TRADING A MIND GAME

You must change your mental attitude first from a normal person to that of a speculator. Almost all traders I have met, except a few successful ones who really made millions and billions trading in the market, simply waste all their time trying to learn the easiest part in perfection, like about how to read data and charts, and trying to perfect entry and exit skills, etc. Trading is a mind game and without having a right frame of mind, it is a losing game even before it starts. Training a trader�s mind is the first step for any successful trader but almost all new traders neglect that part and that explains why more than 95% of traders are a failure in the long run.

Acquiring the knowledge of the market is not difficult for anyone with average intelligence after a few years of hard study in the market. But it is neither the level of intelligence nor the knowledge that decides the outcome of the market operations of a trader. It is the decision making process that is so hard for most traders to overcome and that is the main reason for a success or a failure for all the traders. Some find it easy to make decisions and stick to it and most find it so hard to make decisions and stick to it. Unfortunately, any decision making process in trading is a pain-taking process and humans tend to avoid pains and go for pleasures even if for temporary ones. Assuming one has acquired enough market knowledge and acquired one�s proven trading system (this is the second most important element of success in trading, in fact. An edge in any system is based on the quality of info one has, charts being only an info of secondary quality not the best one)

Through studies and research, a trader faces the task of making decisions to put this knowledge and system into practice. Then, how many traders can honestly say they can commit their ranch when the trade is suggested by their own system (given that trading is just a chance game) and let the profit run for weeks and months when their system tells them, and how many can manage to cut the loss as a routine process when the situation arise. It all sounds so easy when saying it but so difficult when doing it affecting real money in the market. I still do not sleep well when I am running position because even if the profits are running into a few hundred dollars and the system is telling you to carry on, there is no guarantee that the profit will turn into a yard or two in a month time, and it may even turn into a loss in a day or two when something unexpected happens. A painstaking process in real sense. The pain is not knowing what will happen in the future and in fear of losing. So at the end of the day, assuming one has decent trading system and market knowledge and decent info, it is ultimately how disciplined and how well that trader can take the pain of making right decisions at the right time that decides the outcome of the trades. Hence I call trading a mind game. When I interview prospective young traders, I always look for disciplined and strong-willed person as my first priority as long as one has decent education, but strangely in many cases, it is some kind of genius or half-genius with lots of brains with no disciplines who turn up for an interview thinking only bright people can make good traders.

In fact, I always try to pyramid while position trading medium-term once I am convinced of a new medium-term trend emerging. Like in USD/JPY position trading 135-132 as an initial position, adding in 132 and 129 areas. Same for AUD/USD and EUR/USD with similar strategies. But sitting on positions and watching the counter-rallies costing truck load of money is not easy job to do and causes lots of pain all the time. Most traders even among experienced ones cannot bear that pain and give up too early. But there is no other way to make a big money and we have to bite the bullet and "sit and accumulate" as long as the medium-term trend is intact. That is why I always believe psychological aspects of trading is far more important than anything else in successful trading. A mind game like those bluffing game of poker.

Entries and exits can never be "irrelevant" for any trader for any purpose. It is just that psychological aspects of trading are much more important than entries and exits, and decisive for the success or failure of a trader in the long run. Perhaps exits are more important than entries because any perfect or near-perfect entries are possible only in hindsight.

BC�s WORDS OF WISDOM
Any market, be it real estate market or forex market, is all about transferring money from the masses to a few lucky ones in the long run. In most real property speculation cases, the masses make money ,a lot of money, but the money stays as paper profit and evaporate before they realize their paper profit into real hard cash. In most forex speculation cases, the masses barely survive a few years thanks to lack of knowledge of the market and the deadly leverage. But both types of speculators all serve their useful purposes in investment food chain contributing their hard earned money to the market in exchange for a dream.

For any prospective traders, hope this is not in anyway a discouragement. Trading is a hard mind game and not everyone is suitable to be engaged in such a hard game. Most have neither frame of mind nor mental fortitude to survive in this hard game. Mastering TAs or numbers or options business are at best a first tentative step into the right direction with no guarantee to any success. Training a right frame of mind is the most difficult but absolutely necessary part for success and most are simply not ready to go through that hard stage of the learning process because it is a very painful process. Trading is essentially about pain-taking-process in the end although most do not realize it. The process of overcoming fear, greed and mastering tranquility of mind in this hard school of speculation. Fwiw.

Every trader should find his/her method/system which suits his/her own situation and personality. And that system/method must be the one that has proven to be able to make some money through trials. So, if Tom, the medium-term trader, revealed his money making method of last three decades, it may not have the same effect for Dick and Harry, the day traders, and vice versa. Agree that most fail for lack of system/method and/or lack of discipline to follow through.

Trading success is all about making as much as one can when one is right and losing as little as possible when one is wrong. That is the essence of this business. So, any theory or system which looks after the above is a good one.

System is a weapon of a soldier in this market. You must have one as soon as possible. Otherwise, it will be like fighting well-armed Forex robbers with a handbag. Best one is a self-made one because you can never feel comfy in borrowed shoes although borrowing good ideas from others is a good idea. Good luck.

One cannot make a dime unless follow the herd or trend most of the time. It is just that one has to be cautious when overbought/oversold region is approaching and know how to turn at inflection point for the opposite trend. Following herd needs average intelligence and courage but identifying inflection points and taking a necessary action needs not only intelligence but also a lot of courage. Again, fortune favors the brave.

Money management is where most traders go wrong in almost all cases leaving only a few as the winner at the end of the day. Money management and discipline of mind is what makes or brakes a trader at the end of the day, not the elementary entry and exit method.

Forex/Currency Trading: It is a sentiment game w/ a crowd mentality where even the best players w/ the best forecasts are tricked out of good positions by the magic of price action.

TREND TRADING: Accumulation and Distribution
Forex market like any other market works in a very simple way. It accumulates in a certain area for awhile, and once the accumulation is over, it advances to a certain distance until distribution starts, and accumulation happens again and advances to a certain distance again, and repeat and repeat. Day trading may not yield the best results while the accumulation and distribution work out itself, being double-murdered by zig-zag moves, while the market starts advancing out of accumulation area, day trading is a sure way of cutting profit short. In general, day trading is not the best form of yielding the most profits in my experience contrary to what some writers who never made real money in this game try to say.

The safe and better way in making some money must be wait for "accumulation" to be over and ride the whole length of advance until "distribution" starts and reverse as the market dictates as a short-term trade for 2-10 days, as the case may be.

Please study 8 hour or 4 hour line charts or candle charts, especially the patterns and 20 MA inside the charts for a few months everyday, and you will discover what I mean by accumulation and distribution for short-term trades in Forex market. Forex market always needs this process, so you can decide what tactics you will use at a given stage. Imho. Good luck.

TECHNICALS and CHARTING
Why day trade once you get a good seat and the market is going your way. It is always more profitable to ride even the short wave for 2-10 days by adding up. In general, you must day trade only when you are losing. To find a buy entry seat for short-term trades, you can study the "accumulation and distribution patterns and 20 MA" in 8, 4 hourlies or 30 min "Line Charts" (or Candle Charts), together with MACD "overbought and oversold indicators" with its Patterns. If you study them for awhile you will understand when it the best entry point. The remainder is for money management and discipline and of course, experience. Good trades�

On technical side of the trading, the first thing to do is to find out the trend in one�s trading time frame and the proper trading strategy for that trend. Some ride positions for months, while some ride positions for less than an hour or a day and their views of the trend obviously differ. For a trader who is running a position for months, a daily fluctuation may be just a meaningless noise while for a daytrader or an hour trader, a daily fluctuation could be a monstrous tsunami. Having a precise definition and a technique of identifying a trend and the turn of a trend in a trader�s time frame, and adopting the right strategies for that trend is the first elementary step in a hard school of trading. Imho.

