Winning Forex Trading

Winning Forex
The Whole Point Of Trading
Why do we trade? Money. Let's keep that is the front of our minds. Traders get carried away with all the fun fancy stuff they can do. They get carried away with the thrill. They get carried away with the analysis, but trading is all about making more money.

Your Focus

That's the whole point of this website. It's to show you how to win more. Why did you start trading in the first place (or if you're not trading yet, why did you originally think about it)? It was the financial reward. Okay, so together let's take a journey down the path of becoming better traders.

Overview Of Winning

Really quickly, I just want to give you an overview of the three most important things that are forgotten by many traders (dooming them to become losing traders).
· Keep it simple. The simpler your trading regimen and trading rules are, the more likely you are to follow them. Make it easy. Make it simple.
· Don't care. This is the hardest thing for traders to master. You need to figure out a way to not care about your individual trades. You start caring, and you start stressing. You start stressing, and you'll make a mistake. Make a mistake, and you've lost. I guarantee you this is the reason professional fund managers never consistently make large returns. The managers are thinking way too much about what the investors will think of their every move.
· Be sure you have an edge.


How to trade Heikin-Ashi


There are five primary signals that identify trends and buying opportunities:

- Hollow candles with no lower "shadows" indicate a strong uptrend: let your profits ride!

- Hollow candles signify an uptrend: you might want to add to your long position, and exit short positions.

- One candle with a small body surrounded by upper and lower shadows indicates a trend change: risk-loving traders might buy or sell here, while others will wait for confirmation before going short or long.

- Filled candles indicate a downtrend: you might want to add to your short position, and exit long positions.

- Filled candles with no higher shadows identify a strong downtrend: stay short until there's a change in trend.


These signals show that locating trends or opportunities becomes a lot easier with this system. The trends are not interrupted by false signals as often, and are thus more easily spotted. Furthermore, opportunities to buy during times of consolidation are also apparent



The Basic of Forex Trading
Structure of The Market

The FX market is an over-the-counter market with no centralized exchange. Traders have a choice between firms that offer trade-clearing services.

Unlike many major equities and futures markets, the structure of the FX market is highly decentralized. In other words, there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time.

In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service.

Margin

In standard cash stock accounts, money should be deposited for the full amount of the position you are trading, or if you have a margin account, for at least half of the position. This is in contrast to the FX market, where only a small percentage of the actual position value needs to be deposited prior to taking on the trade. This small deposit, known as the margin, is not a down payment, but rather a performance bond or good faith deposit to ensure against trading losses. The margin requirement allows traders to hold positions much larger than their account value (up to 200x the size).

Margin requirements are as low as .5% meaning for every standard lot size of 100,000 units, you must commit $500. However, if you wanted to control a $100,000 in the stock market, you would have to deposit at the very least, $50,000. Even in the futures market you would have to deposit at least $5,000 to control a $100,000 position.

Currency Abbreviations

Below is a list of the abbreviations for various currencies that are commonly traded in the FX market:

EUR = Euro
GBP = British Pound (Sterling, Cable)
JPY = Japanese Yen
CHF = Swiss Franc (Swissie)
USD = United States Dollar
NZD = New Zealand Dollar (Kiwi)
AUD = Australian Dollar (Aussie)
CAD = Canadian Dollar

WHAT DRIVES THE CURRENCY MARKETS

Currency markets move based on countries’ economic data or different world events, which may affect a particular country’s economy.

Market Sentiment
Market sentiment can defy logic; market psychology often contradicts business reality. But in the real world, perception can become reality, at least for a time. Therefore, you must at times be prepared to make moves that are against your better judgment. The flip side is that at other times, your investor intuition can prove to be more valuable than painstaking analysis.

CURRENCY BROKERAGE FIRMS

Currency Brokers are firms or agents of large banks that take orders from different clients, companies or countries for an amount of currency that needs to be bought or sold and converted from one to another. Brokerage firms also allow clients to speculate on the values that a currency will move to in the future. Brokers in the U.S. are required to be licensed and are regulated by the NFA or National Futures Association. Most brokerage firms clear their currency purchases through large InterBank Clearing Desks run by the world’s largest banks.


