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Those traders who have succeeded have developed a winning formula that can be copied and taught. In The Definitive Guide to Building a Winning Forex Trading System, I harness my learnings from the careful study and application of the principles of top traders and share them with you. Armed with this knowledge, your Forex trading success or failure truly is up to you.
AxiTrader is a registered business name of AxiCorp Financial Services Pty Ltd AxiCorp. Investing in over-the-counter derivatives carries significant risks and is not suitable for all investors. You could lose substantially more than your initial investment.
When acquiring our derivative products you have no entitlement, right or obligation to the underlying financial asset. AxiCorp is not a financial adviser and all services are provided on an execution only basis. AxiCorp is authorised to provide general advice only and information is of a general nature only and does not take into account your financial objectives or personal circumstances.
AxiCorp recommends that you seek independent personal financial advice. A Product Disclosure Statement PDS for our financial products and our Financial Services Guide FSG are available at www. The information in this eBook is for Australian residents only. FOREWORD BY SEAN LEE OF FOREXTELL AND FXWW When Sam Eder told me he was going to write collar jobs begin with a university degree.
be a long way towards becoming a gun trader. an eBook on Forex system development, I Trading is different in that there is no school Thanks to The Definitive Guide to a Winning must admit I was intrigued. Sam is one of the except the hard knocks variety! These days, Forex Trading System, you can kickstart this new breed of young trader, forged in the fires most traders are self-taught.
However, learning educational process at your own pace. Get to of retail trading, instead of on an interbank the foundations of trading is essential to know yourself and what makes you tick, and dealing desk like I was. When I received my success. build systems that reflect the type of person copy of The Definitive Guide to a Winning Forex What can be taught are entry strategies, exit you are.
I highly recommend you take your Trading System, I was pleasantly surprised at strategies and money management principles. time and go through this guide in detail. In fact some of my About Sean: Sean has been an FX trader since when he also be translated into simple trading systems. began in the interbank market. Nowadays he leads the way ex-bank colleagues could very well do with in improving market access, services and information for the reading this eBook too!
There is no single strategy that guarantees aspirational retail trader. His FXWW business manages allocation perfect entry and exit levels, but there are programs for the new breed of FX professional as well as Like every profession, there are basics that providing unbeatable market coverage through his chat-rooms on strategies that work better in different need to be mastered before one can excel.
Reuters Messenger. He is also Managing Editor of Forextell and markets. If you can devise a series of strategies aims to provide plenty of good trading ideas from professional Most trades start out with technical school and for different market types, and then recognise traders in an entertaining format.
Once again thanks heaps for a very an eBook. So here it is, The Definitive Guide to informative post. In particular, I have an interest in training tools I have been using. how they build their trading systems. Rather, it has structure, and Thank you for sending this information.
It importantly, how to trade your system mistake- patterns based on the collective psychology of is extremely informative and I am looking at free. the market participants repeat time and time starting a whole new system of trading based again. And it depends on the quality of the on your post Keep up the good work.
The tips for trading techniques to profit. suit the different market types was the best part Stay disciplined in your trading, When I was asked to write about these topics for me.
wood for the trees! If you can understand the you be running your buy dips in a trend problem, then you will have one of the keys to system? Or: how many traders get blown out of a winning Forex trading system firmly within the water trying to buy and hold a strong bear? your grasp. While there are up to 25 different market types The problem is the failure to understand according to Tharp, there are six that should be market types.
of primary consideration when trading Forex. Bull normal Market types — the first key to building a 2. Bull volatile winning Forex trading system 3. Bear normal Expecting the same system to work in all 4. Bear volatile market types is the definition of insanity. Tharp 5. Sideways quiet Market type refers to the different stages or 6. Sideways volatile states that a market flows through. You can see market types in action if you study We have all done it.
The market type concept was made popular by a price chart for a moment. You will notice trading coach and psychologist Van K. Tharp that each currency pair is in constant flux.
Embarked on the quest to find the Holy Grail Sometimes it is trending nicely; at other times in his books and courses. Tharp believes that of Forex trading — a system that produces it coils into a tight range, or is choppy and while it is insanity to expect a system to work in consistent results, week in, week out, with a volatile. all conditions, if you can define the market type limited drawdown and a nice upward-sloping then it is relatively easy to design a system that equity curve.
provides an edge in that specific market. But there is a problem with the Holy Grail Think about it. Notice the current market type systems 2. Notice when that market type has The core problem with most Forex changed. systems and incidentally why most There is a very useful tool you can Forex robots tend to fail in time is that use to help identify the market type — they are only designed for use on one Bollinger Bands.
or two market types. If you instead shift your focus to identifying market Bollinger Bands types and then applying a system to The technique here is quite simple. that market type, you might find your Forex trading becomes more fruitful. Bring up a chart and apply the Bollinger Bands. Bollinger Bands are a How to identify the market type volatility-based indicator.
When they Market types are not so difficult to contract it is a sign that the market identify. expand it is a sign that the market type is more volatile. If to determine direction.
If the sideways range is wide either a bull or bear market type. Be market types you can identify. If you know that historically Markets are like the ocean. more often than not a bull volatile The primeval forces of human ends in a bear volatile, then you emotion drive the ebb and flow can plan accordingly. Similarly if of the price, just as the wild and you understand that a sideways unpredictable forces of Mother quiet usually results in a breakout Nature drive the tides.
to a bull or bear, then you could Like the ocean, the market transitions develop a system to capitalise on this from calm to restless. A stormy night clears into a sunny Trading is a statistical game and day.
Choppy foam settles into knowing probabilities is important. which chart timeframe you should be How did you go? In the chart above, you can see the Bollinger Bands contract into a strong bull. into a sideways quiet, followed by a breakout to a bear normal, The fact is that all charts will display into a bear volatile. The next part is a bit harder to classify but There is an edge if you understand all market types.
Really it comes it could be bull volatile or sideways volatile. Next it moves into a market types, but there is a greater down to preference.
sideways volatile followed by a sideways quiet and finally what I would call a strong bull. Now that you can identify market types, is there anything else you notice on the chart? Can you spot the transitions? As long as the market need to be in adjusting to changes — and the Parabolic SAR indicator with a steep gradient type does not change this can be a pretty more likely you will get fake-outs, so be wary.
that keeps your stop nice and tight in a volatile successful system. Higher timeframes give you more time to market, or perhaps you limit your risk to one or Watch for a change to a volatile market. adjust to changing conditions and your trading two times your initial stop.
intelligently adjusted depending on market tighten your stop. For example, on a trade. Notice the long bullish candles and once you determine the market type on the Systems for each market type widening Bollinger Bands at the top of the weekly charts, you can slide down to the daily chart, signalling a move to a more volatile or hourly charts to snipe for an entry. At the start of this chapter, I mentioned that market type. Here would be a good time to trying to develop a system that works in all Personally I like to define market direction on tighten your stop.
Instead you could look to lower timeframe like the minute chart for build a system that works well an entry. Shorter-term market types seem to in each market type and switch show up pretty clearly on the minute chart between them as the market so it could be a good place to start.
type changes. As a tip, you might notice the market changes Is it a lot of work? Yes it is. But type at certain times of day. Knowing this can is it worth is? be very valuable for your trading. You might not want to take a range trading position on Here are a few rough concepts the London open, for example. for systems that tend to work in each market type.
Manage your stops based on market type Bull normal — buy and hold If you know that a bull volatile typically turns into a sideways or bear volatile, then you In a bull normal market type can adjust your stop types based on that you can simply buy and hold information.
Profit each swing. Look for a pull Bear normal — sell and hold back, a reversal, and then find a Bear normal markets are the logical profit-taking objective on the opposite of bull normal markets. long side. AUD from 1. Instead of trading the sideways quiet you can stalk the shift to a new market type by trading breakouts.
A breakout system is not for the faint-hearted. You will face fake-out and false breakout and then need to have the psychology to hold on for the big wins. But a breakout system that is executed with efficiency is perhaps one of the most powerful systems in the Forex market, where trends can last a long time. Try a short swing trading approach with a profit target that gives you a good risk to reward on your trade.
to trade a sideways quiet market. You can move to a lower timeframe and use a band trading system like in the sideways volatile section below. This approach can be very lucrative if the currency pair stays in this market type for some time.
To where the system performs and Tharp, the Holy Grail is a system trade those market types only. that performs exceptionally well in a particular market type. If you know that you are able You pull a different club out of the to meet your trading objectives for a bag for each different scenario you system operating in a certain market face.
