forex guide » STRATEGIES

writing about forex trading techniques

admin — Sun, 25 Apr 2010 21:00:13 +0000

You may forget this after a while, but going back to the beginning, the single biggest barrier before I could consider FOREX as a legitimate investment channel, was that I didn’t comprehend what it meant to trade FOREX.

Well, I obviously understood, you sort of gamble about a pair of currencies’ ratio – “would the dollar outperform the euro?”, but is this really gambling, meaning, is it completely random? what’s my edge here?

I certainly didn’t know how to explain (though I admittedly heard about) leverages, technical analysis strategies, hedging strategies. let alone did I know anything about spot or forward deals etc’.

Going back to those days, I realized it’s far more important to teach these concepts and explain them, before I could send you off to scout for your perfect broker and start trading or even just compare brokers, before you understand the foundations.

I hereby declare the opening of my pet project – the guide4fx.com online forex trading school.

I think it’s far an important topic to be left here on our blog, so we will add such a category to the site, for your reference, and my personal enjoyment.

most important to point out: even after you read this school’s curriculum, you’d probably have to do some homework about practical trading issues such as broker’s interests, software usage etc’. we believe to cover that in our site, so it will stay out of the scope of the school.

hope you’ll find it useful.

Swing Trading – Creating your way to profits

admin — Sat, 16 Jan 2010 15:38:41 +0000

It doesn’t matter what market you swing trade if you follow some basic tips and advice on implementing your swing trading strategy and use some basic trading principles. Trading or investing can be extremely risky. If you want to improve your trading success or are looking at starting your trading career, as a trader you always need to make sure you approach trading correctly and do not treat it like anything less than a business. Swing trading will give you all the tools you need to be successful, but if you aren’t prepared or know how to use those tools then you will fall far short of what you could have accomplished and be much less successful than you deserve.

Trading is a business and you would be best to treat it like nothing less than a business. The more time, energy and persistence you put into your trading, the more successful you will be. It is common for new traders to treat trading like the lottery and not like a business. In part it isn’t completely their fault. Some companies play on the emotions of traders and promote trading a simple and easy solution to getting rich quickly. The sad truth is that if you treat trading like the lottery, you will quickly discover that the markets are very unforgiving and will quickly slash its way through you trading capital until the balance reaches zero. So, just what can you do if you are starting out as a trader? Think of it as a business. Rome wasn’t built in a day. Make your decision with a long term approach in mind and not with a short term get rich mentality. This is one thing any new traders can do to prepare themselves for a path to successful trading.

Beyond treating trading like a business, you should also ensure that you try to distance yourself emotionally from all money used. Emotions can devastate any trading career and quickly cause you to suffer a string of losses and give up completely with swing trading and trading in general. Don’t make the mistake of trading with your emotions. This is much easier said than done. Perhaps the most difficult thing a person can do is detach themselves emotionally from their trading capital. The idea of a win or loss excites many new traders and this has an enormous impact on their decision making process. It typically causes new traders to make brash and uninformed trading decisions. They place trades that they wouldn’t or shouldn’t have if they had been following their trading plan. Detaching yourself from any money you use for trading is something that will take some time, but it is essential if you wish to survive as a trader.

If you swing trade with the correct psychological foundations in place, you will discover how and why swing trading offers any trader in any market around the world a true trading edge. If you neglect trading in general and do not approach it as a business which will reward you with handsome profits based on how much time and energy you devote to it, you will quickly see why many new traders give up on their trading career. A swing trading strategy provides you with all the essential tools to be successful, whether or not you are successful depend on how you implement them.

