Currency market Forex was formed in 1971, and till the beginning of 1990-s it was not accessible by everybody. The market opportunities were actively used only by big investors, such as banks, funds, financial corporations, as the market entry level was very high, the sums of necessary investments could reach ten million dollars. The following development of the market, including Internet trading, allowed many exchange intermediaries who started to actively attract private investors to trade, offering them attractive terms and conditions.
As a result, the modern Forex market combines both big participants (companies) and retail investors (individuals). Generally speaking, any volunteer who has the aim of profiting in currency trading can become a participant of this global market. All currency market participants are divided into two large groups: those who “make” the market, and those who use its opportunities.
The ones who “make” the market are first of all commercial banks who daily effect numerous currency exchange deals both for themselves and for their clients. The deals made by these organizations can be private (in this case two parties agree upon the deal). Another type of deals is operations done through electronic currency networks (ECN), representing a whole network of large commercial banks. Within such trades a bank places on this virtual trading venue an order to buy or sell currency, and the system automatically finds a seller or a buyer for the placed order – another bank in the network.
The first group of Forex market participants includes also central banks of different countries. Unlike commercial banks whose main goal is getting profit, central banks are oriented at other priorities: in particular, keeping the national currency rate at the level necessary for the economy health.
Being large participants of Forex market, central and commercial banks actively form this market, giving their own quotes. This group is usually called market-makers.
The second group of Forex market participants consists of organizations and individuals who are not able to form the market, but thus actively use its opportunities making deals at already known currency rates.
This group includes international investment funds, transnational trade companies (exporters and importers) and, of course, private investors.
Trade on Forex is carried on round-the-clock, however at different time of day different regions are most active, and certain currencies are most liquid, which depends on the time zones. Conditionally Forex trade is divided into Asia Pacific, European and American trade sessions – these are the regions where trade centres are shifted when the working day in one region is completed. The Greenwich Mean Time (GMT), in accordance with which one of the largest world financial centres – London – lives, is traditionally taken as the reference point. Moreover, there are other time zones which are mostly used - Eastern Standard Time (EST, New York time), Central European Time (CET).
First the market is opened by Asia Pacific region – while Europe is sleeping, New Zealand, Australia and then Japan, Singapore and Hong Kong start active trade – it’s obvious that the highest liquidity is seen in the currency pairs including these countries national currencies. Then the trade is smoothly shifted to Europe, hence the vast majority of deals are done with European currencies. America finishes the trade cycle, and the highest turnover at this period of Forex session is recorded in US dollar and national currencies of the countries which the USA maintains active trading relations with. Apart from that, exactly during American trade session significant currency rate changes take place, as at this period the economic data of the USA are published, and their currency has key positions in the world financial market. Thus there’s no wonder that the published data may drastically influence the market rates of other currencies.
Accessible financial markets of the world
Technology development had direct influence on changes in investment activity. In the last decades there was steady growth of interest in investments in the world financial markets, and consequently, internet trading is booming.
From the beginning of their existence, financial markets attracted investors longing to increase their capital. The importance of capital markets is difficult to overestimate as due to them movement and reallocation of resourses among different countries, economic sectors and enterprises takes place.
Financial markets are necessary for operation of the world commerce and production system. Traditionally 3 large market segments are distinguished - currency exchange Forex, and also stock and commodity exchanges.
Forex market goods are money. Various currency pairs are traded here – highly liquid, and not. However in general this market is liquid, i.e. there are always buyers and sellers in it, and there is always demand and supply for the trade items. Stock market assets are securities and different types of them, from shares to promissory notes. In commodity market derivative financial instruments are traded, including futures contracts. Here you can sell and buy various goods - oil and gas, grain and coffee, meat and sugar.
Dividing into segments is quite conditional – they are interconnected into a consistent financial system, and if some changes take place on one market, it also reflects on what’s happening in another segment. Let’s say natural disaster caused wheat yield depression – it’s followed by increasing prices on these goods, shares of companies working in this field grow, and accordingly, currency rates also change.
Moreover, financial markets are divided into exchange markets and over-the-counter (OTC) markets. Exchange market implies existence of a certain place (exchange) where trades are carried on and deals are made in accordance with the rules and regulations of this exchange. Some of the largest exchanges in the world are NYSE (New-York Stock Exchange) and AMEX (American Stock Exchange). Securities and derivative financial instruments trade is usually carried on exchange markets.
Over-the-counter (OTC) market doesn’t have a certain address – a particular example of such market type is interbank currency market Forex which works round-the-clock and overcomes exchange markets in its volume.
Each of the listed market types has its advantages for a trader: for example, exchange markets are more organized, the processes going on there are transparent and the prices of financial instruments are the same all around the world. In their turn, OTC markets imply high liquidity, round-the-clock accessibility and low entry level.