You would never use a putter to type, then all you need to do is hunt hit a tee shot, or a driver when you for the market type you wish to trade. are stuck in sand. Imagine if you were a golf player who The same applies to trading. Build a excels at putting and could only play toolkit of systems that perform well in on the putting green — and still win different conditions and use them as golf tournaments. appropriate, depending on the market In trading, you can take this type.
Sideways volatile — band trading The hunt for the Holy Grail You make the rules of the game so if Sideways volatile markets can be targeted with a band trading Van K. Tharp still believes in Holy you only want to trade one market approach. Grail systems.
condition, you can. Technical set-ups plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a 2. News-based set-ups week, waiting for just the right moment. It will 3. Big picture fundamental set-ups wait for a baby antelope, and not just any baby 4. Sentiment set-ups antelope, but preferably one that is also sick or lame; only then, when there is no chance it can 5. Expert set-ups lose its prey, does it attack.
That to me is the These set-ups can be used on their own or epitome of professional trading. But be careful… Do you remember when you first got into The essence of a good trading plan is simplicity.
Pick and choose only the best set-ups that suit Set-ups are among the first things to enchant your trading personality. Doing more than that the wide-eyed new entrant to the world of is a recipe for disaster as conflicting set-ups Forex. Those glittering charts with all their cause confusion, indecision and mistakes. indicators that promise to give you a glimpse of the future…and all the profit that portends.
You want to close enough to pounce on its prey. For this, it has a specific routine USD with a breakout entry. You can see how involving stealth, speed and strength. The volatility contracts on the right-hand side of the cheetah moves low in the grass using the small chart, which is our set-up.
This 2 So you can get an idea of what a good set-up looks like, I have borrowed an example from Sean Lee, the founder of FXWW and Forextell. A set-up is not a buy signal Great traders stalk their trades like the cheetah lies in wait for the antelope.
The set-up is the scenario that occurs before the trade is executed. It is not the trade itself. How to think about your set-up Luck is what happens when preparation meets opportunity. What are 2—4 options that can come out of this? What options do I have for a sideways market? Typically it could either breakout or stay within the range. How am I going to make money out of this?
Where are my potential entry points? A close above or below the Bollinger Band on the minute charts would be a suitable entry on this set-up. Where are my potential exit points?
As I believe that prices tend to move towards the clusters of stops at the highs and lows represented by the red lines on the chart below , I see 3. There is strong reversal signal Where can I scale into the trade? these as potential profit areas. The strong reversal signal fails and If I get a reversal failure, I will scale I could place my stop on the lower Bollinger Band, meaning that I have a the breakout continues. reversal candle.
I should consider how to handle each I would also look to apply the complex exits approach in chapter 5 to the option and note it down if it is not If a strong trend develops from a trade. breakout, then that is a new set- What could happen after I enter my trade? up that allows me to add another Where can I re-enter if I get stopped position, in the direction of the trade. Once I enter into the trade, there are four things I think could happen: out? I would then need to ask myself the 1.
The breakout continues and a trend forms If I do get stopped out, then I would same set of questions about the new look to re-enter in either direction if I set-up.
The breakout fails and goes down and hits my stop-loss get a similar signal. excellent set-ups. In addition, consider using decide to trade the cross rates instead. the next as the set-up. The cross rates often now have spreads that are very close to the majors, and because less people specialise in them, you may find you develop a nice edge by choosing to focus on them.
The art of the chart — some damn good technical set-ups The day exponential moving average EMA is my favourite indicator to determine the major trend. When you are trading above the day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell. Your primary guide should always be price.
You can make systematic changes step by step, which will improve your results over time. A trend filter is a set-up that can be used in this way. In this case against it, like Marty Schwartz with his day EMA. If the price is above your entry would be on a lower the indicator you never go short; if it is below the indicator then you timeframe. never buy. Try I came across this indicator manually by looking on the charts or, if you have the skills, by programming a period moving average through Joe DiNapoli who a back-test.
higher timeframe for long-term experienced by the typical trends. moving average. Try a A variation of the 25 x 5 above x 5 period moving average for use on the main timeframe on your entry timeframe. you use for the trade. the winners are three times bigger than the losers, returning twelve times the amount risked over eight trades.
The distinction here is that when you use a chart pattern as a set-up, it is not your entry. Once you see a likely pattern, you then move to a lower Note this is an idealised example. For example, on the periods of whipsaws as markets consolidate before a new trend forms. Some damn good news-based set-ups Some people are attracted to Forex trading for the buzz of it. You can spot them a mile away. They have itchy trigger fingers, they trade big because it gives them a rush, and they tend to lose.
Forex trading is not the place to get your 10 thrills. That part of your psyche Where there is a lack of discipline needs to be put aside when you and emotion in the markets, there trade. Needless to say, this type is profit potential for the prepared of trader is attracted to the thrill and patient trader. For you to take of the news announcement. The advantage of this opportunity, you promise of quick profits is hard for will need a thorough knowledge the gambler inside to resist.
of news set-ups. Here are some important ones. And this presents opportunity. impact analysis tool. What have previous news results been Do they come in as expected or is there a typically a variance? How does the like? market typically react if numbers come in over or under? You can see past results in any decent Forex economic calendar.
How important is the event? Some events move the market more than others. Again, you can find this in an economic calendar. How long do the moves typically last? The reaction to events can be fleeting or can last for months. Try to know how long you can expect the move to last. You could read your favourite sources of expert commentary about what to expect from the news event.
Try www. commentary or chatter if the market is overly long or short and likely to get caught out. Is there news divergence? A powerful set-up can occur if the price reacts the opposite to how it should. For example, if there is negative news and the price reacts positively then it could be a good set-up for a buy. If it is an interest rate announcement, Some traders read the Central Bank minutes to get an insight into their what do the Central Bank minutes say?
directional bias. When there is Trading the news presents you with a clear demand, there tends to be price increases. currency pair with the lower interest rate, This decision will influence how you use the you are likely to have the interest charge news as a set-up. subtracted from your account each day. If you are placing your trade prior to the event, Chris Lori, a popular American trader, takes then it is your prediction of what is actually this set-up very seriously.
He recommends about to occur that is the set-up. become apparent, then this is actually your 11 There is an example of interest rates at work set-up. on the following chart. Here you can see the Source: Forexlive. Here are two very important fundamental set-ups you could consider before each trade, particularly if you are holding long-term positions. Interest rates The interest rate differential between countries is one of the best predicators of currency movements. Currency trading can be seen to be a form of leveraged fixed interest trading.
from the chaff. Their main tool became But if you do find an expert quantitative easing, where source of information about the essentially they would inject cash Forex pairs you are tracking, it into the economy in exchange can give you a built-in edge.
The for toxic debt. This bias towards experience and connections of easing had a telling impact on the those in the industry are not easy movements of currency pairs. for us retail traders to emulate Thus currency traders tune in to and their trade ideas can prove the easing or tightening proclivity well worth tracking.
motivations, which if not considered will lead to trading failure. You should trade. into your complete Forex trading So take note of directional biases system. Because you have your own over time the incongruences will pile up and you will make mistakes that longer term trades.
unique objectives, psychology and harm your trading account. Set-ups abound. Wherever Divergence Lookout for indicators that are signalling a change in trend before the price reverses. you can find a Forex trader you can find a new set-up. Size of the candle Large candles can signal an important event has happened that may create a change in the In fact entire books have trend.
been written on one or two Information about Information about where orders and stops are sitting in the markets can be excellent set-ups. set-ups alone. Here are a the order flow few more set-ups that you should know about.
If market participants are looking to either protect their options from execution or make sure Options barriers Please note that just that an option is executed, then their actions could move the market. because I did not include Sentiment trading is a relatively new innovation in the Sentiment these above does not mean Forex market. It all depends on the trader and the edge they are seeking to find. See which ones suit you and your trading style. Avoid the temptation to overcomplicate.
You must have a specific reason for adding a set-up into your plan, and then you should rigorously test it like a scientist tests a hypothesis. combination of set-ups is a Upcoming news If you assess the events that you have on the horizon for the coming week, you can get a sense chimera.
events of what can move the market and where. As you develop your Forex If a pattern is formed because of a news event or not. You area. I suggest you choose: 1. A market type 2. A trend filter Then choose one other set- up from those listed above or one of your own that you already like. And simply move on. Go and work on other aspects of your system or your position sizing. set-up as a variable as you Corporate buyers A large corporate purchasing currency perhaps due to a merger and acquisition can be a make changes down the powerful set-up.
Open a Demo account and practise in a real-time, risk-free trading environment. Or open a Live account and start trading the markets. NEVER MISS AN Join the ARTICL AxiTrad er blog E OR GU Mental tools fo to conti nue you r journe IDE! Advance r peak t y and d d tradin rading p iscover: g erforma Technic g uides nce al analy s is ere! And mo Click h re!
