum game) in which one player’s profits are the other player’s loses. However, the chances of winning are much greater for excellent traders in forex compared to the casino (and stocks) since the price of the pair varies mostly outside of your broker’s control. THIS IS GOOD ABOUT IT because the pair will follow the price of the worldwide market pretty closely. The currency market is a MACRO market, somewhat similar to a stock index. In contrast, a MICRO market on a particular company is prone to a LOT of irregular movements and market manipulation. Noting that currencies can also be “manipulated” and pushed in one or the other direction for a brief period of time and a few pips, we will return to these macro forces later. However, aside from big central banks, currencies typically follow macro market forces that are outside the control of even the largest financial institutions. The configuration is as follows:
I won’t go into all the specifics since learning the “operational intricacies” of forex trading isn’t difficult and isn’t the issue or the primary hurdle. Instead, I’ll simply say this:
• You always purchase one currency and sell another on every deal. You are buying usd and selling cad when you buy usdcad. When you sell usdcad, you are exchanging usd for cad. You don’t really purchase or sell anything “for real”; you may trade without having a lot of USD or EUR. All of it is handled by your broker, and all you have to do is instruct your broker by pressing the “sell” or “purchase” buttons (it is literally that simple).
• You “purchase” xxxyyy when you anticipate that xxx will gain value relative to yyy or vice versa (or both). Simply put, you purchase xxxyyy when you anticipate a price increase. You are therefore “bullish” on the pair, which is equivalent to being “bullish” (long) on xxx and/or “bearish” (short) on yyy. If you purchase the pair, the price rises as anticipated, and you leave at the proper time, you gain a profit that is credited to your account straight away.
• You “sell” xxxyyy when you anticipate that xxx will lose value relative to yyy or that yyy will gain value relative to xxx (or both). Simply put, you sell xxxyyy when you anticipate a decline in price. In such instance, you are “bearish” on the pair, which is equivalent to being “bullish” (long) on yyy and/or “bearish” (short) on xxx. If you sell the pair and the price declines as anticipated and you leave at the proper time, you win money, which is credited to your account straight away.
• You have the option to “cash in” your earnings at any moment by transferring funds from your broker account to your bank account.
• With Oanda, you may begin trading with as little as $100 and incur risks that are practically symbolic; a “large” profit or loss would be 20 cents. When trustworthy brokers state that “losses may surpass deposited cash,” you shouldn’t be concerned since this is just mentioned for security and never occurs. If you deposit $1,000, the most you can lose is that amount. If you move cautiously, though, you won’t lose it all that quickly, and once you get the hang of it, it will grow—possibly very dramatically.
• Although trading with “real money”—even if it’s only $100—as soon as possible can help you gain a feel for the real thing, you may also trade using a demo account (fake money). Knowing that the SAME winning strategy will automatically translate to 200 or 2000 dollars in profits with a larger deposit once you start consistently making 20 cent net profits (or whatever) is all you need to do. This assumes that your psychology and emotions remain the same with the larger amounts. a lengthy tale
• Think of your first investments of $500 or $1,000 as “tuition fees” for learning; expect to lose them over time as you engage in the process of “learning by doing” and consider them to be part of the price of your “trading education.” Nothing odd about it exists. A bachelor’s degree may cost up to $100,000, yet many scream out at the thought of losing $1,000 to learn lucrative trading? This is what?
• When trading currencies, you may purchase or sell using “leverage”: 10, 20, or 100 times the amount of money that is really in your account. Profits and losses are greatly increased as a result.
• When you first start, I advise you to utilize LOW leverage and a tiny initial investment of between $100 and $1,000. Increase your deposit and leverage after you can consistently earn cent-profits.
• Forex earnings are measured in “pips,” and pairings have five decimals. Depending on your account size and leverage, a pip may be worth anything from one penny to ten dollars. For instance, suppose the price of the eurusd pair climbed by 20 pip from 1.0575 to 1.0595.
