To trade stocks successfully, you must first understand the four stock market stages that individual stocks and the overall market go through. These cycles tell you if you should be long, short or in cash.
Once you are able to identify what stage it is in, you can then trade accordingly to those characteristics.
After a while you won't even have to think about whether you should be long or short. You will know, without question, exactly what you should be doing NOW. You will either be focusing on long positions, short positions, or you will stay safely in cash - just by glancing at a chart!
Here are the four stages that stocks go through. This happens in all time frames whether it is a monthly chart, weekly chart, daily chart, or an intraday chart.
Ok, so I'm not the best artist in the world but I think it will serve our purpose here! What? You thought it would be more complicated that? My philosophy on the stock market is that if it is too complicated then it is just not worth doing. Now, we'll look at the characteristics of the four stock market stages. I promise it will be painless!
Stage one
Stage 1 is the stage right after a prolonged downtrend. This stock has been going down but now it is starting to trade sideways forming a base. The sellers who once had the upper hand are now beginning to lose their power because of the buyers starting to get more aggressive. The stock just drifts sideways without a clear trend. Everyone hates this stock!
Stage two
Finally stocks break out into Stage 2 and begins the uptrend. Oh, the glory of stage 2!! Sometimes I have dreams of stocks in Stage 2! This is where the majority of the money is made in the stock market. But here is the funny thing: No one believes the rally! That's right, everyone still hates the stock. The fundamentals are bad, the outlook is negative, etc. But professional traders know better. They are accumulating shares and getting ready to dump it off to those getting in late. This sets up stage 3.
Stage three
Finally, after the glorious advance of stage 2, the stock begins to trade sideways again and starts to "churn". Novice traders are just now getting in! This stage is very similar to stage 1. Buyers and sellers move into equilibrium again and the stock just drifts along. It is now ready to begin the next stage.
Stage four
This is the dreaded downtrend for those that are long this stock. But, you know what the funny thing is? You guessed it. Nobody believes the downtrend! The fundamentals are probably still very good and everyone still loves this stock. They think the downtrend is just a "correction". Wrong! They hold and hold and hold, hoping it will reverse back up again. They probably bought at the end of Stage 2 or during Stage 3. Sorry, you lose. Checkmate!
Friday 6 December 2013
The best times to trade forex
A significant advantage in forex trading is the ability to trade for twenty four hours each day throughout the week. However, the trading day consists of multiple trading sessions: the European session, American session and the Asian session – also known as the London, New York and Tokyo or Sydney sessions. This is because there is no single exchange in the forex market and different countries trade at different times.
When the traders in London have stopped trading for the day, the traders in New York continue. When the traders in New York stop trading for the day, then the traders in Sydney begin
Different trading sessions have unique characteristics
Each of these trading sessions are driven by the economies that are active and so each session has unique characteristics to them. There isn't necessarily a "best" time to trade forex
When certain countries are open for business, that country’s currency and the currency of their trading partners are likely to be traded in greater volume.
For example, in the Asian session, the companies in Japan are open and will be buying and selling currencies in order to do business with companies in other countries. There will be a high volume of yen being exchanged with the domestic currencies of the corporations that Japanese firms do business with.
When Europe’s businesses are open, then the euro is likely to be traded in higher volume, due to businesses in Europe trading with companies in other countries. At night, when their businesses are closed, they do not trade with other businesses outside of Europe and the trading activity of the euro is going to be lower.
Therefore, whichever session is open, the countries that are trading at the time will directly correlate with the currencies being traded. This means that each trading session will be slightly different in terms of the activity of certain currency pairs, the market volume and volatility.
Forex trading sessions
Strictly speaking, there are no open sessions on the weekend. Trading starts when the Sydney session opens at the beginning of the week and finishes when the New York session closes at the end of the week. However, your location in the world will depend on what time and day this is. If you are trading in Japan, the trading week starts on Monday morning. However, if you are in the UK, this will actually be on Sunday evening.
The following table shows the trading sessions throughout the world according to GMT. You can see from the table, that the trading day starts with the Asian session (Sydney) at 22:00 GMT and closes at the New York session at the same time – 22:00 GMT
When the traders in London have stopped trading for the day, the traders in New York continue. When the traders in New York stop trading for the day, then the traders in Sydney begin
Different trading sessions have unique characteristics
Each of these trading sessions are driven by the economies that are active and so each session has unique characteristics to them. There isn't necessarily a "best" time to trade forex
When certain countries are open for business, that country’s currency and the currency of their trading partners are likely to be traded in greater volume.
For example, in the Asian session, the companies in Japan are open and will be buying and selling currencies in order to do business with companies in other countries. There will be a high volume of yen being exchanged with the domestic currencies of the corporations that Japanese firms do business with.
When Europe’s businesses are open, then the euro is likely to be traded in higher volume, due to businesses in Europe trading with companies in other countries. At night, when their businesses are closed, they do not trade with other businesses outside of Europe and the trading activity of the euro is going to be lower.
Therefore, whichever session is open, the countries that are trading at the time will directly correlate with the currencies being traded. This means that each trading session will be slightly different in terms of the activity of certain currency pairs, the market volume and volatility.
Forex trading sessions
Strictly speaking, there are no open sessions on the weekend. Trading starts when the Sydney session opens at the beginning of the week and finishes when the New York session closes at the end of the week. However, your location in the world will depend on what time and day this is. If you are trading in Japan, the trading week starts on Monday morning. However, if you are in the UK, this will actually be on Sunday evening.
The following table shows the trading sessions throughout the world according to GMT. You can see from the table, that the trading day starts with the Asian session (Sydney) at 22:00 GMT and closes at the New York session at the same time – 22:00 GMT
Top 5 technical indicators to trade commodities
Moving Averages
The simplest indicator one can use is the moving average. This can, for example, be the 9 and 20 day moving averages (MA). The analyst will study their cross-overs and the relative position of the price with respect to the moving averages. Prices movements on a chart can be shown in different formats such as bars, candles or lines. The cross-over between two moving averages may signal a change in trend. When the fast MA (9 day) crosses the slow MA (20 day) from below to above, it will signify a bullish trend. If it crosses from above to below, it will signify a bearish trend. Moving averages may in some situations be used as support or resistance levels for a given trade.
MACD
Another commonly used indicator is the MACD, which is an abbreviation for Moving Average Convergence Divergence. The MACD is a trend-following momentum indicator that measures the difference between two Exponential Moving Averages (EMA).
Simply put, when the MACD is rising it indicates that the 12 day EMA is trading above the 26 day EMA. This implies positive momentum. If this is above the ‘trigger line’ (the 9 day EMA) then the stock is considered bullish. If both lines are falling, the stock is under selling pressure.
The simplest interpretation of a bullish (bearish) moving average crossover occurs when MACD moves above (falls below) its 9-day EMA or ‘trigger line’. If a market is trending down but the ‘trigger line’ rises above the MACD, this implies that downward momentum is decreasing and there is a good chance that a reversal is imminent.
The RSI
The Relative Strength Index (RSI) is used to identify when a market is overbought or oversold. It is computed by analysing all the bullish ranges against all the bearish ranges during a particular period of time (usually 14 days). By adding all the bullish trades (when prices went up) and dividing it by the summation of the bearish days (when prices went down) we then turn it into an index from 0 to 100. A general rule is that when the RSI crosses the 30 line from below, it signifies a bullish signal and when it crosses the 70 line from above, it signifies a bearish signal.
Stochastic
This indicator is based on the observation that, as price is moving higher the closing price tends to be closer to the upper end of the day’s price range. And when prices are falling, the closing price tends to gravitate to the lower end of the day’s range.
The Stochastic is plotted as two lines called %K, a fast line and %D, a slow line. The most common time period for %K is 14 days, but like the RSI it is best to experiment to find what time period works best for a particular market. What %K measures on a scale of 0 to 100, is where today’s close is relative to the total 14 day range. The %D line is a moving average of %K.
Readings above 80 are considered overbought and readings below 20 are considered oversold.
Bollinger Bands
The basis of these relate to the theory that a market’s probable movements (up or down) can be traced to two standard deviations. This means that 90% of all price movements will be confined within a band around the mean. The latter is usually computed from a 20-day moving average and the bands are on either side of the mean. The bands will contract or expand as the price of the commodity oscillates within the bands. As the daily ranges approach the band on either side and exceed the band value, it may signify that a reversal is imminent.
Interpretations
With regard to the MACD, the RSI and the Stochastic, the above ‘rules’ are a very simplistic interpretation and will lead to many false signals. A better interpretation is to:
1. identify support and resistance levels;
2. define the ‘signal line’ and look for breaks above or below it; and
3. wait for divergences to develop from overbought or oversold levels.
