One of the worst mistakes that losing traders make again and again, is looking for and buying into "Holy Grail" or "Magic Set-up" type systems. You've seen these, they are virtually all based on a some combination of technical indicators. Wait until this does this, and that does that, and when it's the first half of the month sell short, if it's the last half, go long. There are trading courses that revolve around the cycles of the moon, and your wife's middle name. There are courses that revolve around last night's winning pick 3 and pick 4 numbers. OK, I'm getting a bit facetious, but I think you know what I mean.
Losing traders are the ones who, no matter how long they've been in the market, still keep looking for a magic bullet. They may not actually be "new" traders at all. But if they are still losing, they are treating the market as more of a one armed bandit in a casino, than as a business.
So when looking for trading information, you have to keep this in mind. A trading set-up based on lunar cycles may actually work for a while...probably only by accident, but nevertheless it may work. So if it produces 10 winning trades in a row, is it a good system for making money? Well, it was for those ten trades. And if the ten trades spanned a period of 5 years, then, yes, it may be a decent system. In the end, the number of consecutive winning trades is not all that important. The real question is "How long is the span of time that the system has produced consistent winners?"
In the age of vast technology, a decent system creator can build, back test and tweak a system that can show positive results based on almost anything. The question is, how will it perform going forward? All forex trading has short and intermediate term trends, and they tend to work themselves out much faster than in stock or bonds or commodities. Creating a system around such trends makes it look absolutely viable. But looking 6 weeks to 6 months out, it may (and probably will) be a disaster.
I mentioned in last night's alert about current circumstances in the forex. Now when I say current, I am referring to the period from about August of 2008 to the present. This period has seen a lot of volatile action, and a great deal of it based upon fear in the markets. The volatility index (VIX) has spiked to incredible levels, displaying the fear and uncertainty in traders' hearts. We've seen a bum's rush to the USD, one of the fundamentally worst currencies in the world. Massive unemployment, record breaking debt and spending levels, falling revenue, exceedingly low interest rates which are failing to stimulate economic growth, are signs of a failing economy. A failing economy means a failing currency.
So why is the dollar shooting to new highs and making such a great display of strength? FEAR. Plain and simple. Traders and investors worldwide will run to the liquidity of the USD, when riskier currencies are getting dumped. They believe their cash will be safe in the dollar. That fear ended up creating inverse fundamental relationships. So if good fundamental news came out for the dollar, the dollar would then get sold. WHY? Traders should have been buying the dollar if the news was "dollar good". But they weren't.
The reason why is because of the familiar paradigm that the US "feeds" the world. If the US is doing well, then her citizens will be spending money. "On what?" you may ask. Everything! We buy the imports of the world. They make the widgets and we buy them. It was a wonderful arrangement. Until the US citizens ran out of money. Until they could no longer refinance their homes. Until their homes became "upside down", where they owed more on them than what they were worth.
So then, each piece of bad news created more fear, and more demand for the liquidity and safety of the dollar. And good news made traders think that the US might be recovering. If so, she would begin spending again. If she bought the trinkets and widgets of the world, they would all be happy again. So good news for the dollar meant the dollar would sell off as traders bought higher yielding currencies in anticipation of a recovery.
Everything turned on its' ear. Up meant down, and down meant up. So that trading systems developed in the last two years may actually perform well, but when fundamentals return to normal, they may be a complete bust. That's why all systems must be tested and proven over time. It is the only way to verify how sound they are.
And that means you must exercise caution and move slowly. After all, if you go risking your account and the system you're following is a bust, you won't have anything left at the end. And sticking with someone who has a proven track record of being in the business over the long haul will also be a benefit. Am I tooting my own horn? Well, yes, just a little. But after all, it is my blog...
Happy Trading!
Bill
www.thefxtradingmasters.com
Tuesday, May 25, 2010
Monday, May 24, 2010
Forex and Calculating Profit Targets
I like the old saying that, "You make your money when you enter a trade, but you get paid when you exit." Getting into a trade is simple but it isn't always easy. Let this help guide you. Just jumping into a forex position will not necessarily make you money. Just like trading anything else, you have to get it for a good price, and sell it for a better one. And that holds true whether you are long or short. You won't make any money if you get into a trade at a bad price.
But the other half of the equation is actually getting paid. We should have an idea of our price targets before we ever enter a trade. If we don't then we have no way to calculate our reward-to-risk ratio.
So how do we set them?
Let's take our last euro trade as an example. We were looking at the formation of a head and shoulders pattern last Friday, May 21, 2010. You may recall, it had not completed it's formation yet. From a technical level, you would not consider the formation complete (nor enter trade) until the shoulder line is broken. In this case the shoulder line was at 1.2465. When we entered the trade at 1.2535, the right shoulder was showing mild weakness. given the overall weakness in the euro, a forecast of more weakness ahead was not rocket science.
So we entered a bit early, banking on that continued weakness, and scored an extra 70 pips. Then, when the price action broke the neckline (which it took 7 hours to do), we were really off to the races.
On a bead and shoulders pattern, here is how you set your price target. Measure the distance from the neckline to the top of the head. That's it! If you have 200 pips from neckline to head, just subtract the 200 pips from the neckline figure, and there's your target.
Now, the formation doesn't guarantee a profit of any size, so you have to keep an eye on your trailing stops. We have not yet reached our h-and-s profit target, so we will continue to monitor the trade. However, if strong euro weakness persists, we could see this fall all the way to 1.2141, as it looks to match the yearly low. At that point we could be putting in a double bottom, a strong bullish sign at the end of a run, or if more weakness is pervasive, we would look to extend the fall with 2 Fibonacci extensions.
We've talked about them a little before, but we'll go more in depth on them tomorrow. For today, just tuck the head and shoulders formation and price targets into your arsenal, and we'll thank God for his generosity in this trade.
Until next time...Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
But the other half of the equation is actually getting paid. We should have an idea of our price targets before we ever enter a trade. If we don't then we have no way to calculate our reward-to-risk ratio.
So how do we set them?
Let's take our last euro trade as an example. We were looking at the formation of a head and shoulders pattern last Friday, May 21, 2010. You may recall, it had not completed it's formation yet. From a technical level, you would not consider the formation complete (nor enter trade) until the shoulder line is broken. In this case the shoulder line was at 1.2465. When we entered the trade at 1.2535, the right shoulder was showing mild weakness. given the overall weakness in the euro, a forecast of more weakness ahead was not rocket science.
So we entered a bit early, banking on that continued weakness, and scored an extra 70 pips. Then, when the price action broke the neckline (which it took 7 hours to do), we were really off to the races.
On a bead and shoulders pattern, here is how you set your price target. Measure the distance from the neckline to the top of the head. That's it! If you have 200 pips from neckline to head, just subtract the 200 pips from the neckline figure, and there's your target.
Now, the formation doesn't guarantee a profit of any size, so you have to keep an eye on your trailing stops. We have not yet reached our h-and-s profit target, so we will continue to monitor the trade. However, if strong euro weakness persists, we could see this fall all the way to 1.2141, as it looks to match the yearly low. At that point we could be putting in a double bottom, a strong bullish sign at the end of a run, or if more weakness is pervasive, we would look to extend the fall with 2 Fibonacci extensions.
We've talked about them a little before, but we'll go more in depth on them tomorrow. For today, just tuck the head and shoulders formation and price targets into your arsenal, and we'll thank God for his generosity in this trade.
Until next time...Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Thursday, May 20, 2010
Forex Trading or Stocks?