I keep my technical side on any pair as simple as possible largely relying on other�s moves to see how I can take advantage of the situation. So for me the strategy is to "range trade". Please always give stop order per your risk profile when you open any new position. Medium-term reversals can be confirmed only in monthly, weekly and daily charts. Chart reading is not to predict the tops or bottoms of any move, but to confirm the change of trend as soon as they are made and adopt right strategies in that new trend. Good trades.

Each cycle is different from the last one and that is the beauty of the market. It is extremely important to look at the big picture from the distance rather than studying the minute and hourly charts with a microscope. And repeat the whole show again and again �til it shows the sign of turning in daily or weekly chart. And flip. Good trades to you.

I use very primitive charting methods. Please read 8 hour charts of EUR/GBP with 20 and 40 MA, and read round figures and breakout (from consolidations, then you will realize the method cannot be more primitive than that, but still deadly effective). Buy on dips towards the support and add up on breakout of that consolidation treating the two as one trade with same stop loss and "keep them" as long as the market moves in your way. Good trades.

As a rule of thumb, 20 MAs in 8 hour, day, week and month are useful for its directional tendency and as a resistance and support point. Not sure how much it is useful in daytrading though.

Please have a look at Eur/Usd and Usd/Jpy weekly 10 RSI and Aud/Usd monthly 10 RSI "patterns", not levels. Then you will find out primitive things work better when coupled with even simpler MAs. And RSI is useful "only in these weekly and monthly time scale" as far as I can see. You can ignore RSI in short-term scales as the inventor of RSI, Wilder, told us long ago.

Good afternoon. Agree with your observation. Once Soros of Quantum Fund hit the nail on the head with his theory of reflexivity in the market and that is exactly how these players work in the market. That rather romantic tool of daily candlestick chart is useful because whenever some players start positioning to start or stop short-term moves in Yen market, say several hundred pips, for whatever reasons, it reveals their intention to the market, more often than not. It sounds so weird to say tens of yards are spent relying on indicators so primitive like hand-drawn candlestick charts, but that is the truth in Yen market. Same as millions of soldiers risking their lives depending on how their generals draw up the battle plan with their cheap red and blue pencils in their operation room desk. Crazy world, I would say, but that is the fact. And as you say, battle is a battle and those ones who make their first move with their candlestick may not always win either. I happen to believe if a child can learn to trade with some simple signals he will do better than most traders, most of the time, making a good living. But then again, movin market is more than just following the signals. Good trades to you.

I guess if you are a daytrader, 30 minute and 15 minute candle charts and line charts in combination with MACD and MA could be more useful than hourly charts or even daily charts. Especially watch out for the down-sign and up-sign with long tails in candle charts and confirmation of the change of short-term trend in line charts breaking accumulation area in these charts. If you are a nimble trader, even a candle-sign is enough to start moving in with stops above or below the long tail end. For dollar/yen trade, read swiss/yen, pound/yen and euro/yen together to confirm the top or bottom. For Eurodollar or dollar/swiss trade, read pound/swiss and euro/pound together to confirm the same. If you are a daytrader, what matters is the flow of that particular day, not the bull or bear bias, so, 30 Min and 15 Min Candle Charts and Line charts are not bad tools to follow these flows. Good trades.

USING CROSSES AND GOLD
EUR/GBP and GBP/JPY have a value as the leading indicators of EUR/USD and USD/JPY moves. EUR/CHF is similar to EUR/GBP in forecasting value but stopped trading and looking at it a long ago after experiencing difficulties in running good sized positions there.

In short, EUR/GBP and GBP/CHF are leading indicators for EUR/USD and USD/CHF, and GBP/JPY, EUR/JPY and CHF/JPY are leading indicators for USD/JPY. EUR/JPY plays a very important role in EUR/JPY direction too, while GBP/JPY plays the same role for GBP/USD. For example, yesterday�s EUR/USD weakness largely started from EUR/JPY sales keeping EUR/USD and USD/JPY downwards. As a rule of thumb, if EUR/USD does not move but EUR/GBP moves first, it is a good indicator that someone is maneuvering in EUR/USD front in the same direction later, and when EUR/USD moves but EUR/GBP does not move first or in tandem, then it is highly likely EUR/USD move is countered by its opponent and the opposite move is highly likely soon. Same applies in USD/JPY and EUR/JPY, GBP/JPY front in the same fashion. Imho. Good trades.

Good morning. EUR/USD, EUR/GBP, EUR/JPY and GBP/CHF all have correlation to a certain degree affecting each other. It simply shows how the money moves around in these pairs. For daily candle studies, it is more accurate to read them all to see where the flow is going, and same for 4 hourly or hourly or even 10 minute charts. In fact, GBP/CHF and EUR/GBP in many cases move a day or two before EUR/USD. Even by watching GBP/CHF and EUR/GBP charts, short term or long-term as above, you can manage to move in front of EUR/USD moves in many cases. Same goes for GBP/JPY and EUR/JPY charts for USD/JPY moves. More study on these pairs moves will reveal some more interesting things too. Good trades.

I have been using USD index and Eur/Gbp (or Gbp/Chf) as my guide dogs since late 70�s with reasonable accuracy for medium-term trend. Never lost money on medium-term bet relying on those guide dogs in fact. But that cross does not work when Pound is deliberately devalued.

AUD/JPY is one of the important pairs influencing AUD after Dollar, Euro and Pound. Usually falling AUD/JPY is good for Yen Bulls as well.

Good evening. Gold is the mirror of Dollar for hedging purposes and the co-relation is excellent. Sometimes, when I am tired of double checking too many "inside infos" rushing in every hour, I just watch Gold to confirm and go ahead with the moves. Gold chart is one of the top charts you must always watch in forex trading. Eur/Gbp chart, along with the Eur/Jpy chart, is an excellent mirror for Eur/Usd directions most of the time too. Gold, Eur/Gbp and Eur/Jpy charts will tell most of the market story most of the time with Gold and Eur/Gbp leading Forex world most of the time. Good luck.

USING STOPS
Please always give stop order per your risk profile when you open any new position. Medium-term reversals can be confirmed only in monthly, weekly and daily charts. Chart reading is not to predict the tops or bottoms of any move, but to confirm the change of trend as soon as they are made and adopt right strategies in that new trend. Good trades.

For position traders, the basic bias of the market in his trading time frame, the liquidity situation of the market in that time frame, and the size of trading positions must be all taken into account when exercising stops, be it based on tech levels or a certain sum of money or a percentage of a total equity. It is a must but also it is form of art like trading itself. And every trader must develop his own unique style of using stops. But unfortunately, all this can be learned only by paying a certain amount of tuition fee to the market.

Yes, but as a position trader I never use tight stops. Same goes for trailing stops. All very far away from the market not to be taken out by meaningless market noises. Initial stop is always 1% of my total equity, and never commit the whole position at a go but always scale in and scale out.

Good morning. You can avoid your problem in most cases by leaving the market always by trailing stops, i.e., do not set the profit target. So, any winning trade must be held as long as market does not tell you to leave by hitting your trailing stops. When you enter the market by market signals and leave by stops or trailing stops, it solves the most difficult part of decision making process rather easier for traders. Good trades.

USD/JPY HINTS
One of the silly rules of thumb in USD/JPY trading is it rarely moves 700-800 pips in a row without 200 pips or more correction in the middle and it almost always retraces back to 350 pips advance point from the start of its 700-800 pips move. All because of liquidity problem in Yen market.

The real battle of bulls and bears for medium-term trend is always around 20 day MA line in Yen market. Daily option activities here and there are of no relevance as far as medium-term trend is concerned.