The simplest indicator one can use is the moving average. This can, for example, be the 9 and 20 day moving averages (MA). The analyst will study their cross-overs and the relative position of the price with respect to the moving averages. Prices movements on a chart can be shown in different formats such as bars, candles or lines. The cross-over between two moving averages may signal a change in trend. When the fast MA (9 day) crosses the slow MA (20 day) from below to above, it will signify a bullish trend. If it crosses from above to below, it will signify a bearish trend. Moving averages may in some situations be used as support or resistance levels for a given trade.
MACD
Another commonly used indicator is the MACD, which is an abbreviation for Moving Average Convergence Divergence. The MACD is a trend-following momentum indicator that measures the difference between two Exponential Moving Averages (EMA).
Simply put, when the MACD is rising it indicates that the 12 day EMA is trading above the 26 day EMA. This implies positive momentum. If this is above the ‘trigger line’ (the 9 day EMA) then the stock is considered bullish. If both lines are falling, the stock is under selling pressure.
The simplest interpretation of a bullish (bearish) moving average crossover occurs when MACD moves above (falls below) its 9-day EMA or ‘trigger line’. If a market is trending down but the ‘trigger line’ rises above the MACD, this implies that downward momentum is decreasing and there is a good chance that a reversal is imminent.
The RSI
The Relative Strength Index (RSI) is used to identify when a market is overbought or oversold. It is computed by analysing all the bullish ranges against all the bearish ranges during a particular period of time (usually 14 days). By adding all the bullish trades (when prices went up) and dividing it by the summation of the bearish days (when prices went down) we then turn it into an index from 0 to 100. A general rule is that when the RSI crosses the 30 line from below, it signifies a bullish signal and when it crosses the 70 line from above, it signifies a bearish signal.
Stochastic
This indicator is based on the observation that, as price is moving higher the closing price tends to be closer to the upper end of the day’s price range. And when prices are falling, the closing price tends to gravitate to the lower end of the day’s range.
The Stochastic is plotted as two lines called %K, a fast line and %D, a slow line. The most common time period for %K is 14 days, but like the RSI it is best to experiment to find what time period works best for a particular market. What %K measures on a scale of 0 to 100, is where today’s close is relative to the total 14 day range. The %D line is a moving average of %K.
Readings above 80 are considered overbought and readings below 20 are considered oversold.
Bollinger Bands
The basis of these relate to the theory that a market’s probable movements (up or down) can be traced to two standard deviations. This means that 90% of all price movements will be confined within a band around the mean. The latter is usually computed from a 20-day moving average and the bands are on either side of the mean. The bands will contract or expand as the price of the commodity oscillates within the bands. As the daily ranges approach the band on either side and exceed the band value, it may signify that a reversal is imminent.
Interpretations
With regard to the MACD, the RSI and the Stochastic, the above ‘rules’ are a very simplistic interpretation and will lead to many false signals. A better interpretation is to:
1. identify support and resistance levels;
2. define the ‘signal line’ and look for breaks above or below it; and
3. wait for divergences to develop from overbought or oversold levels.
Forex trading for beginners
Trading currency in the foreign exchange market (forex) is fairly easy today with three types of accounts designed for retail investors: standard lot, mini lots and micro lots. Beginners can get started with a micro account for as little as $50.
Before you start jumping in you should familiarize themselves with the market and terminology of the forex market, and if you've already been trading stocks online it should be easy to get started.
Below is a list of terms you should learn.
PIP: The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point. A common exception is for Japanese yen (JPY) pairs which are quoted to the second decimal point.
BASE CURRENCY: The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.
CROSS CURRENCY PAIR: A pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having to first exchange the currencies into American dollars.
CURRENCY PAIR: The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
QUOTE CURRENCY: The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency. This is also known as the "secondary currency" or "counter currency".
Now that we've reviewed basic terminology, let's look at some of the differences between trading stocks vs. currencies. In currency trading you are always comparing one currency to another so forex is always quoted in pairs. Sometimes authors of currency research will refer to only one half of the currency pair. For example if an article is referring to the euro (EUR) trading at 1.3332 it's assumed the other currency is the U.S. dollar (USD).
When looking at the quote screen for the first time it may seem confusing at first, however, it's actually very straightforward. Below is an example of a EUR/USD quote.
The quote example shows traders how much one euro is worth in US dollars). The first currency in a currency pair is the "base currency" and the second currency is the "counter currency" or secondary currency.
When buying or selling a currency pair, the action is being performing on the base currency.
For example traders bearish on euros, could sell EUR/USD. Now, when selling EUR/USD, the trader is not only selling euros but is also buying US dollars at the same time. Thus the pair trade.
Let's say that you sell the EUR/USD at 1.4022. If the EUR/USD falls, that means the euro is getting weaker and the U.S. dollar is getting stronger. You might have also noticed the quote price has four places to the right of the decimal. Currencies are quoted in pips. A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what traders watch to count "pips".
Every point that place in the quote moves is 1 pip of movement. For example, if the GBP/USD rises from 1.5022 to 1.5027, the GBP/USD has risen 5 pips.
Now depending on the lot size (standard, mini, micro) the monetary value of a pip can vary according to the size of your trade and the currency you are trading.
The most common lot size is to trade in increments of 10,000 (mini). A lot size of 10,000 for the EUR/USD is worth $1.00 per lot. If you were trading 3 lots or 30,000, each pip is worth $3 in profit or loss. A full size lot, or standard lot, is 100,000 where each pip is worth $10, and a micro lot size is 1,000, were each pip is worth $0.10.
Some currency pairs will have different pip values. Be sure to check with your broker.
One of the nice things about trading currencies is there is no commissions. Looking at the quote image above, notice the small number of pips between the two quoted currencies: the difference in prices is 2.5.
This is known as the spread. The spread is how the broker makes their money and acts similar to the bid/ask in stock trading. Not all spreads are created equal. The spread differs between brokers and sometime the time of day can cause volume to be light and the spread to increase at some brokers.
Before you start jumping in you should familiarize themselves with the market and terminology of the forex market, and if you've already been trading stocks online it should be easy to get started.
Below is a list of terms you should learn.
PIP: The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point. A common exception is for Japanese yen (JPY) pairs which are quoted to the second decimal point.
BASE CURRENCY: The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.
CROSS CURRENCY PAIR: A pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having to first exchange the currencies into American dollars.
CURRENCY PAIR: The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
QUOTE CURRENCY: The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency. This is also known as the "secondary currency" or "counter currency".
Now that we've reviewed basic terminology, let's look at some of the differences between trading stocks vs. currencies. In currency trading you are always comparing one currency to another so forex is always quoted in pairs. Sometimes authors of currency research will refer to only one half of the currency pair. For example if an article is referring to the euro (EUR) trading at 1.3332 it's assumed the other currency is the U.S. dollar (USD).
When looking at the quote screen for the first time it may seem confusing at first, however, it's actually very straightforward. Below is an example of a EUR/USD quote.
The quote example shows traders how much one euro is worth in US dollars). The first currency in a currency pair is the "base currency" and the second currency is the "counter currency" or secondary currency.
When buying or selling a currency pair, the action is being performing on the base currency.
For example traders bearish on euros, could sell EUR/USD. Now, when selling EUR/USD, the trader is not only selling euros but is also buying US dollars at the same time. Thus the pair trade.
Let's say that you sell the EUR/USD at 1.4022. If the EUR/USD falls, that means the euro is getting weaker and the U.S. dollar is getting stronger. You might have also noticed the quote price has four places to the right of the decimal. Currencies are quoted in pips. A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what traders watch to count "pips".
Every point that place in the quote moves is 1 pip of movement. For example, if the GBP/USD rises from 1.5022 to 1.5027, the GBP/USD has risen 5 pips.
Now depending on the lot size (standard, mini, micro) the monetary value of a pip can vary according to the size of your trade and the currency you are trading.
The most common lot size is to trade in increments of 10,000 (mini). A lot size of 10,000 for the EUR/USD is worth $1.00 per lot. If you were trading 3 lots or 30,000, each pip is worth $3 in profit or loss. A full size lot, or standard lot, is 100,000 where each pip is worth $10, and a micro lot size is 1,000, were each pip is worth $0.10.
Some currency pairs will have different pip values. Be sure to check with your broker.
One of the nice things about trading currencies is there is no commissions. Looking at the quote image above, notice the small number of pips between the two quoted currencies: the difference in prices is 2.5.
This is known as the spread. The spread is how the broker makes their money and acts similar to the bid/ask in stock trading. Not all spreads are created equal. The spread differs between brokers and sometime the time of day can cause volume to be light and the spread to increase at some brokers.
Why do 80-90% of beginner Forex traders lose ALL of their money?
First, I'm going to ask that no one adds a comment of 'Thank You' to this thread, because 1) what I say is far from the last word, and 2) I'd like this thread to be a resource for ONLY those who wish to read an entire thread.