A lot of people ask me why I like forex trading. Why is it so much better than stocks or real estate or any other investment?
For me it boils down to a couple of items. The first is ease of use. I can trade from anywhere. I can trade anytime. Stick my mobile card in my laptop and I am open for business anywhere I want to be. I don't have to go house hunting, checking pipes and wires, shingles, or foundations. No negotiations with sellers or buyers, no paperwork or waiting for closings. Yes, forex trading is way easier than real estate.
There are no meetings, no selling, no interpersonal hassles with bosses or employees or co-workers. Now don't get me wrong, I'm not some kind of reclusive, people-hating hermit. But there are zero hassles that you have with other jobs.
So when it comes to trading, I like the quiet time. I enjoy the challenge. and I'm happy about the fact that it is readily available anytime...anywhere.
I also like the idea that it is so inexpensive. Again something you can't really say about getting into real estate. Fees, taxes, lawyers, titles, everybody has their hand in your pocket. Additionally, there are no commissions. What a huge advantage over stocks. Obviously, you ned a much smaller move to break even and start to profit, than when you only have to cover a spread, not a spread plus commissions.
Also, the good amount of movement is such a plus---as you can be profited and out of the market in just a short time is you're a daytrader. And the trends are much more organized and lengthy than in stocks for longer term trades. Thus technical indicators are far more reliable in these markets than in others.
Add it all up, and the forex provides a much more pleasurable investing experience with less drawdown hold time and expense. that's got to help any investor be happer ands live longer!
Happy Trading!
Bill
bill@thefxtradingmasters.com
For me it boils down to a couple of items. The first is ease of use. I can trade from anywhere. I can trade anytime. Stick my mobile card in my laptop and I am open for business anywhere I want to be. I don't have to go house hunting, checking pipes and wires, shingles, or foundations. No negotiations with sellers or buyers, no paperwork or waiting for closings. Yes, forex trading is way easier than real estate.
There are no meetings, no selling, no interpersonal hassles with bosses or employees or co-workers. Now don't get me wrong, I'm not some kind of reclusive, people-hating hermit. But there are zero hassles that you have with other jobs.
So when it comes to trading, I like the quiet time. I enjoy the challenge. and I'm happy about the fact that it is readily available anytime...anywhere.
I also like the idea that it is so inexpensive. Again something you can't really say about getting into real estate. Fees, taxes, lawyers, titles, everybody has their hand in your pocket. Additionally, there are no commissions. What a huge advantage over stocks. Obviously, you ned a much smaller move to break even and start to profit, than when you only have to cover a spread, not a spread plus commissions.
Also, the good amount of movement is such a plus---as you can be profited and out of the market in just a short time is you're a daytrader. And the trends are much more organized and lengthy than in stocks for longer term trades. Thus technical indicators are far more reliable in these markets than in others.
Add it all up, and the forex provides a much more pleasurable investing experience with less drawdown hold time and expense. that's got to help any investor be happer ands live longer!
Happy Trading!
Bill
bill@thefxtradingmasters.com
Wednesday, May 19, 2010
Forex Stops, Exhaustion and Big Figures
Sorry I had to miss yesterday's post, but works of charity are always important. At any rate, the repairs went well, and my friends are all sound and termite damage free once again. Unfortunately, I can't say as much for their neighbors...
In this post we are going to talk about setting stops (again), market exhaustion signs and big figures. Some of this may be a repeat, or just a re-statement of things you've read elswhere, but they are all pretty salient points when it comes to managing risk while letting your trade "breathe".
After all, that's the real trick to setting good stops right? You don't want to get knocked out of an extended move too early, but you don't want to give up too much profit, if your move is finally over. What is a trader to do? Ahhh...decisions, decisions...
Hopefully this post will help you along in that regard.
Let's begin with yesterday's break even Canada trade. We entered about midway through the Tokyo session which is typified by slow action and lower volatility. Oftentimes, currencies will just drift in a certain direction. As the Candollar was making a triple high at the same figure around 1.0440, and since that resistance had seen price failures on 2 previous occasions, it looked as though a break lower may be tipping the market's hand---that it had run out of steam once again.
So we entered around 1.0420 or so. We set our stop at 1.0465, which was well above the triple high resistance area. We could have set it closer, perhaps down around 1.0455, and saved ourselves 10 pips. So how did I chose our stop? In this case, I based it on our previous win in the Candollar earlier in the day. We had successfully scored 45 pips on a small trade, and I didn't want to risk more than that, turning our week negative before we really got started. Plus 45 pips gave us a lot of room for wiggle, to let it breathe. So that was really the basis for that stop. It was above significant market resistance, and it would not turn us negative for the week.
Of course, we were eventually stopped because of the breakdown in the commodity currencies "down under" (Australia and New Zealand). But I knew this was important resistance, and so let me here repeat an important principal, "Old resistance becomes new support". Once an old resistance is broken and prices move to the upside, that old resistance is like a magnet, trying to pull the price back. Almost always it does so successfully. And when the price retreats to that old level, it will frequently stop there and that becomes new support. But remember, it may not stop there "on a dime". Frequently, the price will exceed that support on a sharp break downward, but then rebound right back up to close at or just above the support. When the price does that, we count the support to have held. And if the next candle trades above the previous one, it is a good place to go long. But I'm getting ahead of myself.
After we broke through that triple top, I began looking for the market to retrace to that level. I wasn't disappointed. As the market moved higher, it looked to me as though the price was clear all the way to 1.0500, in other words, there was no serious resistance. I took a position just below 1.0500, because sometimes the market just turns right before it gets to a big figure, sometimes right after. But I only held a draw down for about 25 pips. Then the market began selling off. It seemed the market was getting tired in this push up, so I was happy to keep holding short.
How did I know that exhaustion was setting in? First, let me say, that no one ever really knows. We can't predict the future, but we can look to the past to repeat itself. In the seven 15 minute candles leading up to the break of 1.0500, 4 of them were either bearish candles or very weak, indicating less buying pressure When the last candle pushed up, it closed within 1 pip of its high. A close there or at the high is often a sign of exhaustion. Especially when the next candle cannot exceed the previous high, (which in this case it didn't), and when that secondary candle exceeds the low of the one that pushed high (which it did). So now, all I had to do was sit tight and wait for the weakness to filter through.
So remember, big figures often have a serious effect on prices, but don't try to trade them to the "T". Often, an upmove will blow past a big figure by 20 pips before it reverses down ward. The opposite is true of a downmove, it will exceed the big figure by 20 pips, then reverse upward.
I often visualize prices as a man in a speeding car who turns the wrong way up a one way street. Two blocks away he sees a tractor trailer barreling down on top of him. He slams on his brakes, but he can't stop on a dime...so he slides a few hundred feet. However, getting his car to stop is not the only goal. He has to get it in reverse also. So seeing a big figure ahead of the price action, is like that. The market may actually put the breaks on at the figure, but it still "slides" a bit past it. Then it hurries to get into reverse. Sometimes even that takes a little time.
Hope that helps!
Drop me a line with any comments or questions!
bill@thefxtradingmasters.com
Happy Trading!
Bill
In this post we are going to talk about setting stops (again), market exhaustion signs and big figures. Some of this may be a repeat, or just a re-statement of things you've read elswhere, but they are all pretty salient points when it comes to managing risk while letting your trade "breathe".