Yen position traders sit on their positions gunning for several hundred pips at one go. For day trades, much more nimble approach is required. As Yen position trader, please never buy anything below falling daily 20 MA and never sell anything above rising daily 20 MA, no matter how attractive they look. So start buying only when daily 20 MA starts rising, from whatever level, is not only safe but also proven way of making money although it sounds so simple. Imho. Good trades.

You can read how Yen traders make intraday moves by watching 30 min USD/JPY candlestick chart or line chart if you are not familiar with candle nuance. 4, 8 hourlies are for positional moves. Good trades.

The Tokyo Fix is where the FX rate is established for the day by the banks for their customers. So even though the FX rate may change during the day the customer gets the rate at the time of the fix. There is a fix in Tokyo, London and Toronto (more I am sure). Importers generally settle their accounts on the 5th, 10th, 15th, etc, of the month before and up until the fix ():50 GMT). Sometimes, if there is an "excess" dollar demand $/JPY will continue to climb slightly after the fix. $Bulls will also use this as a staging for extending a rally. $Bears (Yen Bulls) will use this to establish better shorts.

REACTING TO NEWS
News or data are always read by the market along the prevailing market bias. Data can provide a good reading for the state of the market. If the data is bad but the price is still rising or not affected, it must be a bull market which means buy on dip strategy is a better one. Conversely, if the data is good but the price is not rising or even falling, it must be a bear market which means sell on bounce strategy is a better one. The inflexion point must be when bad news or good news. no longer affect the prices as they have done before. Medium/long-term bias changes are usually accompanied by such reactions to the news. Fwiw.

It is not the numbers that counts but how the market reacts to the numbers that counts. That gives some comfort to those who are not privy to the numbers already

FAIR VALUE
Good evening. The concept of fair value in any currency is largely that of CBers and economists and not much about trading ..Almost always currencies overshoot from the fair value areas some 20-30% in their medium-term trend and what makes all hard currencies range in reasonable areas overtime since we had this floating regime in 1971 must the ability of relevant CBs to control the currency ranges and their real economy's weakness or strength to support those ranges. ECB folks were not joking when they said Eur/usd was some 25% undervalued from the fair value when Eur/Usd was below parity levels two years ago. Same goes for BOJ when they were saying Yen was some 10-20% overvalued when it was trading around 100 some three years ago too. That is how these folks view the markets and try to guide the market. Of course, when US Treasury folks say "Dollar is still strong" when it is falling, they are begging the market to sell more Dollars.

DIFFERENT CENTERS
The first hour after opening in Tokyo tend to provide the best liquidity of the day and that is when most heavyweight players try to position their way without having much difficulty for the day. Sydney open is more often used as an ambush hour by certain players using the time window till Tokyo open. One rule of thumb is when Yen jumps at Tokyo open the chances are it will continue throughout the day and a few more days. On different point, learn to position trade Yen or any other currency if one is really going to make a big money one day. Fwiw.

One hour from Tokyo open, London open and NY open are the times where most liquidity of the market exist. And that is where market makers are busy setting the trend for the session or even the day. Your observation has a merit because most of the session or daily moves are started either in London open or Tokyo open or NY open. Especially London Open. Other markets are too thin for any good sized traders to make their market views felt. Good luck.

London is just a market place where all sorts of Forex folks flock to buy and sell. It does not have to be London folks. It could be anyone from anywhere in the world with deep pockets who start setting the market direction on a given day. Same goes for NY and Tokyo sessions markets. In any case, Tokyo and NY still relatively small markets when compared to London as far as Forex goes.

A WORD FOR NEW TRADERS
Traders that try to pick the tops and bottoms of the market throughout the day end up with mostly misery because inexperienced fellows in Forex departments even in first division clubs try to pick the tops and bottoms believing that is where the real big money is. And ego demonstration and bonus consideration comes into play too for smart college graduates. The first thing I do when facing new recruits is, do my best to destroy their ego and fear in the market first. Once their ego and fear are reasonably cured, they become dutiful followers of the market like Pavolv�s hounds and they can survive. And once they can survive, they can be taught on how to put temporary tops and bottoms to the market at much higher level of speculation school. Then, that may take at least a decade of training too.

QUIPS FROM BC
Forex is all about how to hit the next ball correctly rather than worrying about something of a distant future. The next ball may be for 2 pips or 20 pips or 200 pips or 500 pips depending on a trader�s style.

Anything is possible in Forex.

I am useless as a daytrader. Corrections may take days or longer to complete.

Good quality info is everything in this game.

Bottom picking in the Usd/Jpy is the Mother of all risky trades.

We learn how to trade till we stop trading and we learn from each other everyday. That is the beauty of trading and life in general.

Do not worry about what market will do. Just worry about what you will do when market reaches your "pain point" or "happy point". You will have an easier life as a trader that way.

Forex players can operate quietly, but they cannot hide their moves in those charts.

Good morning. Yes, no liquidity and no conviction by players make the market look like a vagrant loitering in his usual area. Good forecasts and trades.

Good sleep is essential for good trading but most of the traders I know of seem to sleep with one eye open.

Forex Money Management

Put two rookie traders in front of the screen, provide them with your best high-probability set-up, and for good measure, have each one take the opposite side of the trade. More than likely, both will wind up losing money. However, if you take two pros and have them trade in the opposite direction of each other, quite frequently both traders will wind up making money - despite the seeming contradiction of the premise. What's the difference? What is the most important factor separating the seasoned traders from the amateurs? The answer is money management.

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.

Amount of Equity Lost	Amount of Return Necessary to Restore to Original Equity Value
25%	33%
50%	100%
75%	400%
90%	1000%

Figure 1 - This table shows just how difficult it is to recover from a debilitating loss.

Note that a trader would have to earn 100% on his or her capital - a feat accomplished by less than 1% of traders worldwide - just to break even on an account with a 50% loss. At 75% drawdown, the trader must quadruple his or her account just to bring it back to its original equity - truly a Herculean task!

The Big One

Although most traders are familiar with the figures above, they are inevitably ignored. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. Typically, the runaway loss is a result of sloppy money management, with no hard stops and lots of average downs into the longs and average ups into the shorts. Above all, the runaway loss is due simply to a loss of discipline.

Most traders begin their trading career, whether consciously or subconsciously, visualizing "The Big One" - the one trade that will make them millions and allow them to retire young and live carefree for the rest of their lives. In FX, this fantasy is further reinforced by the folklore of the markets. Who can forget the time that George Soros "broke the Bank of England" by shorting the pound and walked away with a cool $1-billion profit in a single day? But the cold hard truth for most retail traders is that, instead of experiencing the "Big Win", most traders fall victim to just one "Big Loss" that can knock them out of the game forever.

Learning Tough Lessons

Traders can avoid this fate by controlling their risks through stop losses. In Jack Schwager's famous book "Market Wizards" (1989), day trader and trend follower Larry Hite offers this practical advice: "Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade." This is a very good approach. A trader can be wrong 20 times in a row and still have 80% of his or her equity left.

The reality is that very few traders have the discipline to practice this method consistently. Not unlike a child who learns not to touch a hot stove only after being burned once or twice, most traders can only absorb the lessons of risk discipline through the harsh experience of monetary loss. This is the most important reason why traders should use only their speculative capital when first entering the forex market. When novices ask how much money they should begin trading with, one seasoned trader says: "Choose a number that will not materially impact your life if you were to lose it completely. Now subdivide that number by five because your first few attempts at trading will most likely end up in blow out." This too is very sage advice, and it is well worth following for anyone considering trading FX.

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 Stops

Once 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.

Figure 2

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.

Figure 3

Figure 4

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.

