A Quick Forex Guide for Traders

In this Forex course we will review some steps you need to take care before you venture into your trading journey. Most traders venture into the Forex market with little or no experience in the Forex market. This results in painful experiences like loosing most of the risk capital, frustration because it seemed so easy to make money, etc.

The first thing you need to realize is that, it is not easy to make money. As every other endeavor in life, where important rewards are to come after mastering it, you need to work hard. You need to get very well educated and experienced before having the possibility to receive important rewards on it. The key on mastering the Forex market relies on commitment, patience and discipline.

Ok, you have decided you are going to trade the Forex market, you have seen several advertisings featuring how easy is to make money in the Forex market. You might think this is your opportunity to reach your financial freedom, right away, time is money, why waiting any longer if you have the opportunity to make money now. I know, I've been there, but you have a chance now, I didn't, no body told me what I am going to tell you.

We, Forex traders, make transactions based on a set of rules. These sets of rules are what we call a Trading System. Our systems tell us the exact time where we need to get in the market and out the market in order to make a profit (i.e. buy low sell high.)

Creating a system is the first big step you need to take care first. Why is this so important? Because you need to build a system that suits your personality, otherwise you are going to find hard to follow it, thus hard to profit from.

A system can be based on technical indicators or what we called a mechanical system or based on experience and intuition or what we call discretionary systems. I highly recommend using and trying first a mechanical system, because discretionary systems are dangerous during the early stages of a Forex trader (can lead to indiscipline.) With experience, on later stages, you will find out which signals work better and which ones to avoid.

The next step in this Forex course is to try your system on a demo account. Most Forex brokers offer a demo account, an account with virtual money. This is an excellent choice to test your trading system as there is no money at risk. In this step you will figure out if the strategy works for you. If you feel comfortable trading it, then it is most likely to produce good results. How much time should you stay in this step? It varies, but you shouldn't go one step further until your system gets consistent profitable results over a period of time. It can take many months, but remember, you need to be patient.

You must be honest to yourself; you need to take every single signal generated by your system, not only the signals you thought were going to work, otherwise, you are going to have problems in the next two steps.

Ok, by know you had consistent profitable results on your demo account. You might think its time to go full. Nope, nope, nope. There is a big difference between trading a demo and a real account. The most important difference lies on emotions (fear, greed, anger, etc.) These are psychological barriers that affect every single decision made by traders regardless of what he/she is trading (stocks, bonds, Forex, futures, grains, etc.) These emotional factors, in my opinion, are the most determinant factor that separates profitable traders from the others.

The next step in this Forex course is specially designed to deal with emotions and to confirm the results obtained in the prior step (consistent results in a demo account.) At this step you need to trade in a real account with limited funds. Some brokers offer fractional lot trading. Meaning you are able to trade any desired amount (even cents.) The important thing here is that these emotions we've been talking about are present only when there is real money at risk. At this stage, you are going to see if you are really comfortable trading your system and if you are able to trade with such system, remember different systems produce different emotions. If you are able to produce similar results than those obtained in a demo account, then ready for the next step. If you didn't, then you might need to create another system, there is chance your system never fit you. If you created consistent profitable results on this stage, you have a chance to produce similar results in the next one, on the other hand, if you didn't produce good results in this stage, you will not be able to make on the next stage. Remember, you need to do things right, and be honest to yourself.

The last stage is trading in a real account with sufficient funds. If you are at this stage, and have passed successfully every prior stage, then you have a chance to make it, go ahead and try it, you need to be confident in yourself and in your system, your strategy have already produced consistent profitable results, there are reasons to believe you are going to make it. Very few traders fail at this stage (if passed successfully prior stages).

Trading successfully is no easy task, it requires a lot of work, patience, discipline, and education. By completing the steps outlined in this Forex course, you have a chance to produce profitable results. I repeat it again, you need to be honest to yourself about the results obtained in every stage. Some times you might need expert guidance regarding your system development strategies.

source straightforex.com

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Psychology of Trading Strategy (Psycho-Strategy)

What’s the Psychology of Trading Strategy (Psycho-Strategy)?

I’m sure you understand that the Psycho-strategy is a mere metaphor, however we are going to use the same Forex terminology to describe our hypothetical strategy.

The Psycho-strategy is the mind frame you have to set your mind to if you want to make constantly profit in the world of Forex. It’s the way you have to think and feel in the three stages of the trade; before opening a trade, while the trade is running and after closing the trade.

The first thing I have to advice you before reading this article is that you have to to believe that using the Psycho-strategy is not less important than using your technical and fundamental strategies if not important! if you can’t totally believe that I recommend you to skip this article and continue with your favorite technical and fundamental venerable strategies.

The Psychology of Trading Strategy (Psycho-strategy) setup:

The the Psycho-strategy uses three indicators: Discipline indicator, Greedy oscillator and Fear oscillator.We use these indicators not to tell us when to enter the market (there are much better techniques to enter the marker where the Psycho-strategy can help) but we are using them to refine our overall trading practice hence our success in the Forex world.

Let’s start with the most important indicator; the Discipline indicator:

Discipline indicator:

It is unquestionable that nobody could achieve a goal if he have not already set this goal. Give the best archer the best tools and tell him to shot aimless target! what do you think he will do?

In the Forex (and in live un general) you have to define your goal and keep it obvious if you want to achieve it. For example you have to determine how many pips you want to gain daily, weekly and monthly from your trading.