After all, that's the real trick to setting good stops right? You don't want to get knocked out of an extended move too early, but you don't want to give up too much profit, if your move is finally over. What is a trader to do? Ahhh...decisions, decisions...
Hopefully this post will help you along in that regard.
Let's begin with yesterday's break even Canada trade. We entered about midway through the Tokyo session which is typified by slow action and lower volatility. Oftentimes, currencies will just drift in a certain direction. As the Candollar was making a triple high at the same figure around 1.0440, and since that resistance had seen price failures on 2 previous occasions, it looked as though a break lower may be tipping the market's hand---that it had run out of steam once again.
So we entered around 1.0420 or so. We set our stop at 1.0465, which was well above the triple high resistance area. We could have set it closer, perhaps down around 1.0455, and saved ourselves 10 pips. So how did I chose our stop? In this case, I based it on our previous win in the Candollar earlier in the day. We had successfully scored 45 pips on a small trade, and I didn't want to risk more than that, turning our week negative before we really got started. Plus 45 pips gave us a lot of room for wiggle, to let it breathe. So that was really the basis for that stop. It was above significant market resistance, and it would not turn us negative for the week.
Of course, we were eventually stopped because of the breakdown in the commodity currencies "down under" (Australia and New Zealand). But I knew this was important resistance, and so let me here repeat an important principal, "Old resistance becomes new support". Once an old resistance is broken and prices move to the upside, that old resistance is like a magnet, trying to pull the price back. Almost always it does so successfully. And when the price retreats to that old level, it will frequently stop there and that becomes new support. But remember, it may not stop there "on a dime". Frequently, the price will exceed that support on a sharp break downward, but then rebound right back up to close at or just above the support. When the price does that, we count the support to have held. And if the next candle trades above the previous one, it is a good place to go long. But I'm getting ahead of myself.
After we broke through that triple top, I began looking for the market to retrace to that level. I wasn't disappointed. As the market moved higher, it looked to me as though the price was clear all the way to 1.0500, in other words, there was no serious resistance. I took a position just below 1.0500, because sometimes the market just turns right before it gets to a big figure, sometimes right after. But I only held a draw down for about 25 pips. Then the market began selling off. It seemed the market was getting tired in this push up, so I was happy to keep holding short.
How did I know that exhaustion was setting in? First, let me say, that no one ever really knows. We can't predict the future, but we can look to the past to repeat itself. In the seven 15 minute candles leading up to the break of 1.0500, 4 of them were either bearish candles or very weak, indicating less buying pressure When the last candle pushed up, it closed within 1 pip of its high. A close there or at the high is often a sign of exhaustion. Especially when the next candle cannot exceed the previous high, (which in this case it didn't), and when that secondary candle exceeds the low of the one that pushed high (which it did). So now, all I had to do was sit tight and wait for the weakness to filter through.
So remember, big figures often have a serious effect on prices, but don't try to trade them to the "T". Often, an upmove will blow past a big figure by 20 pips before it reverses down ward. The opposite is true of a downmove, it will exceed the big figure by 20 pips, then reverse upward.
I often visualize prices as a man in a speeding car who turns the wrong way up a one way street. Two blocks away he sees a tractor trailer barreling down on top of him. He slams on his brakes, but he can't stop on a dime...so he slides a few hundred feet. However, getting his car to stop is not the only goal. He has to get it in reverse also. So seeing a big figure ahead of the price action, is like that. The market may actually put the breaks on at the figure, but it still "slides" a bit past it. Then it hurries to get into reverse. Sometimes even that takes a little time.
Hope that helps!
Drop me a line with any comments or questions!
bill@thefxtradingmasters.com
Happy Trading!
Bill
Monday, May 17, 2010
Trading Forex and Market Psychology
Today's post is a rather timely one in terms of what is currently happening in the market. So if you are reading this after May 17, 2010, you'll need to adjust your charts to be sure that you're seeing what we are seeing today.
The euro has spent months being trashed by the dollar. The problems in the euro union are finally coming to light. Just today, a governor from the Royal Bank of Scotland have stated that the euro at 1.15 is reasonable. The euro is presently trading at 1.24oo. So he looks for another drop of 9 cents or a $9000.00 profit on a standard trade. I would not be surprised to see that price before this is over, and frankly, I will look for it to go even lower.
The euro's recent strength, trading as high as 1.51, was greatly over played. Here's why. The euro as an economy is now the "largest" in the world, as measured by raw Gross Domestic Product. In other words they produce more than the United States. Everyone expected this growth to continue, and looking forward at the US with its addiction to spending and throwing money at any problem, it's ballooning debt, and the foolishness of recent administrations, the euro seemed the likely counter trade to the dollar.
Thus the dollar was dumped and the euro was purchased, discounting the European problems. But what you sow you eventually reap. And the eurozone had been planting borrowed money for some time. Their harvest was a crop of debt laden interest which will eventually produce defacto defaults. But while the euro was on it's power run, all these troubles were discounted. But the biggest part of the problem was the euro getting stronger.
While this is a benefit to euro consumers purchasing imported goods, it is an impossible situation for governments who borrow money at one rate and expect to pay it off with cheaper (inflated) euros. As long as the euro was strengthening, the individual governments' debt crises was worsening. The only way to resolve it was to weaken the euro. Given the counter-party relationship that the euro has with the dollar, that could only mean that the dollar would have to go up. Now we have a new problem. The only hope that the US has of being able to service its debt is with inflated dollars. Inflated dollars means cheaper currency. So it has turned into a battle of who will be the weakest.
The "advantage" for the euro, is that it is not a reserve currency. Nobody really cares how "low" it goes. The US dollar, on the other hand, is the reserve currency of the world. Namely, it is the currency in which multiple commodity contracts are completed. So as the dollar gets cheaper, sovereign governments all over the world will buy it up in order to secure a better pricing mechanisms for their purchases. this buying will strengthen the dollar as demand for it increases.
So that what we could be seeing here is the slow cold shoulder being given to the euro. It is dispensable as a currency, whereas the US dollar, in spite of it's troubles is not.
Market psychology goes a long way to mediating these imbalances. As the dollar gets stronger, eventually buyers stop coming to the market to purchase them. Of course, where there are no bidders for an item, the item's value begins to fall. We have been on a six month run on dollar strength and euro weakness. At some point, traders will begin to assess the imbalance and turn the trade the other way. Also, it is necessary that the US government see a weakening dollar in order to have any hope at all to meet their obligations.
The euro has spent months being trashed by the dollar. The problems in the euro union are finally coming to light. Just today, a governor from the Royal Bank of Scotland have stated that the euro at 1.15 is reasonable. The euro is presently trading at 1.24oo. So he looks for another drop of 9 cents or a $9000.00 profit on a standard trade. I would not be surprised to see that price before this is over, and frankly, I will look for it to go even lower.
The euro's recent strength, trading as high as 1.51, was greatly over played. Here's why. The euro as an economy is now the "largest" in the world, as measured by raw Gross Domestic Product. In other words they produce more than the United States. Everyone expected this growth to continue, and looking forward at the US with its addiction to spending and throwing money at any problem, it's ballooning debt, and the foolishness of recent administrations, the euro seemed the likely counter trade to the dollar.
Thus the dollar was dumped and the euro was purchased, discounting the European problems. But what you sow you eventually reap. And the eurozone had been planting borrowed money for some time. Their harvest was a crop of debt laden interest which will eventually produce defacto defaults. But while the euro was on it's power run, all these troubles were discounted. But the biggest part of the problem was the euro getting stronger.