• I advise the ordinary newbie to set up their system such that 1 pip Equals 1 cent. You may then transition to the more “real trading” environment for retail traders, where 1 pip is worth between 10 and 100 dollars. Depending on trading style, trading proficiency, risk management, and risk tolerance, typical daily net earnings range from 20 to 100 pip.
The most popular currencies that are traded are the USD, EUR, JPY, GBP, CHF, AUD, NZD, and CAD, together with all of the potential “pairs” between them. The ones with USD in them are the “majors.” The spread, which you can think of as a transaction cost, is lower during regular business hours and on the more liquid pairs like eurusd and usdjpy, but you can trade around-the-clock from Sunday evening to Friday at 5 p.m., and you can hold open positions for as little as a few seconds to as long as several months, if you want to.
Basics versus Technicals – forex
People have this absurd propensity to hold on to their identities. “I am a firm believer that basic analysis is all that matters”… “I believe that only technical analysis is effective”… I only use indications. I solely use pure price action, you say. It’s pointless for egotistical people to compete in infantile piss-offs; instead, they should unwind, attempt to relax, and, most importantly, work on being more adaptable and flexible in mind and spirit. This will help them survive in trade in the long term.
Let me start by saying that ANY information you may get is helpful in the forex market. Period. Pure fundamentalists who have no knowledge of trendlines, moving averages, buy and sell zones, or even the most basic price patterns are at a significant disadvantage compared to pure technicians who have NO IDEA what is happening in the market.
What precisely are TA (“technical analysis”) and FA (“fundamental analysis”)? Okay, I’ll skip the blather and go right to it: TA is the examination of charts and patterns combined with the determination of sale and purchase zones, often known as supply and demand zones, while FA is macroeconomics. Unless you are a multi-billion dollar hedge fund trading trends (and even then), you must utilize TA and give up FA if you really “want” to avoid one or the other. But why would you voluntarily relinquish control of a significant market component? Lazyness? Yes, that’s right—the profit killer (among many others—we’ll get to that).
FA is the study of each nation’s economy, financial markets, and currency. The majority of “fundamentals” are really “contained” in one practical and straightforward tool: moving averages, therefore you DON’T need to be a good economist like me to grasp the fundamentals! The H4 and D1 periods’ 50-period moving averages show the majority of the fundamentals. The pair is “neutral” and both currencies are about “equal” in strength (fairly” priced and “neutral”) in the present market environment if the H4 MA50 is moving up-down-up-down with no discernible upward or negative trend. If H4 MA50 is typically heading upward, the first currency in a pair has the advantage over the second one, which indicates that Big Money generally believes the first currency’s “fundamentals” to be stronger (hedge funds, large speculators, etc). Similarly if the H4 MA50 is going downward.
The eurusd H4 chart is shown above. Each little bar represents 4 hours of “price activity”; red denotes a decline and green denotes an increase. As it would take too much time to describe in an already lengthy piece, I won’t. When compared to the USD, the EUR fell in December, rose in January, and began to trend down in mid-February. By late February, the slope had flattened out, possibly indicating a trend reversal for March 2017 and a gradual takeover by EUR bulls for Spring 2017.
When you have the knowledge of economics and finance to comprehend what is happening and see the big picture clearly, ALL these moves can be explained, even generally followed, and clearly understood “as they occur.” However, it is not necessary to have a thorough understanding of all the elements because they are essentially “contained” in (“priced in”) the moving average.
Isn’t that AMAZING? Inflation, central bank bias and policy, global capital flows, growth, trade, jobs, credit, tax policy and regulation, politics, sentiment regarding risk, asset demand, etc. are all basic indicators that are revealed through price. Everything is in the major MAs! Since I am a macroeconomics, global finance, central banking, and currency economist, I personally find it very helpful, but it is not required. Just be aware that MAs “contain” all the information you want on the fundamentals.