Thursday, January 25, 2007
FOREX ADVANCE
Money Management: To Minimize Your Loss
by Boris Schlossberg

Like dieting and working out, money management is something that most traders pay lip service to, but few practice in real life. The reason is simple: just like eating healthy and staying fit, money management can seem like a burdensome, unpleasant activity. It forces traders to constantly monitor their positions and to take necessary losses, and few people like to do that. However, as Figure 1 proves, loss-taking is crucial to long-term trading success

Money Management Styles
Generally speaking, there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses. The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy. On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month's worth of profits in one or two trades. (For further reading, see Introduction To Types Of Trading: Swing Trades.)

To a large extent, the method you choose depends on your personality; it is part of the process of discovery for each trader. One of the great benefits of the FX market is that it can accommodate both styles equally, without any additional cost to the retail trader. Since FX is a spread-based market, the cost of each transaction is the same, regardless of the size of any given trader's position.

For example, in EUR/USD, most traders would encounter a 3 pip spread equal to the cost of 3/100th of 1% of the underlying position. This cost will be uniform, in percentage terms, whether the trader wants to deal in 100-unit lots or one million-unit lots of the currency. For example, if the trader wanted to use 10,000-unit lots, the spread would amount to $3, but for the same trade using only 100-unit lots, the spread would be a mere $0.03. Contrast that with the stock market where, for example, a commission on 100 shares or 1,000 shares of a $20 stock may be fixed at $40, making the effective cost of transaction 2% in the case of 100 shares, but only 0.2% in the case of 1,000 shares. This type of variability makes it very hard for smaller traders in the equity market to scale into positions, as commissions heavily skew costs against them. However, FX traders have the benefit of uniform pricing and can practice any style of money management they choose without concern about variable transaction costs.

Four Types of StopsOnce you are ready to trade with a serious approach to money management and the proper amount of capital is allocated to your account, there are four types of stops you may consider.

1. Equity Stop - This is the simplest of all stops. The trader risks only a predetermined amount of his or her account on a single trade. A common metric is to risk 2% of the account on any given trade. On a hypothetical $10,000 trading account, a trader could risk $200, or about 200 points, on one mini lot (10,000 units) of EUR/USD, or only 20 points on a standard 100,000-unit lot. Aggressive traders may consider using 5% equity stops, but note that this amount is generally considered to be the upper limit of prudent money management because 10 consecutive wrong trades would draw down the account by 50%.

One strong criticism of the equity stop is that it places an arbitrary exit point on a trader's position. The trade is liquidated not as a result of a logical response to the price action of the marketplace, but rather to satisfy the trader's internal risk controls.

2. Chart Stop - Technical analysis can generate thousands of possible stops, driven by the price action of the charts or by various technical indicator signals. Technically oriented traders like to combine these exit points with standard equity stop rules to formulate charts stops. A classic example of a chart stop is the swing high/low point. In Figure 2 a trader with our hypothetical $10,000 account using the chart stop could sell one mini lot risking 150 points, or about 1.5% of the account.

3. Volatility Stop - A more sophisticated version of the chart stop uses volatility instead of price action to set risk parameters. The idea is that in a high volatility environment, when prices traverse wide ranges, the trader needs to adapt to the present conditions and allow the position more room for risk to avoid being stopped out by intra-market noise. The opposite holds true for a low volatility environment, in which risk parameters would need to be compressed.

One easy way to measure volatility is through the use of Bollinger bands, which employ standard deviation to measure variance in price. Figures 3 and 4 show a high volatility and a low volatility stop with Bollinger bands. In Figure 3 the volatility stop also allows the trader to use a scale-in approach to achieve a better "blended" price and a faster breakeven point. Note that the total risk exposure of the position should not exceed 2% of the account; therefore, it is critical that the trader use smaller lots to properly size his or her cumulative risk in the trade.


4. Margin Stop - This is perhaps the most unorthodox of all money management strategies, but it can be an effective method in FX, if used judiciously. Unlike exchange-based markets, FX markets operate 24 hours a day. Therefore, FX dealers can liquidate their customer positions almost as soon as they trigger a margin call. For this reason, FX customers are rarely in danger of generating a negative balance in their account, since computers automatically close out all positions.