While this is a benefit to euro consumers purchasing imported goods, it is an impossible situation for governments who borrow money at one rate and expect to pay it off with cheaper (inflated) euros. As long as the euro was strengthening, the individual governments' debt crises was worsening. The only way to resolve it was to weaken the euro. Given the counter-party relationship that the euro has with the dollar, that could only mean that the dollar would have to go up. Now we have a new problem. The only hope that the US has of being able to service its debt is with inflated dollars. Inflated dollars means cheaper currency. So it has turned into a battle of who will be the weakest.
The "advantage" for the euro, is that it is not a reserve currency. Nobody really cares how "low" it goes. The US dollar, on the other hand, is the reserve currency of the world. Namely, it is the currency in which multiple commodity contracts are completed. So as the dollar gets cheaper, sovereign governments all over the world will buy it up in order to secure a better pricing mechanisms for their purchases. this buying will strengthen the dollar as demand for it increases.
So that what we could be seeing here is the slow cold shoulder being given to the euro. It is dispensable as a currency, whereas the US dollar, in spite of it's troubles is not.
Market psychology goes a long way to mediating these imbalances. As the dollar gets stronger, eventually buyers stop coming to the market to purchase them. Of course, where there are no bidders for an item, the item's value begins to fall. We have been on a six month run on dollar strength and euro weakness. At some point, traders will begin to assess the imbalance and turn the trade the other way. Also, it is necessary that the US government see a weakening dollar in order to have any hope at all to meet their obligations.
Friday, May 14, 2010
Forex Trading and US Dollar Strength
Well over a year ago, before the Euro began it's surge to 1.50, I was predicting a tremendous cataclysm in the single currency. In a report published through Agora Financial, I outlined the problems inherent in the euro structure, and explained why it took so long for them to come to light. But that that there were cracks in the dam, and the water wasn't going to hold much longer.
Since the first of the year we have been selling the euro at every opportunity, and making a boatload doing it. But the question may be, why is the euro selling off over all this news about Greece's debt, but the US is not being sold off because of its debt. Frankly, we are in worse shape here, than they are over there.
check out www.usdebtclock.org/index.html (Better keep a barf bag handy!)
For instance, Greece only comprises about 3% of the GDP for the Eurozone. But the state of California, which is just as bankrupt as Greece, represents 8% of our total GDP. So who has the bigger problem? Also we have several other states that are equally in trouble. They, like Greece, Spain, Portugal, Ireland and Italy, represent a drain on the US, not an asset. But for some reason, nobody is really talking about that.
But a big part of why the dollar is appreciating while the euro is getting trashed, is simply the mechanics of the trade. The dollar index is a weighted measurement of a number of currencies versus the dollar. But, guess which one carries the most amount of weight...the EURO! Surprise! In the whole basket of currencies, the euro comprises about 40%!
That's why, up until now, a lot of currency folks would refer to the euro as the anti-dollar. If the dollar was going up, the euro was going down and vice versa. They would always move in tandem. But not so much right now. The dollar is advancing against the euro because of the overweight nature of the currency basket, but it is not really advancing against other currencies. So we're seeing a real disconnect here. Who knows where it will end. The euro was the counter part to the dollar, and the place where people stored their money for safety. But if it is no longer a safe place, what currency will stand up to the dollar? The Yuan? Quite possibly, but not for some time to come. China has a lot of internal housekeeping to tend to first.
But for now, we will continue to look at the euro for a trading pair. Want to ride it all the way down to parity? It'll make you a lot of money. I'll show you how!
Contact me at bill@thefxtradingmasters.com
Happy Trading!
Bill
Since the first of the year we have been selling the euro at every opportunity, and making a boatload doing it. But the question may be, why is the euro selling off over all this news about Greece's debt, but the US is not being sold off because of its debt. Frankly, we are in worse shape here, than they are over there.
check out www.usdebtclock.org/index.html (Better keep a barf bag handy!)
For instance, Greece only comprises about 3% of the GDP for the Eurozone. But the state of California, which is just as bankrupt as Greece, represents 8% of our total GDP. So who has the bigger problem? Also we have several other states that are equally in trouble. They, like Greece, Spain, Portugal, Ireland and Italy, represent a drain on the US, not an asset. But for some reason, nobody is really talking about that.
But a big part of why the dollar is appreciating while the euro is getting trashed, is simply the mechanics of the trade. The dollar index is a weighted measurement of a number of currencies versus the dollar. But, guess which one carries the most amount of weight...the EURO! Surprise! In the whole basket of currencies, the euro comprises about 40%!
That's why, up until now, a lot of currency folks would refer to the euro as the anti-dollar. If the dollar was going up, the euro was going down and vice versa. They would always move in tandem. But not so much right now. The dollar is advancing against the euro because of the overweight nature of the currency basket, but it is not really advancing against other currencies. So we're seeing a real disconnect here. Who knows where it will end. The euro was the counter part to the dollar, and the place where people stored their money for safety. But if it is no longer a safe place, what currency will stand up to the dollar? The Yuan? Quite possibly, but not for some time to come. China has a lot of internal housekeeping to tend to first.
But for now, we will continue to look at the euro for a trading pair. Want to ride it all the way down to parity? It'll make you a lot of money. I'll show you how!
Contact me at bill@thefxtradingmasters.com
Happy Trading!
Bill
Thursday, May 13, 2010
Forex Trading On Slow Days
There are some days (and even some weeks) where it is painful to be a forex trader. In in a rapidly moving market like ours, sometimes it is more like watching paint dry, or grass grow, or the sun move. You get the picture. So what do you do when you are counting on your forex trading for your "daily bread"?
Well, first of all, you shouldn't! Trading is risky, and sometimes it's a losing proposition. If you are dependant on it to pay your bills, all I can say is, get out now! There's an old adage that says, "Scared money will always lose."
If the money you put in the market is for your groceries or your mortgage or you car payment, then I guarantee that as soon as the market turns against you, you will start feeling sick. You will get this knot in your stomach. Worst of all, you may get "paralyzed". This is what happens when losing trades really accelerate. the trader just can't believe his eyes and he watches as the market moves rapidly against him, wiping out far more than he/she should have EVER risked on a trade.
So you might be wondering, how do I ever get ahead in this? First off, allow yourself some time. You need time to get used to the market. You need time to find someone to teach you whom you can trust. You need experience, and only time can provide that.
If you will commit to taking 1000.00, and doubling it each year which means you have to make about 8% monthly, in 10 years you will have over $1,000,000.00 dollars. You're going to live the next 10 years anyway (hopefully) why not make them profitable? And, if you stay around this market a long enough time, you'll see how it is possible to make more.
But isn't a million in cash good enough reason to take things slowly? Plus once you reach that level, $8,000 per month is a pretty nice little income. But if you're not quite ready to retire (or if 8K monthly is NOT enough), just put it off a year. Then you'll be on a 2 Million dollar account, averaging 16K monthly. Add that to your pension and the $800 monthly form Social Security (if you liver here in the US), and you'll be set.
Secondly, taking your time means also, using low leverage on your trades. Don't gear it it up to accelerate your earnings unless you're ready to do so. It will only result in bigger and faster losses, and you'll find yourself trying to recover from quite a hole that you will blow in your equity.
I'll say it again and again, leverage is a two edged sword. And it is only good when you are holding firmly onto the handle. So let the slow days come. Enjoy the relaxed pace, or maybe not even trade at all! When you appreciate them as much as the faster days, and you'll find a much better balance in your trading.