I'll put this on my 'monitored threads' list and take the number of viewers as all the thanks I need....I'm a Buddhist...we don't do gratification.
That said, I'd also have to ask, despite my lack of tenure, that each person who reads this thread to make a note on paper of the comments you'd like to make and wait to see if someone later in the thread has already addressed what you intend on commenting on.
Why do so many beginner Forex traders lose all of their money?
First, the FPA is here to protect you from the non-market risks, namely How to select a forex broker based on informing you how trustworthy the broker is, while trying to protect traders and prevent malicious slander in the form of spam. Another is to protect you from poorly programmed bots, or any other way to get your money away from you other than actual market movements.
I'd like to first point out that, on the same token as how an eight year old can't actually be a good judge of the quality of their teacher, if you haven't done enough reading then you'll inexorably feel that the movements of the market are chaotic. Now, they are chaotic, but to a surprisingly small degree to a well-informed and experienced trader. To sum up quickly, an experienced trader can profitably trade any purchasable or salable commodity, currency, or transferable intangible object.
One can't make that assertion on one's self just based on a successful month of trading on a demo account, and that means that both experience and knowledge are required before the jury can be let out on 'did this broker cheat me.' This is especially true because the traders on FPA are using different brokers, charting systems, and data feeds for current rates, so we can see if there's a discrepancy between the 'real' rates in historical fact and those that have been digitally manipulated by a broker for the broker's profit. I use this specific example to show one regular complaint of inexperienced traders to show that markets can be a major cause of the trader's complete loss of account independent of the broker.
For this matter, I'm going to avoid discussing non-market, or scam, reasons for complete losses of accounts.
First, have you noticed that most demo accounts let you trade with $50K?
In an article I have from just before the credit crisis, to be in the wealthiest 10% of the world's population, you need to have a net worth of $61K. At 100:1 maximum leverage in an account with standard lots, if you traded one lot the wrong way with no stop you'd have to be off by fifty US cents to empty your account. We saw the Swissy go from parity to twenty-one cents over during the credit crisis, but a ten cent drop is a real event. A one cent change is substantial.
It all seems simple. That said, if you have a micro account and you open it with $500, you'd be in the same position. $5000 in a mini account, and it's the same deal.
Wait a second...two things come to mind here. One, two times 5K is enough to buy a cheap car, and most people don't buy a car with a 50% downpayment. Of course there's the other matter of whom you'd trust with half a car of your money...a fool and his money are soon parted they say.
Back to the point though is most people don't have, or can't afford to lose 5K, so logically most forex accounts are started with less.
So you learn on a 50K demo account, and maybe you wing it and figure out rudimentary money management techniques for yourself. For example, maybe you figure out that although you only actually lose money when you hit a stop loss , you have to use stop losses for 1) when the basis of your prediction is clearly no longer likely or 2) capitalizing on the ability to reenter at a position even further away from your stop loss in order to get the profit from the new entry point to your old stop loss , plus the profit you initially attempted to gain. Maybe you also figure out to set your stop loss as less than your expected profit.
The first reason why beginners lose all of their money is because they're underfinanced. If you do a demo with a 50K account, you should only attempt to get half of the profits you aimed for on a live 25K account, a fifth on a 10K, and so on. If you are underfinanced then you won't have as many chances to absorb losing streaks (they really do happen to everyone), or deal with slippage or news events (expected or unexpected). Also, most people think they can use the same number of lots with the same risks on their new live account with their $500 as they could on the $50K, and they can't. I call this 'target management'.
The second reason why beginners lose all of their money is because they risk too much per trade. They're blinded by the potential profit, and they're out before they've had a chance to learn from their mistakes. Simple arithmetic shows that 19 bad trades risking 10% of current account per trade leads to a loss of over 80% of your account, where 19 bad trades at a risk of 2% is a 30ish percent loss. If you want to stay in the game you need to make sure you can be wrong a lot of times before you're out of cash, so I call this 'money management'. 19 bad trades can happen because you bet against the trend, news changed the fundamentals, you flip-flopped your long and short positions trying to catch the trend, you keep on getting nailed by straddling with double OCO orders, you're too impatient, you're overwhelmed by emotions, you're dealing in too many related pairs in the same direction, or your frikken cat sat on the keyboard.
The third reason is because they don't set a risk to yield ratio, or just trade from the gut. A risk to yield ratio is set in order for the profit from one successful trade to compensate for several unsuccessful trades. Thus, if you have a 1:3 risk to yield ratio, you set your stop loss at say 30 pips and your take profit at 90 pips. I also tend to find that if you set your stops too tight that it doesn't give your guess much time to be right, so I never set my stop at less than 15 pips. Now, I must admit that I don't stick religiously to this risk to yield rate if I'm actually watching the charts; I'll sometimes take profit and cancel my OCO take profit /stop loss order. I'll definitely stick to this idea if I have to leave the house or go to bed. If you have a full-time job and are forex trading to personally manage your savings, this is the only safe option. If you have a 1:3 risk to yield ratio you can be wrong twice and right once and still come out with a profit. I call this 'risk management'.
The fourth reason is overconfidence in the line studies that come with charting packages. None of them are 100% accurate all of the time, and that's because the freakin things ain't omniscient. Ichimoku means 'one look' but I promise that nowhere in its algorithm does it include, "Dubai is totally not going to have enough flow for that Dec. 09 $2 Billion maturing loan." In many ways a line study on a chart is like body language. If a person crosses their arms they might be defensive, threatened, disassociating themselves from the others...or just cold. You have to look in clusters to figure out what's going on. Sometimes you need to turn them all off and take a look at the price line, and on several different time charts.
The fifth reason is because you didn't understand all the parts of the last sentence of the second reason's paragraph. Ha! Tricky...forcing you to read the stuff again...THAT'S A GOOD THING!!!
The sixth reason is that we get spooked. Either we lose money we can't afford to lose and don't have enough to continue after learning from our mistakes, or just lose enough to hit our confidence and make us feel like we'll never be able to do it. Never is a long time, and as I've posted several times, the only way to finally fail is to quit. This doesn't mean that you should never quit; it means you should only trade with small amounts of money until you get confident. Let's face it; it wouldn't take much to beat the bank's interest rates these days if you only do slam dunk trades. Those are the ones where a currency is clearly undervalued and is in dire need of a correction. The problem is that when you're dealing with spreads of about 4 pips online instead of the hundred to hundred-fifty pips at a bank, it's hard not to get involved too early. If you're patient and keep abreast of the news, you limit your risk by a fair chunk.
We really do wish you luck, and the fact is that not everyone has to lose...if every one in the world was in some freakish synchronous rhythm in the markets then we actually could all profit with no loss. I wouldn't get my hopes up for that though.
Be Good, and keep your eye on what'll matter more on your deathbed than in your bank account.
I'll put this on my 'monitored threads' list and take the number of viewers as all the thanks I need....I'm a Buddhist...we don't do gratification.
That said, I'd also have to ask, despite my lack of tenure, that each person who reads this thread to make a note on paper of the comments you'd like to make and wait to see if someone later in the thread has already addressed what you intend on commenting on.
Why do so many beginner Forex traders lose all of their money?
First, the FPA is here to protect you from the non-market risks, namely How to select a forex broker based on informing you how trustworthy the broker is, while trying to protect traders and prevent malicious slander in the form of spam. Another is to protect you from poorly programmed bots, or any other way to get your money away from you other than actual market movements.
I'd like to first point out that, on the same token as how an eight year old can't actually be a good judge of the quality of their teacher, if you haven't done enough reading then you'll inexorably feel that the movements of the market are chaotic. Now, they are chaotic, but to a surprisingly small degree to a well-informed and experienced trader. To sum up quickly, an experienced trader can profitably trade any purchasable or salable commodity, currency, or transferable intangible object.
One can't make that assertion on one's self just based on a successful month of trading on a demo account, and that means that both experience and knowledge are required before the jury can be let out on 'did this broker cheat me.' This is especially true because the traders on FPA are using different brokers, charting systems, and data feeds for current rates, so we can see if there's a discrepancy between the 'real' rates in historical fact and those that have been digitally manipulated by a broker for the broker's profit. I use this specific example to show one regular complaint of inexperienced traders to show that markets can be a major cause of the trader's complete loss of account independent of the broker.
For this matter, I'm going to avoid discussing non-market, or scam, reasons for complete losses of accounts.
First, have you noticed that most demo accounts let you trade with $50K?
In an article I have from just before the credit crisis, to be in the wealthiest 10% of the world's population, you need to have a net worth of $61K. At 100:1 maximum leverage in an account with standard lots, if you traded one lot the wrong way with no stop you'd have to be off by fifty US cents to empty your account. We saw the Swissy go from parity to twenty-one cents over during the credit crisis, but a ten cent drop is a real event. A one cent change is substantial.