Conclusion

As you can see, money management in FX is as flexible and as varied as the market itself. The only universal rule is that all traders in this market must practice some form of it in order to succeed.

By Boris Schlossberg, Senior Currency Strategist, FXCM

Reprinted with permission of Investopedia

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.a

High Probability Trading

Even traders with limited experience start to realize that we are not trying to capture every market move. We want to improve our odds and reduce our frustration by filtering, for high-probability trades.

The combination of trend and Fibonacci techniques can provide powerful signals for higher probability trading. We already know that trend-lines have some validity, and so do Fibonacci levels. Combine the two, to improve your chances.

The following charts are the USD/British Pound GBP. First, the daily chart as of October 5th 2005. I have drawn a red down-sloping trend-line joining the two recent swing highs.

The chart has moved down since early September , making a down-trend of consecutive "waves" with lower swing highs and lower swing lows. There were several opportunities to take advantage of the down-move. In this tutorial we will focus on the October 6th opportunity.

In a down-trend we want to short those swing highs, and take profits on swing lows. We don't want to short every time we **think** we have a swing high. If you have tried that, you know about whipsaw and fake-outs already haha. We only want the best trades, those which are more likely to succeed. So how do we choose an optimum entry point?

Our odds are improved if we have a swing high near a down-sloping trend-line (in red on the chart). Markets tend to reverse at Fibonacci levels. So if we have a significant resistance level near a trend-line we have an even better chance of success.

The next chart shows the GBP with Fibonacci resistance levels. Notice the "SK Resistance" level. This represents an area of significant resistance, with a higher probability of a reversal.

If you are new to Fibonacci, those studies look like a confusing series of colored lines. Learning how to use these Fibonacci studies, and which of them are stronger (higher probability), is really easy! I have made two video seminars that explain this.

That "SK Resistance" level, coinciding with a trend-line is an optimum shorting zone. If the market reaches that area (we can't be sure it will), and if the market resists there, we want to take a short position. Once the resistance materializes, it will be difficult for the market to move against us.

Most of us are not trading the daily chart, but we can use the longer-term charts to find **powerful** trends and Fibonacci levels. The next chart is a 60-minute chart. I choose 60-minutes because it clearly shows when resistance has materialized. You may prefer a 30 minute or 5 minute chart.

The following 60-minute chart shows how the Pound rallied to the SK resistance level, and the trend-line. It rallied over those, tested them briefly, then retreated. There are several ways to determine whether resistance has materialized. I have some very powerful techniques for that purpose. However we want this tutorial to focus on some basics. So for now we will use the obvious breaking of the rising trend as our trigger.

During that rally upward, the 60-minute chart has a series of higher swing highs and higher swing lows. Once we broke the highest swing low (see the last bar on the above chart), we know that up-trend has expired. So we want to start shorting rallies and take profits on dips as shown on the next chart (60-minute chart).

Notice how the market broke down, and never looked back! That is what happens when you combine trend-lines with Fibonacci techniques. The best trades go your way and keep on going. That is a characteristic of higher-probability trading.

If this tutorial makes sense, you are ready for my Fibonacci Trading videos! My two introductory videos are inexpensive, and they receive glowing reviews almost daily. You can take your trading to the next level, bring these powerful techniques to your trading just by watching my video seminars.

Taking Profits

So much time is spent on entering a trade. Today I want to focus on some exit strategies. This is not a full Fibonacci course, so if you don't understand the basics I suggest that you visit my website for help with those aspects.

Human nature makes trading very challenging. Sometimes you want to exit a trade too quickly when it goes against you, and to cling on to a winner too long. Too often a winning trade will reverse, taking back most of your profits, or even going into a loss. On the other hand if you exit too soon, you risk missing some big profits. You may find that you're sitting on the sidelines while the market continues well beyond your exit.

In this lesson I'll show you how to bank those profits before they turn against you.

First look at this FOREX chart (JPY hourly chart).

Let's imagine that you were clever (or lucky) enough to enter long near point "A". You're feeling pretty good when price reaches "B". So good that you don't want to exit, because the up-thrust just before "B" give the impression that this market wants to go further.

Before you know it, the market reverses and heads towards "C". Right at "C" you get scared and bail out with a little profit. Not much profit compared to exiting at point "D" or even at "F".

You exit near "C", and feel relieved until you see the market heading (thrusting) up to point "D". You stop kicking yourself long enough to enter when it breaks above "B", just a little before the high at "D".

Soon after your entry near "D", the market retraces to "E", and on the way breaks below the high of "B". Breaking below the high of "B" feels scary because you're thinking this chart could be back at "A" in a flash. So you exit at "E" licking your wounds with a loss in this trade.

You start to notice more frustration now, when you enter somewhere between "E" and "F". You're feeling good near "F", but then the chart dives to "G" and you're stunned! This is a losing day for your account, and it's beginning to hurt.

By this time you feel like the whole market is watching your trades, and they're doing exactly the opposite of what you are doing. You start thinking that they wait for you to enter before they slam you and empty your account..

You have wasted your emotional capital, you don't want to trade any more. You don't have the stomach to consider shorting the rally after "G" to take profits at "H".

There must be a better way!

Banking those profits.

You should seriously consider using profit targets to improve your trading performance. There are several ways to do this, my preference is to use Fibonacci techniques.

On the following chart, I have added a Fibonacci expansion using points "A, B, C". This provides us with three profit targets. They are at 116.52, 116.93, and 117.59, see the blue arrows.

If I add another Fibonacci expansion using points "C, D, E", then two more profit targets are added, at 116.87 and at 117.22 . I have not added those studies to the chart, in order to keep things simple for now. You will notice the 116.87 target is quite close to the profit target at 116.93 in the above paragraph. And the 117.22 target is remarkably close to the swing high at 117.32 which is between E and F. We'll ignore those for simplicity, just remember that Fibonacci is excellent at predicting probable turning points.

The trick with Fibonacci is that the market sometimes blows right through a profit target. So what do you do then? Simple - you stay in the trade! But sometimes the market reverses shortly after a profit target.

Sometimes the market respects a certain Fibonacci level, sometimes not. Some Fibonacci levels are "stronger" than others. Advanced Fibonacci techniques are able to help determine which have more validity, but that is beyond the scope of this lesson. What mechanism could you use to exit the trade?

One practical method of timing a trade is to use an oscillator. Another is to use a moving average. When an oscillator shows a decline of momentum, or when price crosses a moving average, you could exit the trade. Let's explore the "oscillator" option in the following chart.

In that chart, I have removed the Fibonacci studies (less clutter), leaving the blue arrows for profit targets. At the bottom I have added the default Stochastic per E*Signal charting software. I have added a red vertical line whenever the Stochastic "fast" blue line crosses the "slow" red line just after price rises above the Fibonacci target. If you exited when price reached those vertical red lines, you'd be a happy trader!

Already you can see the potential of using profit targets with an exit trigger.

You may want to research the following:

• Possibly exiting a partial position at each profit target.
• Consider entering long again on the dips, when the chart begins to rally again.
• Consider using multiple time-frames, perhaps Fibonacci studies on the hourly chart, and exit triggers on 5 minute charts.

Forex News Trading

The last 30 minute candle gives the picture. In the bottom right corner the time is indicated as 08:40:29. The data release was at 08:30 and the pre-release price was 1.2670 (EURUSD). The action during these ten minutes dwarfs the preceding price action of more than 60 hours. According to News Trading 2006, the spike from 1.2670 to 1.2710 should have had follow-through as the increase in non-farm payrolls was only 50,000 whereas 125,000 was expected. Even a significant adjustment to the previous month simply negated the impact of the 50,000 and brought the month’s net adjustment in line with the three month average. (This supposedly should have resulted in a “no trade” due to no volatility. Big revisions to previous jobs reports are a standard feature and part of the expectations.)