Until next time...,
Bill
Well, first of all, you shouldn't! Trading is risky, and sometimes it's a losing proposition. If you are dependant on it to pay your bills, all I can say is, get out now! There's an old adage that says, "Scared money will always lose."
If the money you put in the market is for your groceries or your mortgage or you car payment, then I guarantee that as soon as the market turns against you, you will start feeling sick. You will get this knot in your stomach. Worst of all, you may get "paralyzed". This is what happens when losing trades really accelerate. the trader just can't believe his eyes and he watches as the market moves rapidly against him, wiping out far more than he/she should have EVER risked on a trade.
So you might be wondering, how do I ever get ahead in this? First off, allow yourself some time. You need time to get used to the market. You need time to find someone to teach you whom you can trust. You need experience, and only time can provide that.
If you will commit to taking 1000.00, and doubling it each year which means you have to make about 8% monthly, in 10 years you will have over $1,000,000.00 dollars. You're going to live the next 10 years anyway (hopefully) why not make them profitable? And, if you stay around this market a long enough time, you'll see how it is possible to make more.
But isn't a million in cash good enough reason to take things slowly? Plus once you reach that level, $8,000 per month is a pretty nice little income. But if you're not quite ready to retire (or if 8K monthly is NOT enough), just put it off a year. Then you'll be on a 2 Million dollar account, averaging 16K monthly. Add that to your pension and the $800 monthly form Social Security (if you liver here in the US), and you'll be set.
Secondly, taking your time means also, using low leverage on your trades. Don't gear it it up to accelerate your earnings unless you're ready to do so. It will only result in bigger and faster losses, and you'll find yourself trying to recover from quite a hole that you will blow in your equity.
I'll say it again and again, leverage is a two edged sword. And it is only good when you are holding firmly onto the handle. So let the slow days come. Enjoy the relaxed pace, or maybe not even trade at all! When you appreciate them as much as the faster days, and you'll find a much better balance in your trading.
Until next time...,
Bill
Tuesday, May 11, 2010
Forex Trading And Setting Stops Losses, Part II
We left off last time talking about setting short stops on smaller time frames.
So just to recap, a smaller time frame of less than an hour should have a price target of 20-30 pips. That means that my stop loss should only be half that, or 10-15 pips. Once you calculate in the spread, say 3 pips on the euro, or 5 pips on the sterling, you are only allowing yourself a movement against you of 10-12 pips. Frankly, that's pretty slim. You will find yourself getting knocked out a lot if you are not careful. If this is the way you really want to trade, the best advice I can give you is you MUST enter your positions near the swing highs and swing lows. That means you must enter based on fixed predetermined points (usually predicted either by pivot calculations or by Fibonacci grids). If you are not familiar with those, it will be very difficult. Many newbie traders I have known, try using candlestick patterns with these short term trades. That was what they were taught by some heartless FX system seller. However, many candlestick patterns need at least 2 complete candles to be verified as a pattern. So you have your 1st candle which shows reversal, then the next candle makes it complete. By that time you will have often moved 10-15 pips. You must move your stop beyond that swing point, then add in your spread, and suddenly, your trade no longer looks all that attractive. In that case, you have to be a good enough trader, that your skills can lead you to a 65-70% win rate. Anything less and you will consistently lose money.
That leads us to our next option...trading longer term charts with wider stops. It has remained part of my mission to preach this kind of trading to traders. Trading this way will do two things for you (if you're smart). First, it won't set you up for "Failure in 15". That's what I call getting taken out in one 15 minute bar on a small trade. You've entered what looks tempting, but in less than 15 minutes, you're a loser. So many newbie traders will do that 2-4 times a day before throwing in the towel. Then they'll come and do it again the next day. It's suicide. Second, it will force you to "gear down" your leverage. Many newbies come to the market with $5,000 or less. If you have a stop loss that is 100-150 pips, you certainly will not be trading a full size lot (if you know what's good for you). A bad trade can wipe out 30% of your account. And the corollary is this; now you have to make back more than 40% just to break even. Another bad trade may put you down to $2,000. Now you need 60% to break even.
So enlarge your stops. Gear down to where when you look at the stop and calculate its distance from your entry, that you are not risking more than 5% of your total account. Thus, if you are on a $5000 account, 5% is going to be $250. If your stop is 150 pips away, you can set your pip size to $1.50. That will give you the staying power to hold your trade, and not have a gut wrenching loss if it should move all the way against you.
Also, stops should be set, not only according to what you're willing to lose, but in tune with the markets rhythm. If a 150 pip stop is still below the last swing high, then you stop is too close. Stops should be outside of the recent swing highs and lows. It is at that point that traders will be looking to enter positions going in the opposite direction. It is at that point when you would know that your choice of direction is incorrect. A stop loss of 200 pips is not too much if you are on a daily chart. Especially, if you have a profit target that is 300-400 pips or more.
Another means of selecting a stop is by using the Average True Range indicator. The ATR calculates the range of the average bar on your chart for a select amount of periods (the preset on MT4 is 14, but you can set it to any amount of periods that you like). Let's say you are looking to short a market, and it has had a nice run up. Then maybe shows an exhaustion type candle (short body, long upper wick), you can enter a trade when the next candle breaks below the low of the exhaustion candle, use the ATR to calculate an average range, add that to the top of the exhaustion candle, and you have another viable stop loss price. Generally, this calculation results in a shorter stop loss distance, thus a smaller loss for you if the market does not go in your intended direction.
I think that will do it for today.
Happy Trading!
Bill
Drop me a line at bill@thefxtradingmasters.com if you have any questions!
So just to recap, a smaller time frame of less than an hour should have a price target of 20-30 pips. That means that my stop loss should only be half that, or 10-15 pips. Once you calculate in the spread, say 3 pips on the euro, or 5 pips on the sterling, you are only allowing yourself a movement against you of 10-12 pips. Frankly, that's pretty slim. You will find yourself getting knocked out a lot if you are not careful. If this is the way you really want to trade, the best advice I can give you is you MUST enter your positions near the swing highs and swing lows. That means you must enter based on fixed predetermined points (usually predicted either by pivot calculations or by Fibonacci grids). If you are not familiar with those, it will be very difficult. Many newbie traders I have known, try using candlestick patterns with these short term trades. That was what they were taught by some heartless FX system seller. However, many candlestick patterns need at least 2 complete candles to be verified as a pattern. So you have your 1st candle which shows reversal, then the next candle makes it complete. By that time you will have often moved 10-15 pips. You must move your stop beyond that swing point, then add in your spread, and suddenly, your trade no longer looks all that attractive. In that case, you have to be a good enough trader, that your skills can lead you to a 65-70% win rate. Anything less and you will consistently lose money.
That leads us to our next option...trading longer term charts with wider stops. It has remained part of my mission to preach this kind of trading to traders. Trading this way will do two things for you (if you're smart). First, it won't set you up for "Failure in 15". That's what I call getting taken out in one 15 minute bar on a small trade. You've entered what looks tempting, but in less than 15 minutes, you're a loser. So many newbie traders will do that 2-4 times a day before throwing in the towel. Then they'll come and do it again the next day. It's suicide. Second, it will force you to "gear down" your leverage. Many newbies come to the market with $5,000 or less. If you have a stop loss that is 100-150 pips, you certainly will not be trading a full size lot (if you know what's good for you). A bad trade can wipe out 30% of your account. And the corollary is this; now you have to make back more than 40% just to break even. Another bad trade may put you down to $2,000. Now you need 60% to break even.