GET EMA IL UPDA TES CONTACT COMPANY ADDRESS DETAILS PHYSICAL POSTAL ADDRESS EMAIL: service axitrader. au AxiCorp Financial Services Pty. Forex trading are: I started this chapter by talking about the 1. When to enter importance of entries and exits and now I am saying they are not to be treated with such 2.
Where to place your stop reverence. When to exit. Together they form the decision-making experience a major time-suck…or worse, end engine of your Forex trading system. up with a half-baked system that costs you not Over the next three chapters we will cover each only time but also money. of these questions, but before we get started, the first step is to understand how they fit into your trading plan.
Recovering From a Drawdown Each trade is like a draw from a lucky dip or a Building a trading system is a little like building spin on the wheel of fortune. a house. These decisions are based on objectives. Your goal for your entries and exits your needs objectives , budget trading capital is to add as many winning tickets into the draw 10 as possible — or to add in tickets that when you Similarly, when you develop entry and exit do pull them ensure you win the jackpot.
a time period i. five trades a week. Your 25 Achieve your objectives over time. Their Before you read on, which system would you prefer? compared to your initial risk. You determine this by working out The system that made the most your initial stop and profit objective.
When you are developing your entry and exit, the one with the most wins is not always the best. Be careful not to fall into this trap. As a side note, it is possible to have a system that has a high win ratio and larger losses than profits.
The initial entry is successful What to do? in your trading plan that you only and you get a new set-up that As above, it is all in the planning. you enter reward ratio. on a breakout and the market Note in your trading plan: starts to trend. position based on a pullback in term positions, or of on shorter- the trend.
This would mean you avoid placing the following The trick to using re-entries is in reversal? Do you reverse again?
trade or look for a profit objective the planning. If you have just had further out. re-entries psychology and cause you to make For the sake of system development mistakes.
we define some types of entries as Note down in your trading plan re-entries. exactly what you will do in a re-entry Re-entries occur in two scenario. circumstances: Reversals 1. The initial entry is stopped out Occasionally you will be in a trade but the set-up conditions still and get a set-up for a trade in exist. a breakout fails and the opposite direction. Like re- then goes back within the range entries, these can be a little difficult before attempting to breakout psychologically as you could be again.
influenced by your current position. You could then employ a after you enter rather than on technical analysis technique such as 3 interpreting a jumble of indicators candlestick analysis for the actual to work out the best time to buy.
For example, on the earlier A good entry has two main criteria. Entry methods that work The entry Almost all entry methods work, but they work differently depending on Now you become the hunter or your set-up, psychology, objectives 4 huntress, spear in hand, pursuing and the market type. a high-quality entry with dogged determination. You are face-to-face Candlestick patterns with the markets, unwavering while Price action candlestick patterns you wait for the perfect moment to can be excellent entries as these strike.
give an indication of the buying and When the time comes, you execute selling pressure between market with aplomb, your supreme skill participants. They tend to work cross-over approach, simply place better in trending markets. your trade when the price either Some indicators that can be used touches or closes over the moving for this approach include: average. Use a limit or stop order that enters automatically once the price moves outside the range.
This will ensure you get in even if the breakout bar is strong. Wait for the price to close outside of the breakout range. Apply your chosen entry technique Method 2 example: 8 4.
Unleash your inner trader to and resistance, trusting in the level execute the entry flawlessly. to hold. You need to manage winners. You do this using So in summary, here is the entry complex exits. Wait for your set-up conditions 2.
for you. All sounds a bit mystical? Each exit is quite simple on its own. the market is doing in front of you, while The complexity comes with the variety of exits considering the objectives identified for the that are required so that you can: trade before it was placed. Trade what is in front of you Trailing stop price or indicator 2. Achieve your objectives. A trailing stop surprise, surprise trails the It is how you react to what happens after you current market price.
There could be a whole enter the trade that matters. Here is a list of article on trailing stops there are so many, some exits to consider for your trading system. suffice to say they can be based on a set price say 50 pips behind the market or they can Profit target be based on an indicator such as a moving A profit target is an order you place in the average.
market to close your position once it hits a If you like moving averages, try displaced certain price. These are useful in sideways moving averages. tend to look at price action for my exits, but for Profit objective certain trading styles they are very good. A profit objective is different to a profit target.
I will cover two more types of trailing stop A profit objective is a goal for your trade. When below that are particularly important. you understand your system, you will know how much profit a trade is capable of making.
If you are in a trade that takes off like this, then you can adjust your trailing stop to avoid giving back your gains. Perhaps you go to a lower timeframe or are prepared to only give back one or two times your risk. They also You can exit based on price action.
For example, you form a platform for a further might see a candlestick reversal pattern that indicates extension of the price. With the trend is coming to an end. This powerful approach helps Be in the moment with it. you to maintain your profits if your trade gets As a trader you can only plan and then be close to your profit target, does not touch it, present.
Once you execute the trade you are Fundamental exit and reverses. simply experiencing, not creating. Your exit You can exit a position based on market Account target decision should be based on what the market fundamentals and news.
position following negative news. positions in your account once this target is achieved. If you enter simply and apply Time stop the right exit to the right scenario. Scale out You may exit after a specific period of time in a As always, I encourage you to get out your trade or on Friday before the market closes for By scaling out, you exit portions of your trading plan or trading journal and integrate the weekend.
position, based on different criteria. For this lesson into your Forex trading for example, you might take a small amount off The cross rates maximum effect.
Over time you can some more at a pre-planned target, and finally to get an indication of the direction of the come back for more. Generally, though, the rates provided by market makers to retail traders are quite close to the pricing quoted in the interbank market.
No standard data Exchange rates differ from one market maker to another because there is no consensus specified by a centralised market. Different market makers have different rates at the same time although usually not differing by more than a few pips. A trader would have to accept what is being quoted by his broker unless he compares prices with other brokers.
Price charts from different price feed vendors will also look slightly different as they each have their own data source. Although, in general, the currency prices are quite similar. The forex trading day Also, being a hour market, boundaries of a trading day are blurred. Traders from around the world are in various time zones.
Traders from, say, Singapore would display a different timing from their US counterparts — who tend to display EST Eastern Standard Timing on their price charts. While the trading arena has had a boost from the CME-Reuters joint venture of a central forex exchange, it remains to be seen if that can benefit independent traders. Trade manipulation by some market-making brokers is something that is difficult for traders to prove, and something that is easy for the culprits to dismiss.
However, despite the limitations that come with the OTC territory, spot forex trading can be extremely financially rewarding for those who are aware of the limitations and know how to deal with them. And trading forex is not one of the easiest ways — despite what many new traders believe.
Many traders fail, and they empty their trading accounts before they learn how to exploit the forex market to their advantage. Although there are also traders who are successful in forex trading, their numbers are small compared to the majority of losers. Many times, traders are not aware that they have the power and might to shift the odds to their favour, that they can dramatically increase their chances of success if they want to. The main reason why many traders get defeated by the market can be attributed to their lack of knowledge.
In this 21st century, where the buzzword is knowledge, it is not just a matter of working hard, but also a matter of working smart.
Knowledge is the key that can open many doors — if you have an intimate knowledge of how something works, you can then come up with ways to exploit what you know to your advantage. This applies to forex trading as well. You need to know how to identify high probability trade setups and how to manage your money wisely. For every transaction in the forex market, there are winners and losers.
Your goal is to make more overall profits than losses over a period of time, and to emerge an overall winner. My approach to consistent trading success lies in three main pillars, or the 3Ms: Mind, Money and Method. It is often said that we are our own worst enemy. Human beings are emotional creatures, and most of our decisions are guided more by emotions than logical thinking. Our mind is capable of playing tricks on us; we can get seduced into unfavourable situations by our emotions.
Emotions can work for us or against us. Sometimes they can save us from landing in a pile of sticky mess, but sometimes they can land us in it. We can also turn the tables around by playing tricks on our mind, making it believe whatever we want it to believe. Do you have the mental strength? Whether you are new to trading currencies or a forex trader who has some experience, here are some questions to ask yourself: Do you really have a strong desire to succeed in forex trading?
Sure, every one wants to succeed in something, but do you have the desire to want to succeed in forex trading? First of all, this field is not for every one, for you must have the passion for it. If you just want to try your luck, or dabble, in trading, you will just end up among the majority who lose their money.
You must have the deep desire to want to accomplish your goals, because without this desire, your thoughts will not materialise into action, and it is action that could transform your goals to reality. To be a successful trader, you must be highly self-motivated, have a concrete plan of action, and not be afraid of failure. Are you prepared to devote a lot of time and effort into picking up trading skills and knowledge?