The main participants of financial markets are central banks of different countries, finance and investment funds, commercial banks and brokerage companies, along with speculators and hedgers.
The principle of speculators’ (traders’) work on different financial markets is identical: the profit is made on price difference, whether that be currency rates difference, or difference between sell and buy prices of futures contracts or stocks. There is another strategy of increasing capital – portfolio investment, where an investor invests into prospective assets whose price successively increases.
An undoubted advantage of financial markets is the fact that traders are not limited in their activity – here you can operate various volumes of investments, thus, volumes of potential profit are not limited either.
The trade process is simplified to the maximum: for access to the trades you need only an intermediary – a brokerage company, a computer with a specially installed program – trading platform, and Internet access.
Forex market is the largest financial market popular in the traders sphere. Some of its advantages are round-the-clock operation, low entry level, quickness of making deals and, of course, high liquidity.
The object of sale on this interbank market is currencies. Forex was formed in 1971 when fixed currency exchange rates were changed to floating ones.
Algorithm of trade on Forex is simple: buying and selling of currencies and getting profit on rates difference. Both short-term and long-term investments can be done on currency market.
Participants of currency market are so-called “primary” entities – importers and exporters, and secondary – commercial banks, multinational corporations, investment and pension funds, and also brokerage and dealing companies.
Movements on currency market are usually formed by so-called market makers – these can be central and commercial banks of different countries. Banks form the market by giving their quotes for currency rates.
The main trade instrument of the market is currency pair; rates reflect the price of the base currency which is expressed in units of the quote currency. As currency rates quotation is done from two sides, this is reflected in Bid (buy) and Ask (sell) prices. The difference between Ask and Bid is called spread – this is where commercial banks and brokerage companies get profit from.
The majority of deals in Forex are made with US dollar, as this is the main world currency. The other popular for speculative deals currencies are Euro, Yen, Swiss franc and British pound.
In case of floating rate, the currency rate is determined in accordance with the law of supply and demand. Many factors influence change of currency rate – profit of a particular country, purchasing power, inflation and interest rates, and also confidence in a certain currency in the world market.
Despite round-the-clock operation of Forex, at different time of the day different currency pairs can be more or less liquid. For example, before the start of American trade session (7.00 EST), the most liquid are such currencies as US dollar, Yen and British pound. European trade session is ideal for short-term trading.
It is obvious for an experienced trader that successful trading on currency market requires proper studying of its functioning laws. Certainly it’s important to know who are the most significant market participants able to form movements in the market, where to find a brokerage company that will provide everything necessary to start trade activity in Forex, and which criteria this company should match. It’s not less important to choose from the variety of trade instruments the most suitable one, and to detect the moment when making a deal can be effective and profitable. Don’t forget that trading should be based not upon intuition, but on detailed analysis of the market and events that potentially could influence the currency rates.
Securities are goods of the stock market. Buying shares of a certain company, the investor becomes its co-owner and can claim to dividends – his profit share out of the company’s profit. Apart from that, investors can carry on active securities trade, buying and selling them in favourable conditions in the market, and thus making profit on the share prices difference.
Stock market is divided into primary securities and secondary securities market. Primary securities market is IPO market in which just issued by companies securities are placed. The main participants of this market are big corporations, government establishments, finance and investment funds, pension funds, and private investors. On the secondary market active trade is carried on – securities are sold and bought here tens and hundreds of times. Secondary securities market can be both exchange market and over-the-counter (OTC) market: on the first one only stocks of companies and establishments listed in the stock exchange are traded. Three largest stock exchanges of the world are New-York Stock Exchange, Tokyo Stock Exchange and NASDAQ.
All the rest securities, not listed in big stock exchanges, are sold and bought on the over-the-counter (OTC) market and are circulated freely. Accordingly, stock exchange trade implies following the rules of the stock exchange on which these financial instruments are listed, while prices on OTC securities market depend on results of the deal participants’ negotiations. Financial instruments of OTC market are shares of small companies working in different traditional sectors, securities of companies who started development of new sectors and have growth and development potential, and also government securities.
The main and well-known types of securities are shares and bonds, although apart from them substitutes of shares are traded on stock exchange – for example, futures and stock options, and also bills of exchange, cheques, certificates of deposit, etc. Thus the main turnover falls on shares and bonds.
The name “share” fully reflects the essence of this financial instrument, as a share gives its owner the right to get a profit share out of the total profit of the company whose shares he possesses.
As a rule, two types of shares are distinguished – common shares and preferred shares. Common shares give their owner voting right at shareholders meetings and mean that the shareholder is a co-owner of the company, moreover, holder of such shares may get profit on the share prices difference. A holder of preferred shares may reckon on getting dividends and also trade them, although preferred shares have lower liquidity than common shares.
Before shares used to be issued on paper and were kept by shareholders of companies. Nowadays such shares almost don’t exist, a modern share is no more than a record in special databases – shareholder registers. If an investor acquires a share, this security is credited to his account in depository, if he sells it – the record gets deleted from the account.