So enlarge your stops. Gear down to where when you look at the stop and calculate its distance from your entry, that you are not risking more than 5% of your total account. Thus, if you are on a $5000 account, 5% is going to be $250. If your stop is 150 pips away, you can set your pip size to $1.50. That will give you the staying power to hold your trade, and not have a gut wrenching loss if it should move all the way against you.
Also, stops should be set, not only according to what you're willing to lose, but in tune with the markets rhythm. If a 150 pip stop is still below the last swing high, then you stop is too close. Stops should be outside of the recent swing highs and lows. It is at that point that traders will be looking to enter positions going in the opposite direction. It is at that point when you would know that your choice of direction is incorrect. A stop loss of 200 pips is not too much if you are on a daily chart. Especially, if you have a profit target that is 300-400 pips or more.
Another means of selecting a stop is by using the Average True Range indicator. The ATR calculates the range of the average bar on your chart for a select amount of periods (the preset on MT4 is 14, but you can set it to any amount of periods that you like). Let's say you are looking to short a market, and it has had a nice run up. Then maybe shows an exhaustion type candle (short body, long upper wick), you can enter a trade when the next candle breaks below the low of the exhaustion candle, use the ATR to calculate an average range, add that to the top of the exhaustion candle, and you have another viable stop loss price. Generally, this calculation results in a shorter stop loss distance, thus a smaller loss for you if the market does not go in your intended direction.
I think that will do it for today.
Happy Trading!
Bill
Drop me a line at bill@thefxtradingmasters.com if you have any questions!
Monday, May 10, 2010
Forex Trading And Setting Stop Losses
The use of stop losses is an incredibly volatile topic among traders. Some say use them. Some say don't. Some say the brokers hunt stops. Some say that is foolishness. Some say keep them close. Some say put them several levels deep. What do I say? (After all, this is my blog!)
There are two sides to every coin. So I say let's examine the pros and cons of each side and see what we can figure out.
The truth is...both are right. It simply depends on your own trading style.
I have traded without stops before. And before I knew how to do it, it cost me a bundle. Trading without stops means you have to scale your position down to the nearly lowest possible point. For instance, if you have a $5000 account, you should probably stick with 10 cent pips. Then even a 1000 pip move against you is still only taking $100 of your total account. Using smaller pip increments can allow you to build tremendous positions as the price moves against you So if you added a position every time the price moved 100 pips against you, you would end up with 10 positions, and each pip would now be worth $1.00. Your draw down would be $550 on a $5000 account. That is more than many traders would recommend, but you're not trading like most traders. And you can be assured not many currencies travel 1000 pips without a retracement. At this point you only need a retracement of 550 pips to break even. If the currency moved even to its first fibonnacci retracement area, it would fall about 490 pips, and the likely hood that it would stop there would be pretty low. But what you're looking for in this instance is not just a retracement, but a change in direction. Moving to its previous low would net you $450, and any move beyond that would be even more.
Also please note, those kinds of movements usually take months to play out. So even though you're looking at a nice return of 10%, it may take 8 to 12 weeks for such a move to come to completion.
Thus, the key to NOT using stops is gearing down your leverage to the very lowest of levels.
If you are not willing to trade like that, then you must use stops. I think I said once that a man would be a fool not to do so. Other wise, if your leverage is geared up and you have no stop, you will blow out your account in a relatively short matter of time.
So, moving ahead on the assumption that we are using stops, what is the best way to go? Close to my entry or farther away?
Again, it depends on your trading style. Some traders are short termers, and others are longer. When I talk about a short termer, I'm talking about someone who trades on the 15 minute charts or less. If that is your trading arena, you should keep your losses shorter, and closer to your entry. The reason why is this. Short term signals are notoriously less reliable. So you don't want to base a big loss on a faulty signal. Also, short termers should look for smaller profits. It is true that every 200 pip move starts with a signal on the five minute chart at the very beginning. But it is a serious mistake to look for that on every trade. If you're trading 0n 5 or 15 minute charts, be happy with with 10-30 pips. On that short term of a trade, I will move my stop to break even after I profit just 10 pips. But that also means that I have to be shorting near a good swing high or buying near a good swing low. If I am not close, my stop will be too wide to have a good reward risk/ratio. In other words if I am looking for just a 20 or 30 pip profit, I can't be having a 20 or 30 pip stop loss. 5 to 10 would be maximum plus I have to add in the spread. My stop should be less than than my profit target at all times.
So let's wrap this up here, and continue tomorrow.
Happy Trading!
Bill
There are two sides to every coin. So I say let's examine the pros and cons of each side and see what we can figure out.
The truth is...both are right. It simply depends on your own trading style.
I have traded without stops before. And before I knew how to do it, it cost me a bundle. Trading without stops means you have to scale your position down to the nearly lowest possible point. For instance, if you have a $5000 account, you should probably stick with 10 cent pips. Then even a 1000 pip move against you is still only taking $100 of your total account. Using smaller pip increments can allow you to build tremendous positions as the price moves against you So if you added a position every time the price moved 100 pips against you, you would end up with 10 positions, and each pip would now be worth $1.00. Your draw down would be $550 on a $5000 account. That is more than many traders would recommend, but you're not trading like most traders. And you can be assured not many currencies travel 1000 pips without a retracement. At this point you only need a retracement of 550 pips to break even. If the currency moved even to its first fibonnacci retracement area, it would fall about 490 pips, and the likely hood that it would stop there would be pretty low. But what you're looking for in this instance is not just a retracement, but a change in direction. Moving to its previous low would net you $450, and any move beyond that would be even more.
Also please note, those kinds of movements usually take months to play out. So even though you're looking at a nice return of 10%, it may take 8 to 12 weeks for such a move to come to completion.
Thus, the key to NOT using stops is gearing down your leverage to the very lowest of levels.
If you are not willing to trade like that, then you must use stops. I think I said once that a man would be a fool not to do so. Other wise, if your leverage is geared up and you have no stop, you will blow out your account in a relatively short matter of time.
So, moving ahead on the assumption that we are using stops, what is the best way to go? Close to my entry or farther away?
Again, it depends on your trading style. Some traders are short termers, and others are longer. When I talk about a short termer, I'm talking about someone who trades on the 15 minute charts or less. If that is your trading arena, you should keep your losses shorter, and closer to your entry. The reason why is this. Short term signals are notoriously less reliable. So you don't want to base a big loss on a faulty signal. Also, short termers should look for smaller profits. It is true that every 200 pip move starts with a signal on the five minute chart at the very beginning. But it is a serious mistake to look for that on every trade. If you're trading 0n 5 or 15 minute charts, be happy with with 10-30 pips. On that short term of a trade, I will move my stop to break even after I profit just 10 pips. But that also means that I have to be shorting near a good swing high or buying near a good swing low. If I am not close, my stop will be too wide to have a good reward risk/ratio. In other words if I am looking for just a 20 or 30 pip profit, I can't be having a 20 or 30 pip stop loss. 5 to 10 would be maximum plus I have to add in the spread. My stop should be less than than my profit target at all times.
So let's wrap this up here, and continue tomorrow.
Happy Trading!
Bill
Friday, May 7, 2010
Forex and the preservation of Capital
The key to a successful trading career in the Forex, is being around long enough to make it happen. Eventually, all good traders learn this secret. If they don't, they are not good. And if they are not good, they won't be trading for long. At some point, if a trader's forex business does not become profitable on its own, that is to say, if his account is not growing by means of trading, he will stop. he will no longer feed money he has earned somewhere else into a proposition that just keeps sucking it all up.