To be really good at anything, you need skills and knowledge in that field. A huge amount of time, effort and money is required for a trader to attain consistent success in forex trading.
Despite the availability of forex trading-related resources on the internet, and in the bookstores, traders can find it quite daunting to learn about trading on their own as they do not know what there is to be known. I recommend that you check out those which are offered by skilled and practising instructors. Note: Be wary of signing up for courses or seminars that are full of hype, for they can be very misleading. Avoid those that give you the impression that you can attain consistent profits after two days of intensive learning, or those that require you to purchase expensive software.
While there are some shortcuts to gaining knowledge via courses or seminars, there is no substitute for honing your trading skills in the market. Are you willing to accept losses as part of trading? Every one makes mistakes, and mistakes are inevitable. Got a trading loss?
Then whip out your trading log to record what your mistakes are and what you have learnt from that losing trade. Always have something positive to take away from your losses, and treat it as a learning experience.
Know that there will be other trades coming your way. Are you willing to take sole responsibility for your trading decisions? You read some market analysis, and then trade according to what the analyst is saying. That trade turns out to be a loser, and you turn around to blame it on that market report.
It is dangerous to blame losses on other people, the forex market, or the stars, for you are the only person responsible for pulling the trigger. And if you blame others you will never be able to find out how you can improve. Fear and greed Fear and greed are the two dominant emotions that affect not just the state of our mind, but also the currency market. In fact, the fluctuations of these two emotions are the main drivers of the currency market. There are, of course, other emotions that exist in the market such as disappointment, regret and so on, but fear and greed are the principal forces that tilt the scales of supply and demand of currencies.
When traders feel overly optimistic about a country or its currency, they become consumed by the great hope that the currency would appreciate in value against another currency. They are then guided by this hope and greed to buy the currency pair now so that they could hopefully sell it at a higher price in the future.
Greed then grows into euphoria, as traders continue to buy and buy, thus taking currency prices to newer highs. When people are buying a currency with great hope, they are also selling the other currency in the pair with great fear. On the other hand, when currency prices go down, fear and greed are also the main drivers of the move. All in all, fear and greed are behind the steering wheel of the currency market.
So, while you must learn to recognise these emotions in the market, the problem comes when you allow them to distort your logic when it comes to making trading decisions, as most of these decisions will turn out bad, and are likely to cause you to regret your actions later. Since there is no way of banishing these emotions for good, the best thing to do is to control these emotions, instead of letting them control the way you think and act.
Face and control your fears Since greed can be categorised as a kind of fear, which is the fear of missing out, I will discuss the primary types of fears relating to trading, and how they can be overcome. The first step to preventing fears from ruining your trading performance is to recognise the various forms of fear that is connected to trading. And once you recognise the type of fear you are experiencing, the easier it is for you to handle that emotional obstacle so that you can trade better.
That is the key to emotion-free trading. It is not about pretending that those fears do not exist, but how you handle them that matters. Here are some common trading-related fears.
Fear of missing out Why do so many people rush to departmental store sales, or rushed to buy technology stocks during the dot-com boom? Any kind of buying mania stems from a very strong emotion that is commonly invoked in people, and that is the fear of missing out.
In trading, this fear manifests itself especially during a sharp rally or decline of a currency pair. Your heart begins to pound really fast, and you have a million thoughts zipping through your brain, with most of the thoughts urging you to buy now, now, now. I am losing out! Traders suffering from this type of fear are usually the ones who get onto a trend too late. Be disciplined and hold off that mouse whenever you sense that this type of fear is creeping up on you. Think instead of all those traders who are pouring dumb money into the market, and be glad that you know better than them not to join in the craze.
Fear of losses Trading is a game — there will be winners, and there will be losers. Sometimes you win some, sometimes you lose some. Losses are bound to happen, no matter how accurate a trading system may be. The fear of losing is most prominent in new traders as they do not yet have adequate trading skills and knowledge to help assess and evaluate trading opportunities with a high level of confidence.
This can lead to trading paralysis, whereby traders become afraid of pulling the trigger when it comes to entering or exiting trades as they fear losing money or a big portion of their trading capital. However, if you have a reasonable stop-loss order in place, that is in accordance to your money management rules, you should have no reason of being fearful of damaging the trading account based on just one trade.
That is what stop-loss orders are for — to guard against huge losses. When you do encounter hesitancy in pulling the trigger, evaluate if you have valid reasons for doing so or if you are simply held back by fear. Traders just have to get used to the reality that losses are inevitable. The trick is to ensure that your losses are kept small so that you do not harm both your trading account and your state of mind. A trader does not have to be right.
It does not matter at all whether he or she is right or wrong; what counts is whether he or she is profitable in the long run. Traders should not be hung up on the outcome of single trades, or even a few trades, as trading performance has to be assessed over a period of time. What matters is that you end up profitable over a period of time. Once you place less emphasis on being correct on a current trade, your fear of making wrong decisions should abate, thus enabling you to make better trading decisions without feeling burdened by the overwhelming pressure to be correct in that trade.
Remember that there will be times of losses and times of profits, which is why it is so important to enter only trades that have a high probability of success. Focus on the big picture Do not get caught up in feeling invincible or pessimistic after a win or a loss. As trading is a very highly charged and emotional activity, it is very easy for traders to oscillate between emotional highs and lows. The outcome of just one trade should not affect your overall performance, unless you have violated proper risk management guidelines by betting the farm on a single trade or by over-leveraging.
A trade is just one of many trades. When you are wrong on one trade or several trades, try not to beat yourself up or feel regret. Instead, analyze to see where and how you could have done better in those trades or what mistakes you may have made, and record what you have learnt from them. If there was really nothing that could have been preventable, just accept that the market is unpredictable.
The outcome of one or a few winning or losing trades should not be magnified. Other trades will surely come. I strongly believe that once a trader has honed his or her trading skills, the ultimate factor that will affect his or her overall profitability is money management skills. Money management is all about managing the possible risks, and it is the defining factor that separates winners and losers in forex trading.
Novice traders think of how much they can harvest from the market; experienced traders think of how much they can lose to the market. Many traders are so eager to trade to make big money that they completely overlook money management. Poor money management also explains why so many traders get wiped out by the market. Money management is about fully optimising your trading capital.
It allows you to be proactive in managing risks, and to cope with trading losses — which are part and parcel of the game. It is an essential tool to ensure that you will have more than enough to last another day in the trading game. No matter how good a trading system may be, there will be times when you will experience a series of losses.
Success comes to those who have set down rules for money management, and have the discipline to follow them through their trading. Preserve your capital The shining light that attracts all traders to the forex market is the prospect of being able to grow their money by tapping into the online trading platform as their own in-house money tree. In almost any field, it is true that most people are drawn to short-term benefits, but are myopic when it comes to long-term planning.
Trading is no exception. When risk capital is put aside for trading, you are hoping that this amount of money could be transformed into a much bigger amount; otherwise, what would be the point of risking it? But if this capital runs out, what can you bank on to make your desired profits? After all, money begets money. To drive home the importance of capital preservation, I will discuss the concept of drawdown, and how that is relevant to money management. In other words, it is the amount of money that you lose — it is usually expressed as a percentage of your total trading equity at any given time.
Drawdown is not an indication of your overall trading performance, as it is calculated when you have a losing trade against your new equity high or your original equity, depending on which is higher. Recovering from drawdown As drawdown gets bigger and bigger, it becomes increasingly difficult to recover the equity. Many people are not aware that in order to recoup the percentage of equity that they lose, they will need to gain a bigger percentage just to break even.
The answer is no. It will require an Let me show you with numbers. OK, that is not scary yet, but if you start losing more and more of your capital bigger and bigger drawdowns , the faster you will go down the rabbit hole. While many traders hope for that One Big Win that will magically transform them into millionaires overnight, they are more likely to be confronted with the One Big Loss that will threaten their survival in the forex market if they do not exercise careful money management.
If a trader has a big loss, he or she will have to spend more time to get back to where he or she was before, instead of using the time to make profits. Traders who burn out quickly in the market are those who do not show respect for risk. On the other hand, traders who have flourished are those who fully understand the importance of stringent money management and incorporate that into their trading approach.
There is no way around to recouping slowly, unless you want to drive yourself to total destruction by risking more and more of your equity to try to make back your losses. Holding on to a losing trade for too long is the biggest cause of a big drawdown.
Be well-capitalised Most new traders run out of money even before they see any profits in their trading account. Indeed, those who are new to trading most likely do not have a good understanding of the risks and dangers that are lurking in the market, and few even know what drawdown means or have even heard of this word. Many of them do know that trading can be very risky if they do not know what they are doing or how things work in the currency market and, to them, one of the obvious but incorrect ways to limit this risk is by allocating just a small amount of money to their trading account.