Your goal have to be realistic, attainable and measurable: realistic goal means you have to set a goal that is not impossible for you and anybody to achieve, for example you can be a millionaire from trading Forex for few weeks or months. attainable goal means you can easily achieve the goal for example gaining 100 pips daily is not impossible in Forex trading so it’s a realistic goal but 25 pips per day is more attainable goal, get it?

The goal you have set have to be measurable which means you can easily say I’ve achieved my goal of today or this month. Goals like “I want to be a millionaire or I want to get the maximum pips the market could offer” are not measurable goals.

The first line in the Discipline indicator is the Goal line, the second line in the Discipline indicator is the Rules line.

Any successful person has his set of rules which he extremely bind himself to it, you too have to set you trading rules and obey them to the end, for example one of successful traders rules “Set stop loss before trade”.

You have to discover your trading rules and more important to obey them to the end, of course you can change this rules occasionally (i.e. every six months you have to review your trading rules) but once you have set them you can’t change them “Rules couldn’t’ be changed while playing the game”.

The Discipline indicator now has two lines: Goal line and Rules line; these lines have to be unbreakable, untouchable, you have to limit you trade between these lines and don’ let Greedy or Fear indicators to breaks your Goal and Rules lines.

Fear and Greedy oscillators:

The fear making of loss and Greedy of making more profits are very like bulls and bears that imagined fighting each others and move the market accordingly. Both of the fear and greedy trying to break your Discipline indicators lines.

Fear of losing maybe advising you to ignore setting stop loss for you trade and break one of your trade rules. Fear maybe asking you to close a profitable trade once the market start to move against you for awhile.

Greedy acts the same trying to break your rules but inversely of fear; Greedy will tell you to continue in a profitable trade although you Goal has been achieved seeking more pips. Greedy will advice you to remove your trailing stop hoping o make the maximum of he market.

As long as Fear indicator and Greedy indicator oscillate between the Discipline upper line - Goal line - and lower line - Rules line - you will constantly make profits with the Psycho-strategy!

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Inverted Pyramid Based Forex Trading Strategies

As a trader, you must develop a Forex trading strategy that will allow you to quickly identify flaws and make adjustments while continuing to trade. A classic approach used to evaluate risks in the currency trading system is the inverted pyramid approach. All macroeconomic factors that affect a chosen currency pair are a function of the top of the inverted pyramid. All technical factors are considered as you move down to the bottom of the pyramid. Traders assign weight to different parts of the pyramid. Purely technical traders may apply more weight to the bottom of the inverted pyramid (upside down triangle) while fundamental traders may apply more weight at the top.

In order to make use of the inverted pyramid you will need to understand the macroeconomic factors that are a function of the top of the inverted pyramid. These include international issues that influence the global trading community. These types of issues may be gauged from news reports and news feeds with global coverage. News networks, such as CNN, provide up to date coverage of terrorism, oil prices and other such issues.

In order to account for the technical factors that apply to the pyramid, you will need to determine specifics and sediment in the particular market within which you are trading and also for any market that impacts the market within which you are trading. You must decide the type of technical indicators that will be used in your Forex trading strategy. Some traders rely upon randomness and chance while others engage more complicated mathematical computations to calculate weighted moving averages. You must be able to develop and visualize a picture of the market, which identifies events that are of importance to affect the market. You also need to develop a general feel about the market. News reports and specific market reports will assist you in developing a picture of the market and also indicate of the direction in which the market is headed.

You will need to determine which currency pairs are volatile in relation to the macroeconomic environment and market conditions that have been identified. You will need to have knowledge of the market in order to identify and differentiate market indicators from events that bear no real significance. Your analysis of acquired data should indicate whether price movements represent a trend or volatility in the currency trading system. You will then be able to use this analysis to narrow your options to trades that offer the most potential.

You must be able to set floors and ceilings in your technical analysis to establish trading levels and then use those levels in your Forex trading strategy. Technical patterns that indicate the direction of trades in specific currency pairs should be developed. Once you have narrowed down to a specific currency pair for trade, you will then need to reexamine its market sediment as it applies to the technical analysis. You will have to identify entry and exit points for your chosen trades.

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Andrew Daigle is the owner, creator and author of many successful websites including ForexBoost at http://www.forexboost.com/ and http://forex-trading-system.typepad.com/ , Free Forex Training Resource for the Novice and Advanced Forex trader.

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Forex Calculating Profit & Order Type

As we have specified in earlier page, in order to calculate the pip value or how much is one pip, you have to know some additional information such as: trading size (how many lots), leverage used, and the actual rate of the pair for which you want to calculate the pip value

Calculation Formula for currencies with USD as quote currency (or X/USD such as EUR/USD, GBP/USD, and AUD/USD)

(Selling Price - Buying Price) x lot size x number of lots = Profit / Loss

Example :

• Buy 3 standard lots EUR/USD at 1.2000
• Sell (liquid) 3 lots EUR/USD at 1.2010
• Profit = (1.2010 - 1.2000) x 100.000 x 3 = $300

• Sell 1 standard lot GBP/USD at 2.0001
• Buy (liquid) 1 lot GBP/USD at 2.0000
• Profit = (1.2001 - 1.2000) x 100.000 x 1 = $10

Simple method :

As you can see from example number 1 and 2, for every standard lot (100K) the profit is $10/pip.