It all seems simple. That said, if you have a micro account and you open it with $500, you'd be in the same position. $5000 in a mini account, and it's the same deal.
Wait a second...two things come to mind here. One, two times 5K is enough to buy a cheap car, and most people don't buy a car with a 50% downpayment. Of course there's the other matter of whom you'd trust with half a car of your money...a fool and his money are soon parted they say.
Back to the point though is most people don't have, or can't afford to lose 5K, so logically most forex accounts are started with less.
So you learn on a 50K demo account, and maybe you wing it and figure out rudimentary money management techniques for yourself. For example, maybe you figure out that although you only actually lose money when you hit a stop loss , you have to use stop losses for 1) when the basis of your prediction is clearly no longer likely or 2) capitalizing on the ability to reenter at a position even further away from your stop loss in order to get the profit from the new entry point to your old stop loss , plus the profit you initially attempted to gain. Maybe you also figure out to set your stop loss as less than your expected profit.
The first reason why beginners lose all of their money is because they're underfinanced. If you do a demo with a 50K account, you should only attempt to get half of the profits you aimed for on a live 25K account, a fifth on a 10K, and so on. If you are underfinanced then you won't have as many chances to absorb losing streaks (they really do happen to everyone), or deal with slippage or news events (expected or unexpected). Also, most people think they can use the same number of lots with the same risks on their new live account with their $500 as they could on the $50K, and they can't. I call this 'target management'.
The second reason why beginners lose all of their money is because they risk too much per trade. They're blinded by the potential profit, and they're out before they've had a chance to learn from their mistakes. Simple arithmetic shows that 19 bad trades risking 10% of current account per trade leads to a loss of over 80% of your account, where 19 bad trades at a risk of 2% is a 30ish percent loss. If you want to stay in the game you need to make sure you can be wrong a lot of times before you're out of cash, so I call this 'money management'. 19 bad trades can happen because you bet against the trend, news changed the fundamentals, you flip-flopped your long and short positions trying to catch the trend, you keep on getting nailed by straddling with double OCO orders, you're too impatient, you're overwhelmed by emotions, you're dealing in too many related pairs in the same direction, or your frikken cat sat on the keyboard.
The third reason is because they don't set a risk to yield ratio, or just trade from the gut. A risk to yield ratio is set in order for the profit from one successful trade to compensate for several unsuccessful trades. Thus, if you have a 1:3 risk to yield ratio, you set your stop loss at say 30 pips and your take profit at 90 pips. I also tend to find that if you set your stops too tight that it doesn't give your guess much time to be right, so I never set my stop at less than 15 pips. Now, I must admit that I don't stick religiously to this risk to yield rate if I'm actually watching the charts; I'll sometimes take profit and cancel my OCO take profit /stop loss order. I'll definitely stick to this idea if I have to leave the house or go to bed. If you have a full-time job and are forex trading to personally manage your savings, this is the only safe option. If you have a 1:3 risk to yield ratio you can be wrong twice and right once and still come out with a profit. I call this 'risk management'.
The fourth reason is overconfidence in the line studies that come with charting packages. None of them are 100% accurate all of the time, and that's because the freakin things ain't omniscient. Ichimoku means 'one look' but I promise that nowhere in its algorithm does it include, "Dubai is totally not going to have enough flow for that Dec. 09 $2 Billion maturing loan." In many ways a line study on a chart is like body language. If a person crosses their arms they might be defensive, threatened, disassociating themselves from the others...or just cold. You have to look in clusters to figure out what's going on. Sometimes you need to turn them all off and take a look at the price line, and on several different time charts.
The fifth reason is because you didn't understand all the parts of the last sentence of the second reason's paragraph. Ha! Tricky...forcing you to read the stuff again...THAT'S A GOOD THING!!!
The sixth reason is that we get spooked. Either we lose money we can't afford to lose and don't have enough to continue after learning from our mistakes, or just lose enough to hit our confidence and make us feel like we'll never be able to do it. Never is a long time, and as I've posted several times, the only way to finally fail is to quit. This doesn't mean that you should never quit; it means you should only trade with small amounts of money until you get confident. Let's face it; it wouldn't take much to beat the bank's interest rates these days if you only do slam dunk trades. Those are the ones where a currency is clearly undervalued and is in dire need of a correction. The problem is that when you're dealing with spreads of about 4 pips online instead of the hundred to hundred-fifty pips at a bank, it's hard not to get involved too early. If you're patient and keep abreast of the news, you limit your risk by a fair chunk.
We really do wish you luck, and the fact is that not everyone has to lose...if every one in the world was in some freakish synchronous rhythm in the markets then we actually could all profit with no loss. I wouldn't get my hopes up for that though.
Be Good, and keep your eye on what'll matter more on your deathbed than in your bank account.
5 Forex Money Management Tips
Anyone serious enough about trading would do well to incorporate money management techniques to their trading plan to protect their portfolio.
Nearly all successful traders use a money management strategy along with their regular trading plan, and if you have ever experienced a severe drawdown on your account, you probably do too.
Basically, having safeguards in place to protect your account to remain in business is far better than the alternative. What follows are some general guidelines for money management, which can be incorporated into a trading plan.
Tip #1: Only Trade With Risk Capital
Trading currencies involves taking substantial risks, no matter how you look at it. Because of the free-floating currency market, currency trading has considerably more in common to gambling than investing.
As a result, putting funds at risk which you cannot afford to lose should never even be considered by a responsible forex trader. This includes money needed for key housing expenses such as your mortgage or rent payment, or the weekly food allowance necessary for your or your family's sustenance.
In general, traders do better by only trading forex with funds known as risk capital. Such money has been specifically designated for trading because it is expendable and therefore not needed for the basic essentials of living.
Tip #2: Cut Losses Short, Let Profits Run On
These just have to be some of the most popular words of wisdom that Wall Street has ever passed on to its novice traders.
The basic idea behind this saying is that you should first endeavor to manage your risk by using stop losses in a disciplined way.
Secondly, you should also allow your profits to accumulate when you have a winning position. Traders often use trading stops for this purpose.
Furthermore, as a wise trader once said, "In trading, it's not what you make, profits take care of themselves; it's what you don't lose that really matters."
Nearly all successful traders use a money management strategy along with their regular trading plan, and if you have ever experienced a severe drawdown on your account, you probably do too.
Basically, having safeguards in place to protect your account to remain in business is far better than the alternative. What follows are some general guidelines for money management, which can be incorporated into a trading plan.
Tip #1: Only Trade With Risk Capital
Trading currencies involves taking substantial risks, no matter how you look at it. Because of the free-floating currency market, currency trading has considerably more in common to gambling than investing.
As a result, putting funds at risk which you cannot afford to lose should never even be considered by a responsible forex trader. This includes money needed for key housing expenses such as your mortgage or rent payment, or the weekly food allowance necessary for your or your family's sustenance.
In general, traders do better by only trading forex with funds known as risk capital. Such money has been specifically designated for trading because it is expendable and therefore not needed for the basic essentials of living.
Tip #2: Cut Losses Short, Let Profits Run On
These just have to be some of the most popular words of wisdom that Wall Street has ever passed on to its novice traders.
The basic idea behind this saying is that you should first endeavor to manage your risk by using stop losses in a disciplined way.
Secondly, you should also allow your profits to accumulate when you have a winning position. Traders often use trading stops for this purpose.
Furthermore, as a wise trader once said, "In trading, it's not what you make, profits take care of themselves; it's what you don't lose that really matters."
Forex Trading Psychology – The Main reason Why Forex Traders Fail
Forex Trading Psychology
There are many answers in the market to this question: Why do most forex traders fail?
- Some blame it on over trading
- Some blame it on emotions
- Some blame it on revenge mentality
- Some blame it on impulse
- Some blame it on the market
- Some blame it on bad luck
- Some blame it on poor entry
- Some blame it on not taking profits
- etc etc etc
As you can see, there will be tons and tons of reasons that explains why forex traders fail.
This is all that relates to forex trading psychology.
But i strongly believe that it all leads to one answer.
MONEY
Forex Trading Psychology – The Main reason Why Forex Traders Fail
Yes, the answer is MONEY.
The main reason why most traders fail is because of money.
No doubt that we all trade forex for the money.
But it will be the money that kills us in forex.
Forex trading psychology – Let me explain.
To us our money that we put in our forex capital is our hard earn money. Who isn’t?
when we have that mentality that we CANNOT lose the money in our capital.
And as all man are greedy. We want to multiply our capital FAST.
That’s when we lose it all.
To succeed in forex trading, we have to FORGET that there’s money involved.
You have to learn to trade not because of the money. But because you like forex trading and you are passionate about it.
You have to learn to trade right and not trade for the money.