Fundamental factors go into one of two categories: 1) What IS occurring right now, and 2) What the major market participants EXPECT will occur (expectations): According to John Maynard Keynes in the 1930s, “successful investment involves predicting the anticipations of others.”
Things connected to real capital flows as a result of growth, trade, and competition, as well as what actually occurs or what Big Money believes WILL happen, are the market movers for price:
• Inflation: higher rates are bullish (please bear with me; the lengthy tale is one I address in 12-week university courses in international finance or monetary theory).
• More employment and growth is positive.
• Credit: More is favorable.
Less taxes are bullish.
• Government spending: unless there is a crisis with the nation’s debt, a sizable “stimulus program” is bullish (rare for the 8 currencies mentioned above).
• Attitude of the central bank: A “hawkish” central bank will increase the value of the currency. For a variety of tactical and policy reasons (housing or asset bubbles, inflation, etc.), the central bank occasionally wants to prevent a currency from appreciating (to aid exports) but does not want to cut the policy interest rate (which would weaken the currency). In these circumstances, the central bank officials will attempt to “talk down the currency” through comments and communications (CAD and NZD do this a lot). If the global forex market believes the currency “should” gain, these techniques have an impact for a few days, but it does not endure much more than 1 or 2 weeks.
• Trade: Increasing exports is positive.
• Global capital: a country’s currency will often increase in value if large sums of money from other nations are used to purchase financial assets, real estate, or land there. and if a lot of local and foreign money wants to LEAVE the nation, this might cause the currency to fall!
• Market sentiment: Positive sentiment is positive, but JPY and CHF are exceptional for this since they often appreciate when the world’s financial markets get uneasy (don’t ask why; it’s a lengthy tale).
IF YOU GET LOST IN THE DETAILS, THIS VERY SHORT RECAP WILL BE OF GREAT ASSISTANCE.
When a nation’s commodities, services, and/or assets (stocks, bonds, real estate, etc.) are in great demand, the same goes for its currency, which tends to appreciate. The other factors mentioned above also play a big role.
It involves “watching and comprehending what is going on” with these factors and the overall market mood, as well as having an awareness of the relative influence and relevance of what is occurring. Finding your “macro bias” on a pair of shoes is helpful (buy or sell). If you understand FA better, you may also “trade the news” in a more successful manner.
The benefit of H4 and daily moving averages is that they already include all previous “fundamentals” of the currency within their trends and directions, and they tend to continue in the same direction simply because a country’s macro fundamentals do not (or very rarely) “suddenly change overnight” from bad to good or from good to bad — the process is gradual, and it shows in the news on the various variables discussed above, so the news about fundamentals tends to slant toward the positive. Currency market factors resemble a speed boat more than a transatlantic voyage.
Sometimes the trend weakens (a string of fundamental news items that contradict recent events) or strengthens (a string of fundamental news items that “add confirmation” to the current trend), and these fundamental changes will once more be reflected in the moving averages as increasing, decreasing, flattening slopes, etc. Remember that all past fundamentals are “in” MAs, and all recent fundamentals are “in” price action and “in” recent MA changes in the H1 and H4 charts. Being able to interpret the movements in the MAs and relate them with what is happening will help you better understand what is happening and significantly improve your trading. Remember this.
It’s crucial to comprehend the impact of news. Frequently, news is released that has a significant one-time impact and is at odds with the prevailing “market mood” towards the economy. For instance, in a prospering economy that is otherwise increasing, you can observe fresh unfavorable facts about employment or industrial output. When market participants 1) “over react” to the news, 2) get over it, regroup, and see the bigger (positive) picture, and 3) the fundamentally sound, strong fundamentals “come back to the surface,” such as massive asset demand, large volume exports, large long leveraged positions in the market, etc., the result is frequently a short-term depreciation of the currency that can last between an hour and a week. Does the “one negative news data point” amid a broader picture of a robustly increasing economy alter the situation? NO! The overall bullish trend of the currency will return at this point, making long bets on it a profitable trade (until the entire negative “tantrum” is over). However, the currency is now “underpriced” owing to the brief negative move brought on by the “contrary” news. Thus, it helps to “understand what is going on” in order to better comprehend price movements and understand their causes.