The more subtle marketing wizards package it very scientifically. They use impressive looking historical statistics to show how price action unfolded immediately after certain economic data releases. See the pattern, they trumpet, and make money from it.

The less subtle approach explains how to beat the gun with proprietary data feeds on supposedly important data releases. In reality, most of these data releases have never had any significant impact on the forex market before, but despite this, the marketing wizards invite you to join them in the shoot-out by paying a monthly subscription in the belief that this will help you beat the market makers.

Before I go any further in showing you how to really lose your money, your mind and your interest in this most lucrative market, let me just tell you why I think you can pay attention to what I have to say on the topic. Apart from the fact that I describe in my book, Bird Watching in Lion Country – Retail Forex Trading Explained (BWILC), the absolute necessity of real-time analysis and the folly of basing a trading strategy for the long-term on very short-term technical analysis indicators - or other illusionary patterns - I also explain a term which I coined: “relational analysis”. This simply means that, if you are trading forex, you have to relate three things all the time: price, time and events.

News trading as a concept has mainly to do with “events” and specifically with those anticipated events that cause prices to move more than usual, but only briefly - brief even in terms of short-term trading. News trading as offered by the marketing wizards takes this concept and then distorts it to rob you of your money.

Non-farm payrolls: March 1998

My mentor is an institutional bond trader who has a simple view on technical analysis: “if the prices are high, it may be time to sell and if the prices are low it may be a time to buy”. (He amusingly referred to traders’ screens filled with every conceivable squiggle, line and indicator as Playboys – dirty pictures.)

The point he was making is that trading decisions were not made based on technical analysis other than for the basic positioning it could give you as regards where the price is now, relative to where it has been recently. If you are closely monitoring the market you will have a feel for this anyway, but charts are helpful for a quick snapshot picture.

Noting and being acutely aware of upcoming economic data releases was one of the main elements of his analysis and approach to understanding the market and price action. This is what he based his trading decisions on. At the time I started trading in 1998 I was only vaguely aware of things like CPI, PPI, trade balance, money supply, and unemployment – all the things that give economists and analysts that warm and fuzzy feeling – but I quickly acquired an interest, figured out what each of them meant and started using the Sunday papers’ business section to monitor releases and follow the comments.

At this stage I was trading bonds on margin here in South Africa.

I had no live real-time price feed, nor a charting service. After a few months I got a pager-based informational price feed which was about as real-time as you could get. In addition to price changes it also informed me of economic data releases. If you saw a price change occour that made you to want to trade, you used the phone to call the broker - who wasn’t in the primary business of fielding these sorts of calls - and so, if you were lucky you got through to someone who was willing to help, and that help usually took the form of discussing how stupid your anticipated trade was.

My dumbest trading idea ever

Now, you have to understand, there is a psychological element to all of this. Big price moves are exciting – and they lure traders. If you could figure out how the prices would react to the data releases you might just have it made, I thought. But my mentor explained to me why this was about my dumbest idea. Of course I knew everything, and disagreed. “Look”, I said “Here are all the examples, I have this cracked.” But I didn’t. And he explained to me why. Let me first give you some background.

One of the things that I realized when looking into the phenomenon of News Trading (2006 retail FX version) was that it was brand new in the forex market (you’ll see how new below.) I have been watching economic data and its effect on short-term forex pricing since I started in forex in 2000/1. I did this because this is the genetic code of the forex market. Very early on I bought a book by Brian Kettell, “What drives the Currency Markets”? This book contains a dedicated chapter on the phenomenon of expected economic data releases and the academic research on their impact on the US dollar, in the very short term and also in the longer run. With the right perspective of the market all data releases make sense, as do price action around these data releases. (I am not talking about the on-the-release spikes.)

When I decided to write this newsletter, something prompted me to go to my 1999 diary in which I did some initial, and to me, important research on price behaviour and relating different markets’ influences on the market I was involved in (the South African government bond market). And then I almost fell on my back. What did I see?

On Friday 5 March 1999 at 15:30 local time I wrote:

“US Employment as expected. 14.16% à 14.11% !!!!”

I was referring to the non-farm payrolls report. My note indicated that it had come out as expected and my exclamation marks indicated that it had triggered a relatively big price move on the South African bond market.

Consciously or unconsciously, relating price, event and time has been a part of my trading from the very beginning and a constant feature of my analysis. It has become the genetic code of my 4 X 1 strategy and relational analysis. I watched the effect of the non-farm payrolls for probably 5 to 6 years before many so-called forex gurus caught on. In fact, many of them mechanically recited the mantra “don’t trade on a Friday, play golf” until quite recently.

If repetition is the mother of all learning, my news watching experience may have been behind what I said to my clients in my Daily Briefing (GMT 06:00) on non-farm payrolls (GMT 12:30) October 6, 2006:

You can also rest assured that the new bread of news traders will have an increasing tussle with their clearinghouses - a fight the news traders will lose and due to the historical sentiment that the jobs report is the big one, the day that April / May 2003/4 - can't exactly remember which one - will be repeated and the blood will be flowing is nearing. Someone is going to get sick of it and run the market and shake out every trade straddle and news trader trick in a million mile radius ...

My dumbest trading idea ever - reborn: Class of 2006 News Traders

The idea of doing something on News Trading came to me after I had launched my Bird Watching Newsletter in August 2006. The first two newsletters covered the topic of leverage. I didn’t know what I was going to do for the third. And then it came to me as a flash-back to my days as an early bond trader, how I was going to beat the market. Dumb idea, the dumbest I have ever had. That was then, now it is 2006, but history is repeating itself. There are a lot of newbies thinking they are sitting on the best idea since sliced bread, but as they’ll find out, they are just being plain dumb.

I cottoned on to the revival of the “dumbest trading idea ever” (2006 version) when one of my clients who was trading a live account contacted me on the Instant Messenger, with an ominous “what’s happening here?” “Here” was the market and a recent data release, and “what was happening” was basically nothing. Yet my client was bothered. Why? (As background I should perhaps just mention that my main source of real-time information and analysis is CNBC Europe. All economic data releases are discussed beforehand, flashed instantaneously, and analysed afterwards. My television is near me, either with the sound on (not very often), or with the sound way down, which allows me to see the ticker and news flashes.)

So for a moment I was taken aback by the client’s question because as far as I knew nothing had happened and, the way I had anticipated it, nothing was supposed to happen. It was some minor data release in the US of no real consequence for forex and the release was basically as expected. However, zooming in on my very short-term charts I saw there had been a flurry of price action around this mundane data release and a relatively significant spike and then a reversal but, all said, no big deal, yet my client was anxious. Why?

And then the penny dropped. News Trading had become the big new thing. I should have picked it up, the signs were all around me. Marketing wizards were punting it. Bird Watching affiliates had become big on “News Trading” recently. I checked and sure enough, there had been a number of recent referrals from those sites. New clients increasingly had “News Trading” in their vocabulary. I should have seen it earlier, but there it was, the new manifestation of my old dearest and dumbest trading idea ever, the News Traders of 2006.

And where News Trading is present, sorrow, loss and confusion is never far behind. It was all so familiar. Of course it was much sexier now with instant information, many different feeds to choose from, analysts by the dozen, gurus by the bagful, and those exhilarating 1 minute and 5 minute tick charts tracking the rising and falling account equity of 1 minute-a-day News Trading “millionaires”, but the results were the same: people losing money.

Hop-a-long Cassidy and the Forex Kid

At school I read cowboy books. The only author I can remember now is the legendary Louis L’Amour.

Crossfire Trail; Showdown at Yellow Butte; Last Stand at Papago Wells; The First Fast Draw; The Quick and the Dead; The Sacketts; Hanging Woman’s Creek and many more.