Traders do overtrade, you already know; but why actually?

admin — Sat, 16 Jan 2010 15:30:09 +0000

Ari Kiev suggests a few possible explanations in his book “Trading to win”. Some traders may overtrade just to gain some sort of involvement. They can’t sit still and do nothing. It’s as if they think, “An active trader trades all day.”
If you hold this belief, you will tend to feel you are missing out on something if you stand aside and do nothing. Other traders try to reach high performance goals, and feel that unless they make trade after trade, they have no chance of reaching them.
Professional institutional traders, for example, must make profits to stay employed. Sitting around doing nothing doesn’t make them think they can make a profit. When you fail to reach your performance objectives, there’s a powerful motive to make trades just to feel you are making some progress.
What often happens, however, is that bad trades are made and losses are mounted? In addition, while one is engaged in these loosing trades, he or she is not searching for solid, high probability setups. In the end, profits objectives are missed completely.

Personality may be an issue for some traders. Traders with an impulsive temperament may crave the excitement that excessive trading brings. While others may overtrade to cope with a general frustration they feel in their lives. For them, putting on trades is like playing the lottery – every trade brings hope of success and fulfillment.

Dr. Brett Steenbarger in his book “The Psychology of Trading” suggests that overtrading may be the result of daydreaming. Traders want to have a feeling of power and control, but the markets are difficult to control. Daydreams allow a fearful trader to feel powerful. Dreaming that you will make huge winning trades allows them to feel better. But many times, traders start believing their daydreams. And when daydreams start to seem believable, they may wrongly believe that all they have to do is put on trades and they will be profitable in the end. Even though commissions are relatively low these days, you can still end up paying unnecessary commission costs by overtrading. In addition, some of those small, seemingly insignificant trades can become significant if you lose perspective and invest too much money on a trade that is a bad idea.

One of the best solutions to overtrading is to be brutally honest with yourself. Evaluate your trading ideas and make sure that you have sound reasons for putting on a trade. It’s useful to develop and trade very detailed trading plan. You must have a written plan that defines all aspects of your trading, and you must commit to following that plan to the letter.
• Define your criteria for entering and exiting trades as precisely as possible.
• Identify the signals or indicators you will use to monitor the trade, and anticipate which indicators will signal when a trade is going against you.
If you have a trade going against you, the solution is very simple, get out because you can always get back in. Never let a looser get out of hand. As traders, we must accept the fact that losses are to be expected.

If you trade good setups with a union of events, and avoid making trades on impulse, you’ll increase your profits, and feel good about how you are productively using your time to make those profits.

Controlling profits – The Real trader way

admin — Sat, 16 Jan 2010 15:28:24 +0000

This may seem an odd headline as your probably thinking all traders want big profits so will accept them – this is not so. Many traders are very often right about the big trends but fail to make money from them. Why? Let’s get to the way.
Many traders have excellent forex methods and are right about the long term trends but cannot hold them due to the emotion of fear.
So what do they fear?
They fear of losing the profit that they have in an open position is something all novice trader struggle with. The bigger the profit gets the greater the temptation is to snatch it before it gets away.
As volatility eats into open equity, the temptation to take the profit becomes too much and the trader banks it.
Missing the huge profits and what might have been
Of course the trade them goes on to pile up $20 – 30,000 or more in profits!
The trader knows he should be in – but did not have the mental discipline to stay in the market.
It’s easy to say holding a trend is not hard just stay disciplined but that’s only if you have never done it!
It’s hard even for experienced traders.
Money is on the line in many instances big money and emotions start to take control.

Over Coming Fear When Trend Following

Of course you need to overcome these emotions and learn how to overcome the psychological trap of fear.

It is possible for the traders to turn average gains into huge gains and the way to do this is to have confidence in the method you are using. Even if you are following someone else’s methodology you will only be able to hang onto a trade if you have confidence in it.

1. Confidence in your method is essential and you should know how and why it works and will give you the big profits.

2. Hold stops back at entry. If it’s a long term trend, don’t trail too quickly or closely that will see your trade gets taken out by normal market volatility.

3. Accept the facts that open equity will drawdown sometimes by several thousands of dollars per day – don’t tick watch – look once a day only, and hold with your stop in place.