This money management strategy requires the trader to subdivide his or her capital into 10 equal parts. In our original $10,000 example, the trader would open the account with an FX dealer but only wire $1,000 instead of $10,000, leaving the other $9,000 in his or her bank account. Most FX dealers offer 100:1 leverage, so a $1,000 deposit would allow the trader to control one standard 100,000-unit lot. However, even a 1 point move against the trader would trigger a margin call (since $1,000 is the minimum that the dealer requires). So, depending on the trader's risk tolerance, he or she may choose to trade a 50,000-unit lot position, which allows him or her room for almost 100 points (on a 50,000 lot the dealer requires $500 margin, so $1,000 – 100-point loss* 50,000 lot = $500). Regardless of how much leverage the trader assumed, this controlled parsing of his or her speculative capital would prevent the trader from blowing up his or her account in just one trade and would allow him or her to take many swings at a potentially profitable set-up without the worry or care of setting manual stops. For those traders who like to practice the "have a bunch, bet a bunch" style, this approach may be quite interesting.

Boris Schlossberg is the Senior Currency Strategist at Forex Capital Markets in New York, one of the largest retail forex market makers in the world. He is a frequent commentator for Bloomberg, Reuters, CNBC and Dow Jones CBS Marketwatch. His book "Technical Analysis of the Currency Market", published by John Wiley and Sons, is available on Amazon, where he also hosts a blog on all things trading.

THE SMART INVESTOR

THE SMART INVESTOR Although risk is an inseparable part of the currency market, here are some tips to minimize it: • Use strict Money Management techniques. • Invest only as much as you can afford to lose. Don’t get in over your head. • Don’t trade just to trade. • Always use stop losses to ensure that you’re able to trade again the next opportunity. • Trade with the current trend because the probability of a winning trade is much higher. • Monitor your trades often and don’t be afraid to reassess your positions

# posted by Paul W : 7:54 AM 1 Comments
Wednesday, January 24, 2007
TECHNICAL ANALYSIS
Candle stick charts:


Candlestick charts have been around for hundreds of years. They are often referred to as "Japanese candles" because the Japanese would use them to analyze the price of rice contracts.

Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day.

The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the stock price rose, red indicates a decline:


Support and resistance:

Support and resistance are the focus of how supply and demand meets. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.


Support is a level at which bulls take control over the prices and prevent them from falling lower. Think of support as a floor, when we fall we hit the floor and most of the time; we bounce back up, just like a stock. But sometimes, we fall through the floor, and keep on falling until we hit another floor, just like a stock.

Resistance, on the other hand, is the point at which sellers take control of prices and prevent them from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations.
Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower.

You can see that it is trading in a flat channel, which is just what you want. However, you can apply support and resistance levels upward or downward.
This is the most basic form of technical analysis. All you must do is determining where the support line is and the resistance line is. However, when a price breaks through one of them, you will see a rally based on whatever line was broken. When this happens it is a good idea to stay out of the trade and wait for the price to determine the next support and resistance line. A breakout above a resistance level is evidence of an upward shift in the demand line as more buyers become willing to buy at higher prices. Similarly, the failure of a support level shows that the supply line has shifted downward.

Moving averages:

In this lesson we will examine, explain and apply the simple moving average to a 4hour time frame chart. Moving averages are one of the most popular and easy to use technical tools available to the average investor. They smooth a data series and make it easier to spot trends, channels, something that is especially helpful in volatile markets. Moving averages are also a great starter for anyone who wants to expand their technical analytical knowledge in any market. I would suggest you log into the DEMO account at FXCM (explained in DEMO section) and pull up the AUD/USD 4hour time chart, preferably a candle stick chart and apply the following.


The simple moving average is formed by computing the average price of a security over a specified number of periods. When ever you input a variable for a simple moving average calculation, it is always the close price of the security that will be included in the calculation. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. For an example, here are the closing prices of ABC stock.

15+16+17+18+19 = 85
85 / 5 = 17

The averages are then joined which creates a curvilinear line, or the moving average line. Continuing our example, if the next closing price in the average is 20, then this new period would be added. As each days ends, a new day will be added and the oldest day will be eliminated (15). Once a price has broken a moving average line, and depending on what type of time frame, it might signal a shift upwards or downwards. As you see in the picture below, it has broken all three moving average lines in the upward direction, and as you can see, it continued to climb higher.


MACD or Moving Average Convergence Divergence:

MACD is A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting "faked out" or entering into a position too early, as shown by the first arrow.

2. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.

3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. The zero line often acts as an area of support and resistance for the indicator.