It depends on how many data points “accumulate against the present macro bias” and how long the new direction of the economy will endure, but a series of “contrary to prior general attitude” CAN alter the dynamics generally and DO cause price to reverse direction or to halt a trend. This occurs when a pair switches from bullish to flat or bearish, or vice versa. and you will frequently “see” this “in the charts” with MA crossings.
For H4 and daily charts, the issue with FA and moving averages is that they include PAST information yet are sluggish to adapt. Take a current instance. As seen by this dropping usdcad pair (remember: if usdcad goes down, it signifies usd is “depreciating” vs cad, or equivalently, cad is appreciating versus usd), CAD was generally bullish in January and February 2017 owing to improved fundamentals.
In most CAD pairings, the trend of CAD appreciation was extremely widespread in January and February 2017. Then, in late February, rumors surfaced that Canada’s federal government would be raising capital gains taxes dramatically. As you can see by the sudden upward movement of usdcad on the far right of the chart (depreciation of cad vs usd), there was a very immediate reaction. This made Canadian assets IMMEDIATELY LESS ATTRACTIVE TO GLOBAL CAPITAL. and all cad pairings had the same rapid decline in value.
This illustration demonstrates that although the trend of moving averages might provide us with a broad signal, they cannot provide us with immediate information about what is happening “right now.” You may check directly at price to observe how it is changing both independently and in relation to the primary MAs to comprehend what is happening right now. In order to really grasp what is occurring and to inform my trading biases, entry, exits, etc., I also prefer to monitor the major news. However, you don’t need to understand why to “see” that the price of CAD is declining significantly. You may achieve this with the use of chart analysis.
I will state it right now: I am a fan of the COMBO of quality chart analysis with just MAs and pure price action, employing basic candlestick patterns, simple trendlines, and resistance/support zones that I don’t have space to cover in this already lengthy blog article. I would rather avoid “technical signs,” nevertheless. I sometimes check at the RSI or CCI, but I must admit that I find these metrics perplexing and pointless since they are just another way to display price. Instead of trying to avoid the effort of understanding what is happening with obscure “indicators” that will make you blind instead of helping you, I say just “look at the chart” and understand what is happening. They are like crutches that prevent you from having full autonomy; free yourself of them and “see” the matrix!
I won’t be able to get into all the specifics of effective TA or FA in this blog article, but in general, you should consider price dynamics, MAs, and price in relation to MAs. You MUST be able to interpret trapped shorts or longs, “see” how much bull/bear momentum there is just by looking at price, etc. You MUST be able to identify the main buy and sell “zones”: places where the pair finds lots of “buyers” (buy zone, or “support”) and lots of “sellers” (sell zone, or “resistance”).
In this H1 audusd chart, the two blue lines represent “buy zones” or “support zones.” Observe how the price decline abruptly comes to an end in some areas. This is due to the enormous volume of purchase orders that are awaiting at such levels. For sale zones, the same logic holds. It is important to note that I am using the phrase “zone” rather than “value” since they are fuzzy zones separated by just a few pip instead than extra-precise points. R/S zones on daily timescales are bigger and more “substantial” (solid and difficult to “puncture”). When they break, they often reverse: sale zones turn into buy zones, and buy zones turn into sell zones. There are certain explanations for this, but I don’t want to turn this into an ebook. Some are quite strong; for instance, 100 for the USDJPY is a very strong support, and parity for the USDCAD is also pretty strong.
Now that the price has “bounced off” S/R levels, you could be tempted to think, “Oh nice, well, I just have to wait for price to increase and I will profit.” It’s not that easy since 1) R/S values ARE often pierced, particularly on lower timeframes, and 2) you will see “fakeouts” when the price SEEMS to break through before returning to hit your stop loss.