How to calculate profit per pip ? Profit/pip = total profit / total pips

• Example number 1 : $300/3 = $10/pip
• Example number 2 : $10/1 = $10/pip

Conclusion : (applies for x/USD Pair only !)

• For every 1 standard lot, profit (loss) = $10/pip
• For every 1 mini lot, profit (loss) = $1/pip
• For every 1 micro lot, profit (loss) = $0.1/pip

Calculation Formula for currencies with USD as base currency (or USD/X such as USD/JPY and USD/CHF)

[ (Selling Price - Buying Price) / Closing (liquidating) Price ] x lot size x number of lots = Profit / Loss

Example :

• Buy 1 standard lot USD/JPY at 110.00
• Sell (liquid) 1 lot USD/JPY at 110.01
• Profit = [ (110.01 - 110.00) / 110.01 ] x 100.000 x 1 = $9.09

Calculation Formula for mixed currencies (such as EUR/JPY) [ (Selling Price - Buying Price) / USD/JPY Closing Price] x lot size x number of lots = Profit / Loss

Example :

• Buy 1 standard lot EUR/JPY at 162.70
• Sell (liquid) 1 lot EUR/JPY at 162.71 USD/JPY closing price of the previous day is 118.10
• Profit = [ (162.71 - 162.70) / 118.10 ] x 100.000 x 1 = $8.47

Please note :

If you open a Buy position (going Long), you will open with offer price, and will have to use bid price while selling it back (liqudating, closing, stop loss, and taking profit)

If you open a Sell position (going Short), you will open with bid price, and will have to use offer price while selling it back (liqudating, closing, stop loss, and taking profit)

Profit Target, Stop Loss, and Trailing Stop

Profit Target is a target point at which you want to liquidate your position in profit automatically, when the market price hits it. This means, you dont have to monitor your open positions all the time, just set a profit target, and once market price hits it, your position will be closed in profit automatically

Stop Loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses if the market moves against an investor's trade.

• If you open a Buy or Long Position, profit target level should be placed Higher than opening price.
• If you open a Sell or Short Position, stop loss level should be placed Lower than opening price.

Example :

• Buy (Long) EUR/USD 1.2000 (offer price)
• Profit Target 1.2050 (50 pips profit target, bid price)
• Stop Loss 1.1950 (50 pips stop loss, bid price)
  
• Sell (Short) EUR/USD 1.2000 (bid price)
• Profit Target 1.1950 (50 pips profit target, offer price)
• Stop Loss 1.2050 (50 pips stop loss, offer price)

Trailing Stop is an kind of stop loss. This function enables you to automatically set stop loss level whenever the profit you got has exceeded the minimum trailing stop level. If the profit has not exceeded minimum trailing stop level, it will not work ! Please keep in mind that trailing stop usually is executed directly from your computer (client software), not your broker's server so it is highly recommended to put a stop loss besides trailing stop.

The objective of trailing stop is to protect your profit if the market moves against your position so the profit will never go anywhere.

If Trailing stop level is set to 10 pips. Right after your position has reached profit more than trailing stop level (more than 10), then the stop loss will be set to 10 pips away from your open position to protect your profit . Lets say you have already got 10 pips profit, then trailing stop will put a stop loss to 0 (10 pips away from open). If your profit is 20, then stop loss will adjust the stop loss to 10 points profit (still 10 pips awa from open).

Example :

Trailing stop = 10 pips, You open a buy position at 1.2000, suddenly price moves to 1.2010, trailing stop set a stop loss at 1.2000 (Break Even). Market keeps moving to 1.2020, trailing stop level will be adjusted to 1.2010 (10 pips profit), and so on.

Basic Forex Order Types

There are 3 basic order types to trade currencies. They are called Market Order, Stop and Limit Pending Orders.

Market Order is an order to go Long (Buy) or short (Sell) at the current market price. You can't edit these rates.

Example :

Your trading software shows a quote for GBP/USD is at 1.9996 (bid)/2.0000 (ask). This means you can order a buy position at 2.0000 or you can order a sell position at 1.9996 at the moment.

But if you are willing to place an order at different price, you need to use Stop or Limit Pending Orders.

Stop Pending Order :

There are 2 benefits of using Stop Pending Orders :

• Stop Buy Order is used when you want to Buy above the current market price. Example : Current price is at 1.2000, and you want to Buy only if the market hits 1.2050. You can set a Stop Buy at 1.2050
• Stop Sell Order is used when you want to Sell below the current market price Example : Current price is at 1.2000, and you want to Sell only if the market hits 1.1950. You can set a Stop Sell at 1.1950

Limit Pending Order :

There are 2 benefits of using Limit Pending Orders :

• Limit Buy Order is used when you want to Buy below the current market price.

Example :

Current price is at 1.2000, and you want to Buy only if the market hits 1.1950. You can set a Limit Buy at 1.1950

• Limit Sell Order is used when you want to Sell above the current market price

Example :

Current price is at 1.2000, and you want to Sell only if the market hits 1.2050. You can set a Limit Sell at 1.2050

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Fundamental Or Technical Analysis?

Basically, forex traders always use two different approaches to make decisions in forex trading. The first approach is Technical Analysis, and the other one is Fundamental Analysis. But we added 1 more approach which was not included among two approaches above. We call it Logical Analysis.

What does Fundamental, Technical, and Logical Analysis mean ?

Technical Analysis is the art of forecasting price movements through the study of chart patterns, indicator signals, sentiment readings, volume, open interest, and other mathematical analysis to identify trading opportunities.