Therefore, the number one rule in Forex trading is "Preserve Your Capital". If you don't keep your powder dry, you won't have anything with which to fight at all. There are a number of means of doing this, and you should experiment with them to see what best fits your trading psychology.
1. Don't take high risk trades. that seems like common sense, but it is very uncommon. what defines a risky trade (before it becomes a loss)? The reward to risk ratio. If the reward is much smaller than the risk, you will be a loser. You cannot constantly put on trades like that without the majority becoming losers. Make sure that at all times, you reward to risk is 2-to-1. Then, even at only winning 50% of your trades, you will be profitable.
2. Trade Less. I was never profitable until I practiced this rule. There may be some really successful scalpers in this world, but I don't know any of them that are retail traders. I will look forward to meeting one of them one day. But for now, trade off of longer term charts. The 4 hour and daily are fine. You will catch bigger moves, the stops will be so many pips that it will force you to trade with very low leverage (or else risk your entire account at one time), and the technical signals on these charts are far more successful.
3. On a daily basis, never let your biggest loser match your biggest winner. That's another way of saying "Cut your losses short, and let your winners run." I also mean don't just arbitrarily cut a trade loose, just because it is approaching a loss that is the size of your biggest win. Before you ever entered that losing trade, you should be able to assess the possible damage if your stop loss is hit. if it is equal to your last big trade, just let it go by. Exercise some discipline and just walk away.
4. When your trade is in the profit, move your stop to break even. We'll talk more about this next week, and I'll introduce you to a new indicator which I use to help set and manage my stops.
Happy Trading!
Bill
Therefore, the number one rule in Forex trading is "Preserve Your Capital". If you don't keep your powder dry, you won't have anything with which to fight at all. There are a number of means of doing this, and you should experiment with them to see what best fits your trading psychology.
1. Don't take high risk trades. that seems like common sense, but it is very uncommon. what defines a risky trade (before it becomes a loss)? The reward to risk ratio. If the reward is much smaller than the risk, you will be a loser. You cannot constantly put on trades like that without the majority becoming losers. Make sure that at all times, you reward to risk is 2-to-1. Then, even at only winning 50% of your trades, you will be profitable.
2. Trade Less. I was never profitable until I practiced this rule. There may be some really successful scalpers in this world, but I don't know any of them that are retail traders. I will look forward to meeting one of them one day. But for now, trade off of longer term charts. The 4 hour and daily are fine. You will catch bigger moves, the stops will be so many pips that it will force you to trade with very low leverage (or else risk your entire account at one time), and the technical signals on these charts are far more successful.
3. On a daily basis, never let your biggest loser match your biggest winner. That's another way of saying "Cut your losses short, and let your winners run." I also mean don't just arbitrarily cut a trade loose, just because it is approaching a loss that is the size of your biggest win. Before you ever entered that losing trade, you should be able to assess the possible damage if your stop loss is hit. if it is equal to your last big trade, just let it go by. Exercise some discipline and just walk away.
4. When your trade is in the profit, move your stop to break even. We'll talk more about this next week, and I'll introduce you to a new indicator which I use to help set and manage my stops.
Happy Trading!
Bill
Thursday, May 6, 2010
Trading The Forex News, Part 3
As we have previously stressed, it is a serious newbie mistake to attempt to play the news without some really good experience and rationale behind what you are doing. Also you need to have a fixed money management system in place to prevent fear and greed from driving the trade, rather than a strict calculated criteria.
Anyone who has been in this business very long can tell you stories of monster trades that fell into the "emotional" category. I have entered trades that I watched make a boatload of money from the news, only to "hold on too long" and watch my profit dissolve in a reversal, or worse yet, become a loser that eats away at my capital.
I have also had trades where I just watched it lose. Mesmerized by how fast the market was moving, and "knowing" it would turn around just as fast and make me profitable. But then it never did. I ended up stopping the bleeding only to sit there stunned and wonder what I had done to my account.
The trader who does such foolish things is destined for failure, unless he has an endless supply of money, or at least some very deep pockets.
Know in advance what you are prepared to lose, on EVERY trade, then STICK TO IT. No matter how it feels. if you play the Forex with your emotions, You Will Lose. Period.
And this is why trading the news is so dangerous for newbies. It has an emotional appeal. The allure and opportunity to get rich quick. But it usually ends up the other way around.
OK. So I mentioned a couple of posts ago that I use the news differently from most. Here's how. Rather than entering a trade around the news, I will be in a few days, or at least several hours, in advance. By the time the news comes, I am in the profit. Then I simply sit aside dispassionately, and wait for the data. If it is in my favor, I will let the trade run and follow it with a trailing stop. Often news that really moves the market, will move it for hours afterward. So I have to be sure to give it enough room to allow for the immediate volatility, than just watch the profits build up.
If the news moves against me, I 'll just go ahead and exit the trade, (generally before it hits my extra wide stop), because I know that the price action will likely continue against me for the rest of the day...and perhaps even into the next few sessions.
Preservation of Capital...that is the name of the game, and the real Holy Grail of Forex. More on that tomorrow.
Drop me a line and let me know if these "news" lessons were helpful.
bill@thefxtradingmasters.com
Be sure to check out our offer on the website:
www.thefxtradingmasters.com
Until next time...Happy Trading!
Bill
Anyone who has been in this business very long can tell you stories of monster trades that fell into the "emotional" category. I have entered trades that I watched make a boatload of money from the news, only to "hold on too long" and watch my profit dissolve in a reversal, or worse yet, become a loser that eats away at my capital.
I have also had trades where I just watched it lose. Mesmerized by how fast the market was moving, and "knowing" it would turn around just as fast and make me profitable. But then it never did. I ended up stopping the bleeding only to sit there stunned and wonder what I had done to my account.
The trader who does such foolish things is destined for failure, unless he has an endless supply of money, or at least some very deep pockets.
Know in advance what you are prepared to lose, on EVERY trade, then STICK TO IT. No matter how it feels. if you play the Forex with your emotions, You Will Lose. Period.
And this is why trading the news is so dangerous for newbies. It has an emotional appeal. The allure and opportunity to get rich quick. But it usually ends up the other way around.
OK. So I mentioned a couple of posts ago that I use the news differently from most. Here's how. Rather than entering a trade around the news, I will be in a few days, or at least several hours, in advance. By the time the news comes, I am in the profit. Then I simply sit aside dispassionately, and wait for the data. If it is in my favor, I will let the trade run and follow it with a trailing stop. Often news that really moves the market, will move it for hours afterward. So I have to be sure to give it enough room to allow for the immediate volatility, than just watch the profits build up.
If the news moves against me, I 'll just go ahead and exit the trade, (generally before it hits my extra wide stop), because I know that the price action will likely continue against me for the rest of the day...and perhaps even into the next few sessions.
Preservation of Capital...that is the name of the game, and the real Holy Grail of Forex. More on that tomorrow.
Drop me a line and let me know if these "news" lessons were helpful.
bill@thefxtradingmasters.com
Be sure to check out our offer on the website:
www.thefxtradingmasters.com
Until next time...Happy Trading!
Bill
Tuesday, May 4, 2010
Forex and Trading the News, Part 2
Last time we looked at some of the rationale, both good and bad, for trading the news releases. I wrote on how to trade the trends following up to the news release. I should add here, that if you are trading those shorter term movements, generally I want to be out several hours before the news release itself.