There are also many new traders who begin their trading business with little initial capital as they simply do not have enough money. Whatever their reasons may be, being under-capitalised will be more than just a mistake; it is often the prelude to trading failure.
Forex traders who want to set themselves up for success must be well-capitalised. Never mind that some retail brokers are offering a minimum account deposit of just a few hundred dollars — a paltry amount that almost every one can afford.
Sufficient initial capital must be available to cushion the impact of a string of consecutive losses, so that you do not wipe out your trading account. A series of losses is really not that uncommon in trading, and all traders must be financially prepared for it. Those with insufficient trading capital tend to set really tight stops, which will naturally then lead to a higher probability of being stopped out. They also tend to have a good chunk of their account eaten away by unreasonably large losses in relation to their trading account, if they do not set tight stops.
So it seems that whichever way they turn, they are setting themselves up for failure, unless they are willing to trade smaller lot sizes. Looking outside of trading, many other businesses fail because the owners often do not have enough capital to tide them over the initial starting phase. For example, a new restaurant owner must set aside enough money to pay the rent of the restaurant for at least a few months to a few years, assuming that the restaurant would not make any net profits in that period of time.
If the owner only has enough to pay for two months rent from his or her own pocket, and the restaurant is still not making enough to cover the rent and other expenses in the third month, how do you think the business is going to sustain itself? The entire business could fail, not because of the business model, but because of the lack of sufficient capital to keep the business running while the customer base builds up.
Trading, as I have mentioned before, must be treated just like any other business, not a frivolous casual pursuit. The point is this: by starting off sufficiently capitalised, you are more likely to adhere to your money management rules and, by doing so, you are really giving yourself a good fighting chance in the market. Losses are really just part of the trading game.
If trading losses are kept manageable and reasonable, they should not dent your trading account too much, provided that you are well-capitalised. Knowing when to get out of a losing position in the currency market is a very important tool of risk management.
Stop-loss orders allow traders to set an exit point for a losing trade, and are the best weapon against emotional trading.
While I recommend that traders place a stop-loss order at the time of placing their entry order, mental stops may also be used — but preferably by traders who are more disciplined.
From experience, it is much wiser to have a wider but reasonable stop than to have an unreasonably tight stop. Generally, a stop-loss order should not be shifted in the losing direction while a position is opened. A good trader should know beforehand when to cut his or her losses, and also when to get out of the market with profits. It is indeed the elusive factor that courts the relentless determination of its seekers. Want to know where it lies? It only exists in the creative part of the mind — together with fairies and gnomes.
There is no perfect formula or strategy that can achieve that unrealistic goal because people who are involved in the financial markets evolve with changing market circumstances, even though certain old habits die hard. Despite the non- existence of the magic formula, there are certainly high probability ways of trading the forex market.
While the bulk of this book is focused on the Method part, you need to combine Method with both Money and Mind in order to attain success in the trading business. The old question: technicals or fundamentals? There are generally three broad categories of forex traders pertaining to what they base their trading decisions on: 1. the technical trader, 2. the fundamental trader, 3.
the trader who combines both technicals and fundamentals. Each type of trader has a distinctively different way of interpreting the currency market based on his or her own opinions. Technical trading A technical trader believes that historical data has a big role in the forecasting of future price action, and is thus devoted to currency price chart analysis, making use of various charting tools such as support and resistance levels, trendlines and a myriad of chart indicators to understand past price behaviour so as to predict what the market will do next.
Most forex traders employ some kind of technical analysis to help them make trading decisions. Technical traders assume that everything that is to be known about the market has already been factored into the current price. Fundamental traders believe that the exchange rate of currencies are largely driven by economic and geopolitical conditions, aside from central bank interventions, and will keep track of economic data such as trade balances, inflation, Gross Domestic Product GDP , unemployment rates, interest rates and so on.
They are also concerned about what policymakers have to say regarding the monetary policy of the country, and will keep on top of these when speeches are scheduled. Combing technicals and fundamentals Since there are advantages of analyzing the forex market from these two different fields, it would be too restrictive to just side with one area and ignore the other.
The most effective traders tend to make trading decisions based on a combination of both technical and fundamental factors in order to get a feel of the overall market sentiment, and then decide to either trade that sentiment or to trade against it taking a contrarian approach.
The strategies taught in this book must always be combined with the prevailing market sentiment, which is influenced mainly by fundamentals. Some strategies may work well for some traders, but may not have the same results for others over a period of time.
This may seem puzzling for some people who are wondering that if something works for someone, then it should work for other people as well. In trading, there are so many other factors specific to each trader that can influence the overall trading performance — his or her emotions, psychology, trading time frame, money management rules, lifestyle, trading capital and so on. The strategies included in this book are open to customisation according to your own personal preference.
Many traders do not give themselves the fighting chance and time to stay in the game as they are prone to getting wiped out very quickly. The Ten Rules For Forex Trading I list here ten rules that I think are important for trading forex. Dos 1. When trying out a new trading strategy, always test it in a demo account, or with a small amount of money, before you commit more money to it. Always keep a record of each of your trades, with details of: why you got in, how you got out and why it turned out the way it did.
Have a personalised trading plan and update it as you learn from the market. If you are unsure of a trade, stay out. It is better to miss an opportunity than to have a loss. When trading, keep up-to-date with both the fundamentals and technicals affecting the market. A trader in the dark is a trader in the red. It will affect you emotionally, and you will most likely lose it to irrational trading.
Always know why you are getting into a trade, and how you are going to get out of it. Just be concerned about being profitable. Chances are that your account will be decimated before you can recoup your losses and go into profit.
Vent your frustrations elsewhere after a loss. Do you see it as a big mechanical matrix which is devoid of emotions? Or do you think of it in mathematical and probability terms?
Perhaps, you may even view it as just a vast network of computers which are designed to cheat the trader sitting in front of his or her computer and trading electronically. Most traders I know have a love-hate relationship with the forex market, thinking that the market is, in turn, either against them or for them. To me, the forex market is nothing more than the compressed display of emotions at any one time emanating from currency speculators around the world. It is similar to a big living organism, like a human being, which is made up of numerous cells, with each cell carrying out its own function and interacting with other cells of the body, working to keep the body alive with round-the-clock chemical and biological processes.
The forex market is alive as a macro living organism, which comprises a vast number of market participants acting out their perceptions and emotions, thus driving the blood around the invisible entity. The participation of each player, whether the player is an institutional dealer or an independent trader, is akin to the individual functioning of a cell, which collectively will constitute the whole organism — the forex market in this case.
Knowing what the market thinks and how it thinks is crucial to trading success because, ultimately, the trader is dealing with other traders out there, and needs to know what they are thinking. Even if you see the market as an enemy, what could be better than knowing the weak points and being able to read the mind of your adversary? In this chapter, I shall focus on how you can better understand the market, and use that knowledge as one of your trading weapons.
Market sentiment is simply what the majority of the market is perceived to be thinking or feeling about the market — it is the most important factor that drives the currency market.
This is so because traders tend to act based on what they feel and think of certain currencies, regarding their strength or weakness relative to other currencies. Market sentiment sums up the overall dominating emotion of the majority of the market participants, and explains the current actions of the market, as well as the future course of actions of the market.
The trend adopted by the forex market is actually a reflection of the current market sentiment, which in turn guides the trading decisions of other traders, whether they should long or short a currency pair.
In the process of making educated trading decisions, traders have to weigh a multitude of factors which could influence the bias of a currency, before making up their minds about the current and future state of certain currencies. There are three main types of sentiment when it comes to forming opinions in the forex market: 1.
bullish, 2. bearish or 3. just plain confused. If the majority of the market wants to sell that currency, the market sentiment is deemed to be bearish; if the majority wants to buy that currency, the market sentiment is bullish; and when most market participants are unsure of what to do at the moment, the sentiment ends up being mixed.
Market sentiment acts like a fickle lover, capable of changing its mind based on certain incoming new information which can upset the existing sentiment. One moment everyone could be buying the US dollar in anticipation of a stronger dollar; the next second they could all be dumping it as they fear the dollar would start to weaken due to the impact of some new piece of information, which is almost always some fundamental news.
Interest rates Trends in interest rates are one of the most significant factors influencing market sentiment, as interest rates play a huge role affecting the supply and demand of currencies. Every currency in the world has interest rates attached to them, and these rates are decided by central banks.
Some currencies have higher interest rates than others, and these are usually the currencies that attract the most attention from savvy international investors who are always looking across the global landscape in the continual search for a better interest rate yield on fixed-income investments.