Fundamental Analysis focuses on key underlying economic and political factors to determine the direction of a currency's value. Fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumors. There are a number of fundamental indicators traders may follow that reflect how an economy is changing and gleam insight into Forex market prices to come.

Logical Analysis is an approach to exploit the law of eternal balance in the universe (its like the eternal balance of yin and yang). Forex and every matter in this world are affected by the universe. Hence this approach can be implemented in forex as well. Later we will give you a very profitable trading system to gain an enormous profit based on this method.

Fundamental, Technical, and Logical Analysis. Which one is the best ?

Technical traders usually say that it is impossible to trade on the news, because the market moves so fast. In the other hand, fundamentalists say that only the news move the market and indicator is always a follower.

The big question is what actually moves the forex market? It is trader's expectation and speculation that moves the market! Neither the news nor the graphs move the market. The most dramatic price movements, however, occur when unexpected events happen.

There is another important question you should think of: How much money is traded by fundamentalists, and how much money is traded by technical traders?

We will tell you a little secret in forex industry. Do you know that almost all of big banks, hedge funds, and other big financial institutions trade using Fundamental Analysis? And unfotunately those big financial institutions have the biggest amount of money in the world.

So what is the correlation with forex market? It is very rational and predictable : At the time they open trades (using a large amount of money), the market moves accordingly. What do fundamentals do ? If the news report for a country is better than expected, that country's currency usually gets stronger and moves the price, if it's worse, that currency will be weaker and moves the price to the other way.

Do you know why there is only a small amount of fundamental forex trading e-book taught by forex brokers out there ? This probably has something to do with more profitable nature of fundamental analysis. As you know, some brokers dont like if their customers win. If you win they will lose (they trade against you).

What about technical traders ? It seems that most of technical traders and small traders don't have such a lot of money compared to big financial institutions, even altogether.

For complexity, there are lots of different indicators and timeframes used in technical analysis. At the same moment, each of them are giving different signals.

The conclusion is we prefer to use fundamental analysis compared to technical. Then what about logical analysis ? To be honest, logical analysis the best method to trade forex, as it will give you a constant, reliable, and greatest result almost all the time.

Forex Trading Tips

Trading tips suitable for Technical Traders : Only use the most common, widely used Trading Indicators and Never trade during important News Accouncement Time.

Trading tips suitable for Fundamental Traders : Be patient, discipline, use an accurate clock and only trade during important news release.

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How to Achieve Trading Perfection?

Achieving Trading Perfection - Trade quality, not quantity. Take the best of the best. Get the big picture. If you haven’t previously come across such advice, or if you have and are not following it, it is time that you take these words to heart. But how?

Trade selection and adequate planning go hand in hand. This is where most would-be professional traders miss the boat.
Much more money is made as a result of proper planning than from sitting and trading everything that comes along or “looks” good.
It’s difficult to fully understand why people think they have to trade so much. It’s difficult to truly grasp why people think that they have to take as many trades as they do.
Just the opposite is true. There is a correct approach to each and every trade. That is what achieving perfection is all about.
It all starts with proper management: planning, organizing, delegating, directing, and controlling.
These facets of management must be woven together into your trading; they do overlap.
Although planning is the major management function involved in achieving perfection, you can’t possibly plan well unless you are organized to do so.
You must have your tools at hand: your trading software, your data, the proper equipment. All of the rudiments for planning must be in place, which in itself is a part of organizing.
You must be physically fit when you plan: well nourished, properly exercised, well rested and mentally alert - all part of having your life organized, all part of achieving perfection as a trader.
To be a winning trader, you have to be among the best. There can be no middle ground. There are only winners and losers, and to be a winner you have to be a champion. And, just like any champion, you must have discipline, self-control, and a willingness to train, train, train.
There are no runners-up in trading, you either get the gold or you give the gold. Often, while others are busy going to parties or watching sports events, you are busy poring over charts, studying, thinking, planning. When others are listening to music or watching TV, you are busy practicing your trading, practicing trade selection, working hard to become a more astute trader.
Part of achieving perfection involves the diligent study of charts. The data, as presented on your screen and preserved as charts, are, for the most part, all you have for making trading decisions. They are a picture, a visualization of what is taking place in the reality of the forex market. Your job in achieving perfection and becoming an adequate trader is to picture and imagine in your mind what makes prices move and form the way they do. Ask yourself, “How does what I see in front of me relate to the supply and demand for the underlying?” Ask yourself, “Is what I am seeing on the chart even related to supply and demand, or is what I am seeing related to an engineered move by some insider or market mover?”
Supply and demand are not what makes prices move or fail to move most of the time. The sooner you realize that fact, the better off you will be. Markets are engineered, manipulated? You need to know that.
But there’s more to a chart than merely price patterns. Reflected in the chart are the emotional reactions of human beings. Reactions to rumors and news; to national and world events; to government reports - these, too, are on the charts.
You might say that price movement, or the lack thereof, is the net effect of all the perceptions of all the traders who are participating in the market for a particular futures.
There is something else on the charts, something that too few take into account. That something is the manipulations from and by the insiders, the market movers, and by commercials holding large inventories of the underlying you are attempting to trade.
In achieving perfection as a trader, you must train yourself to look for evidence of any and all of these things as you study your charts. It is the cumulative action of all perceptions which causes patterns to form on a price chart.
You must learn to look for the truths in the markets. There are certain truths which are self-evident; they are always true. For instance, take the phenomenon of a breakout. When prices break out, no one can change the fact that they did break out. It is a fact and it is true. The breakout may turn out to be a “false” breakout, but nevertheless it is a breakout. As part of achieving perfection in your trade selection skills, you have to learn to tell which breakouts are most likely true breakouts, and which ones are most likely false. How can you know? By the price patterns on the chart.
And what about trend? Your job in achieving perfection as a trader is to master how to trade a trend. A trend is a trend, is a trend. It is a trend until the end, and part of your job is to know when a market is not trending.
The trend is the trend while it lasts. While a market is trending it is telling the truth. The trend can change, but the truth is the truth. If prices are rising, the trend is up. If prices are falling, the trend is down. The truth can be found in the trend. It is an immutable fact. You are to learn to make my money by trading with the trend. You are to learn what constitutes a trend. You have to learn to spot trends early so that you can make the most out of the market while it is trending. Your job in achieving perfection as a trader is to learn to recognize when a trend will most likely begin, and just as important, to learn to be even more adept at deciphering when a trend is ending.
In achieving perfection, you must learn to recognize “your” trade(s), and to take only “your” trades. Trade the formations and patterns that you can easily recognize and identify.
You must learn to trade using tips and tricks that you are shown and to accumulate and keep a collection of techniques that result in the selection of high probability trades.
How are you to do all this? Practice, practice, PRACTICE. Practice recognition of congestion areas. Practice recognition of high probability breakouts. Practice trend recognition. Practice and more practice. Just like anyone who wants to achieve perfection at anything, there must be total dedication, study, practice and more practice. You are to become a trading virtuoso. You are to practice, yet always realizing that you will never attain true perfection, that there is always room for improvement. There is usually a way to refine: ways that you can do things better, more efficiently, and with greater speed and finesse.