4. Learn to love risk and see the short term drawdown as inevitable to get your hands on the bigger pot of profits at the end of the trend.

5. Study the big trends historically and match yours with some to give you an idea of the target you can expect. Keep in mind if you trend follow and you catch a big trend it can last for months or years and run for a 7 dollar profit!

Confidence Discipline and the eyes on the bigger prize

you can do it – it just takes a mindset that is focused on making big gains and ignoring short term volatility. It’s hard but if you can have confidence and discipline, you can hold on for bigger profits without the fear of losing.

Forex Orders – Types and their importance

admin — Sat, 16 Jan 2010 15:22:46 +0000

Market Order
Generally saying, market order is an order to buy or sell at the current market price. As for as an example, EUR/USD is currently trading at 1.2140. As if you wanted to buy this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon, it’s like using their just a simple-one click ordering. You like the current price, you click once and gotcha; it’s yours! The one and only difference is you are buying or selling one currency against another currency instead of buying something weird or things which are not important to you at the present time.
Limit Order
Limit orders are orders placed by traders to buy or sell at certain prices and normally have the price and duration of the order as oppose to market order. With limit order you either wait for the price to reach the desired figure then place your order or you place your order in advance so that when the exact figure is reached, your order gets executed.
Take Profit Orders
Take profit order is an order placed when you feel that the price will go against you after reaching some positive level, you put your take profit orders to enable you exit with some profit from that particular trade. As oppose to stop loss order which even though your position has been closed but at a negative figure, you have some few losses to deal with.
OCO (One Cancels the Other)
OCO orders are combined orders with both a stop price and a limit price. When one of the orders is executed, the other is automatically cancelled. OCO orders are applicable to open positions, or they can be used to open a new position.
Say for example a trader believes that the UAD/CAD, currently traded at 1.2380/1.23833, will continue trending higher; you believe that should the pair break above 1.2391, it will rise to at least 50 pips. Nevertheless, you expect that prior to this major incline, the pair will retrace to 1.2375. You can place an entry limit at 1.2375, but in case the pair does not hit 1.2375 before climbing higher, you would miss the trade. You then place an OCO order to buy the USD/CAD if it reaches 1.2375 or 1.2391. Of the two, the first bid price to exist in the market will trigger the order.
Stop Loss Order
Traders place stop loss orders to an open position to avoid further losses, if by any chances the price move faster against you, the stop loss order will become your exit strategy. Stop loss order is a good money management practice and traders are normally advised to have them when executing the previous mentioned orders.
Limit Entry Orders
This type of order initiates an open position to sell each time the market rises, or buy each time the market falls. The client believes the market will turn in direction at the level of the order. 1. Buy Entry Limit: An order to buy at a price below the existing exchange value. 2. Sell Entry Limit: An order to sell at price above the existing trade value.
Understanding different types of forex orders and their uses is an essential basic skill. Take your time to study them and try them out using a demo account. And it’d be probably be a great help for you in forex trading.

Traders do overtrade, you already know; but why actually?

admin — Tue, 12 Jan 2010 14:16:32 +0000

Controlling profits – The Real trader way

admin — Thu, 07 Jan 2010 17:11:55 +0000

Over Coming Fear When Trend Following

Of course you need to overcome these emotions and learn how to overcome the psychological trap of fear.

1. Confidence in your method is essential and you should know how and why it works and will give you the big profits.

2. Hold stops back at entry. If it’s a long term trend, don’t trail too quickly or closely that will see your trade gets taken out by normal market volatility.

3. Accept the facts that open equity will drawdown sometimes by several thousands of dollars per day – don’t tick watch – look once a day only, and hold with your stop in place.

4. Learn to love risk and see the short term drawdown as inevitable to get your hands on the bigger pot of profits at the end of the trend.