The other popular kind of securities is bonds. A bond is an obligation of the party who issued this security to pay to the party who bought the bond not only its cost, but also an interest of this cost during a certain time period. At the stock exchange bonds are traded not in currency, but in percentage of the nominal value, as the (nominal) of this security is always known.
Security price is the price at which it’s sold. The price depends on the profit it brings and is formed at the moment when the seller and the buyer make a deal.
At the stock exchange several types of financial operations are distinguished. First, it’s so-called spot contracts – they are settled immediately after the deal and imply prompt payment. A second type of financial operations is forward deals which are analogical to deals in commodity market. Arbitrage deals are based on securities trading between stock exchanges in case of difference in securities prices. Another type of operations – block trade – imply trading large securities volumes.
How to read Forex charts
Mastering of base skills of working on Forex is necessary – especially the ability to read charts and interpret them correctly.
First let’s revise the base knowledge about trading that is directly connected with the ability to read graphs. Each currency pair is always quoted the same way. For example, EUR/USD pair is always denoted so, and means that EUR is the base currency, and USD is the quote currency, and it cannot be any other way round. That’s why when a chart of this pair shows current price fluctuations at 1.2155, this means that 1 euro will be bought for 1.2155 American dollars.
Your trading volume is the amount of the base currency that you are trading, and if you want to buy 100,000 EUR/USD, you actually buy 100,000 euro.
Let’s point out the moments which are the most important for a Forex chart:
If you buy a currency pair and open a long position, you should understand that a growing line on the graph denoting this pair shows the profit level. In this case the base currency strengthens against the quote currency. On the other hand, if you sell a currency pair in a short position, and the chart demonstrates declining, then, accordingly, it’s also the level of your potential profit. In this case the price of the base currency declines against the quote currency. Always check the set timeframe. Numerous trading systems use different time periods in order to define the entry point. For example, a system can use 4-hour or 30-minute graphs in order to detect the general trend of a currency pair with use of such indicators as MACD, Momentum, or with help of support and resistance lines.
Make sure that the chart that you have open shows the correct time period which is necessary for your analysis.
On the majority of graphs the Bid price is shown more often than Ask. Remember that both these prices are always present in the market. For example, the current price of EUR/USD pair can be on 1.2055 bid and 1.2058 ask levels. When you buy, you do it at the ask price, which is always higher than the other. And when you sell, you do it at the bid price, which is lower than the first one.
Also consider that in many trading terminals, when you set stop orders (buy, if the price exceeds a certain, specified one, or sell, when the price gets lower the set one), you can choose stop both in case of bid and ask.
Don’t’ forget that the time shown at the bottom of the chart displays the time in a certain time zone – for example, it can be GMT or New-York time. This factor is taken into account in Forex trading and is especially important if a trader actively uses fundamental analysis and, accordingly, orients at regularly published data.
All factors mentioned above are necessary for the correct reading of graphs. This will help you to avoid making mistakes common for novices working with charts.
Your ideal pair
It’s well known that trade in Forex market is done with money. Thus money here is both goods and means of payment, so the main trade instrument on the market is currency pair.
Quite a vital issue for traders is choosing a currency pair for trade.
A code of 3 Latin letters is used for notation of currencies – usually the first two letters stand for the country of the currency origin, and the last one – for the first letter of the currency name (USD, where US – United States, D – dollar).
As Forex trade is always done in currency pairs, the notation of a full financial instrument consists of two code designations of currencies divided with a slash – for example, EUR/USD. The first currency is base, the second is quote currency. Operations are done with base currency whose price is measured in quote currency. In other words, in USD/JPY pair a trader buys or sells dollars for Japanese yens.
There are most popular currency pairs whose trade volume is very high in Forex market – these are, in particular, EUR/USD, USD/CHF, GBP/USD and USD/JPY.
Each currency pair has its features that a trader has to know in order to carry on effective trade. EUR/USD pair is the most traded both among novice and professional traders. For confident trade with this pair a trader should keep track of what’s happening in political and economic life of Europe and America.
USD/JPY is the second by popularity, trade in this pair is especially active during Asia Pacific trade session. GBP/USD pair takes the third place – this instrument may be quite difficult for novices, as uncontrolled volatile movements are common for it.
USD/CHF and GBP/USD pairs are considered to be the lowest in liquidity. Thus, for example, low liquidity of USD/CHF pair is quite attractive for hedge funds, and also for traders whose goal is to make maximum profit in a short period of time.
There is no universal answer to the question: which currency pair should be chosen for trade? However, it’s known that the optimal choice for a trader is the pair for which he can predict movements. Novices are recommended to choose their trading strategy first, and then choose a currency pair considering specificity of the strategy, volatility and time of trade sessions.
