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Forex and Foreign Exchange - Trading with
Strategy
Trading successfully is by no means a
simple matter. It requires time, market knowledge and market
understanding and a large amount of self restraint. ACM does
not manage accounts, nor does it give market advice, that is
the job of money managers and introducing brokers.
As market professionals, we can however point the novice in
the right direction and indicate what are correct trading
tactics and considerations and what is total nonsense.
Anyone who says you can consistently make money in foreign
exchange markets is being untruthful.
Foreign exchange by nature, is a volatile market. The
practice of trading it by way of margin increases that
volatility exponentially. We are therefore talking about a
very 'fast market' which is naturally inconsistent.
Following that precept, it is logical to say that in order
to make a successful trade, a trader has to take into
account technical and fundamental data and make an informed
decision based on his perception of market sentiment and
market expectation.
Timing a trade correctly is probably the most important
variable in trading successfully but invariably there will
be times where a traders' timing will be off. Don't expect
to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put
the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading fx markets is speculative and can result in loss, it
is also exciting, exhilarating and can be addictive. The
more you are 'involved with your money' the harder it is to
make a clear-headed decision. Money you have earned is
precious, but money you need to survive should never be
traded.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards,
is it in a trading range. Is the trend strong or weak, did
it begin long ago or does it look like a new trend that's
forming. Getting a clear picture of the market situation is
laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they
would like to get out, after all the goal is to make money.
This is true but when trading, one must extrapolate in his
mind's eye the movement that one expects to happen. Within
this extrapolation, resides a price evolution during a
certain period of time. Attached to this is the idea of exit
price. The importance of this is to mentally put your trade
in perspective and although it is clearly impossible to know
exactly when you will exit the market, it is important to
define from the outset if you'll be 'scalping' (trying to
get a few points off the market) trading intra-day, or going
longer term.
This will also determine what chart period you're looking
at. If you trade many times a day, there's no point basing
your technical analysis on a daily graph, you'll probably
want to analyze 30 minute or hour graphs. Additionally it is
important to know the different time periods when various
financial centers enter and exit the market as this creates
more or less volatility and liquidity and can influence
market movements.
Time your trade:
You can be right about a potential market movement but be
too early or too late when you enter the trade. Timing
considerations are twofold, an expected market figure like
CPI, retail sales or a federal reserve decision can
consolidate a movement that's already underway. Timing your
move means knowing what's expected and taking into account
all considerations before trading. Technical analysis can
help you identify when and at what price a move may occur.
We will look at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating,
stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx trader a very large amount of
leverage, trading at full margin capacity (in ACM's case 1%
or 0.5%) can make for some very large profits or losses on
an account. Scaling your trades so that you may re-enter the
market or make transactions on other currencies is generally
wiser. In short, don't trade amounts that can potentially
wipe you out and don't put all your eggs in one basket. ACM
offers the same rates regardless of transaction sizes so a
customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to
be feeling about the market and therefore what it is doing
or will do. This is basically about trend. You may have
heard the term 'the trend is your friend', this basically
means that if you're in the right direction with a strong
trend you will make successful trades. This of course is
very simplistic, a trend is capable of reversal at any time.
Technical and fundamental data can indicate however if the
trend has begun long ago and if it is strong or weak.
Market expectation:
Market expectation relates to what most people are expecting
as far as upcoming news is concerned. If people are
expecting an interest rate to rise and it does, then there
usually will not be much of a movement because the
information will already have been 'discounted' by the
market, alternatively if the adverse happens, markets will
usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14
day RSI and making trading decisions based on that. If that
was the case, when RSI would go under the 30 level, everyone
would buy and by consequence the price would rise. Needless
to say, the world is not perfect and not all market
participants follow the same technical indicators, draw the
same trend lines and identify the same support & resistance
levels. The great diversity of opinions and techniques used
translates directly into price diversity. Traders however
have a tendency to use a limited variety of technical tools.
The most common are 9 and 14 day RSI, obvious trend lines
and support levels, Fibonacci retracement, MACD and 9, 20 &
40 day exponential moving averages. The closer you get to
what most traders are looking at, the more precise your
estimations will be. The reason for this is simple
arithmetic, larger numbers of buyers than sellers at a
certain price will move the market up from that price and
vice-versa.
Information, charts or examples contained in this lesson are
for illustration and educational purposes only. It should
not be considered as advice or a recommendation to buy or
sell any security or financial instrument. We do not and
cannot offer investment advice. For further information
please read our disclaimer.
by Nicholas H. Bang
www.ac-markets.com
Free Stock Trading
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