A LOT of “stop hunting” also occurs in certain R/S zones. When a broker sees 5000 stop loss orders all within 10 pip range, stop hunting happens. He moves the price in the intended direction in order to hit the stops, benefit from your loss, AND get a higher entry price for the next move.
Lower period price movements (H1) must be appropriately interpreted and placed in a larger context (H4 and D1 trends, even the weekly chart, market mood, etc.).
Currency trading tactics
What time period should we utilize first? The never-ending query. Swap the ones that are effective for you. Focus on the daily, H8, and H4 charts while using lesser leverage if you work and don’t want to (for the time being) engage in full-time forex trading. You may trade shorter durations if you wish to trade full-time and are prepared to spend all of your time looking at your screen. I trade using H1, H4, and the daily, with an emphasis on H4, but I also monitor the weekly to keep the “big picture” in mind. The broader the stops you need to have and the less leverage you can use, the longer the period. Longer durations are less unpredictable and have less market “noise.” The 1 minute and 5 minute charts virtually never make sense, yet some people DO earn money with these charts. Really, it’s up to you. Use H1 and below if you wish to enter and exit 10 transactions each day. Trade H4, H8, or the daily if you wish to take your time and research the charts and market news a little.
You must have a “goal” in mind before you begin a trade, as well as a point at which you should quit at a loss if the market moves against you. You normally establish TP (take profit) and SL (stop loss) orders when you place a buy or sell order. Throughout the transaction, they are always subject to change.
It is important to note that probability is the foundation of trading. Ideally, you want to push the odds “in your favor” by more than 50%. Although this isn’t entirely accurate, for retail dealers it represents the harsh reality. Some traders (those with enough capital) can incur a lot of losses, be “wrong” 70% of the time, and STILL make money: 40 pip gain (which, depending on your trading account size and leverage, might be 400$ or 4000$) is the result of 7 losses of 20 pip and 3 gains of 60 pip. For all practical purposes, we will say that you as a retail trader should aim to have a better-than-50-50 success rate, with average losses at least slightly lower than average gains. The problem is that most retail traders like you and I do not have the capital or the mental fortitude to withstand a system with a 30% success rate (and a 70% fail rate!). Your “edge” is what this is (what makes you profitable). If you are serious about one day being competent and successful at forex trading, you NEED an edge, and finding one will take up all of your time and attention. It’s not necessary for a system to be complex. You will ultimately lose money if you purchase systems from other people since they will operate unpredictably. Finding YOUR method and style requires a lot of work and mental energy, and there is no getting around it. Period.
As a retail trader, you normally seek a win percentage of about 60% or 70% with losses that are almost equivalent to profits: 80 pip gain is the result of 3 20 pip losses and 7 20 pip victories.
Some advocate placing stop losses at 20 pip levels and profit goals at 40 pip levels in order to achieve a “profit-to-loss ratio” of 2:1 or whatever. That’s good, but it implies that your stop loss will be placed twice as near to the entry price as the profit objective, which DOES NOT ENSURE a winning strategy since it raises the likelihood that the stop loss will be hit. The likelihood of reaching your stop loss depends on two factors: 2) The gap between the entry price and your stop loss. 1) The caliber of your entries. The smaller your stops can be, but the tradeoff is always there, depending on how good you are at entering trades (i.e., the price moves “in your favor” nearly immediately upon entrance most of the time).
Getting back to probability…
Any trade’s anticipated profit is determined by:
E(profit) = p(loss) + (1-p)(profit), where p is the likelihood that your SL will be reached. The greater “p” will be, the nearer your SL is to your entering point. By becoming the king of entries, you can reduce p, but doing so requires time, commitment, and intense attention. Just be aware that establishing stops using the 2:1 or other win-to-loss ratios is not always as straightforward.