Volatility is currency pair price fluctuations in a certain period of time. Currency pairs have different volatility level – for example, GBP/JPY and GBP/USD are pairs with high volatility for which price jumps are common, thus trading in them is recommended to professionals or speculators who have a special strategy tailored for sudden price changes. Pairs with the lowest volatility are EUR/CHF and EUR/GBP.
Graphic and mathematical hints
In order to raise effectiveness of their financial activity, experienced traders widely use market analysis. There are two types of analysis – firstly fundamental, based on correlation of different economic factors, and secondly technical, studying price behaviour in the past in order to predict its change in the future.
Technical analysis is much more popular in the traders’ sphere than fundamental, in order to do it you don’t have to be an expert in economic science and follow up with events happening in the world’s economies and politics. For doing technical analysis you need only historical price data for a certain financial instrument – and such data, as well as means of building up necessary graphs, are available in any trade terminal.
Technical analysis, in its turn, is divided into two subtypes. For example, graphic subtype is based upon analysis of price graphs for a certain time interval.
In graphic analysis, prices can be reflected in a few ways. The common are such reflection means as: bars, lines, Japanese candlesticks, Renko, Kagi and Point and Figure (X_O).
An integral part of graphic method of price analysis is trend analysis, in which the direction of trend is detected along with its life cycle. Traditionally they distinguish short-term trend (length – 1 day-3 months), medium-term (3 months-1 year) and long-term (over 1 year). Trend detection and tracking its life cycle is important for making profitable deals. It’s a well-known fact that you don’t necessarily have to hit the beginning of a trend – more important is its middle which is a much more profitable time interval for the trader.
At the beginning of a trend, the amount of deals increases, and prices change on average 1/4 to 1/3 of the total fluctuations. In the middle of the trend life cycle some recession in trade takes place – at this moment a big amount of speculators are noticed in the market, and in the end of the period the rates decrease – even down to the initial level. By the end of the trend life cycle the amount of deals decreases, but the price doesn’t change drastically. Professionals recommend to make long-term deals during the second period of the life cycle touching also the first half of the last period of the life cycle.
Mathematic method of technical analysis is computer analysis in which indicators and oscillators play the main role. As a rule, a trade terminal has a standard set of common indicators. But there are also means allowing a trader to create his own indicators laying out necessary parameters.
What are indicators needed for? With their help you can detect market trends and point out moments of trends change. However traders know that sometimes using different indicators leads to a quite contradictory picture and demonstrates wrong signals. That’s why certain groups of indicators are traditionally used in case of a trend in the market, and others – in flat conditions. A so-called “absolute” indicator which can be relied on in any situation in the market, doesn’t exist. The main function of oscillators is producing signals about change of the market direction.
For effective work it’s always recommended to use indicators and oscillators of different groups, combining them in such a way that will help to level their possible negative features.
They distinguish 3 groups of indicators and oscillators: trend ones, which are meant to work with at presence of a trend in the market (Moving average, Envelopes, MACD, Bollinger Bands, Parabolic stop and reverse – SAR, +/-DM indicators, ADX indicator); flat ones, helping to work in absence of a trend in the market (Stochastic oscillators, CCI, RSI, MACD-histograms); volume indicators, analysing dynamics of volume change.
Search for optimal entry and exit points on Forex market
When novices start trading on the currency market Forex and get their first losses and first profit, they start to understand the importance of some components in trading. In particular, defining the so-called entry point – the right moment to enter the market and start making deals.
It’s equally important not only to be able to lower risks of potential losses by using stop loss orders, but also to cope with greediness and take profit when it’s possible – and as high as possible. There are numerous well-known recommendations and methods of defining the right time to enter the market – for example, you can orient on the main economic news and global events, combine technical indicators, etc. However, basically the moment of market entry can vary, and a trader can decide to miss favourable moments for entry – but this optionality, relevant for market entry, becomes critical when it’s necessary to close a position and exit the market. The marginal nature of modern trading makes impossible waiting for changes too long and staying in the market with an open position. Moreover, each open position is a kind of limitation of the trading process in general.
Choosing an optimal point of exit from the market and closing positions could be quite an easy task, if Forex wasn’t so chaotic and volatile. In experienced traders’ opinion, closing orders for each position should be constantly reviewed with the time of new market data issue (of both fundamental and technical kind).