This, of course, also depends on the geopolitical or economic risks of that particular currency. Just like when a bank lends money to a higher-risk borrower, high-risk currencies require a significantly higher interest rate for investors to consider keeping money in those currencies.
What causes fluctuations in interest rates? The value of money can and does decrease when there is an upward revision of prices of most goods and services in a country.
The nice word for this erosion in value is, of course, inflation. Controlling inflation Central banks are responsible for ensuring price stability in their own country, and one of the ways they employ to fight inflationary pressures is through the setting of interest rates. If inflation risks are seen to be edging upward in, say, the US, the Fed would raise the federal funds rate, which is the rate at which banks charge each other for overnight loans.
When the overnight rate is changed, retail banks will change their prime lending rates accordingly, hence affecting businesses and individuals.
An increase in interest rates is an attempt to make money more expensive to borrow so that there will be a gradual decrease in demand for that currency, thus slowing down an overheated economy. Interest rates and currencies The most important way in which interest rates can influence currency prices is through the widespread practice of the carry trade.
A carry trade involves the borrowing and subsequent selling of a certain currency with a relatively low interest rate, then using the funds to buy a currency which gives a higher interest rate, in an attempt to gain the difference between these two rates — which is known as the interest rate differential.
The trader is paid interest on the currency he or she is long in, and must pay interest on the currency he or she is shorting. This difference is the cost of carry. Therefore, a currency with a higher interest rate tends to be highly sought after by investors looking for a higher return on their investments. The increased demand for that particular currency will thus push up the currency price against other currencies.
For instance, in there was a strong interest among Japanese investors to invest in New Zealand dollar-denominated assets due to rising interest rates in New Zealand.
The then near-zero interest rates in Japan forced a lot of Japanese investors to look outside of their country for better yields on cash deposits or fixed- income instruments. See Figure 5. When forex traders anticipate this kind of situation, they become more inclined to buy that high-interest-rate currency as well, knowing that there is likely to be massive buying interest for that currency. So, in general, rising interest rates in a country should boost the market sentiment regarding the currency of that country.
The opposite is true too: when interest rates are cut in a country, that would result in quite a bearish sentiment regarding the currency of that country, and traders would be more willing to sell than buy that particular currency. Economic growth Besides interest rates, economic growth of countries can also have a big impact on the overall currency market sentiment.
Since the United States has the largest economy in the world, the US economy is a key factor in determining the overall market sentiment, especially of currency pairs that have the USD component.
A robust economic expansion, coupled with a healthy labour market, tends to boost consumer spending in that country, and this helps companies and businesses to flourish.
A country with a strong economy is in a better position to attract more overseas investments into the country, as investors generally prefer to invest in a solid economy that is growing at a steady pace. Forex traders, expecting this consequence, will put on their bullish cap to buy that currency before the investors do. Gross Domestic Product GDP , 2. the unemployment rate, and 3. trade balance data. These are explained below.
Unemployment rate The unemployment data reports the state of the labour market of a country. Trade balance data Another widely watched economic indicator is the trade balance data. Trade balance measures the difference between the value of imports and exports of goods and services of a country. If a country exports more than it imports, it has a trade surplus. For example, if the US imports an increased amount of goods and services from Europe, US dollars will have to be sold in exchange to buy euros to pay for those imports.
The resulting outflow of US dollars from the United States could potentially cause a depreciation of the US dollar against the euro or other currencies, and that can affect market sentiment surrounding the USD. The opposite scenario is true for a country that is experiencing a trade surplus. Global geopolitical uncertainties such as terrorism, transitional change of government or nuclear threats can cause investors to lose faith in some particular currencies, and they may prefer to shift their assets into a safe haven currency when these circumstances arise.
Market sentiment is very sensitive to such geopolitical developments, and can cause a strong bias towards a particular currency. For example, during periods of high tension in the Middle East in , the market formed a very bullish sentiment towards the US dollar, which became the preferred currency to hold in such turbulent times, replacing the traditional status of the Swiss franc as the safe haven currency.
Forex traders should be keenly aware of the current geopolitical environment in order to keep track of any potential change in market sentiment, which could impact currency prices. But how can you get an idea of the overall sentiment of the market? You can do so by reading reports by analysts and financial journalists in news wires or by visiting online trading forums to see what other traders are discussing.
However, these ways of getting a feel of the current market sentiment are not too accurate; you may think that other traders are in a buying or selling mood, but that may not be what is really happening in reality. Here are some of the more effective ways of gauging market sentiment: 1. The Commitment of Traders COT report 2. Commitment Of Traders COT report What is the COT?
The COT report provides traders with detailed positioning information about the futures market, and is, in my opinion, one of the most underrated tools that forex traders can make use of to enhance their trading performance. The report is compiled and released weekly by the Commodity Futures Trading Commission CFTC in the United States every Friday at Eastern Time, and records open interest information about the futures market based on the previous Tuesday.
Anyone can access the COT report for free on the CFTC website www. There are basically two types of reports available: the futures-only COT report and the futures-and-options-combined COT report. I usually just access the futures- only report for a glimpse of what has happened in the futures dimension of the forex market. In order to get through to the currency futures data, you have to wade past other commodities like milk, feeder cattle and so on, so a little patience is required.
Even though the data arrives three days late, the information nonetheless can be helpful since many traders spend their weekend analyzing the COT report. The time lag between reporting and release is the main handicap of the COT data, but despite this limitation, you can still use it as a sentiment tool. Figure 5. You can see the long and short positions held by traders in each of the three main categories defined by the CFTC, as explained below.
Some notes to the figure above. For example, a German car-maker, who exports to the US, expects to receive 10 million euros worth of sales within the next quarter. To hedge against the possibility of a US dollar decline which would affect the amount of euros it would receive once converted, the German car-maker would short 10 million in Euro FX futures.
On the other hand, if a US car manufacturer exports 10 million US dollars worth of cars within the next quarter, it would long the equivalent in Euro FX futures contracts. The COT report tells you the long and short positions undertaken by participants from each category.
When it comes to analyzing information pertaining to currency futures in the COT report, it is generally more relevant for traders to focus on the non- commercial participants rather than on the commercial participants.
The reason behind this is that these large speculators trade the futures contracts mainly for profits, and do not have the intention to take delivery of the underlying asset, which in this case would be cash. Large speculators, however, will usually close their losing positions instead of rolling them over to the next month. Why use The COT? The COT report allows you to gauge market sentiment in the currency futures market, which also influences the spot forex market.
Currency futures are basically spot prices which are adjusted by the forwards derived by interest rate differentials to arrive at a future delivery price.
Unlike spot forex which does not have a centralised exchange at the time of writing, currency futures are cleared at the Chicago Mercantile Exchange. Price quotation One of the many differences between spot forex and currency futures lies in their quoting convention.
In the currency futures market, currency futures are mostly quoted as the foreign currency directly against the US dollar. That said, spot forex and currency futures do have one similarity: the spot and futures prices of a currency tend to move in tandem.
When either the spot or futures price of a currency rises, the other also tends to rise, and when either falls, the other also tends to fall.
What is of concern to us is whether the non-commercials are net long or short in that currency futures. In order to determine the volume of contracts that these large speculators are holding net long or short positions of for that particular currency futures, you just need to calculate the difference between the longs and shorts, that is, subtract the number of short contracts from the number of long contracts.
A positive figure shows the number of net long contracts, while a negative figure shows the number of net short contracts. As you can see in Figure 5. The non-commercials are long 98, contracts and short 12, contracts. Therefore, they are overall net long 85, contracts - Usually, when a particular currency is trending up against the US dollar, the non- commercials tend to register a net long position since these large speculators tend to ride on the existing trend.
The opposite situation is true too: the non-commercials tend to register a net short position when a particular currency is trending down against the US dollar. Knowing whether this category has been net long or short a few days ago only indicates to us the positioning in retrospect; this information is only useful if you compare the latest net positioning with the positioning figures from the past few weeks or months.
By comparing the latest net positioning with that of the past few weeks or months, you can tell if the latest net long or net short positioning is skewing towards an extreme reading. My observation of the financial markets is that dramatic price moves, usually at major turning points, tend to occur when the majority of the market is positioned incorrectly.
And since the large speculators are more inclined to close their losing positions than the commercial hedgers, it is beneficial for us to keep an eye on their net directional positioning as well as their net contract volume in the currency futures market. If these large non-commercials are positioned on the wrong side of the market, you can expect liquidation of these positions, with the extent of liquidation depending on the total volume of contracts traded in the wrong direction.