When you trade right and forget about the money, the money will come naturally.
But when you are too focused on the money, all your emotions will trigger.
You will get into impulse trades, probably because you made a lost on the last trade and you want your money back.
Or because you look at the trade and you are so confident about it, you GAMBLED your whole account size on that trade. and to lose it all.
Or because you want to feel good and look good, and you think that you are able to double your account in a week. So you take trades that are way beyond your money management risk %.
Or you made a series of losses, and you think that if you increase your risk percentage on this particular trade, you will make back your losses.
And the list goes on…
FOREX TRADING PSYCHOLOGY – The Main reason Why Forex Traders Fail
There are many answers in the market to this question: Why do most forex traders fail?
- Some blame it on over trading
- Some blame it on emotions
- Some blame it on revenge mentality
- Some blame it on impulse
- Some blame it on the market
- Some blame it on bad luck
- Some blame it on poor entry
- Some blame it on not taking profits
- etc etc etc
As you can see, there will be tons and tons of reasons that explains why forex traders fail.
This is all that relates to forex trading psychology.
But i strongly believe that it all leads to one answer.
MONEY
Forex Trading Psychology – The Main reason Why Forex Traders Fail
Yes, the answer is MONEY.
The main reason why most traders fail is because of money.
No doubt that we all trade forex for the money.
But it will be the money that kills us in forex.
Forex trading psychology – Let me explain.
To us our money that we put in our forex capital is our hard earn money. Who isn’t?
when we have that mentality that we CANNOT lose the money in our capital.
And as all man are greedy. We want to multiply our capital FAST.
That’s when we lose it all.
To succeed in forex trading, we have to FORGET that there’s money involved.
You have to learn to trade not because of the money. But because you like forex trading and you are passionate about it.
You have to learn to trade right and not trade for the money.
When you trade right and forget about the money, the money will come naturally.
But when you are too focused on the money, all your emotions will trigger.
You will get into impulse trades, probably because you made a lost on the last trade and you want your money back.
Or because you look at the trade and you are so confident about it, you GAMBLED your whole account size on that trade. and to lose it all.
Or because you want to feel good and look good, and you think that you are able to double your account in a week. So you take trades that are way beyond your money management risk %.
Or you made a series of losses, and you think that if you increase your risk percentage on this particular trade, you will make back your losses.
And the list goes on…
FOREX TRADING PSYCHOLOGY – The Main reason Why Forex Traders Fail
Use Support and Resistance to Enhance Your Trading
Support and resistance levels are price levels on charts from past activity that can be used to determine market entry and exit points for individual stocks. Technical traders believe the market follows patterns, and those patterns can be used to help the trader. One thing to keep in mind is that technical traders do not believe using support and resistance levels will always work; however, using the theory may aid your trading strategy.
A support level is a price level where a stock tends to linger, or find support, as the price drops. You may see this with certain stocks you're monitoring - the stock price hovers around a particular price on down days. If the stock price drops below this support level, it may continue to drop until the stock finds another support level.
A resistance level is a price level where a stock lingers as the price increases. The stock price may hover around an upper price level but not pass through it, indicating "resistance" to further price increases. If the stock price does pass through the resistance level this is referred to as a breakout - which could potentially continue until the next resistance level is reached.
A support level is a price level where a stock tends to linger, or find support, as the price drops. You may see this with certain stocks you're monitoring - the stock price hovers around a particular price on down days. If the stock price drops below this support level, it may continue to drop until the stock finds another support level.
A resistance level is a price level where a stock lingers as the price increases. The stock price may hover around an upper price level but not pass through it, indicating "resistance" to further price increases. If the stock price does pass through the resistance level this is referred to as a breakout - which could potentially continue until the next resistance level is reached.
When is the best time to trade currencies?
When it comes to trading, everyone is trying to look for an “edge” but of course it is not easy to find. An edge can come in any form and is usually a small change that can make a difference. Many people, particularly new traders, do not realize that you can gain an edge in currencies by simply trading only during specific times of the day. A common mistake that traders make is to try to apply the same strategy across different currency pairs and time frames. However, an even bigger mistake is to try to look for trades based upon a specific strategy during all times of the day. Unlike other markets, in forex, a trader can look for his or her setup and place a trade at 7 in the morning or 7 in the evening. The problem is that a strategy that works at 7am may not work as well at 7pm and vice versa. This is particularly true for short-term traders who have no interest in holding a position overnight.
For example, let us assume that we are using a breakout strategy. In order for a breakout to occur, there needs to be a catalyst. In order for there to be a continuation, there needs to be momentum. Therefore, the best time of the day to look for breakout opportunities and to avoid a fake out is around major economic releases when there are a lot of participants in the market. More specifically, breakout strategies work best around European and U.S. economic releases.
Range traders on the other hand need to avoid trading around economic releases and any time of day where there can be significant volatility. When there is breaking news, the ranges tend to be broken. Therefore, the best time of day to trade for range traders is when there is no economic data being released anytime soon and when there are fewer participants in the market.
Based upon our study, the best times for breakout or momentum traders to trade is between 13:00 and 17:00 GMT when both European and U.S. traders are in the market. This makes perfect sense since close to 60 percent of global forex turnover happens during the London and U.S trading session. The best time for range traders to trade is between 21:00 and 6:00 GMT which is when there tends to be little event risk and only Asian traders in the market.
Believe it or not, you can gain a valuable edge by simply trading only during the times of day that is conducive to the strategy.
For example, let us assume that we are using a breakout strategy. In order for a breakout to occur, there needs to be a catalyst. In order for there to be a continuation, there needs to be momentum. Therefore, the best time of the day to look for breakout opportunities and to avoid a fake out is around major economic releases when there are a lot of participants in the market. More specifically, breakout strategies work best around European and U.S. economic releases.
Range traders on the other hand need to avoid trading around economic releases and any time of day where there can be significant volatility. When there is breaking news, the ranges tend to be broken. Therefore, the best time of day to trade for range traders is when there is no economic data being released anytime soon and when there are fewer participants in the market.
Based upon our study, the best times for breakout or momentum traders to trade is between 13:00 and 17:00 GMT when both European and U.S. traders are in the market. This makes perfect sense since close to 60 percent of global forex turnover happens during the London and U.S trading session. The best time for range traders to trade is between 21:00 and 6:00 GMT which is when there tends to be little event risk and only Asian traders in the market.
Believe it or not, you can gain a valuable edge by simply trading only during the times of day that is conducive to the strategy.
The Best Currency Pairs to Trade & Times to Trade Them?
Two common questions that I get from aspiring forex traders are: “which currency pairs are best to trade?” and “what are the best times to trade?”
This two-part article will first address the question “which currency pairs are best to trade?”, and next week we will address the question “what are the best times to trade?” You should use this two-part article series as a reference guide to answer any question you may have about which currency pairs to trade and what times to trade them. Enjoy.
Types of Currency Pairs:
There are three categories of currency pairs; majors, crosses, and exotics. The following points will explain which currency pair’s fall into these three categories and the advantages or disadvantages of each.
• Majors
The “major” forex currency pairs are the major countries that are paired with the U.S. dollar (the nicknames of the majors are in parenthesis). We are also including silver and gold in this list since they are quoted in U.S. dollars and we trade them regularly.
EUR/USD – Euro vs. the U.S. dollar (Fiber)
GBP/USD – British pound vs. the U.S. dollar (Sterling, Cable)
AUD/USD – Australia dollar vs. the U.S. dollar (Aussie)
NZD/USD – New Zealand dollar vs. the U.S. dollar (kiwi)
USD/JPY – U.S. dollar vs. the Japanese yen (the Yen)
USD/CHF – U.S. dollar vs. the Swiss franc (Swissie)
USD/CAD – U.S. dollar vs. the Canadian dollar (Loonie)
XAU/USD – Gold
XAG/USD – Silver
Now, there are some things we need to discuss about the “majors” before we move on to discuss the “crosses”.
First off, many of the major currency pairs are correlated in their price movement, meaning they move almost identical to one another. For example, the EURUSD and the GBPUSD tend to move in the same general direction (not exactly the same), the GPBUSD is typically a bit more volatile than the EURUSD, but if the EURUSD is in an obvious up or down trend you can safely assume the GBPUSD is in the same trend, thus we say they are positively correlated.
The USDCHF is negatively correlated to the EURUSD, so if the EURUSD is moving higher the USDCHF is most likely moving lower. You will find if you take a EURUSD chart and a USDCHF chart of the same time frame and hold one right side up and one upside down, they will look fairly similar, this is because they are negatively correlated.
So what does this correlation business mean to you? It means you need to be careful when making your trading decisions so as to not double up your risk or trade against a position you currently have open. For example, if you enter a long on the EURUSD and the GBPUSD, you are basically doubling your risk, and there is really no point in trading both at the same time, you might as well trade one or the other, if there is a similar price action setup on both, pick the pair that the setup looks more defined on.