Confidence Discipline and the eyes on the bigger prize

How are stop losses important to forex traders?

admin — Wed, 06 Jan 2010 10:23:16 +0000

Despite the fact that it is one of the most important orders which a Forex trader can place, a surprisingly large number of foreign currency traders simply ignore the stop loss order.
This type of market is called a stop loss order for a very good reason – it stops you from making too heavy a loss should the market move against you. So, why do so many traders ignore a trading tool which is specifically designed to protect their trading interests?
The answer is emotion.
The Forex market is a technical market and foreign currency trading must be based upon a technical analysis of the market. But human beings are emotional creatures and, even when the numbers are staring us in the face, there will always be an urge to go with our feelings and let our hearts rather than by our heads dictate our decisions.
If you ask most traders why they do not use stop loss orders they will tell you that one of their greatest fears is that often, despite the fact that a trade is moving against them, their instinct tells them that it is basically sound and that it will reverse in their favor. If they had a stop loss order is placed on the trade, there is a danger that their position would automatically be closed out before the market had an opportunity to reverse.
Undoubtedly there are occasions on which this will happen but all too often it will not. If you are away from the trading floor and don’t have a stop loss order in place then all too frequently you will return to find that you have made an unexpectedly large loss and the trader who remains on the trading floor not likely to fare any better, despite the fact that he is there watching the action.
In the latter case the trader can see that the market is moving against him and that his trade is moving into a loss but he hangs in there because he continues to believe that t he market is going to turn in his favor shortly: However, as a relatively small loss starts to turn into a fairly large one he finds himself in the position of not only still being convinced that the market will reverse, but also now feeling compelled to hold his position because he needs to recover some of his now large loss when the market does turn. In the end of course he is invariably forced to admit that he has made a mistake and to close his position before an already large loss turns into a disaster.
Even the most experienced traders do not make a profit on ever trade they make and losing trades are a fact of trading life. Nevertheless, the only way to become a successful trader is to minimize the size of any losing trades by ensuring that you put a stop loss order on all of your trades. In this way you protect yourself against movements in market and also stop your heart from ruling your head.

How To Read Forex Graphs

admin — Wed, 06 Jan 2010 10:17:08 +0000

Forex technical analysis consists of reading different types of graphs. It is very important to know how to read forex charts. Only by reading charts you will be able to interpret patterns and based on that you can make the appropriate trading decision.

You have to understand a few points to understand any technical chart. The graphs are direct representations of the movement of price of a currency. The price is a reflection of the action of buying and selling that takes place between the buyers and sellers in the forex market. Every kind of transaction in the over the counter forex trading process or between the interbank tend to provide with the price movements.

Since you are dealing with real price movements of actual traders, the influence of the fundamental trends for the currency is also reflected in the price movement. When you understand the basic market psychology where the investors are scared or when they are in a need to want more then you can pretty much relate the patterns in the charts and make a stable trading decision.

Most of the data charts consist of the following 4 terms:
• H indicates the highest price
• L indicates the lowest price
• O indicates the opening price
• C indicates the closing price
The 3 main types of charts used in Forex are:
• Bar Charts: The bar chart also known as the OHLC chart is represented by a line for a particular period of time. There are 4 hooks in the bar providing H, L, O, and C price over a period of time marked in the bar. This is plotted date versus price. The top of the bar denotes highest price, and the lowest denotes low price, small dot on left side denotes opening price, small dot on right side denotes closing price.
• Candlestick Charts: Imagine a candle with two sided wicks. This is the ideal representation of a Candle Stick Chart. A red color candle means that the closing price is lower than the opening price. A blue color candle means that the closing price was higher than the opening price. If there is a wick in the upper part of the bar/candle it is known as wick it denotes the high. If there is a wick in the lower part of the bar/candle it is known as wick it denotes the low.
• Line Chart: In this chart the, closing prices are connected together by a straight line. This represents the kind of fluctuations that are seen for a currency pair.
Every kind of chart can be plotted for the time duration required. There are 1 minute charts, 10 minute charts, 1 hours charts, 1 day, 2 day, weekly, monthly, quarterly, yearly and literally any kind of time frame that one requires.
There are several other types of charts like Renko charts, Tick Chart, Heikin Ashi Chart, Kagi Charts, Three Line Break, Point and Figure Charts, Equivolume charts and many more are around in the market. It is easy to understand what they represent and ideally all of them revolve around H, L, O, and C. The above illustrated 3 main types are the major ones.