Let’s give an example: you open a short position in EUR/USD pair at 1.2563, the support/resistance level at the same time is 1.2500/1.2620. You set a stop loss order at 1.2625, and take profit order at 1.2505. This is a day position, or optionally, it can be held for 2-3 days. This means that you should close it before the maturity, otherwise it will become unpredictable, as the market doesn’t stand still, and the situation can drastically change compared to the one that was when you opened the position. Since the position is open and the orders are set, you should keep an eye on the market and events happening in it, and also use technical indicators in order to adjust the set orders. Some traders, for example, prefer opening medium positions (length – 2-4 days) and try to lower stop loss order 10-25 pips every day. At the same time traders are monitoring news and lower the stop loss level in case that the current events can potentially have negative influence on the open position. If the profit level is already quite high, experienced traders try to move the stop loss to the opening point in order to change the position from potentially profitable to really profitable. The main goal of the trader in this case is to find balance between greediness and cautiousness. If your position stays open longer and longer, the profit level should be more limited, and loss – reduced. Also a trader should always remember that if sudden movements occur in the market, more cautiousness with the closing order will be useful for a speculator, even if the position is still showing profit.
No doubt that every trader has his own strategy and habits. Nowadays people in general are more and more interested in investing their funds with the purpose of their quick increase. The only problem is that not many people are able to cope with investment risks – that’s why some of them just use banks services, where although their capitals increase, but very slowly. But if you want really significant growth of investments, you will have to take up risks. Risk is a constant companion of those who dream of getting quick and enormous profit.
How to choose an appropriate trading system
One of the most important components worth thinking about before starting trading on Forex is choosing a good trading system. All Forex systems are different in a range of parameters, thus it is essential for a trader to find his own optimal one before to start working on the market, spending time and investing money.
We all want to find such a system which will be quite profitable exactly for us (considering that everybody have their own definition of “profitability”) and suit us from the daily trading point of view (this means the possibility of non-stressful trading with such a system).
Therefore, we should choose a trading system based on a few important principles and giving us the assurance that we shall get more benefits than disappointments from Internet trading.
While searching for a Forex system, it is necessary to consider the following:
1. Profitability of the system denoted both in pips per month and in the dollar equivalent of the account. In most cases the profit is shown in pips per month, and this method is the most popular in comparison of different trading systems.
However with this approach you should be careful, because the nominal value in which trading on Forex is carried will depend on the risk level for each deal, that depends, in-turn, on the stop loss interval established in this system, if a model of fixed risk is used.
2. Maximum historical system drawdown.
It can be denoted in pips or in percentage ratio. Maximum historical system drawdown is the level of the most significant drawdown which happened in the past during testing of the trading system or working in real conditions. Drawdown data can be used for comparing trading systems, but you can also use drawdown in order to find out the reserve amount necessary to start working with this system.
3. Profit and loss correlation.
This is an average gains amount compared to losses incurred in the trading process. High ratio means the reliability of the system, however the figures should always be considered and compared in correlation (profit/loss).
4. High profit/loss correlation ratio is a bonus for a trading system demonstrating that the system can be acceptable from psychologically comfortable trading perspective.
Ideally this ratio should be 2, 3 or more, in order for a trader to be sure that the system is really potentially profitable, and is not balancing on the border between possible profits and losses.
5. Logicality and consistency of the system.
If you manage to find a highly profitable system with a reasonable drawdown level, and in addition this system is consistent – then you have found the ideal one. But you can also accept a system demonstrating a little higher drawdown and a little lower consistency, provided that its profitability stays on a high level. Make sure to check the efficiency of the system by working on historical data – the monthly, quarterly and yearly results can show a lot about the system.
6. The daily amount of time spent on trading.
Some systems are designed just for 15-minute intervals 4 times a day, others – for a few hours. Some systems trade only at a certain time – for example, at the time of important economic news and preview releases. Therefore, you are informed in advance when you should be in front of the computer.
Degrees of trading psychology
When Internet trading is concerned, one of the most ignored facts is trading psychology. Most traders spend days, months and even years, trying to find an optimal trading strategy for themselves. However a trading strategy is a part of the game. Definitely this is one of the most important parts, but it’s not less important to have a money management plan and to realize all psychological barriers that can influence the trading process. Success in the activity called Internet trading is finding a reasonable balance between all the said aspects.
In the market conditions, when a loss occurs, what is the first thought that comes up in your head? Most probably you think: “Maybe something is wrong with my trading system”, or “I knew that I shouldn’t have traded at that moment” (even if your system was giving signals of a potentially profitable trade). But sometimes we must analyse deeper the nature of our mistake in order to be able to avoid such mistakes in the future, according to the results.
In trading on the Forex market, and also on any other financial markets, there is statistics, according to which only 5% of traders achieve their goals and get stable profits. The most interesting fact is that there is just a little difference between such traders and all the rest. These 5% take their mistakes into consideration and treat them as something to learn upon, they estimate even small mistakes as an invaluable lesson. Mistakes for them are an incentive to improve their trading process, make it better every following time. Finally this small difference for traders between success and failure becomes an enormous difference.