Such mass unwinding of positions tends to bring about a powerful price move in the opposite direction which could last for a few days, and it is this turning point that you could detect with the COT data before the reversal scene actually plays out. Example: COT — using extreme position An example of this was played out in the week through November 17, In this case, all those who had the intention to go long on GBP had already done so. X-axis displays the dates for every three weeks even though the data for every week is shown on the chart.
Y-axis displays the net number of speculative contracts. Positive numbers indicate net long positioning, while negative numbers indicate net short positioning. The presence of an extreme reading allows you to be prepared for a possible trend reversal which could occur when large speculators liquidate their positions.
A mere increase or decrease of contracts for a particular currency futures does not indicate anything which could be of predictive value, as it simply shows you what has happened, but not what could possibly happen in a high-probability scenario. COT data is a diamond in the rough What deters many traders from using the COT report is its raw organisation of data, but that is not good enough an excuse to completely neglect this little treasure trove. The information from the COT report can be transferred into a spreadsheet so that further analysis can be conducted in a more suitable format.
Analysis of the COT report does not always throw up trading opportunities in the spot forex market, but when it does, you will be better prepared for a potential turn of tide, and be more confident in your trades.
Even though entries and exits cannot be timed solely based on the COT data, it can be an extremely useful tool to have in your toolbox to gauge the overall market sentiment. The forex market is very efficient at discounting future expectations by incorporating them into current prices. Very often, when news comes out better than is expected by economists and analysts, the currency of that country is more likely to soar against another currency.
When the news is worse than expected, that currency is more likely to fall against another currency. However, if the news or data turn out to be worse than expected and still the currency price soars, that is, the market reacts in a very bullish way to worse than expected data, a bright red flag should be waving at you.
The opposite situation also applies: if price action remains very bearish to much better than expected news, it signals a highly suspect price move. In short, you should look out for a contrarian market reaction to better or worse than expected news.
Under these circumstances, it is better to assume that the price move is hardly supported by substance, and could reverse sometime soon. A bullish price move that is not accompanied by evidence will soon be due for a reality check, just like a bearish price move that is not accompanied by evidence is very likely to be corrected very soon.
For example, if a piece of news turns out to be worse than expected, and assuming that there are no pre-release rumours or leaks of the news, and the currency pair rallies to break above a significant resistance level, you have reasons to suspect that the breakout move is likely to be false and unsustainable.
Even if the currency pair manages to make new highs later on, you should be prepared for a possible trend reversal very soon. The relative significance of news will vary from time to time. Summary As you have seen, market sentiment can be used, and should be used, to time your trade and identify profitable trading conditions.
The Market Sentiment Strategy has to be applied in conjunction with other strategies as it does not have precise entry and exit signals. Once you get a sense of the current market sentiment, you can then decide whether it is best to trade with or against the sentiment, taking into account all other factors. While it may be sensible to trade in the direction of the current sentiment, sometimes, trading against the sentiment can also be a profitable strategy, provided that you have valid reasons to do so.
For example, when the COT report indicates extreme positioning of the market, or when the market seems to be feeding off false euphoria on worse than expected news, it may be better to trade against the overall sentiment.
You should, however, wait for a more precise signal that the current sentiment is wearing off before going against it, as sometimes false euphoria can last for quite some time before resulting in a reversal. This signal could be a failed breakout of some sort or some other pattern failure. Always keep in mind that currency prices are, after all, the expressed perceptions of traders and market sentiment is really the blood that drives the market on the whole. Being able to ride on a trend is akin to making full use of the wind direction to steer your ship towards your destination.
For a ship to go against the wind requires a tremendous amount of effort — one has to fight the stubborn resistance from the opposing wind. Indeed, for most of the time, it pays more to be on the side of the current trend than to go against it. In the forex market, trend riders can capture any trend regardless of whether it is rising or falling in an attempt to generate trading profits.
Forex tends to have quite trending markets, regardless of which time frame you are looking at — trends are often formed on hourly, daily or weekly charts. With trends possibly having a long lifespan stretching to months, or even years, it is no wonder that many traders and fund managers exalt the strategy of hitching onto trends, with the glorious aim of capturing enormous profits from start to finish.
Trend riding is one of my favourite trading approaches, and I often ride the uptrend or downtrend after the trend has been established, rather than anticipating the move before it happens. I would say that even though the trend is your friend most of the times, one has to use a variety of methods to distinguish between a continuation of the trend and a possible trend reversal. But before you can ride on trends, you first need to identify what the current trend is, and to determine the time frame of the trend.
The question of what kind of trend is in place cannot be separated from the time frame that a trend is in. Trends are, after all, used to determine the relative direction of prices in a market over different time periods. There are mainly three types of trends in terms of time measurement: 1. primary long-term , 2. intermediate medium-term , and 3. These are discussed in further detail below. Primary trend A primary trend lasts the longest period of time, and its lifespan may range between eight months and two years.
This is the major trend that can be spotted easily on longer term charts such as the daily, weekly or monthly charts. Long-term traders who trade according to the primary trend are the most concerned about the fundamental picture of the currency pairs that they are trading, since fundamental factors will provide these traders with an idea of supply and demand on a bigger scale. Intermediate trend Within a primary trend, there will be counter-cyclical trends, and such price movements form the intermediate trend.
This type of trend could last from a month to as long as eight months. Knowing what the intermediate trend is of great importance to the position trader who tends to hold positions for several weeks or months at one go. Short-term trend A short-term trend can last for a few days to as long as a month. It appears during the course of the intermediate trend due to global capital flows reacting to daily economic news and political situations. Day traders are concerned with spotting and identifying short-term trends and as such short-term price movements are aplenty in the currency market, and can provide significant profit opportunities within a very short period of time.
You can easily gauge the direction of a trend by looking at the price chart of a currency pair. A trend can be defined as a series of higher lows and higher highs in an uptrend, and a series of lower highs and lower lows in a downtrend. In reality, prices do not always go higher in an uptrend, but still tend to bounce off areas of support, just like prices do not always make lower lows in a downtrend, but still tend to bounce off areas of resistance.
There are three trend directions a currency pair could take: 1. uptrend, 2. downtrend or 3. Uptrend In an uptrend, the base currency which is the first currency symbol in a pair appreciates in value. An uptrend is characterised by a series of higher highs and higher lows. However in real life, sometimes the currency does not make higher highs, but still makes higher lows.
Downtrend On the other hand, in a downtrend, the base currency depreciates in value. A downtrend is characterised by a series of lower highs and lower lows, but similarly, the currency does not always make lower lows, but still tends to make lower highs. Sideways trend If a currency pair does not go much higher or much lower, we can say that it is going sideways.
When this happens the prices are moving within a narrow range, and are neither appreciating nor depreciating much in value. For the Trend Riding Strategy, I shall focus only on the uptrend and the downtrend. The stages of a trend are not clear- cut, and that includes the starting and ending stages; and each stage can vary in length of time. Nascent trend 2. Fully charged trend 3. Aging trend 4. End of trend Figure 6. As you can see, Stage 1 of the uptrend started when the currency pair first emerged from the down trendline.
Later, a double top formation hinted that the uptrend was at Stage 3 when the trend was beginning to show signs of weariness. Stage 1: Nascent trend Right after a reversal, the embryonic trend emerges into the new territory with the greatest amount of uncertainty, as traders have the least amount of confidence in the direction of the nascent trend.
Price moves are often sharp, and may even retest the price levels seen before the entry into the new territory as bulls and bears wrestle for power. This characterises Stage 1 of a trend, and it is where aggressive traders get into the currency market, hoping to be right about the new direction of the trend and reap potentially the most profits by getting in early.
Since this stage of the trend has the greatest level of uncertainty, it is also where the risk of trend failure is greatest. Stage 2: Fully charged trend By the time the trend reaches Stage 2, it is fully charged. Either the bulls or the bears have won the battle over the other by now, and are persistently pushing the currency prices higher during an uptrend, or lower during a downtrend.
The highly confident behaviour of the bulls in the uptrend and of the bears in the downtrend gives little room for uncertainty about the trend direction.
This stage is ideally the best time for the risk-averse trader to join in the prevailing trend, after getting confirmation from the technical picture and market sentiment. Stage 3: Aging trend As with human beings, a trend gets old and tired eventually.
edu no longer supports Internet Explorer. To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. Frequently, they will complain that a strategy doesn't work. Few people understand that successful trading of the FOREX market entails the application of the right strategy for the right market condition. Grace Cheng highlights seven trading strategies, each of which is to be applied in a unique way and is designed for differing market conditions.
She shows how traders can use the various market conditions to their advantage by tailoring the strategy to suit each one. This revealing book also sheds light on how the FOREX market works, how you can incorporate sentiment analysis into your trading, and how trading in the direction of institutional activity can give you a competitive edge in the trading arena.