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Forex for Dummies

Forex Basics
If you've already read the "What is Forex?" section then you should know what Forex market is and what it is all about. If not, please, do it. There are five essential aspects of foreign currency market a beginner trader (and an old one as well) should be aware of :

• Forex Fundamental Analysis
• Forex Technical Analysis
• Money Management
• Forex Trading Psychology
• Forex Brokerage

Understanding and mastering these sides of trading are crucial to organize your Forex trading experience.

Forex Fundamental Analysis
Fundamental analysis is the process of market analysis which is done regarding only "real" events and macroeconomic data which is related to the traded currencies. Fundamental analysis is used not only in Forex but can be a part of any financial planning or forecasting. Concepts that are part of Forex fundamental analysis: overnight interest rates, central banks meetings and decisions, any macroeconomic news, global industrial, economical, political and weather news. Fundamental analysis is the most natural way of making Forex market forecasts. In theory, it alone should work perfectly, but in practice it is often used in pair with technical analysis. Recommended e-books on Forex fundamental analysis :

• Reminiscences of a Stock Operator
• What Moves the Currency Market?

Forex Technical Analysis
Technical analysis is the process of market analysis that relies only on market data numbers - quotes, charts, simple and complex indicators, volume of supply and demand, past market data, etc. The main idea behind Forex technical analysis is the postulate of functional dependence of the future market technical data on the past market technical data. As well as with fundamental analysis, technical analysis is believed to be self-sufficient and you can use only it to successfully trade Forex. In practice, both analysis methods are used. Recommended e-books on Forex fundamental analysis are :

• The Law Of Charts
• Candlesticks For Support And Resistance
• Trend Determination

Money Management in Forex
Even if you master every possible method of market analysis and will make very accurate predictions for future Forex market behavior, you won't make any money without a proper money management strategy. Money management in Forex (as well as in other financial markets) is a complex set of rules which you develop to fit your own trading style and amount of money you have for trading. Money management play very important role in getting profits out of Forex; do not underestimate it. To get more information on money management you can read these books :

• Risk Control and Money Management
• Money Management (A chapter from The Mathematics of Gambling)
  

Forex Trading Psychology
While learning a lot about market analysis and money management is an obvious and necessary step to be a successful Forex traders, you also need to master your emotions to keep your trading performance under strict control of mind and intuition. Controlling your emotions in Forex trading is often a balancing between greed and cautiousness. Almost any known psychology practices and techniques can work for Forex traders to help them keep to their trading strategies rather to their spontaneous emotions. Problems you'll have to deal while being a professional Forex trader:

• Your greed
• Overtrading
• Lack of discipline
• Lack of confidence
• Blind following others' forecasts

These are very professional books on psychology written specially for financial traders :

• Calming The Mind So That Body Can Perform
• Emotion Free Trading
• The Miracle of Discipline

Forex Brokerage
Every Forex trader like any other professional needs tools to trade. One of these tools, which is vital to be in market, is a Forex broker and specifically for Internet - on-line Forex broker - a company which will provide real-time market information to trader and bring his orders to Forex market. While choosing a right Forex broker things to look for are the following :

• Being a professional company you can trust
• Provide you with real-time quotes
• Execute your orders fast and accurately
• Don't take a lot of commissions
• Support the withdraw/deposit methods you use

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What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

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Forex Trading History

Foreign exchange of currencies can be dated back to ancient times, when merchants of different sorts traded coins from country to country. In ancient Egypt the first coins were used, and paper notes were added later on by the Babylonians. The history of Forex continues in the middle ages when foreign exchange was maintained by international banks. This enabled a growth of the European powers and contributed to the spread of foreign currencies throughout Europe and the middle east. The history of Forex is therefore perhaps the longest of all the other markets, and this is one of the advantages of Forex over other market options.