Most of us correlate the made mistakes with the results of the trades (with regard to money). But the truth is that mistakes are made when certain market recommendations are not followed, when trading rules are violated. Let’s see the following possible market scenarios:
Scenario one: the system gives a signal to trade
1. The signal is taken, and the market situation promises getting profit. Result of trading: positive, related to profit. Lessons learned: you should follow the trading system and its signals, because thus, according to the given chances, it’s possible to get profit. Assurance in this is confirmed by the result of trading connected with the trading system and its advantages. Mistakes made: none.
2. The signal is taken, and the market situation shows possibility of getting losses. Result of trading: negative, money losses. Lessons learned: it’s impossible to be in profit following each trading signal, lossmaking trading is an integral part of the business. Even despite the losses, the trader is proud that he followed his trading system. Mistakes made: none.
3. The signal is received, but not taken, thus the market situation promises getting profit. Result of trading: neutral. Lessons learned: disappointment, the trader starts thinking that each trading session is potentially lossmaking, and it’s almost impossible to get profit. As a result, the trader loses self-confidence. Mistakes made: ignoring trading signals received from the system.
4. The signal is received, but not taken, thus the trading is potentially lossmaking. Result of trading: neutral. Lessons learned: the trader starts thinking: “I’m able to work more productively than my system”. Even not thinking about it consciously, the trader will try to improve the system and analyse each signal received from it, because unconsciously he assumes that he is able to do much more than his system. Based on this assurance, the trader tries to outwit the system. Such mistake, as a rule, leads to disastrous effects to our confidence in the trading system. Confidence in our own esteem turns into arrogance. Mistakes made: despite the presence of a trading signal, it’s decided not to trade.
Scenario two: the system doesn’t give a signal to trade
1. The trader stays outside the market. Result of trading: neutral. Lessons learned: observing discipline gives results, there is an understanding that you should start work only if good potential opportunities exist, and the system gives relevant signals. The trader keeps confidence in himself and the trading system he uses. Mistakes made: none.
2. The trader starts trading as the market situation shows potential profit. Result of trading: positive, getting profit. Lessons learned: this mistake has big influence on the trader himself, his system and his further career in trading. The trader starts thinking that he doesn’t need a trading system at all, because he can make better decisions not based on signals. In this case the trader starts trading basing on his own conclusions, and confidence in the trading system opportunities completely vanishes. Confidence in his own esteem turns into arrogance. Mistakes made: starting trading with no signal.
3. The trader starts trading, although the market situation shows potential losses. Result of trading: negative, money losses. Lessons learned: the trader starts to reconsider his trading strategy, and next time he will think twice before entering the market and trading, while there was no signal received from the system. The trader will think: “It’s better to enter the market when my system gives a relevant signal, only such trading sessions have high probability of getting profit”. Therefore, the trader starts to trust the trading system more. Mistakes made: entering the market with no signal.
As you can see, there is no correlation between the result of trading and mistakes made. Even when the most critical mistakes are made, the result can be profit, however it can also be the beginning of the end of a trader’s career. As it was mentioned before, mistakes can be related only to violation of trading rules.
All mistakes described above are directly connected with trading system signals and a trader’s decisions about further actions.
Most of mistakes can be avoided, if a trading plan is created. This plan consists of criteria that we use while making decisions about entering the market or staying out of the market, and also includes a money management plan, i.e. the decision about a sum to risk. Secondly, and the most important – we should strictly follow the set plan, as we created it before all possible psychological barriers that would become present when starting to trade.
How to cope with mistakes?
There are numerous methods, here is just one of them.
Step 1: Each mistake helps gain valuable experience. Try to avoid naturally arising emotions of disappointment and treat mistakes from the positive side. Instead of getting into depression, say to yourself: “OK, I did something wrong. What exactly did I do wrong?”
Step 2: Define exactly what mistakes you made and what were the reasons behind them. Understanding the nature of a mistake will help to avoid an identical mistake in the future. Most often you will find a mistake where you most unlikely expected to see it. Take, for example, a trader who doesn’t follow a trading system due to the fear of getting losses. But why is he afraid? Probably because this system doesn’t suit him well. As you can see from the example, the reason of a mistake does not lie on the surface, and in such cases it’s important to get at the roots of the matter.
Step 3: Evaluate the consequences of a mistake, make up a list of consequences, both good and negative ones, and analyse them.
Step 4: Take actions. Calculated actions are the last and the most important step. In order to learn to take thought-out actions, probably you should change your traditional way of behaviour. The understanding of mistakes, their analysis and relevant actions are small, but still steps towards success. Maybe it will be necessary to reconsider your trading system and choose another one, the most optimal for you, so that in the future you can fully trust its signals.
The understanding that the consequences of any trading session do not have anything in common with mistakes made will open up new opportunities for you, in the frames of which you will be able to understand the true inwardness of each mistake. The way to success in the financial market is complicated and long, the process of correcting mistakes and attempts not to repeat them take a lot of time.
The way we cope with this process helps us to build our future as a trader – and what’s the most important – as a strong personality.