Similarly, if you enter a long position on the EURUSD and a short on the USDCHF, you are essentially doubling your risk. I have found the USDCHF to be very choppy compared to the EURUSD and GBPUSD, and I rarely trade the USDCHF as a result, I aim my focus on the EURUSD and GBPUSD if I want to trade a European currency against the U.S. dollar. This is not to say you should never trade the USDCHF, but just be advised that in my experience the EURUSD and GBPUSD provide better price action trading opportunities.
The EURUSD is also the most widely traded pair, and therefore it carries the highest volume of all currency pairs, this also means it is the most liquid, which is another reason I prefer it over its correlated counter-parts. The EURUSD makes up about 27% of forex trading volume, next is the USDJPY at 13%, followed by the GBPUSD at 12% of the total forex trading volume
This two-part article will first address the question “which currency pairs are best to trade?”, and next week we will address the question “what are the best times to trade?” You should use this two-part article series as a reference guide to answer any question you may have about which currency pairs to trade and what times to trade them. Enjoy.
Types of Currency Pairs:
There are three categories of currency pairs; majors, crosses, and exotics. The following points will explain which currency pair’s fall into these three categories and the advantages or disadvantages of each.
• Majors
The “major” forex currency pairs are the major countries that are paired with the U.S. dollar (the nicknames of the majors are in parenthesis). We are also including silver and gold in this list since they are quoted in U.S. dollars and we trade them regularly.
EUR/USD – Euro vs. the U.S. dollar (Fiber)
GBP/USD – British pound vs. the U.S. dollar (Sterling, Cable)
AUD/USD – Australia dollar vs. the U.S. dollar (Aussie)
NZD/USD – New Zealand dollar vs. the U.S. dollar (kiwi)
USD/JPY – U.S. dollar vs. the Japanese yen (the Yen)
USD/CHF – U.S. dollar vs. the Swiss franc (Swissie)
USD/CAD – U.S. dollar vs. the Canadian dollar (Loonie)
XAU/USD – Gold
XAG/USD – Silver
Now, there are some things we need to discuss about the “majors” before we move on to discuss the “crosses”.
First off, many of the major currency pairs are correlated in their price movement, meaning they move almost identical to one another. For example, the EURUSD and the GBPUSD tend to move in the same general direction (not exactly the same), the GPBUSD is typically a bit more volatile than the EURUSD, but if the EURUSD is in an obvious up or down trend you can safely assume the GBPUSD is in the same trend, thus we say they are positively correlated.
The USDCHF is negatively correlated to the EURUSD, so if the EURUSD is moving higher the USDCHF is most likely moving lower. You will find if you take a EURUSD chart and a USDCHF chart of the same time frame and hold one right side up and one upside down, they will look fairly similar, this is because they are negatively correlated.
So what does this correlation business mean to you? It means you need to be careful when making your trading decisions so as to not double up your risk or trade against a position you currently have open. For example, if you enter a long on the EURUSD and the GBPUSD, you are basically doubling your risk, and there is really no point in trading both at the same time, you might as well trade one or the other, if there is a similar price action setup on both, pick the pair that the setup looks more defined on.
Similarly, if you enter a long position on the EURUSD and a short on the USDCHF, you are essentially doubling your risk. I have found the USDCHF to be very choppy compared to the EURUSD and GBPUSD, and I rarely trade the USDCHF as a result, I aim my focus on the EURUSD and GBPUSD if I want to trade a European currency against the U.S. dollar. This is not to say you should never trade the USDCHF, but just be advised that in my experience the EURUSD and GBPUSD provide better price action trading opportunities.
The EURUSD is also the most widely traded pair, and therefore it carries the highest volume of all currency pairs, this also means it is the most liquid, which is another reason I prefer it over its correlated counter-parts. The EURUSD makes up about 27% of forex trading volume, next is the USDJPY at 13%, followed by the GBPUSD at 12% of the total forex trading volume
What is the Best Timeframe to Trade?
What is the best timeframe to trade from? What is a timeframe anyway? The video above goes over this and more.
What is a Timeframe?
The chart below is a weekly chart of the USD/JPY currency pair. A weekly timeframe when it comes to trading simply means that a single candle on your chart represents a whole week of trading.
Different timeframes can have different trends
The Weekly chart of the USD/JPY shows a clear uptrend since November of 2013 when the Bank of Japan embarked on its massive new money printing effort.
But look at the hourly chart below taken on the same day, May 23 2013. The hourly chart shows a downtrend. Different timeframes can show different trends and different ways to look at the market.
Larger Timeframes are Lot Cleaner
As you can see from the 2 charts above, larger timeframe charts tend to look a lot cleaner and they are thus easier to trade. They are recommended for new traders. The lower you go down in timeframes, the more messy price action becomes. The lowest timeframes like the minute or second charts contain the most “noise”, or random unpredictable market movements.
Look at Larger Timeframes For Direction, Lower Timeframes For Entry
You should always look at the larger timeframe charts like the Daily and the Weekly chart to give you a general direction.of where price is heading. You then move to the lower timeframe charts like the 15 minute or 1 hour to time your entries. This way of trading will allow you to “beat” the larger timeframe traders. You could get in lot sooner and also get out lot sooner then someone trading off a weekly chart.
5 Forex Day Trading Mistakes To Avoid
Averaging Down
Traders often stumble across averaging down. It is not something they intended to do when they began trading, but most traders have ended up doing it. There are several problems with averaging down.
The main problem is that a losing position is being held - not only potentially sacrificing money, but also time. This time and money could be placed in something else that is proving itself to be a better position.
Also, for capital that is lost, a larger return is needed on remaining capital to get it back. If a trader loses 50% of her capital, it will take a 100% return to bring her back to the original capital level. Losing large chunks of money on single trades or on single days of trading can cripple capital growth for long periods of time.
While it may work a few times, averaging down will inevitably lead to a large loss or margin call, as a trend can sustain itself longer than a trader can stay liquid - especially if more capital is being added as the position moves further out of the money.
Day traders are especially sensitive to these issues. The short time frame for trades means opportunities must be capitalized on when they occur and bad trades must be exited quickly
Pre-Positioning for News
Traders know the news events that will move the market, yet the direction is not known in advance. A trader may even be fairly confident what a news announcement may be - for instance that the Federal Reserve will or will not raise interest rates - but even so cannot predict how the market will react to this expected news. Often there are additional statements, figures or forward looking indications provided by news announcements that can make movements extremely illogical.
There is also the simple fact that as volatility surges and all sorts of orders hit the market, stops are triggered on both sides of the market. This often results in whip-saw like action before a trend emerges (if one emerges in the near term at all).
For all these reasons, taking a position before a news announcement can seriously jeopardize a trader's chances of success. There is no easy money here; those who believe there is may face larger than usual losses.
Trading Right after News
A news headline hits the markets and then the market starts to move aggressively. It seems like easy money to hop on board and grab some pips. If this is done in a non-regimented and untested way without a solid trading plan behind it, it can be just as devastating as placing a gamble before the news comes out.
News announcements often cause whipsaw-like action because of a lack of liquidity and hair-pin turns in the market assessment of the report. Even a trade that is in the money can turn quickly, bringing large losses as large swings occur back and forth. Stops during these times are dependent on liquidity that may not be there, which means losses could potentially be much more than calculated.
Day traders should wait for volatility to subside and for a definitive trend to develop after news announcements. By doing so there is likely to be fewer liquidity concerns, risk can be managed more effectively and a more stable price direction is likely. (For more on trading with news releases
Risking More Than 1% of Capital
Excessive risk does not equal excessive returns. Almost all traders who risk large amounts of capital on single trades will eventually lose in the long run. A common rule is that a trader should risk (in terms of the difference between entry and stop price) no more than 1% of capital on any single trade. Professional traders will often risk far less than 1% of capital.
Day trading also deserves some extra attention in this area. A daily risk maximum should also be implemented. This daily risk maximum can be 1% (or less) of capital, or equivalent to the average daily profit over a 30 day period. For example, a trader with a $50,000 account (leverage not included) could lose a maximum of $500 per day. Alternatively, this number could be altered so it is more in line with the average daily gain - if a trader makes $100 on positive days, she keeps losing days close to $100 or less.
The purpose of this method is to make sure no single trade or single day of trading hurts the traders account significantly. By adopting a risk maximum that is equivalent to the average daily gain over a 30 day period, the trader knows that he will not lose more in a single trade/day than he can make back on another. (To understand the risks involved in the forex market
Unrealistic Expectations
Unrealistic expectations come from many sources, but often result in all of the above problems. Our own trading expectations are often imposed on the market, leaving us expecting it to act according our desires and trade direction. The market doesn't care what you want. Traders must accept that the market can be illogical. It can be choppy, volatile and trending all in short, medium and long-term cycles. Isolating each move and profiting from it is not possible, and believing so will result in frustration and errors in judgment.