1816-The Gold Standard Changes Forex History
The gold standard was a trading standard that was used as a fixed value for trading commodities. This means a certain weight in gold was established and used to trade for other currencies. This started to be in use in 1816, when the British pound was defined as 123.27 grains of gold. This meant that the British banks had a specific value that was defined and this in turn helped set the UK standard currency as stable.
The US adopted the gold standard in 1879 and replaced the British pound when the European nations stopped using the gold standard in the outbreak of World War I.

1944 - The Bretton Woods System
By the end of WW II, the economical status of the world's great nations had changed. The UK had suffered a great financial blow and its economical state was disastrous, while the US had remained relatively unchanged by the war. The dollar rose as the new standard of the financial market. At a conference held at Bretton Woods in the US in 1944, a new international financial framework was introduced into Forex history. The US dollar now became the new global reserve currency, when other currencies where set according to the dollar. At this summit the US, UK and France met in order to try and better the European economies scathed by the war, and to create a stable environment by which the global economies could restore themselves. The Bretton Woods Accord established the pegging of currencies and the International Monetary Fund (IMF), and established the world bank.

1973 - The Floating Exchange Rates
By 1972 a few major countries, such as the UK, suffered economical difficulties and initiated the floating of their currencies. The Smithsonian agreement was signed in 1971 and meant creating a more flexible agreement than Bretton woods where currencies had the ability to fluctuate more. The European market also tried to move from its dependency on the US dollar with more joints and agreements signed to ensure currencies' extended flexibility. Both the Smithsonian agreement and the European Joint Float collapsed, signifying the official switch to a free-floating currency system. Governments were now free to peg their currencies or allow them to freely float. In 1978, the free-floating system was officially mandated, but like previous attempts failed in 1993.

1994 - Forex History Changes With The Introduction of The Internet
During 1994, online currency trading made its debut, with the first online Forex transaction done. Since then, the market has grown to what it is today, with a total circle of more than $1.9 trillion every day. The big change in Forex history is that now anyone could participate and invest in the market. The vast amount of people trading online Forex is due mostly to the option of margin investments that are available with online Forex trading.

2002 - The Arrival of the Euro to Forex Trading
On January 1, 2002, the history of Forex trading was changed with the introduction of the Euro as the official currency between twelve European nations. The Euro is now the second most frequently traded currency in Forex markets. The countries first added to the Euro currency were: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. More details on the Forex market is available at Forex info. Forex History can be seen as spanning only one decade, or it can be measures from ancient times when coins were swapped. In any case no one undermines the importance of the Forex market today.

Written by Debbie Graham - Section Editor published with www.fxinfo.com

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Forex Glossary

Ask (Offer) — price of the offer, the price you buy for.
Bank Rate — the percentage rate at which central bank of a country lends money to the country's commercial banks.
Bid — price of the demand, the price you sell for.
Broker — the market participating body which serves as the middleman between retail traders and larger commercial institutions.
Cable — a Forex traders slang word GBP/USD currency pair.
Carry Trade — in Forex, holding a position with a positive overnight interest return in hope of gaining profits, without closing the position, just for the central banks interest rates difference.
CFD — a Contract for Difference - special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.
Commission — broker commissions for operation handling.
CPI — consumer price index the statistical measure of inflation based upon changes of prices of a specified set of goods.
EA (Expert Advisor) — an automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.
ECN Broker — a type of Forex brokerage firm that provide its clients direct access to other Forex market participants. ECN brokers don't discourage scalping, don't trade against the client, don't charge spread (low spread is defined by current market prices) but charge commissions for every order.
ECB (European Central Bank) — the main regulatory body of the European Union financial system.
Fed (Federal Reserve) — the main regulatory body of the United States of America financial system, which division - FOMC (Federal Open Market Committee) - regulates, among other things, federal interest rates.
Fibonacci Retracements — the levels with a high probability of trend break or bounce, calculated as the 23.6%, 32.8%, 50% and 61.8% of the trend range.
Flat (Square) — neutral state when all your positions are closed.
Fundamental Analysis — the analysis based only on news, economic indicators and global events.
GTC (Good Till Cancelled) — order to buy or sell of a currency with a fixed price or worse. The order is alive (good) until execution or cancellation.
Hedging — maintaining a market position which secures the existing open positions in the opposite direction.
Jobber — a slang word for a trader which is aimed toward fast but small and short-term profit from an intra-day trading. Jobber rarely leaves open positions overnight.
Kiwi — a Forex slang name for the New Zealand currency - New Zealand dollar.
Limit Order — order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.
Liquidity — the measure of markets which describes relationship between the trading volume and the price change.
Long — the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.
Loss — the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.
Lot — definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).
Margin — money, the investor needs to keep at broker account to execute trades. It supplies the possible losses which may occur in margin trading.
Margin Account — account which is used to hold investor's deposited money for FOREX trading.
Margin Call — demand of a broker to deposit more margin money to the margin account when the amount in it falls below certain minimum.
Market Order — order to buy or sell a lot for a current market price.
Market Price — the current price for which the currency is traded for on the market.
Offer (Ask) — price of the offer, the price you buy for.
Open Position (Trade) — position on buying (long) or selling (short) for a currency pair.
Order — order for a broker to buy or sell the currency with a certain rate.
Pivot Point — the primary support/resistance point calculated basing on the previous trend's High, Low and Close prices.
Pip (Point) — the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).
Profit (Gain) — positive amount of money gained for closing the position.
Principal Value — the initial amount of money of the invested.
Realized Profit/Loss — gain/loss for already closed positions.
Resistance — price level for which the intensive selling can lead to price increasing (up-trend)
Settled (Closed) Position — closed positions for which all needed transactions has been made.
Slippage — execution of order for a price different than expected (ordered), main reasons for slippage are - "fast" market, low liquidity and low broker's ability to execute orders.
Spread — difference between ask and bid prices for a currency pair.
Stop-Limit Order — order to sell or buy a lot when the market reaches certain price. Usually is a combination of stop-order and limit-order.
Stop-Loss Order — order to sell or buy a lot for a certain price or worse. It is used to avoid extra losses when market moves in the opposite direction.
Support — price level for which intensive buying can lead to the price decreasing (down-trend). Technical Analysis — the analysis based only on the technical market data (quotes) with the help of various technical indicators.
Trend — direction of market which has been established with influence of different factors.
Unrealized (Floating) Profit/Loss — a profit/loss for your non-closed positions.
Useable Margin — amount of money in the account that can be used for trading.
Used Margin — amount of money in the account already used to hold open positions open.
Volatility — a statistical measure of the number of price changes for a given currency pair in a given period of time.