Forex psychology: learn to keep the border between a trading plan and emotional outbursts
Many organizations providing education in trading on Forex ignore the most important aspect of the market – the human nature.
You can easily find lots of charts, pivot points, moving averages, trend lines and Fibonacci levels, and also state-of-the-art developments in autotrading. Any website devoted to Forex publishes data necessary to a trader, with squillion of news, interviews, forecasts and opinions.
You can even find market entry and exit signals, support and resistance lines, and use all these as effective help in making decisions in the trading process. No doubt that all this impresses novices at the first stages. Therefore, the possibility of getting losses and wishing to lower risks motivate the majority of more or less experienced traders to search for additional methods helping to trade effectively.
If you realize the importance of having a trading plan for every trading session that you are going to carry on, then you should be familiar with the feeling of doubt, when after opening a position the market starts changing suddenly which influences both your emotions and self-esteem.
Are you definitely upset?
While you are watching the market moving against any logics, your emotions start pushing you to completely change the initially chosen positions, and you ignore your own trading plan built up in advance.
On the other hand, all your educational materials, videos and colleagues insist with one accord on the paramount role of a trading plan – and you cannot get rid of this axiom.
Real professionals should learn to listen to their “inner self” – their unconsciousness. Our mind is able to keep immense amounts of data. We use our five senses all the time, as they help to enrich our life experience. While our unconsciousness works towards all aspects of our life, the conscious mind has just a limited capacity and is usually used by us for solving common day-to-day tasks.
When we trade, absolutely all our experience is concentrated deep inside our mind and slowly builds up something that some people call an “invisible analyst”, and others – the sixth sense.
While the main characteristics of the Forex market is its volatility, and 80% of traders don’t keep market positions open for longer than 2-3 days, as the majority are day-traders, it’s easy to understand that the market conditions change at lightning speed, thus building up a trading plan can be treated as an old-fashioned procedure.
The only method to smooth the conflict between emotions and the mind is to learn how to get one’s priorities right. Novices don’t have enough emotional experience and cannot feel something connected with the market processes, hence they are recommended, first of all, to rely on the mechanisms of a trading plan.
In order to implement this in practice, give yourself time for studying the art of charts interpretation, prepare for work by studying the economic calendar and its data in advance, learn to build up an exhaustive trading plan. After a trading decision has been taken, don’t change it no matter what happens. In this case you should act like a robot while implementing your trading strategy. There should be no place here for your emotions.
On the way of your professional development, in the course of time, your “invisible analyst” will start regulating your trading decisions, being present and taking part in the working process. Now it’s high time to create a separate space for emotions that will help to feel the market. Using emotions in the trading process in doses, combining the emotional and rational components, but not mixing them, demonstrates professionalism and helps to achieve optimal trading results.
Fundamental truth about trading
1. Study the fundamentals of Forex trading. It’s amazing how many people just don’t understand what they do. In order to achieve a really high level in the business called “trading” and become one of few really successful traders, you should be well-educated in this type of activity that you have chosen for yourself. This doesn’t mean that you need to get a diploma in one of the most prestigious universities – the market doesn’t care where you studied. The paramount is the quality of your education.
2. There is nothing more extensive than the market
3. The art is not being in the market, but the ability to read it. To “saddle” a wave is much more preferable than to fall victim to it.
4. Trading with the trend is much more preferable than working on the peak or on the bottom of the market.
5. There are at least 3 types of market: ascending, sideways and descending. Choose different strategies for working on each of them.
6. Don’t buy on the bull market, don’t sell on the bear one.
7. Let the profit grow and cut losses.
8. Let your profit grow, but don’t give way to your greediness. As soon as you get high profits, diversify it, leaving only a share for a new trading session. It is natural to hope that a single deal will end up with super-profit, but it is quite far from reality. Do not hold a position open for too long and do not invest all your gained profit in the market without a remaining balance.
9. Use protective stops in order to limit losses.
10. Always use stop loss orders and never let your losses grow hoping that the situation is just going to change. Usually such a policy even increases the amount of financial losses. You will win something, but you will also lose something. Just examine the reason of your losses, and carry on working. Make it grow into a habit to define an acceptable level of profit and risks in advance, before entering the market.
11. Avoid setting protective stops at round figures. Protective stops for long positions should be set under integral figures (10, 20, 25, 50,75, 100), and for short ones – above them.
12. Setting stop losses is an art. A trader should combine technical factors on price charts with money management principles.
13. Analyse your losses. Learn from them. These are obviously quite costly lessons for you. Thus most traders don’t learn from their mistakes just because they don’t like thinking about them.
14. Treat all arising problems calmly: your first loss is your least loss.
15. Carry on your work. In Forex, those who stay in the market for quite a long time, finally get a chance for a big gain due to significant market movements.
16. If you are a novice, start working with mini-accounts and carry on working with them for at least one year – thus you will be able to analyse your success and failures without losing big amounts of money.