The best way to avoid unrealistic expectations is formulate a trading plan and then trade it. If it yields steady results, then don't change it - with forex leverage, even a small gain can become large. Accept this as what the market gives you. As capital grows over time, the position size can be increased to bring in higher dollar returns. Also, new strategies can be implemented and tested with minimal capital at first. Then, if positive results are seen, more capital can be put into the strategy.
Intra-day, a trader must also accept what the market provides at different parts of the day. Near the open, the markets are more volatile. Specific strategies can be used during the market open that may not work later in the day. As the day progresses, it may become quieter and a different strategy can be used. Towards the close, there may be a pickup in action and yet another strategy can be used. Accept what is given at each point in the day and don't expect more from a system than what it is providing
Traders often stumble across averaging down. It is not something they intended to do when they began trading, but most traders have ended up doing it. There are several problems with averaging down.
The main problem is that a losing position is being held - not only potentially sacrificing money, but also time. This time and money could be placed in something else that is proving itself to be a better position.
Also, for capital that is lost, a larger return is needed on remaining capital to get it back. If a trader loses 50% of her capital, it will take a 100% return to bring her back to the original capital level. Losing large chunks of money on single trades or on single days of trading can cripple capital growth for long periods of time.
While it may work a few times, averaging down will inevitably lead to a large loss or margin call, as a trend can sustain itself longer than a trader can stay liquid - especially if more capital is being added as the position moves further out of the money.
Day traders are especially sensitive to these issues. The short time frame for trades means opportunities must be capitalized on when they occur and bad trades must be exited quickly
Pre-Positioning for News
Traders know the news events that will move the market, yet the direction is not known in advance. A trader may even be fairly confident what a news announcement may be - for instance that the Federal Reserve will or will not raise interest rates - but even so cannot predict how the market will react to this expected news. Often there are additional statements, figures or forward looking indications provided by news announcements that can make movements extremely illogical.
There is also the simple fact that as volatility surges and all sorts of orders hit the market, stops are triggered on both sides of the market. This often results in whip-saw like action before a trend emerges (if one emerges in the near term at all).
For all these reasons, taking a position before a news announcement can seriously jeopardize a trader's chances of success. There is no easy money here; those who believe there is may face larger than usual losses.
Trading Right after News
A news headline hits the markets and then the market starts to move aggressively. It seems like easy money to hop on board and grab some pips. If this is done in a non-regimented and untested way without a solid trading plan behind it, it can be just as devastating as placing a gamble before the news comes out.
News announcements often cause whipsaw-like action because of a lack of liquidity and hair-pin turns in the market assessment of the report. Even a trade that is in the money can turn quickly, bringing large losses as large swings occur back and forth. Stops during these times are dependent on liquidity that may not be there, which means losses could potentially be much more than calculated.
Day traders should wait for volatility to subside and for a definitive trend to develop after news announcements. By doing so there is likely to be fewer liquidity concerns, risk can be managed more effectively and a more stable price direction is likely. (For more on trading with news releases
Risking More Than 1% of Capital
Excessive risk does not equal excessive returns. Almost all traders who risk large amounts of capital on single trades will eventually lose in the long run. A common rule is that a trader should risk (in terms of the difference between entry and stop price) no more than 1% of capital on any single trade. Professional traders will often risk far less than 1% of capital.
Day trading also deserves some extra attention in this area. A daily risk maximum should also be implemented. This daily risk maximum can be 1% (or less) of capital, or equivalent to the average daily profit over a 30 day period. For example, a trader with a $50,000 account (leverage not included) could lose a maximum of $500 per day. Alternatively, this number could be altered so it is more in line with the average daily gain - if a trader makes $100 on positive days, she keeps losing days close to $100 or less.
The purpose of this method is to make sure no single trade or single day of trading hurts the traders account significantly. By adopting a risk maximum that is equivalent to the average daily gain over a 30 day period, the trader knows that he will not lose more in a single trade/day than he can make back on another. (To understand the risks involved in the forex market
Unrealistic Expectations
Unrealistic expectations come from many sources, but often result in all of the above problems. Our own trading expectations are often imposed on the market, leaving us expecting it to act according our desires and trade direction. The market doesn't care what you want. Traders must accept that the market can be illogical. It can be choppy, volatile and trending all in short, medium and long-term cycles. Isolating each move and profiting from it is not possible, and believing so will result in frustration and errors in judgment.
The best way to avoid unrealistic expectations is formulate a trading plan and then trade it. If it yields steady results, then don't change it - with forex leverage, even a small gain can become large. Accept this as what the market gives you. As capital grows over time, the position size can be increased to bring in higher dollar returns. Also, new strategies can be implemented and tested with minimal capital at first. Then, if positive results are seen, more capital can be put into the strategy.
Intra-day, a trader must also accept what the market provides at different parts of the day. Near the open, the markets are more volatile. Specific strategies can be used during the market open that may not work later in the day. As the day progresses, it may become quieter and a different strategy can be used. Towards the close, there may be a pickup in action and yet another strategy can be used. Accept what is given at each point in the day and don't expect more from a system than what it is providing
Thursday 5 December 2013
Long Black Real Body at High Price Area
just as a long white candle could be an early signal that the market may
be trying to build a bottom, so it is that a distinctively long black real
body at a high price may be a tentative warning of a top. The long black
real body should be significantly longer than the candles preceding it.
This is illustrated in Exhibit 2.16. Such a long black real body displays
that the bears had grabbed control of the market. The longer the rally
continued and the more overbought the market, the more reliable the
cautionary signal of this long black real body becomes.
The long white candle (1) in Exhibit 2.17 echoes a vibrant market.
However, there were a few warnings that Home Depot was overheating.
The first was that the relative strength index (RSI) was above 70o/oS. uch
a high RSI figure is a clue that the market is overbought. Another sign
that the bulls were losing their upside push was the series of small real
bodies following the tall white candle at 1. These small real bodies showed
that the supply-demand situation was more in balance as comPared to
tall white candle 1 (candle L showed that demand was overwhelming
supply). Small real bodies are discussed in more detail later in this chapter.
Falling black real body at 2 showed that the bears had wrested control
of this stock. Note how black real body 2 was the longest black real body
since at least November 1992. This shouts out a warning that there is
now something very different about the market, and that appropriate
defensive action-such as selling covered calls, or offsetting some longsshould
be undertaken. For those who are familiar with all the candle
patterns, note how the tall white candle at 1 and the black real body at
be trying to build a bottom, so it is that a distinctively long black real
body at a high price may be a tentative warning of a top. The long black
real body should be significantly longer than the candles preceding it.
This is illustrated in Exhibit 2.16. Such a long black real body displays
that the bears had grabbed control of the market. The longer the rally
continued and the more overbought the market, the more reliable the
cautionary signal of this long black real body becomes.
The long white candle (1) in Exhibit 2.17 echoes a vibrant market.
However, there were a few warnings that Home Depot was overheating.
The first was that the relative strength index (RSI) was above 70o/oS. uch
a high RSI figure is a clue that the market is overbought. Another sign
that the bulls were losing their upside push was the series of small real
bodies following the tall white candle at 1. These small real bodies showed
that the supply-demand situation was more in balance as comPared to
tall white candle 1 (candle L showed that demand was overwhelming
supply). Small real bodies are discussed in more detail later in this chapter.
Falling black real body at 2 showed that the bears had wrested control
of this stock. Note how black real body 2 was the longest black real body
since at least November 1992. This shouts out a warning that there is
now something very different about the market, and that appropriate
defensive action-such as selling covered calls, or offsetting some longsshould
be undertaken. For those who are familiar with all the candle
patterns, note how the tall white candle at 1 and the black real body at
Long White at a Low Price Level
reversal. It could, however, be one clue that the prior trend may
be changing. For instance, as shown in Exhibit 2.5, a long white real
body at a low price range may be the first sign of a market bottom. A
long white candle shows that the ability to rise is virtually unimpeded
by the bears. The closer the close is to the high of the session, and the
longer the white real body, the more important the candle line.
Exhibit 2.6 shows that in late \991., this stock was stabilizing near $5.
The first sign that the bulls were attempting to take control was the
unusually long white real body at 1. Note how this real body was extended
compared to the prior real bodies. However, an almost equally
long, but black real body (for information on black real bodies, see page
29), on the week after candle L showed that the bears still had enough
force to offset the bulls' advance. In early \992, another unusually long
white candle, shown at2, appeared. This white candle opened on its low
(since it does not have a lower shadow) and closed on its high (since it
does not have an upper shadow). Such a candle is exceptionally strong,
notably when it is so elongated as in candle 2. Candle 3 was another
strong white candle that propelled prices to new multi-month highs. With
the tall white candles L and 2 both appearing near $5, we can see the
significanceo f that $5 support area. Consequently,w hen prices corrected
back to this level in fuly and August 1992, it is not surprising that the
selloff stopped near $5.
