What is Forex?

FOREX (Foreign Exchange) is an international financial market where currencies are bought and sold freely. Many of the major currencies have been traded freely from the early 1970s but back then forex was only open to the very big players. With the invention of the internet, it has opened the doors to a much wider spectrum of traders. You can even start trading with as little as $100.

It is the most liquid financial market in the world with in excess of one trillion dollars traded daily, this is far greater than any other financial market. One can not be certain of the exact numbers as unlike futures, stocks etc there is no centralized exchange. The market is traded from midnight on Monday (GMT) to midnight on Friday.

The Forex market has a very wide spectrum of traders from the very small to the very large including Central banks, banks, corporations, hedge funds, portfolio managers and small speculators. The forex market is often used by big business’ to hedge their currency risks on theirs imports and exports

Simple Trend Line Strategy

This is a good simple strategy. I have traded it myself on a demo account with great success. It involved looking at the daily charts and drawing trend lines. A trend line must connect to at least two points. It is important that the trend line doesn’t have any breaks between the two points it connects to. Here is an example:

As trend lines are often used as support and resistance points, the market often bounces and sometimes even reverses at them. The way we can use this to our advantage is by placing buy or sell orders at the trend lines. We can place a stop just below the trend line, but ensure you leave enough room for volatility. If the trend line holds you can either set a TP at a support or resistance point or use a trailing stop. I like trailing stops personally. If the trend line breaks you take a small loss, but if it holds as they so often do you have a good chance of a winning trade that greatly exceeds the risk you took. You can see how this happened around the 11th May on the chart above. If you had placed a sell order at this point, it would have been a very nice, low risk trade.

Tips for new forex traders

• Have a concrete trading plan
• Always stick to your trading plan
• Never under any circumstance over trade
• Never to pay much attention to what an “Expert” believes price will do in the future, He has no idea
• Don’t believe the news, believe the price action
• Always use solid risk management
• Trade with the trend, it is your friend after all
• Make sure your strategy has a good chance of being profitable after the spreads have been paid
• Make sure your strategy can comfortable survive a bad run of trades
• Choose your forex broker wisely
• Do your very best to leave emotions completely out of your trading
• Double check your orders to ensure there are no mistakes
• Never try and find the strategy that is the “holy grail” you won’t find it
• Don’t even consider trading live until you are confident you have a good chance of succeeding
• Never think trading is easy
• Don’t waste your money buying other peoples strategies
• Be very skeptical about any training course. The vast majority of forex training courses are less than stellar.
• Spend time reading forex forums online. They are free and contain a lot of useful information

Forex News Trading

Trading the news has grown massively amongst retail traders in recent years. My belief is that it stems from the dream of being able to spend a few minutes a day trading the news for a big financial gain. Unfortunately this is rarely the case with news trading. At first glance it does look very easy, but just like technical trading it requires extreme patience and discipline and does involve substantial risk to your capital.

There are many major news releases that often significantly move the market. Amongst big ones are:

• Non-Farm Payroll
• CPI (consumer price index)
• Trade Balance
• Retail Sales
• PPI (Producer Price Index)
• Interest Rate decisions
• GDP (Gross Domestic Product)

These releases often have a big effect on the market. The significance of the movement is often related to the amount of surprise in the numbers. If the numbers are inline with expectations, it is often the case the market won’t move as much, but not always.

Forex News Trading Strategies

If you were trading in January 2007 you may remember the Bank of England shocked the vast majority of traders by hiking rates by 25bp. Let’s look what happened to the pound:

The pound shot up by a staggering 150 pips or so in the first minute. The move was so big because there was such an element of surprise amongst most traders. The traders who managed to get in before the big initial spike will have done extremely well. This is a common strategy for news trading. Waiting for a surprise event to occur, then trying to beat the spike. This is certainly not as easy as it might sound. There are two major obstacles for most traders; 1) Getting the numbers before the market moves 2) Finding a broker that will execute your order before the market moves. There are services out there that try to get the numbers to you quickly for less than $50 per month but often all but the very expensive ones fail. I believe the bloomberg terminal to be about the quickest, but it is around $1600 per month, out of the question for many small traders.