17. Do not start trading with your last available funds. Make sure that you have enough funds for trading on your account and you will not run out of money as soon as the market temporarily moves against you.
18. Be more impartial and less emotional.
19. Actively use money management principles.
20. Diversify, but do not overdo.
21. Do not trust impulse trading: always have a plan.
22. You should always have definite goals formulated.
23. Five steps for building a trading system:
1. Start with a general idea.
2. Transform it into a set of certain rules.
3. Check everything on charts.
4. Test the system on a demo account.
5. Estimate the results.
24. Plan your work, and work on the trading plan.
25. Trade according to the plan, reject fear, greediness and hope. Define in advance when you are going to enter the market, what sum you are ready to risk and at which point you are planning to take profit.
26. Strictly follow your plan. If you opened a position and chose a stop loss level, do not change your decision before the stop works out or there are reasonable grounds of fundamental natures requiring immediate changes.
27. Any trading strategy should take into account 3 important factors: a price forecast, timing and money management. A price forecast shows what tendencies are present in the market. Timing defines entry and exit points, and money management – sums to be used in trading.
28. Trading systems working effectively in an ascending market, can give wrong signals in a descending one.
29. Check everything at least twice.
30. Always think about “possibilities”, since everything connected with trading exists not on the assurance level, but just on a probability level. You can take the “right” decisions, but see the market moving against you. Do not expect that there will be no failures; failures are an integral part of any trader’s work, and they cannot be avoided.
31. Trade only using a strategy that you consider optimal to your personal needs.
32. Control your risks:
1. Do not risk more than 3-4% of your capital when opening a position.
2. Define the entry point before entering the market.
3. If you lose a predetermined sum, finish trading, analyse the reasons of the failure, make a pause and come back to the market only when you feel confident.
33. Answer honestly to yourself: what do you want to get from trading?
34. Avoid a margin call situation.
35. Close your lossmaking positions before profitable ones.
36. Firstly learn to trade in long-term conditions, and only after that start trading short-term.
37. Try to ignore consensual views. Don’t take too serious everything that the financial mass media say.
38. Learn to feel comfortable being in the minority. If you are really right, the majority of people will not agree with you (90% losers vs. 10% successful).
39. Technical analysis is a skill that is mastered due to experience and on-going training. Try to always feel like a student.
40. Beware of non-checked information. Wait until the market prompts to you if the received information was right, and if yes, then open a position in a forming trend.
41. Buy gossip, sell news.
42. Choosing the right time is a key factor in trading on Forex.
43. “Buy and wait” strategy is not a strategy for the Forex market.
44. When you open an account with a broker, consider not only the initial deposit amount, but also the time period during which you are going to trade. This will help you to save your capital and avoid the Las Vegas principle: “I shall be trading until I run out of money”. The experience suggests that those who are able to work in the market for a long time, eventually get significant profits.
45. Keep a trading journal. Constantly record in it the information about opening prices, price changes, your stop orders, and also your personal observations. Read the records from time to time, use them in analysing your actions.
46. Do not overtrade.
47. Open two accounts: real and demo. Studying process does not finish at the moment when you start working in the real market. Use the demo account for testing alternative strategies.
48. If you are superstitious, do not trade when something worries you.
49. Technical analysis is studying of the market by use of charts with the purpose of predicting future price changes and market trends.
50. Charts reflect the “bull” or “bear” nature of the current market situation.
51. The goal of building up price charts is defining trends at early stages of their origination in order to follow the developing trend in trading.
52. Fundamental analysis studies the reasons of market movements, technical – their effect.
53. Traders come across three options of decisions: to open a long position, a short one or not to do anything. In an ascending market conditions it is better to choose the first strategy. If the market is falling, the second one will be more effective. If there is sideways movement in the market, then the third strategy – staying outside the market – is usually the wisest decision.
54. The broader a pattern, the higher the potential. The word “broader” denotes the height and the width of a price pattern. The height reflects its volatility, the width – the amount of time necessary for its full formation. The bigger the size of a pattern is, the more significant the price fluctuations (volatility) are, and the longer time its formation takes, the more important it becomes and the more substantial the potential for further price movements is.
55. Remember that two points are always necessary for drawing a trend line.
56. A moving average is just a reaction. This indicator follows the market and signals a trend, but only after its projection.
57. When the closing price gets above the moving average, this is a signal to buy. A signal to sell is price movement lower than the moving average.
58. Support and resistance are the most effective graphic instruments used for market entry and exit. Support and resistance are especially valuable for setting stop losses.
59. The financial instrument that has the biggest correlation with the American dollar compared to others in the commodity market is gold. The prices of gold and dollar usually move in opposite directions.
60. Yen is extremely sensitive towards price changes in the commodity market, and also to what happens with the Nikkei index, changes in the Japanese stock market and in the real estate market.