Consider that I set my profit objective at 40 pip and my stop loss at 20 pip. The likelihood of your stop loss being struck is too high if there is not enough “air” between it and your profit objective in relation to the typical price movement throughout your holding period. even when your entrance is strong and should “shift the odds” in your favor (i.e., increase the probability of moving AWAY from your stop loss shortly after entering). Use low leverage and little sums until you master “tight” entry, which are ones where the market moves in your favor practically quickly. Avoid stop-hunting when dealing with round numbers and R/S values. Additionally, you need to create rational profit goals that aren’t “on the other side” of significant R/S ratios since doing so lowers your chances of success! You’ll notice that I focus a lot on entrances, but I believe EXITS are far more crucial and much harder to perfect, so devote the same amount of time to them as you do to your entry techniques.
Rules in your trading strategy are essential since they will make you practice self-control and, on average, skew the odds in your favor. Emotions, excessive trading, fear, and greed are some of your worst adversaries. Greed is one of my own weaknesses; I have a propensity to “overstretch” successful deals. Simple rules govern me. For instance, I almost never trade against the direction of the H4 MA50, I never short the JPY or CHF, I always wait for a “retest” of R/S levels in the H1 time frame before entering for a bounce or a breakout, I never trade “against” the current H1 candlestick (if it is “up” even slightly, I do not short, even if it has a clear “bearish tail” on a solid resistance), and I almost I also have a few additional regulations, but as you can see, they are all fairly straightforward and unambiguous. It provides me a benefit.
Take a look at this USD/JPY H4 chart from early 2017:
Keep in mind that there are two distinct down “waves”: one at the beginning and one at the conclusion, when the price is below MA50, ending a “up motion,” and producing a bearish candle. THAT is a signal for me to enter. After three waves, which often occurs, I usually leave when I notice dojis or other market indicators of tiredness. Ralph Nelson Elliott first identified these waves and gave them the name “Elliott Waves,” but you don’t need to study the (often absurdly overcomplicated) details of “Elliott Wave Theory” to trade them as long as you know what the market is doing and how to “read” a chart with price action and moving averages!
What causes price waves? There are three basic causes.
Let’s talk about a downward tendency. The price decreases when sellers join the transaction. They are content because they are doing well. Once important levels are reached, they decide to “take profit” and quit their short positions, which temporarily reduces sell pressure and shifts the balance of power in favor of buyers. The sell pressure ultimately returns and sellers in, creating a second wave, etc., if the downward movement is supported by good fundamentals. First, there is that.
Massive orders placed in the billions on the currency market, which are often motivated by real factors like asset demand, trade, etc., are the second cause of waves. Imagine, for instance, that a large US mutual fund wishes to purchase significant quantities of CAD-denominated Canadian bonds or that a sizable US importer wants to purchase CAD in order to purchase Canadian export items. They must purchase a significant quantity of CAD, but if they act too soon, they will drive up the price of CAD and impose a hefty cost on themselves both now and in the near future. As a result, very big purchases occur in waves rather than all at once—four times 500 million dollars are purchased. These four sizable transactions—not monster orders like those worth $2 billion—create waves as they move through the market and attract CAD buyers (and USD sellers) with them, which causes the USD/CAD exchange rate to decline. When the immediate influence fades, traders’ temporary cancellation of big orders and profit-taking (leaving positions) cause the price to move in the other direction. When these waves are propelled by solid fundamentals, such as significant global carry trades, they may sometimes endure for a very long period.
The third argument is weirdly connected to the second one: you want to enter at a LOW price if you have a large purchase order, right? Now what? In order to “get sellers into the market and contribute to the down trend,” you first use a massive SELL to drive the price lower. As a result, the price declines. You place your huge purchase order at this better (lower) price once the price is low. Get it? Because the global market is just too large for any one person to tinker with it for an extended period of time in any meaningful manner, large players DO “manipulate” the market in the short term, but they do not influence the overall direction of a pair in the longer run.