There are many different strategies for trading the news. Another is a “fade”. This is where you speculate that the market will move in the opposite direction after a spike. You can see on the chart above how price moved down in the short term after the spike. This often happens, but not always. Finding the top is not easy and does require a lot of discipline and practice.

Conclusion

While the prospect of news trading may be very appealing due to the low time commitment, like other forms of trading does require a lot of patience and discipline and certainly is not as easy as it may initially sound. However, with a lot of practice it is possible to make some very nice returns on your money.

Forex Risk Management

Forex Risk management is a term often used with FX trading. It is perhaps one of the biggest factors that separates the winning traders from the losers. Experienced traders know they must use extreme discipline at all times when trading if they have any chance of succeeding. The inexperienced trader may find this part of their trading the single most difficult thing to master. With FX trading it is always essential to have the long term picture in mind. One day here or there really has very little impact on the big picture. It is important that the amount risked on each trade reflects this view. For example there is no point risking 1% of your account per trade for 3 months, then risking 20% on one trade because it is a “sure thing”. This kind of behavior is little more than gambling and that is not we want. We want the long term odds inour favour. It also potentially undoes all the hard work you did for those 3 months.

Let’s say we have a $10,000 account balance and have developed an intraday strategy and would like to risk 1% of our account balance on each trade:

Now let’s say our strategy is telling us to buy GBP/USD and there is major support 20 pips below price and we want to risk 30 pips.

1% of our account is $100. So we need to select the position size with this in mind.

If we divide the amount we would be prepared to risk with the number of pips we are prepared to risk, it will tell us the price per pip we wish to trade. Let’s do this simple math

$100 / 33 = $3.33.

The pip values of one minilot on GBP/USD are one $1 per pip. So our position size would need to be 3.3 minilots. Many brokers do not allow us to trade fractional minilots so we will round it down to $3. So our position size will be 3 minilots for this trade.

So the worst that can happen on this trade would be an approximately 1% loss. As no trader can win 100% of the time, and will inevitably go through a bad run at some point, it is essential to ensure when this does occur, it is a minor bump along the road and not a complete disaster to your account. Remember, always think of the big picture. Forex Risk Management is so important!

Let’s take a quick look at what would happen if you used too much risk on your trades and hit a bad run. Most strategies do at some point. Say you were trading with 1% risk per trade your account was -10% at the end of the month, you would need around 11% to get back to break even. If however you had exposed yourself to a much higher risk, say 5% per trade and were -50% at the end of the month, you would need to make 100% just to get back to breakeven, this would be disastrous. Compounding can work nicely for you, but it can also work against you.

It can be very difficult at first for new traders to consistentlyuse good risk management as it’s easy to let your emotion dictate your trading. These are some of the emotions and thoughts I experienced at first:
“Nevermind, This trade lost, I will just trade will double next time to make it back”
“I’m carrying a large floating loss, the market will move back in my favour”
“I’m bored I don’t have a signal but I want to be in the market and I price will continue to move up”
“A hedge fund manager on bloomberg expects the pound to appreciate so I will use high leverage and go long”

and many more..

These kind of emotions are very common amongst new traders and they really are an almost certain way to be a losing trader. It with this in mind that it is very important that new traders trade on a demo account for many months prior to trading live. It is true, that the vast majority of new traders lose all their money in a very short time frame and the vast majority of traders end up losing money in the long term, even many of the big institutional traders. With this in mind it is essential that you are fully knowledgeable and prepared for trading and have got over the emotions that come it.

Conclusion

The carry trade is a potentially lucrative way of trading/investing, however it is not without considerable risks, especially when traded with large amount of leverage. There are strategies that traders use to trade to hedge to offset some of the risk in carry trades. You can look at some of these in the strategies section. If you do seek to carry trade, I wish you all the best.