If you haven’t read the books I am sure you would have at least seen a traditional western movie. The plot is pretty simple. There are cowboys and there are crooks. The crooks come to town and cause havoc. In ride the cowboys and you know the shooting is about to start. All the decent folk get out of the way, mothers grab children off the street, stores close, windows are boarded, old people get off the boardwalk, someone peeks from behind a curtain. There is danger in the air, and before you can say “shoot-out”, Main Street is cleared. The action starts, guns blaze, the bad guys turn tail. And sometimes there is an interesting sub-plot - some testosterone driven wannabe Kid with a gun joins in. He’s been told beforehand not to, but he can’t be dissuaded. He reckons he’s slick with a fast draw but he’s just an amateur. He comes up against the pros and the result is a dead Kid.

One of L’Amour’s books is called The Daybreakers … sounds a bit like The Day Traders.

The Class of 2006 News Traders know when there will be a shoot-out, they know it is going to be ugly, but they can’t be talked out of it. They’re the wannabe Kid. Don’t join the shoot-out, the greybeards tell them, but no, they know better.

The problem with shoot-outs is that so much can happen and there is a lot that can go wrong. For instance, the other guy can be faster on the draw. But he can also have a back-up man somewhere behind you, just in case. Crooks come in pairs (as do currencies). Shoot-outs are unpredictable, lead flying in all directions, and the only guy who benefits is the funeral parlour owner (the forex broker?).

News Trading 2006 version

As far as I can see there are two main strategies used by the Class of 2006 News Traders.

Strategy 1 – The fast draw

This dumb strategy asserts that by being quicker than the broker who gives you the prices to trade on, you can actually make money on a variety of data releases.

This can’t be done consistently, but people fool themselves into thinking it can with one or two text book examples, and using the perfect science of hindsight.

Strategy 2 – follow the leader

This strategy, equally unsuccessful, believes that if the prices go in one direction after the news release they will in the vast majority of cases continue to do so. This, despite good evidence that price action following data release is pretty much a random walk. Of course, this is not enough to deter Hop-a-long Cassidy and the Forex Kid, and they will grimly hang in there until the last bit of life blood is drained from their account.

Slick marketing wizardry shows technicolour examples of fantastic big directional moves on news releases according to the classic News Trading models, ie, the straight forward shootout. Recently however the reviews of their trades are punctuated, with “classical reversals” (being shot in the back?), exceptions to the rule, and other qualifications - only the traders using the professional services offered at a price (like opening and funding a live trading account) are privy to this “inside info”. In other words, simplistic marketing is used to lure Forex Kid to the shoot-out and the moment he arrives he is caught in a deadly crossfire. Doesn’t this sound ominously like the intra-day technical analysis models touted by the self-same forex marketing wizards?

Why do Hop-a-long Cassidy and Forex Kid keep ending up in the mortuary?

It is simply a fact, based on statistical probabilities, that when there is more than a certain amount of lead flying about, you will be hit.

When the shoot-out of data releases starts, the wise old men of Forex Town, sitting on the veranda’s day in and day out watching the daily lives of Forex Town’s folks, vacate Main Street. That is why they are old – remember the adage: there are old traders and there are bold traders but there are no old bold traders.

Many readers (at least all those who have read Bird Watching in Lion Country) know that one of the major delusions of retail forex created by the marketing wizards is that the forex market is ideal for technical analysis. Every marketing wizard trick was initially built on this illusion. People with a deep understanding of technical analysis, which most starry-eyed newbies in the forex market don’t have, know that one of the pillars of technical analysis is accurate volume information. If a move occours on high volume it is much more meaningful than a move on low volume (because a move supported by volume is likely to continue and not peter out in a false break).

Where’s the volume control?

In the spot forex market there is no reliable real-time volume information available, particularly on the retail level. Notwithstanding this, extreme importance is given to technical analysis by the marketing wizards and volume was simply substituted by fast price moves, which, I might tell you, is a wholly inadequate replacement. In other words, a relatively large / fast intra-day price move is seen as extremely important - it must have been on large volume, the argument goes. This, however, is bogus. A large, fast move in the forex market can be caused by almost anything.

Believing it is volume just because the price is moving fast and far, will cost you dearly.

On an intra-day level, fast and relatively large price moves are usually caused by a lack of liquidity. In fact it is a situation of lower, not higher volume and the pros actually don’t like trading if they feel the liquidity is thin and they are not getting the prices they want.

Volume in the currency market can come from two sources: either very large single transactions by a single or handful of participants with the same objectives, or many participants with smaller transactions with the same objectives at any given time. If you for one moment think a number of rational, professional money managers, traders or executing agents will use an erratic data release to do large transactions, you will seriously have to rethink even your most basic assumptions about the forex market. Since 2001 there has been an explosion in general forex market volumes and a large portion of this increase was due to the growth in the numbers of hedge funds and smaller money managers like Commodity Trading Advisors (CTA). It is certainly fair to assume that this large increase in the number of participants contributed to both better liquidity and larger volatility across all time frames in the FX market.

Nobody in his right mind, with his business or bonus at stake, is going to do highly leveraged trades and take undue risks when price movements are random. You have to understand that this is simply not how professional investors or traders, responsible for other people’s money, trade. Highly leveraged gambles on intra-day events are just not part of their repertoire. These guys are pros, and if it is not part of their repertoire, it should not be part of yours.

Don’t trust your mother, but trust your forex counter party

Because the forex market is not a centralized exchange regulated by exchange rules which assure participants that their transaction will be honoured, you have to trust your counter party. What makes this dynamic so interesting is that your counter party also has to trust you and that if this mutual trust is violated someone is going to come short.

Unfortunately retail traders are prone to seek opportunities to exploit the perceived faults in their counter parties’ armour. The moment that this threatens the sustained profitability of the counter party these schemes fall flat – they always have and they always will.

Scalper arbitrage was probably the first of these schemes. As marketing wizards competed to lure more clients, they decreased spreads and margin requirements which opened opportunities for arbitrage pip scalpers to enter the fray using a variety of tricks at the expense of their counter party – the market maker. The pip scalpers had fantastic demo account track records. Things changed the moment the market makers’ (real) money was on the table. This was probably the first fight that the retail traders (the pip scalpers) lost hands down against the market makers, who simply instructed their dealers to identify the pip scalpers who didn’t heed the warnings, and take them out. Problem solved.

The second one was straddling news releases. The thing the retail traders tried to exploit was marketing wizards luring clients with guaranteed fixed spreads and guaranteed stops. It was basically just the US non-farm payrolls that really attracted this group a few years ago. They would place entry orders on both sides of the market just before the data release. Apparently a win-win scenario. So what did the market makers do? They refused to guarantee that they would execute your price on the level you had entered it. As a result they could enter you at a bad price and then take you out on the stop on the retracement and even if you then made money on the other leg of the straddle, it was hardly enough for you to cover your loss on the first stopped-out leg.

However, systemic risk for the market maker remained a problem. If a few hundred or thousand retail traders take 100:1 and 200:1 bets on a data release, the market maker became seriously exposed. Market makers are there to make money, not to run the risk of blowing up on one economic data release.

The problem was that they had to cover themselves against the positions taken by the non-farm payroll straddlers by hedging their exposure at their own clearing houses. Now you try to convince a big bank dealer to take a huge position one minute before non-farm payrolls release. He will send you packing. So the market makers couldn’t off-set their risk and thus had to carry the risk of huge and highly leveraged positions themselves. One bit of bad luck and a whole month’s profits could be wiped out.