Look at this daily chart of eurnzd for 2016 and early 2017:
Take note of the waves first. Second, see the downward trend over a year. Why? German and the majority of the zero-risk Euro Area 10 year bonds had returns of 0, whereas New Zealand’s was 3%. Thus, in order to take advantage of the various yields, there were sizable leveraged borrowings in Euros that were “exchanged” for NZD (sell EUR, buy NZD), which caused the EUR to decline against the NZD. also present is the wave structure. A wave always occurs at some point in time. When the market is “horizontal,” it is ranging up and down; when it is significantly trending, it is doing the opposite. Massive carry trades may “unwind” significantly under certain macroeconomic circumstances, producing the reverse trend.
the long term trades and trends
Even for day traders, as bizarre as it could sound, I typically advise avoiding trading “against” the major trends (H4 or D1 — I favor H4 as it is more current). Why? Because you need to know what is “behind” that seemingly harmless little chart you are viewing: Exchanges worth hundreds of billions of dollars on several pairs are being pushed by major entities including banks, hedge funds, multinational corporations, pension funds, mutual funds, sovereign funds, enormous central banks, and computer-driven mega trading orders, among others. Even if you have a two-hour holding period, do not play “against” these powerful players! Because pricing moves WITH the market on average over the long term, such changes will have more amplitude, and your “edge” will have a second edge — the whole market! Do not assume that a trend is ending if it is not flattening and follow it blindly when it meets your other conditions.
How long should you let the post remain open? It can take a few seconds or many weeks. Each strategy has benefits and drawbacks. You will be more susceptible to “news effects,” weekend gaps, and significant price swings the longer your open position will remain. Therefore, you should use less leverage. Entering a long-term trade may STILL be “fine-tuned” right down to the H1 chart: after analyzing the pair, you predict that a 500 pip long-term uptrend will commence shortly. The weekly, daily, and often some FA charts are used for this. The next step is to go further to identify a solid “entry” for your long-term trade. You realize that the typical arrangement for entering long is “today.” In order to “fine tune” the entry, you need drill down to H4 and H1, since failing to do so might result in a loss of up to 100 pip before the price begins to move in your favor. You will experience less of a “starting” decline if your entry point is narrower.
It might be difficult to know when to sell, but if you are holding long-term holdings, you will usually do so when a trendline or moving average is broken. In order to remain “in” your position, you must tactically shift your stop loss throughout the course of the transaction. This may go on for a while. Also possible is a straightforward trailing stop. A trailing stop of 100 pip may be established after the transaction has moved +100 pip in your favor, for instance, if you entered the market successfully and anticipate to make 500 pip in profit.
Psychology and leaving losers behind
I’d venture to suggest that most traders “get it right” sometimes with their transactions. Price “probably” will go in the way you anticipated… some time… The problem is that you can’t “wait” for the price to move in your favor for three weeks while putting up with significant drawdowns! This is why I advise you to CONTINUE TRYING if your analysis is accurate and you have faith in your approach. But resist being obstinate! Why do I say that? Let’s say you believe the eurusd will decline. OK. Let’s say your maximum drawdown tolerance is 20 pip. If the price goes against you after you enter, EXIT for the moment, wait a little and try again later with a better entry… Yes, you will always pay the spread when you “try,” but you will be pleased if the price really goes in the opposite direction of your expectations. and orders of magnitude expose you to be completely incorrect! Yes, this also implies that you could decide to sell if the price moves in the direction you had anticipated. In any case, once the chart obviously “moves” in your favour, you can just enter again if you wait around and keep an eye on it. maybe you’ll just miss that opportunity… WHAT THEN? There will ALWAYS be a following successful transaction, I GUARANTEE! Observe this. Make it bold and in red.