REAL BODY AND SHADOWS
While an individual candle usually should not be used alone to place a
trade, the size and color of its real body and the length of its shadows
can provide a wealth of information. Specifically, looking at a line's real
body and shadows gives a sense of the supply and demand situation.
This section will discuss this basic idea, and explain how to use real
bodies and shadows to get clues about the market's underlying strength
or weakness. By using the candle lines discussed below, you may be able
to get an early and tentative indication of market direction.
THE REAL BODY
In ]apanese charts, even an individual candle line has meaning, and one
of the first clues about the vitality of the market is to look at the size and
color of the real body. To the |apanese, the real body is the essence of
the price movement. This is a critical and powerful aspect of candle charts;
through the height and color of the real body, candle charts clearly and
quickly display the relative posture of the bulls and the bears.
This section will be segmented according to the decreasing size of the
real bodies. The first part of this section will consequently focus on long
white and then long black real bodies. After these, attention is turned to
candles with small real bodies called spinning tops. These diminutive
real bodies display a market where the bulls and bears are in a tug of
war.
This section will conclude with candles that have no real bodies. These
candles have the same (or nearly the same) opening and closing. Such
candles, called doji (pronounced d6-gee), reflect a market in a state of
transition. Doji, as you will see later, can be an important market signal.
Long White Real Bodies
A long white real body is defined as a session that opens at or near the
low of session, and then closes at or near the session's high. The close
should be much higher than the open. For example, if a stock opens at
$40 and closes at $4ff/v it would not be a long white candle since the
opening and closing range were relatively close. For a long white candle
to have meaning, some Japanese candlestick traders believe that the real
body should be at least three times as long as the previous day's real
body.
trade, the size and color of its real body and the length of its shadows
can provide a wealth of information. Specifically, looking at a line's real
body and shadows gives a sense of the supply and demand situation.
This section will discuss this basic idea, and explain how to use real
bodies and shadows to get clues about the market's underlying strength
or weakness. By using the candle lines discussed below, you may be able
to get an early and tentative indication of market direction.
THE REAL BODY
In ]apanese charts, even an individual candle line has meaning, and one
of the first clues about the vitality of the market is to look at the size and
color of the real body. To the |apanese, the real body is the essence of
the price movement. This is a critical and powerful aspect of candle charts;
through the height and color of the real body, candle charts clearly and
quickly display the relative posture of the bulls and the bears.
This section will be segmented according to the decreasing size of the
real bodies. The first part of this section will consequently focus on long
white and then long black real bodies. After these, attention is turned to
candles with small real bodies called spinning tops. These diminutive
real bodies display a market where the bulls and bears are in a tug of
war.
This section will conclude with candles that have no real bodies. These
candles have the same (or nearly the same) opening and closing. Such
candles, called doji (pronounced d6-gee), reflect a market in a state of
transition. Doji, as you will see later, can be an important market signal.
Long White Real Bodies
A long white real body is defined as a session that opens at or near the
low of session, and then closes at or near the session's high. The close
should be much higher than the open. For example, if a stock opens at
$40 and closes at $4ff/v it would not be a long white candle since the
opening and closing range were relatively close. For a long white candle
to have meaning, some Japanese candlestick traders believe that the real
body should be at least three times as long as the previous day's real
body.
CONSTRUCTION OF THE CANDLE LINE
The first step in using the power of candles is learning how to construct
the basic candle line. Exhibits 2.3. and 2.4 show that the candle line
consists of a rectangular section and two thin lines above or below this
section. We see why these are named candlestick charts; the individual
lines often look like candles with their wicks. The rectangular part of the
candlestick line is called the real body. lt represents the range between
the session's open and close. When the real body is black (e.g., filled in),
it shows that the close of the session was lower than the open. If the real
body is white (that is, empty), it means the close was higher than the
oPen.
The thin lines above and below the real body are the shadowsT. he
shadows represent the session's price eXtremes. The shadow above the
real body is referred to as the upper shadow and the shadow under the
real body is the lower shadow. Accordingly, the peak of the upper shadow
is the high of the session and the bottom of the lower shadow is the low
of the session.
Candle charts can be used throughout the trading spectrum, from
daily, to weekly, and intra-day charting. For a daily chart, one would use
the open, high, low, and close of the session. For a weekly chart, the
candle would be composed of Monday's open, then the high and low of
the week, and Friday's close. On an intra-day basis, it would be the open,
high, low, and close for the chosen time period (i.e., hourly).
Exhibit 2.3 shows a strong session in which the market opened near
the low and closed near its high. We know that the close is higher than
the open because of the white real body. Exhibit 2.4 illustrates a long
black candlestick. This is a bearish session in which the market opened
near its high and closed near its low.
The |apanese focus on the relationship between the open and close.
This makes sense; probably the two most important prices of the day are
the open and close. It is therefore surprising that American newspapers
have openings for futures prices, but not for stocks. A member of the
Nippon Technical Analysts Association told me that he found it unusual
that U.S. newspapers do not have opening stock prices; the Japanese
have the openings in their papers. He said that he did not know why
the Americans disregard the openings.
I would expect that just as almost all technical software vendors now
carry candle charts, so it may be that as candles become more popular
in the equity market, newspapers may, by popular request, carry stock
openings. Until then, in order to obtain the data needed to draw the
candles (the open, high, low, and close) you need to use a data vendor
service. These services furnish prices on disks or through modems. The
data supplied from a data vendor are then transferred into a technical
analysis software package that will draw the candles based on these
data.
A note of caution: Some data vendors who do not have the actual
opening price of a stock default to the prior session's close as today's
open. This, in my opinion, is not valid. You must have the true open to
draw an accurate candle line. Although an open on a stock will usually
not be much different from the prior close, there are some candle patterns
in which a higher or lower opening (compared to the prior close) gives
valuable information. A data vendor that includes actual opens on stocks
is Dial Data (Brooklyn, NY).
the basic candle line. Exhibits 2.3. and 2.4 show that the candle line
consists of a rectangular section and two thin lines above or below this
section. We see why these are named candlestick charts; the individual
lines often look like candles with their wicks. The rectangular part of the
candlestick line is called the real body. lt represents the range between
the session's open and close. When the real body is black (e.g., filled in),
it shows that the close of the session was lower than the open. If the real
body is white (that is, empty), it means the close was higher than the
oPen.
The thin lines above and below the real body are the shadowsT. he
shadows represent the session's price eXtremes. The shadow above the
real body is referred to as the upper shadow and the shadow under the
real body is the lower shadow. Accordingly, the peak of the upper shadow
is the high of the session and the bottom of the lower shadow is the low
of the session.
Candle charts can be used throughout the trading spectrum, from
daily, to weekly, and intra-day charting. For a daily chart, one would use
the open, high, low, and close of the session. For a weekly chart, the
candle would be composed of Monday's open, then the high and low of
the week, and Friday's close. On an intra-day basis, it would be the open,
high, low, and close for the chosen time period (i.e., hourly).
Exhibit 2.3 shows a strong session in which the market opened near
the low and closed near its high. We know that the close is higher than
the open because of the white real body. Exhibit 2.4 illustrates a long
black candlestick. This is a bearish session in which the market opened
near its high and closed near its low.
The |apanese focus on the relationship between the open and close.
This makes sense; probably the two most important prices of the day are
the open and close. It is therefore surprising that American newspapers
have openings for futures prices, but not for stocks. A member of the
Nippon Technical Analysts Association told me that he found it unusual
that U.S. newspapers do not have opening stock prices; the Japanese
have the openings in their papers. He said that he did not know why
the Americans disregard the openings.
I would expect that just as almost all technical software vendors now
carry candle charts, so it may be that as candles become more popular
in the equity market, newspapers may, by popular request, carry stock
openings. Until then, in order to obtain the data needed to draw the
candles (the open, high, low, and close) you need to use a data vendor
service. These services furnish prices on disks or through modems. The
data supplied from a data vendor are then transferred into a technical
analysis software package that will draw the candles based on these
data.
A note of caution: Some data vendors who do not have the actual
opening price of a stock default to the prior session's close as today's
open. This, in my opinion, is not valid. You must have the true open to
draw an accurate candle line. Although an open on a stock will usually
not be much different from the prior close, there are some candle patterns
in which a higher or lower opening (compared to the prior close) gives
valuable information. A data vendor that includes actual opens on stocks
is Dial Data (Brooklyn, NY).
Subscribe to:
Posts (Atom)