The market maker makes the rules

There was a particular non-farm payrolls day a few years ago during which, just before the release, the market was run up about 60 or 70 points and on the data release it was run down about 150 points. Blood flowed on “Forex Street”. The shoot-out was rigged. Rumours abounded that a large futures company caused this outrageous price movement. The market makers had had enough and changed the rules of the game to restore order and prevent news release straddles that could harm them.

How did they do this? Well, they made adjustments to their business practices and their contractual arrangements with clients. Spreads are fixed under normal market conditions and so stops will be honoured under normal market conditions, but not under abnormal market conditions – market makers were free to widen their spreads and thereby pass the risk on to the trader. Sometimes they simply wouldn’t allow traders from entering orders shortly before keenly watched data releases. And the decision as to what constitutes normal and abnormal market conditions rests exclusively with the retail forex market maker. Problem solved.

The Class of 2006 News Traders vs Market Makers

Straddling is no longer an option, so News Traders do the next best thing. They try to beat the gun by guessing the direction of the market’s first move, and then they try to benefit with highly leveraged positions.

There are a few challenges, however:

Being fastest on the draw. This means you need to get a good price close to the pre-release price and before your market maker removes the arbitrage opportunity (initial price spike according to News Trading theory) in an instant.

Being fastest on the draw also means you have to draw faster than the rest of the mob trying the same thing. The risk of them jumping the gun enters the equation.

Before you can actually start drawing to shoot, you have to decide what this data release actually means and how all those who react after you, will react to the data release. What will have the main and immediate affect, the headline or the details?

In other words you must take a guess if this data release will indeed cause a large enough move for you to risk taking the highly leveraged position and secondly, you have to guess correctly the direction of this move vis-à-vis the US dollar.

Opportunists who can see what is going on don’t try to jump the gun but jump in counter the first spike, causing more erratic price movements.

Here is a challenge for anybody who thinks he is going to make a living by consistently beating the odds in a well-publicised shootout with the ever-evolving dynamics I have described above.

Let’s assume you will be able to beat the gun and regularly get an extremely good fill on your news trade. All you will be dependent on then is to analyse the market correctly to understand if the first spike will be up or down (let’s look at it from a USD perspective).

How do you determine that? Well that’s the question, and it doesn’t have a simple answer, despite what the News Trading gurus, analysts and TV talking heads say. There are simply too many factors playing a role: the history of this particular data release, expectations, how far expectations are off or might be off, the actual figures of the data release, the expectations’ reaction to its own expectations, the expectations reaction to the data, it just goes on and on until the final result is just another bout of randomness.

If you don’t believe me try tossing a coin over a period long enough to get a representative sample and then compare your results with that of your guru’s.

News Traders – architects of their own demise.

Let’s look at the dynamic the Class of 2006 News Traders cause in the FX market:

They don’t straddle the market beforehand. They jump in the market on the data release mostly in the same direction (there aren’t many gurus promoting this loony method to lose money). What happens? They cause a sudden great demand for a currency, let’s say euro. As a result euro’s price spikes up - I am talking a few seconds. Our news traders’ orders get filled usually at a worse price than they had hoped for but nevertheless they are in the market and then two things happen – this is before most professionals, still looking at the details of the release, even paid attention to the immediate price action. First this sudden demand just vanishes, so there is no upwards momentum to cause the follow-through the news traders hope will give them their measly pip target on their highly leveraged position. Secondly the weak “highly leveraged” hands with a few pips profit decide to get out, and in a wink there is suddenly euro supply and a turnaround materialises.

During all of this you have a market maker trying to make a decent market for decent clients and now having to manage this crazy action in a traditionally illiquid market. It took a very prominent forex market maker specialist - in fact the one currently with the highest net capital according to the CFTC reporting - about two months to figure out that they have a bunch of hooligan traders on their hands that could cause them serious damage. Their response, as I mentioned above, was to start fooling around with the spreads in order to discourage and chase away News Traders.

Fixed and floating spreads are a topic of a future newsletter, but understand this: widening spreads, thus increasing the cost and the risk to deal, is a basic protection mechanism of the forex market. In the week following 9/11 the New York Stock Exchange was closed as a protective measure against market meltdown. The forex market increased the spreads to 30 - 40 pips on the most popular pairs and 80 – 100 pips on the less liquid pairs.

News Trading is fundamentally an arbitrage opportunity, but like all arbitrage opportunities it will vanish very quickly if the market catches on. There is already evidence that this is happening and this evidence is clear from the reporting of the sudden change in fortunes of some of the gurus now selling this as a subscription opportunity. Whereas past records are reportedly flawless, recent records are certainly not.

In this case, just as with the initial pip scalpers, the arbitrage is basically a duel between the mob of retail traders and their market maker. There will only be one winner.

The death knell for News Trading as a popular strategy

Why do people latch on to News Trading? Because they buy the pitch sold to them by marketing wizards that News Trading is the new way to become a consistent winner. There is no other reason. Unfortunately marketing wizards have already realized that News Trading can make good money for them (but not for you). Here is the proof:

One of the biggest forex marketing wizard companies is behind the popularisation of the 2006 News Trading fad. You must understand that News Trading only makes sense if it is done highly leveraged and very regularly. According to this specific crowd you must push the leverage and you must, wait for this, “place close stops”, because “it will be suicide to use the high leverage without close stops”. (And this is true, but it is only a half-truth, and as with all half-truths it is the other half that kills you.) If this strategy were to be put forward by an individual he would appear foolish. But touted and encouraged by a market maker and their introducing brokers it appears legitimate and savvy.

I downloaded a free report some two years ago from a company. The report gave statistical evidence regarding very short-term price behaviour and supports my contention that it is basically random and that there is no edge to be derived from searching for repetitive linear patterns in these very short-time frames. This company has now changed its view on the randomness of short-term price behaviour. Needless to say they now push News Trading. Unlike some outfits who ask subscription fees for their services (guessing which way the market will go after data releases) everything is free, but you must open a trading account to use their automated News Trading service at the big marketing wizards mentioned above. Even documentation prepared by the big marketing wizards above is provided by this company.

It is pretty clear who sits behind the current popularisation of News Trading. The beneficiaries of regular highly-leveraged-tight-stop trading strategies are the market makers and their marketing agents who promote the viability of this kind of hair-brained trading.

(I again want to point out that while professionals may even play along and have a punt on some data releases it will never be a consistent feature of their professional strategy to expose themselves to any great degree. Yet this is what you are encouraged do: take all your trading capital, gear it up like crazy and take a punt on what is essentially an event with a 50 / 50 probability of satisfying your highly leveraged bet. The placement of a close stop practically ensures that in every instance you do not make money, the market maker gets a nice pay out in addition to whatever he made on the spread.)

And that is why I say you can bet your bottom dollar that most fools who try News Trading will lose. Different game, but the same people are selling it. Here is an example of why you should be very afraid.

A prominent and respected analyst at one of the largest market makers (and marketing wizards) wrote an article on News Trading in which the technical analysis approach to intra-day trading is debunked. Now this should make your ears prick up because they were (and still are) the very ones punting it – to take your money. Ever innovative, they have come up with News Trading as the big new thing, though in this research article news trading in the spot forex market is discouraged.

So what is the solution – can retail traders win?

Yes they can win. They can win if they first of all do not fall for the tricks of marketing wizards. In order to be able to do that you must understand the market very well. Secondly you need to have a strategy that is, or has aspects of it, used by professionals. Thirdly, and this is very important - you must not catch the unwanted attention of a market maker. Do not violate the trust relationship that is supposed to exist by trying to exploit weaknesses in the system and create a scenario where your market maker can only lose. He holds the aces because he can change the rules of the game. If you have a strategy that offers a winning edge, you will be able to negotiate this market and make money without resorting to any fundamentally flawed concepts and tactics which attract the sort of attention from your counter party that will end up costing you money.