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Mistakes in a Trading Environment

When it comes to trading, one of the most neglected subjects are those dealing with trading psychology. Most traders spend days, months and even years trying to find the right system. But having a system is just part of the game. Don't get us wrong, it is very important to have a system that perfectly suits the trader, but it is as important as having a money management plan, or to understand all psychology barriers that may affect the trader decisions and other issues. In order to succeed in this business, there must be equilibrium between all important aspects of trading.
In the trading environment, when you lose a trade, what is the first idea that pops up in your mind? It would probably be, "There must be something wrong with my system", or "I knew it, I shouldn't have taken this trade" (even when your system signaled it). But sometimes we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.
When it comes to trading the Forex market as well as other markets, only 5% of traders achieve the ultimate goal: to be consistent in profits. What is interesting though is that there is just a tiny difference between this 5% of traders and the rest of them. The top 5% grow from mistakes; mistakes are a learning experience, they learn an invaluable lesson on every single mistake made. Deep in their minds, a mistake is one more chance to try it harder and do it better the next time, because they know they might not get a chance the next time. And at the end, this tiny difference becomes THE big difference.

Mistakes in the trading environment
Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, a mistake has nothing to do with it, mistakes are made when certain guidelines are not followed. When the rules you trade by are violated. Take for instance the following scenarios :

First scenario: The system signals a trade.

• Signal taken and trade turns out to be a profitable trade.
  Outcome of the trade : Positive, made money.
  Experience gained : Its good to follow the system, if I do this consistently the odds will turn in my favor. Confidence is gained in both the trader and the system.
  Mistake made : None.
• Signal taken and trade turns out to be a loosing trade.
  Outcome of the trade : Negative, lost money.
  Experience gained : It is impossible to win every single trade, a loosing trade is just part of the business; our raw material, we know we can't get them all right. Even with this lost trade, the trader is proud about himself for following the system. Confidence in the trader is gained.
  Mistake made : None.
• Signal not taken and trade turns out to be a profitable trade.
  Outcome of the trade : Neutral.
  Experience gained : Frustration, the trader always seems to get in trades that turned out to be loosing trades and let the profitable trades go away. Confidence is lost in the trader self.
  Mistake made : Not taking a trade when the system signaled it.
• Signal not taken and trade turns out to be a loosing trade.
  Outcome of the trade : Neutral.
  Experience gained : The trader will start to think "hey, I'm better than my system". Even if the trader doesn't think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her "feeling" is more intelligent than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence.
  Mistake made : Not taking a trade when system signaled it

Second Scenario: System does not signal a trade.

• No trade is taken
  Outcome of the trade : Neutral
  Experience gained : Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system.
  Mistake made : None
• A trade is taken, turns out to be a profitable trade.
  Outcome of the trade : Positive, made money.
  Experience gained : This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader's trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence.
  Mistake made : Take a trade when there was no signal from the system.
• A trade is taken, turned out to be a loosing trade.
  Outcome of the trade : negative, lost money.
  Experience gained : The trader will rethink his strategy. The next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go "Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success". Confidence is gained in the system.
  Mistake made : Take a trade when there was no signal from the system
  As you can see, there is absolutely no correlation between the outcome of the trade and a mistake. The most catastrophic mistake even has a positive trade outcome, made money, but this could be the beginning of the end of the trader's career. As we have already stated, mistakes must only be related to the violation of rules a trader trades by.
  All these mistakes were directly related to the signals given by a system, but the same is applied when getting out of a trade. There are also mistakes related to following a trading plan. For example, risking more money on a given trade than the amount the trader should have risked and many more.
  Most mistakes can be avoided by first having a trading plan. A trading plan includes the system : the criteria we use to get in and out the market, the money management plan : how much we will risk on any given trade, and many other points. Secondly, and most important, we need to have the discipline to follow strictly our plan. We created our plan when no trade was placed on, thus no psychology barriers were up front. So, the only thing we are certain about is that if we follow our plan, the decision taken is on our best interests, and in the long run, these decisions will help us have better results. We don't have to worry about isolated events, or trades that could had give us better results at first, but then they could have catastrophic results in our trading career.