People who have a scarcity mentality and desire to capture every action are emotionally controlled. I GUARANTEE that there will be lots of profitable setups in the next days, weeks, and months of forex trading. ALWAYS. Keep this in mind and avoid trying to “catch all the major movements”; doing so is the surest way to lose money. You really need a method that will keep you OUT of the market most of the time, in my opinion. That is what will discipline you and give your trade some structure, logic, and order.
A transaction you enter goes against you. Your usual tolerance for a trade is about -20 pip loss before you judge the transaction to be likely to fail. It starts at -8 pip, then moves on to -15, then -28. Avoidance and denial start to creep in as your brain and ego look for ways to escape… It will soon turn around, according to -33… “I’m certain it will change shortly.” This is wagering… Once it becomes apparent, you DO NOT WANT to comprehend the immense loss. You widen your denial and go into a detached phase of hoping and longing. STOP.
AVOID. LOSERS BRUTALLY… Never turn around or glance back… Keep in mind that there will be many more profitable setups in the next days, weeks, and years. Chill! Nothing is being lost on your end.
Here is a typical approach you could take for a small retail trader with anywhere between zero and ten thousand in their trading account. This assumes that you are not yet “tight” with your entry strategy but that you are generally competent at understanding the market and predicting “where it is going”.
For the “same deal” and the same pair:
Situation 1: Good direction, poor first two entry
poor admission on try 1 cut loss at -8 pips overall (spread included)
Try two: poor entry cut loss at a total loss of -12 pips (spread included)
Try 3 nearly instantly moves in the desired direction for a gain of 55 pip.
Net: plus 35 pip. Actually, this is one transaction with a loss of 20 pip and a gain of 55 pip.
Situation 2: The wrong way
poor admission on try 1 cut loss at -8 pips overall (spread included)
Try two: poor entry cut loss at a total loss of -12 pips (spread included)
Try three: poor entry cut loss at a total of -10 pips (spread included)… and leave!
-30 pip net. Actually, this is only one transaction with a 30 pip loss and a profit of 0.
Scenario 3: Good entrance AND the right direction
Goes -7 (including spread) in attempt 1 leads directly to a net of +55 pip.
Net: plus 55 pip. This transaction resulted in a net profit of +55 pips.
You can tell that I like the “3 strikes you’re out” rule. After three attempts, if you don’t succeed, you either have terrible entry skills and need to improve on your entry strategy, or you have good entry skills but are just incorrect about the direction price is moving given the chart you’ve picked and the duration for your open position. Keep in mind how crucial it is to close off lost trades quickly and to let winnings run and “mature” to earn the most pips. Of course, avoid going beyond to avoid doing the worst possible thing, which is to turn winners become losers. The adage “you can’t go bankrupt taking profits” is generally true, but it’s not entirely accurate since if you “take gains” too quickly (little earnings), they won’t make up for the losses! This is easy, but it’s still important to state, because it requires strong entry, good exits, good money management, solid emotional control, and a good grasp of FA and TA. You will also be more lucrative if you are better at entries AND at good “anticipation” of future direction.
Those who are prone to anxiety, nervousness, insecurity, and hesitancy may struggle more with forex trading, particularly with the shorter periods. To avoid 1) overtrading and “following the market,” you need a system with defined rules that limit you. 2) Hesitation that results in paralysis and excessive analysis not removing losers 4) collecting profits too quickly, among other additional issues. FOREX traders need to concentrate on developing inner serenity, centering, focus, equilibrium, clarity of mind, and spirit, as well as mental and physical fortitude, stability, and health. I’d like to suggest rock climbing! It helps a lot. Whatever path you choose, find methods to improve these areas of your life since they serve as the cornerstones of wise, joyful trading.
Even though there is a LOT more to talk, I will stop here. A LOT! However, this article is already pretty lengthy and is not an ebook. I hope that at least provided you with a few helpful hints. My goal is to assist you, and I believe I accomplished that with this (lengthy!) article. Share and like!