There is more than one way to make money trading any market and there are a myriad of factors playing a role in being successful, including having a scientific edge, being a master of relevant analysis and working through the constant changes in the markets. Success as a trader does not come cheaply, it does not come overnight and it does not come from running after every fad touted by marketing wizards. Success is hard earned, requiring application of, and dedication to, sound trading and business principles. Bird Watching in Lion Country – Retail Forex Trading Explained is a thorough introduction to what you need in this regard and it explains in sufficient details my strategy and methodology that have served me and my clients well.

How to Read a Chart & Act Effectively

Introduction

This is a guide that tells you, in simple understandable language, how to choose the right charts, read them correctly, and act effectively in the market from what you see on them. Probably most of you have taken a course or studied the use of charts in the past. This should add to that knowledge.

Recommendation

There are several good charting packages available free. Netdania is what I use.

Using charts effectively

The default number of periods on these charts is 300. This is a good starting point;

• Hourly chart that’s about 12 days of data.
• 15 minute chart its 3 days of data.
• 5-minute chart it’s slightly more than 24 hours of data.

You can create multiple "tabs" or "layouts" so that it’s easy to quickly switch between charts or sets of charts.

What to look at first

1. Glance at hourly chart to see the big picture. Note significant support and resistance levels within 2% of today’s opening rate.

2. Study the 15 minute chart in great detail noting the following:

• Prevailing trend
• Current price in relation to the 60 period simple moving average.
• High and low since GMT 00:00
• Tops and bottoms during full 3 day time period.

How to use the information gathered so far

1. Determine the big picture (for intraday trading).

Glancing at the hourly chart will give you the big picture – up or down. If it’s not clear immediately then you’re in a trading range. Lets assume the trend is down.

2. Determine if the 15 minute chart confirms the downtrend indicated by big picture:

Current price on 15-minute chart should be below 60 period moving average and the moving average line should be sloping down. If this is so then you have established the direction of the prevailing trend to be down.

There are always two trends – a prevailing (major) trend and a minor trend. The minor trend is a reversal of the main trend, which lasts for a short period of time. Minor trends are clearly spotted on 5-minute charts.

3. Determine the current trend (major or minor) from the 5 minute chart:

Current price on 5-minute chart is below 60 period moving average and the moving average line is sloping downward – major trend.

Current price on 5-minute chart is above 60 period moving average and the moving average line is sloping upward – minor trend.

How to trade the information gathered so far

At this point you know the following:

• Direction of the prevailing trend.
• Whether we are currently trading in the direction of the prevailing (major) trend or experiencing a minor trend (reaction to major trend).

Possible trade scenarios:

1) Lets assume prevailing (major) trend is down and we are in a minor up-trend. Strategy would be to sell when the current price on 5-minute chart falls below the 60 period moving average and the 60 period moving average line is sloping downward. Why? Because the prevailing trend is reasserting itself and the next move is likely to be down. Is there more we can do? Yes. Look for further confirmation. For example, if the minor trend had stalled for a while and the lows of the past half hour or hour are very close to the 5 minute moving average then selling just below the lows of the past half hour is a better place to enter the market then just below the moving average line.

2) Lets assume prevailing (major) trend is down and 5-minute chart confirms downtrend. Strategy would be to wait for a minor (up trend) trend to appear and reverse before entering the market. The reason for this is that the move is too “mature” at this point and a correction is likely. Since you trade with tight stops you will be stopped out on a reaction. Exception: If market trades through today’s low and/ or low of past three days (these levels will be apparent on the 15 minute chart) further quick downward price action is likely and a short position would be correct.

3) A better strategy assuming prevailing trend down, 5-minute chart down, and just above days lows is to BUY with a tight stop below the day’s low. Your risk is limited and defined and the technical condition (overdone?) is in your favor. Confirmation would be if today’s low was a bit higher than yesterday’s low and the price action indicated a very short-term trading range (1 minute chart) just above today’s low. The thinking here is that buyers are not waiting for a break of today’s or yesterday’s low to buy cheaper; they are concerned they may not see the level.

4) Generally speaking, the safest place to buy is after a sustained significant decline when the bottoms are getting higher. Preferably these bottoms will be hours apart. By the third or forth higher bottom it is clear a bottom is in place and an up-move is coming. As in the example above your risk is limited and defined – a low lower than the last low.

5) The reverse is true in major up-trends.

Other chart ideas

• There are always two trends to consider – a major trend and a minor trend. The minor trend is a reversal of the major trend, which generally lasts for a short period of time.
• Buying above old tops and selling below old bottoms can be excellent entry levels; assuming the move is not overly mature and a nearby reaction unlikely.
• When a strong up move is occurring the market should make both higher tops and higher bottoms. The reverse is true for down moves- lower bottoms and lower tops.
• Reactions (minor reversals) are smaller when a strong move is occurring. As the reactions begin to increase that is a clear warning signal that the move is losing momentum. When the last reaction exceeds the prior reaction you can assume the trend has changed, at least temporarily.
• Higher bottoms always indicate strength, and an up move usually starts from the third or fourth higher bottom. Reverse this rule in a rising market; lower tops…
• You will always make the most money by following the major trend although to say you will never trade against the trend means that you will miss a lot of opportunities to make big profits. The rule is: When you are trading against the trend wait until you have a definite indication of a selling or buying point near the top or bottom, where you can place a close stop loss order (risk small amount of capital). The profit target can be a short-term gain to nearby resistance or more.
• Consider the normal or average daily range, average price change from open to high and average price change from open to low, in determining your intra-day price targets.
• Do not overlook the fact that it requires time for a market to get ready at the bottom before it advances and for selling pressure to work it’s way through at top before a decline. Smaller loses and sideways trading are a sign the trend may be waning in a downtrend. Smaller gains and sideways trading in an up trend.
• Fourth time at bottom or top is crucial; next phase of move will soon become clear… be ready.
• Oftentimes, when an important support or resistance level is broken a quick move occurs followed by a reaction back to or slightly above support or below resistance. This is a great opportunity to play the break on the “rebound”. Your stop can be super tight. For example, EURUSD important resistance 1.0840 is broken and a quick move to 1.0860, followed by a decline to 1.0835. Buy with a 1.0820 stop. The move back down is natural and takes nothing away from the importance of the breakout. However, EURUSD should not decline significantly below the breakout (breakout 1.0840; EURUSD should not go below 1.0825.
• After a prolonged up move when a top has been made there is usually a trading range, followed by a sharp decline. After that, a secondary reaction back near the old highs often occurs. This is because the market gets ahead of itself and a short squeeze occurs. Selling near the old top with a stop above the old top is the safest place to sell.
• The third lower top is also a great place to sell.
• The same is true in reverse for down moves.
• Be careful not to buy near top or sell near bottom within trading ranges. Wait for breakaway (huge profit potential) or play the range.
• Whether the market is very active or in a trading range, all indications are more accurate and trustworthier when the market is actively trading.

Limitations of charts

Scheduled economic announcements that are complete surprises render nearby short-term support and resistance levels meaningless because the basis (all available information) has changed significantly, requiring a price adjustment to reflect the new information. Other support and resistance levels within the normal daily trading range remain valid. For example, on Friday the unemployment number missed the mark by roughly 120,000 jobs. That’s a huge disparity and rendered all nearby resistance levels in the EURUSD meaningless. However, resistance level 200 points or more from the day’s opening were still meaningful because they represented resistance to a big up move on a given day.

Unscheduled or unexpected statements by government officials may render all charts points on a short-term chart meaningless, depending upon the severity of what was said or implied. For example, when Treasury Secretary John Snow hinted that the U.S. had abandoned its strong U.S. dollar policy.