How to deal with mistakes
There are many possible ways to properly manage mistakes. We will suggest the one that works better for us.

Step one: Belief change.
Every mistake is a learning experience. They all have something valuable to offer. Try to counteract the natural tendency of feeling frustrated and approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself "ok, I did something wrong, what happened? What is it?

Step two: Identify the mistake made.
Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake nature will prevent you from making the same mistake again. More than often you will find the answer where you less expected. Take for instance a trader that doesn't follow the system. The reason behind this could be that the trader is afraid of loosing. But then, why is he or she afraid? It could be that the trader is using a system that does not fit him or her, and finds difficult to follow every signal. In this case, as you can see, the nature of the mistake is not in the surface. You need to try as hard as you can to find the real reason of the given mistake.

Step three: Measure the consequences of the mistake.
List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better traders after dealing with the mistake. Think on all possible reasons you can learn from what happened. For the same example above, what are the consequences of making that mistake? Well, if you don't follow the system, you will gradually loose confidence in it, and this at the end will put you into trades you don't really want to be, and out of trades you should be in.

Step four: Take action.
Taking proper action is the last and most important step. In order to learn, you need to change your behavior. Make sure that whatever you do, you become "this-mistake-proof". By taking action we turn every single mistake into a small part of success in our trading career. Continuing with the same example, redefining the system would be the trader's final step. The trader would put a system that perfectly fits him or her, so the trader doesn't find any trouble following it in future signals.
Understanding the fact that the outcome of any trade has nothing to do with a mistake will open your mind to other possibilities, where you will be able to understand the nature of every mistake made. This at the same time will open the doors for your trading career as you work and take proper action on every mistake made.
The process of success is slow, and plenty of times it is attributed to repeated mistakes made and the constant struggle to get past these mistakes, working on them accordingly. How we deal with them will shape our future as a trader, and most importantly as a person.

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Psychology of Trading

As we have discussed before, this discussion forum is to explore the psychology behind the success or failure to trade successfully. As most traders with any experience know, the ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market, and taking the most amount of money from your observation; that is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.

This month, I would like to address one of the more common trading errors. Everyone has made the error of overtrading at some point and many continue to make this error despite knowing they have this problem. Just knowing you have a propensity for a trading problem is half the battle but more importantly, you need skills and tools to correct your trading error. One of the more critical skills to develop in my view is to stop and confront the problem of overtrading.

Overtrading is a symptom of a deeper psychological problem which I like to call attachment to results. All traders have a certain degree of results they are pursuing in the markets; that is not the problem. The markets exist to exploit inequalities (real or imagined) in the supply and demand of something or financial instruments. It is a good thing to see an opportunity and assume the risk for the potential that is there. Once that action has been taken the only question is whether or not that inequality you perceived is an actual event that is unfolding over time. Between the time you execute for an entry and the time you liquidate for an exit; the markets will be moving. That movement is where the issue of attachment to results translates into your personal results.

Attachment to results can actually be expressed two ways depending on your personal psychology and trade method. The first way is holding losers and the other way is overtrading. We will discuss the issue of holding losses at a later time but the net effect on your equity is the same whether your problem is holding losses too long or you overtrade. Attachment to you results is the bedrock problem behind either overtrading or holding losses. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe.

If you use an hourly timeframe to pick your points of entry it is safe to assume that more than one hour must pass in order to determine if your executed trade has potential as you see it. Should the market move against your position that is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade. As the market moves, if you are attached to your results, that movement means something to you. It is personally helping or hurting your equity. As your account balance changes from open trade equity, your focus narrows down to how this is affecting you personally. Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. Attachment to results now says “You are missing it! You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work. This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The trader has failed to allow time to pass and let the market do what it is going to do. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.

Solving this problem is a factor of learning patience as well as adapting your thinking to better fit with the market you trade. I have observed from working with many developing traders that if they have the problem of overtrading, the simplest solution is to impose a new set of rules on their execution that allows time to pass. I have a very common sense based method that I would encourage you to try for yourself. Simply turn your screen off; the assumption here is that the market will do what it will do whether you watch it or not. The problem is not the market price action, the problem is attaching meaning to that action and executing. If you can’t see the price action, you can’t execute. So the first thing we do is impose the rule: After you execute you have to turn the screen off for at least one bar of your time frame as a minimum.

In most cases, several bars are needed to either confirm or deny a trade potential is developing so often the trader must sit in front of a dark screen for several hours. The market is still moving, but in this case, the stop is also still where it was originally placed, the limit is still where it was placed and the trader cannot reevaluate the trade nor do anything except wait. During this time I also require the trader to write out in as much detail as possible exactly his hypothesis for the trade. This keeps the trader focused on the critical thought required to do the trade as opposed to how the tic-by-tic price action is affecting his equity. After enough time, this self-imposed isolation develops into patience to let the trade work. At some point, the trader will no longer need to be “in the dark” and he has the skill to simply sit still and let the trade work.

Next month we will talk more about attachment to results as it comes out when you hold losing positions. In the meantime, if you have a tendency to overtrade; try this method. I think you will be surprised at how fast you learn to let your trades work.

This article written by by Jason Alan Jankovsky, originally published at www.traderslog.com

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