This invaluable book is ideal for new and current traders wanting to improve their trading performance. Filled with practical advice, this book is a must-read for traders who want to know exactly how they can make money in the FOREX market. wilson putra. this is something you have looking for when making serious decision about Dollar investment stuff. Jose Antonio Muñoz. Channa Khieng. Log in with Facebook Log in with Google.
Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Continue Reading Download Free PDF. Related Papers. How To Trade Dollar. Download Free PDF View PDF. How to Make a Living Trading Foreign Exchange. The 10 Essentials of Forex Trading -free-ebook-download. com Website: www. com First published in Great Britain in by Harriman House.
Copyright © Harriman House Ltd The right of Grace Cheng to be identified as the author has been asserted in accordance with the Copyright, Design and Patents Act ISBN British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher.
This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher. Printed and bound in Great Britain by Biddles Ltd, Kings Lynn, Norfolk.
Index by Indexing Specialists UK Ltd No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author. Designated trademarks and brands are the property of their respective owners. Dedication I dedicate this book to my husband, Pedro. Thank you for your constant encouragement, support and love.
This book is also dedicated to my loving parents who have always believed in me. She has also been featured in newspapers, magazines, newsletters and on TV. Grace is the creator of the PowerFX Course which is designed for both new and intermediate traders to jump-start their trading performance. Grace has mentored hundreds of independent traders through her PowerFX Course.
Her web site is at: www. And the development of sophisticated online foreign exchange trading platforms in recent years has attracted many traders to the market — traders who seek an income in addition to their day job or those who wish to trade a new market besides stocks and futures.
Who this book is for This book is primarily for those who are new to the world of currency trading and are curious about how they can make money from the forex market. Existing traders who are trading on demo or live accounts should also find some useful advice in this book. Some knowledge of candlestick charting is assumed as I will be using candlesticks to display the high, low, opening and closing prices in the charts throughout the book.
All you need to start is a computer with fast and stable internet access and a relatively small account with a broker. About this book This book describes seven fundamental and technical trading strategies for trading the foreign exchange markets. The purpose of this book is to show you how you can trade forex with these winning strategies. I will share with you some new ideas, interesting concepts, and the nuts and bolts of how you can implement each strategy more effectively.
This book is quite different from traditional technical analysis books because, while those books may document the reliability of certain technical patterns, I will explain in this book why certain technical patterns do not work as well in the forex market and therefore need adapting.
For example, I have increasingly noticed that in recent times the first attempt of a price breakout more often than not results in a failure. The strategies that I am going to share with you are suitable for trading the forex market in any time frame — ranging from minutes to weeks. Throughout the book I also explain certain aspects of the forex market so that you can gain an insight into how the market behaves.
Flexibility is required for the trader to adapt his or her strategies to different market conditions, as well as for the trader to customise trading strategies to suit his or her own trading style and personality.
Therefore, feel free to tweak or modify any of the parameters of these strategies to suit your own preferences. The 7 strategies in this book must be applied with discipline and a huge dose of common sense.
Their rules and guidelines are not set in stone. What I provide is a guide to implementing these strategies so that you can tilt the odds of success to your side. How this book is structured The book contains the following chapters. Getting Started Find out why the forex market is constantly growing, and why an increasing number of people are turning to trade this particular asset class in their quest to accumulate wealth.
For those who are new to trading, take a look at the differences between investing and trading, and the various choices of trading time frames. Spot Forex Market Structure The forex market has long been the exclusive playground of the big players, namely banks, institutional investors and hedge funds.
But the playground is no longer restricted to just them; individuals can also participate in this speculative game. It is essential to know where you, the trader, stand in the overall big picture. How To Overcome The Odds Of Trading Forex How are you going to tackle the odds that are stacked against you from the start in the forex trading business?
In this chapter, I will highlight the three Ms that have brought me success in this field: Mind, Money and Method. Many traders, especially the inexperienced ones, are too fixated on finding the perfect trade setup, the perfect trading system or the strategy that never fails, thus neglecting the other more important aspects that are crucial to good trading performance.
Find out what defines the current market sentiment, and how you can incorporate market sentiment analysis into your trading. Strategy 2 — Trend Riding There is so much more to riding trends than simply closing your eyes and buying at any point during an uptrend or short-selling at any point during a downtrend. This chapter shows you how you can jump on a trend when the trend is the most robust, rather than when it is about to end. This way you can ride a trend with a higher chance of success.
Strategy 3 — Breakout Fading Many false breakouts occur in forex price charts, and the occurrence of these fakeouts provides the perfect opportunity for fading breakouts, that is, trading against those breakouts. In this chapter, I explain why most breakouts fail, and how you can identify high-probability fading opportunities.
Strategy 4 — Breakout Trading When currency prices break out of certain price levels, a large sustained move in the direction of the breakout may occur, giving rise to a situation whereby big profits could potentially be captured in the least amount of time.
The main problem with trading breakouts is that many of these breakout attempts fail. In this chapter I walk you through several guidelines of how you can better identify potential breakout opportunities for this strategy. This particular strategy, however, requires that the forex market registers a period of relative calm and low volatility before the strategy is to be implemented. Strategy 6 — Carry Trade This is a fundamental trading strategy that is highly favoured by institutional investors.
In this chapter, I explain how a carry trade works, and highlight some points which you should keep in mind when adopting this strategy in the forex market.
Strategy 7 — News Straddling The forex market is extremely sensitive to economic and geopolitical news from around the world, especially those which relate to the industrialised countries. Find out how you can trade news releases with a higher probability of success.
Risk disclosure Trading forex involves substantial risk, and there is always the potential for loss. Your trading results may vary. No representation is made that any information in this book will guarantee profits or prevent losses from trading forex. You should be aware that no trading strategy can guarantee profits. Further information For more information about my trading strategies, the proprietary PowerFX Course and other forex market information, please visit the following website where I also host a daily forex blog — www.
This book, however, shall focus on the trading of spot forex. The most significant difference between spot forex and futures is that spot forex contracts are traded over-the-counter at no central location, while forex futures are traded on an exchange. This gives rise to another unique aspect of spot forex — the hour non-stop action; this is one major reason why I enjoy trading spot forex. With round-the-clock trading a person in any time-zone can trade spot forex at any time — whether during the day or night.
The best career decision I have made was to trade forex full-time. Forex trading has brought me both financial and emotional satisfaction, even though my initial learning journey was long and arduous. When I started in forex, I could only find one book on forex trading.
Forex was not as popular as stocks or options trading, so there were very few articles in magazines that focused on this field. I spent the first one and a half years learning how to trade forex and honing my skills on a demo account, before progressing to a real account, when I became consistently profitable.
The breakthrough came when I incorporated fundamental and sentiment analysis into my predominantly technical-based analysis. Even though I was able to dedicate myself to full-time trading, I found the initial learning curve to be extremely steep, as I had no mentor and had to learn all the ways of losing in the market before I learnt how to profit from it.
I hope that through this book, aspiring and current traders are able to fast-track their learning, and greatly improve their trading performance.
While there are up to 25 different market types The problem is the failure to understand Strategy 1 – Market Sentiment The forex market is heavily driven by market sentiment, and it AdLas 3 Mejores Plataformas de Trading Online Probadas y Elegidas Por Digital Pecunia. Plataformas Reguladas, Confiables y en Español. Apertura % en línea AdCompre y Venda Online con CFDs! Capital en riesgo. Practique con Nuestro Demo This section of our forex trading PDF is all about forex charts. When it comes to a AdSpreads as low as pips and zero commission on popular shares CFDs.. Forex and CFDs are high risk products and can result losses that exceed blogger.coms From Pips · Access Global Markets · Open A Free Demo Account · Fully Regulated ... read more
not so suitable, or you are making a mistake You have now avoided disaster and 3. This may seem puzzling for some people who are wondering that if something works for someone, then it should work for other people as well. Download Free PDF. Be well-capitalised Most new traders run out of money even before they see any profits in their trading account. This means that sometimes I will end past midnight, and other times I will be done well before lunch time. But type at certain times of day. The transaction risk is in relation to the exchange rate and any time zone differences.In order to get through to the currency futures data, you have to wade past other commodities like milk, feeder cattle and so on, so a little patience is required, forex trading setups pdf. For example, on the earlier A good entry has two main criteria. After reading our forex trading PDF you should now be feeling confident enough to begin trading. You should be aware that no trading strategy can guarantee profits. Big picture fundamental set-ups wait for a baby antelope, and not just any forex trading setups pdf 4. I also take the time to interact with the online community of traders by participating in forums such as that as ForexVibes www.