But not only is there decent opportunity to trade leading up to the announcements, but following them as well. Especially if the news is a surprise and causes a reversal, or if it is a surprise and continues in the direction of the trend. A news release that offers no surprises, either good or bad, can just be rather boring, and difficult to trade.
Trading Forex price action after a news release, is done just the same way as in the days leading up to it. Make sure you have established the direction of the trend, then trade off of the 5 minute charts. Keep your stops close, just beyond the previous swing high or low, and let your winners run with a trailing stop. See yesterday's entry for more detailed information.
Another means of trading Forex news announcements, and making a profit from entering a trade, is to look at the immediate price action after the announcement, and then just enter a longer term position. So if the market gets a surprise to the upside from a data announcement, watch the price action for 5-15 minutes, to see if there is a discernable direction. If so, you can enter on a pullback, again using a 5-15 minute stochastic, and just trail the move. It will likely last all day unless there is some other news to off-set it.
Tomorrow we will take up part 3 of Trading the Forex News, using news to augment or exit an existing trade. And we will have a very timely example from our Euro trade this week!
Until next time...Happy Trading!
Bill
But not only is there decent opportunity to trade leading up to the announcements, but following them as well. Especially if the news is a surprise and causes a reversal, or if it is a surprise and continues in the direction of the trend. A news release that offers no surprises, either good or bad, can just be rather boring, and difficult to trade.
Trading Forex price action after a news release, is done just the same way as in the days leading up to it. Make sure you have established the direction of the trend, then trade off of the 5 minute charts. Keep your stops close, just beyond the previous swing high or low, and let your winners run with a trailing stop. See yesterday's entry for more detailed information.
Another means of trading Forex news announcements, and making a profit from entering a trade, is to look at the immediate price action after the announcement, and then just enter a longer term position. So if the market gets a surprise to the upside from a data announcement, watch the price action for 5-15 minutes, to see if there is a discernable direction. If so, you can enter on a pullback, again using a 5-15 minute stochastic, and just trail the move. It will likely last all day unless there is some other news to off-set it.
Tomorrow we will take up part 3 of Trading the Forex News, using news to augment or exit an existing trade. And we will have a very timely example from our Euro trade this week!
Until next time...Happy Trading!
Bill
Monday, May 3, 2010
Forex and Trading the News
When one trades the forex, it is always important to look at the news items for the week. "Trading the news" is one mistake that newbies make on a regular basis. There are a great many trading systems and trading programs that are designed around the very principle of trading the volatile jolts that are produced by news items.
This is a fairly popular trading idea, since news comes out on a regular basis, and offers a lot of "opportunity" related to the data. Especially when a figure comes out which is a surprise to the fore casted data, or a big change from the previous month, quarter or year.
However, the big problem with trading the news is that many traders will try to "front-run" the news. That is, they will actually take a position before the news is released, and hope that it is the correct direction once the news is released.
I will be the first to confess, this "can" be an explosive means of profits. But it is a two edged sword. The same movement which gives big, fast profits, will also give big, fast losses. There are reasonable ways to trade the news, we will discuss some of them here. However, what we will recommend is using the news to END a trade, or to augment a trade that is already "on".
You may remember from previous reading that my system is based on doing everything opposite from what nearly everyone else recommends. Thus if everyone is creating systems based on making profits from the news, I am going to use it to take my profits.
But first, let's "go with the flow" for a couple of minutes. How can you make profits from the news? First, if we are expecting a big news announcement, such as GDP, or Non farm Payrolls. or an Interest Rate Change, most news pairs will begin to trend in the 2-3 days before the announcement. Depending on the forecast of news, the trend may be either up or down. The direction doesn't really matter. But since I will be looking at a shorter time frame, what I do is look to the daily chart, and see if the particular day I am trading on is up or down. The multi-day trend is not as important here.
So if the day is up, I will switch to the 5 minute chart, and buy every time the stochastics give me an oversold, and then a buy signal. (Please check the blog entries on stochastics for further information on that particular indicator.)
Since I will only trade with the trend, I will ALWAYS wait for a good over-sold signal and an upturn before entering a long trade on the buy side.
If the day is a "down" day, I will be looking for opportunities to sell short my selected currency. Again, I will wait for an overbought signal with a sell signal from the stochastics "turning down".
Be sure to keep a close stop, (the nearest swing high or swing low on the 5 min chart), and a trailing stop once the trade is profitable, to keep locking in profits on the way up. Remember, in this scenario, unless a reversal is underway, and the up trend is actually changing to become a downtrend, the oversold indicator is pretty reliable. But the over bought is not. Since it is an uptrend, it can remain over bought for a long time. While some traders will exit this trade as soon as the stochastic becomes over bought and crosses above 80, I will stay in longer. By using a trailing stop loss I can stay in a rising trend that may stay overbought for a long time before it pulls back.
That should do it for today, as this post is getting a bit "long in the tooth". Tomorrow we will come back and see how to trade the news after it is released.
This is a fairly popular trading idea, since news comes out on a regular basis, and offers a lot of "opportunity" related to the data. Especially when a figure comes out which is a surprise to the fore casted data, or a big change from the previous month, quarter or year.
However, the big problem with trading the news is that many traders will try to "front-run" the news. That is, they will actually take a position before the news is released, and hope that it is the correct direction once the news is released.
I will be the first to confess, this "can" be an explosive means of profits. But it is a two edged sword. The same movement which gives big, fast profits, will also give big, fast losses. There are reasonable ways to trade the news, we will discuss some of them here. However, what we will recommend is using the news to END a trade, or to augment a trade that is already "on".
You may remember from previous reading that my system is based on doing everything opposite from what nearly everyone else recommends. Thus if everyone is creating systems based on making profits from the news, I am going to use it to take my profits.
But first, let's "go with the flow" for a couple of minutes. How can you make profits from the news? First, if we are expecting a big news announcement, such as GDP, or Non farm Payrolls. or an Interest Rate Change, most news pairs will begin to trend in the 2-3 days before the announcement. Depending on the forecast of news, the trend may be either up or down. The direction doesn't really matter. But since I will be looking at a shorter time frame, what I do is look to the daily chart, and see if the particular day I am trading on is up or down. The multi-day trend is not as important here.
So if the day is up, I will switch to the 5 minute chart, and buy every time the stochastics give me an oversold, and then a buy signal. (Please check the blog entries on stochastics for further information on that particular indicator.)
Since I will only trade with the trend, I will ALWAYS wait for a good over-sold signal and an upturn before entering a long trade on the buy side.
If the day is a "down" day, I will be looking for opportunities to sell short my selected currency. Again, I will wait for an overbought signal with a sell signal from the stochastics "turning down".
Be sure to keep a close stop, (the nearest swing high or swing low on the 5 min chart), and a trailing stop once the trade is profitable, to keep locking in profits on the way up. Remember, in this scenario, unless a reversal is underway, and the up trend is actually changing to become a downtrend, the oversold indicator is pretty reliable. But the over bought is not. Since it is an uptrend, it can remain over bought for a long time. While some traders will exit this trade as soon as the stochastic becomes over bought and crosses above 80, I will stay in longer. By using a trailing stop loss I can stay in a rising trend that may stay overbought for a long time before it pulls back.
That should do it for today, as this post is getting a bit "long in the tooth". Tomorrow we will come back and see how to trade the news after it is released.
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