A new strategy – 1234 strategy

admin — Mon, 28 Dec 2009 16:03:26 +0000

Forex traders always need to exchange Forex trading opinions and strategy. Recently, there is a so called ‘1234′ strategy in Forex trading.

‘1′ refers to one concept. Realizing the Forex trading is seeking the greater return through smaller risk. Specifically saying, the Forex market is a fair and also a giant market, there is no Forex trader who is able to control this market, therefore any Forex trader which undergo Forex trading does not ensure profit making. Since no Forex trader is certain about profit making why do they still do transaction? This is because the Forex trader thought the probability of making profit is bigger than probability of making loss. For example, after Forex trader analyzes the present trend and bought pound, the probability which the pound loses money is 50 pips, but gains probability is 150 pips, then this definitely is an opportunity which is worth investing. But 50 pips losses probabilities are in fact if the Forex trader really execute stop lost. Therefore this ‘1′ concept is closely related to stop lost. Truly understanding this point, while doing transaction Forex traders can rely on own initiative observing the rule and the discipline, so that uncontrollable loss will not happen.

‘2′ refers to two points which are stops loss point and take profit point. The majority Forex trader does not make money in the Forex market, this is because they are not using these 2 points efficiently and effectively. Most Forex traders frequently encounter the similar experience: Buys up one kind of currency hoping the currency to rise, later on the anticipation is not correct and do not want to stop loss, the loss later become larger and larger and still keep on waiting. After the long waiting, the currency starts gradually to rise strongly, but when the currency approaching the original opening price position, most Forex traders hurriedly left the market, finally a trend has rise even stronger, but the Forex traders have miss opportunity. This kind of phenomenon repeatedly occurs among Forex traders, mainly is because the Forex traders have not following these two points. If Forex traders on certain position able to promptly stop loss, it will avoid from a long period of waiting. Such situation is very normal and also happened frequently. Any Forex traders should put stop loss as a price to pay, a price that could win a high profit; there is no free lunch in this world, understanding this will make you not feeling bad about your loss.

‘3′ is about margin allocation of adopting 1/3 proportional distribution law. Specifically, the combined orders executed are allowed to use up to 1/3 of the margin, but it cannot be used up in one shot. Because the market contains uncertainty, after if you buy up and the trend is different from anticipation, the entire transaction will cause you to fall into the passive condition. But as for the 1/3 way of Forex trading, after buying a position, the market reverse movement, promptly stop loss can help to reduce your lost, but if the market is consistent with the anticipated direction, Forex traders can use the unrealized profit to supplement the margin, causes the profit space unceasingly to enlarge.

‘4′ is four aspects to consider in choosing the right time to execute an order. First, fundamental analysis, many technical analysts prefer not use the consideration basic surface factor. But average Forex traders’ experience have not reach such level, most Forex traders must use fundamental analysis to anticipate the best time to enter the market. Second is the technical analysis consideration, the technical specification is various, different Forex traders may choose their own preferred Forex charts and views to execute orders. Third, is to analyze the market through the currency movement trend. For example, if US dollar after experiencing a period fall, and after US announces a worse data but US dollar no longer to fall again, indicated US dollar dead end strength already melted, the date for US dollar to rise supposed to be not too far away. Fourth, conducts the analysis research through correlation market. If the short-term international crude oil market unceasingly will innovate high, might analyze from this phenomenon to US dollar, Japanese Yen disadvantage, but to euro, pound, Canadian dollar advantageous, to auspicious court attendant’s influence neutrality.