How To Choose a Forex Trading System That Works and Suits You

There are so many different trading systems you could use to trade the forex market, some better suited to certain people than others. For example some people may find it easier to comprehend and take into account fundamental factors as opposed to looking at a screen covered in technical indicators, and vice-versa.

The first logical step in determining what type of trading system would best suit you is actually being aware and understand the widely known methods of analysis used in trading the currency market. Once you are aware of the tools that are available, you can generally tell what type of analysis suits you. For example some of the main technical analysis methods which are popular include:

* Pivot points
* Chart patterns
* Fibonacci retracements
* Candlestick patterns

And some fundamental factors which are widely used include analyzing:

* Interest rates
* Trade balances
* Unemployment rates
* Gross domestic product (GDP)

You may now actually be able to develop your own system by combining certain methods of analysis together, giving you a method which you are comfortable with. On the other hand you may decide that you would like to trade someone else’s system, either way, that brings us to the next step which is determining the profitability of a trading system.

Determining Profitability

Most people would think that back testing is the best way to determine a systems profitability. However back testing doesn’t always give you a true idea of how profitable a system is. The reason for this is because when you’re back testing your system on historical charts, you are only seeing the obvious setups which have occurred, and not always seeing the ones that are less obvious. These less obvious ones sometimes can produce losses, which is why back testing isn’t always the best method to implement.

A better method of determining profitability is by trading your system in real-time with a demo account. This would give you a true understanding of what your system is capable of. This would also allow you to familiarize yourself with your trading platform at the same time. When determining profitability you must look at it in terms of expectancy and opportunity.

Expectancy & Opportunity

These two factors together will be able to tell you what you could expect to make over a period of time. Expectancy is calculated with the following formula:

(Probability of winning × average win) – (Probability of losing × average loss)

This will give you a figure which is the average amount you can expect to make per trade. This shouldn’t be a negative amount, if it is you should look at some other method of trading since you cannot make money on a system that produces a negative expectancy. Obviously the higher this figure is the better. Now to the opportunity factor.

The opportunity factor is how often you are able to trade using your system. By multiplying your expectancy figure with your opportunity factor it will tell you how much you could expect to make over a period of time. The more opportunity you have to trade, the more money you should expect to make. This now brings us to the last component of a trading system, money management.

Money Management

Without proper money management you will end up as a statistic. In other words one of those 90%+ of traders who loose their money. Money management tells you how much of your account balance to risk per trade. The whole point of money management is to ensure your survival over the long term, and to preserve your capital.

The most common form of money management is the percent risk model which tells you not to risk more than x percent of your account balance on any one trade. A range between 1-3% is generally an accepted amount which has been a reliable percentage to use in order to make money in the long term.

How to Trade Forex The Safe Way

In order to reduce losses in trading in the forex market, you will need the necessary and adequate amount of risk management systems in place. Staying afloat is essential in staying in the forex game. It will be unlikely that you will recover from a loss of money that you cannot afford to lose. A good trader will know how to reduce losses quickly and also ride profitable positions higher. Systems such as stop losses and profit caps are needed to keep losses manageable.

Stop losses are so essential to make a successful trade that most brokers will not allow you to trade without a stop-loss in place. A stop-loss is a system that automatically closes out a position when the bid or offer price reaches the given level. For example if your long (you have bought) a currency, your stop-loss will be placed below the current market price and will be activated if the price falls past this threshold. Stop losses are beneficial to traders because it is positive knowledge that you’re protected from a downside risk. This is useful for novice traders because they can become ‘emotionally trapped’ in a falling trade.

Guaranteed stop-losses are offered by some brokers and will provide extra protection for traders. Rare intervals where the market gaps – decreasing without trading at each consecutive rate – and traders who have no acquired guaranteed stop-losses are only assured of getting the next available price. Factors such as central bank or government intervention, political, war or natural crises may cause falls that expose traders without guaranteed stop-losses to substantial losses. Stop-losses can be moved higher or lower to suit the trader. By reducing the stop-loss (placing it closer to the purchase price) you’ll limit the potential size of your loss and by increasing it (placing it further away from the purchase price) you will increase your exposure.

Profit caps are opposite to stop-loss because you place a limit on the profits that you have made. It is beneficial for traders who leave trades unattended over night; a profit cap will be triggered when the market moves through a given threshold and will secure the profit made for the trader.

Automatic triggers are needed to limit the risk but money management is as important. This means making the decision on how much money you can afford to lose on a trade and how much you are able to invest. It is also recommended that you invest no more than 10% of your available funds in any single trade. These practices and systems will certainly help you in protecting your funds from losses. Mental discipline is also needed to become a successful trader.

Entries, Exits, Emotions and Trading Profitably

Entries & exits, emotions and making money.

Do you have difficulty or challenges with any of these?

It's understandable if you do. These are the most common challenges for traders, and the most burning questions that are brought up on a very regular basis. I know exactly how you feel. The frustration of knowing that you're smart enough to make it work, yet losing money or just breaking even really is nerve-racking.

Seeing your money disappear with trades where the market moves against you and you hang on to it, hoping that it will turn around, then having it turn into a sizable loss is just gut-wrenching.

Even worse is when you miss out on one that you pick right or either act too late or hang on to it too long and watch your profits vaporize.

Then the confusion sets in. You get gun-shy about even entering trades and your confidence is circling the drain. It's a downward spiral that is totally opposite of what you expected when you got into trading.

There is hope, though.

You are definitely smart enough, and have what it takes. I know that because you would never have been in a position to even consider trading if you hadn't already proved it.

You're experiencing challenges with the entries and exits, emotions and making money because those challenges are the result of what happened when you first started trading. Nobody told you about it because they didn't know.

What happened is a series of events that seem perfectly normal and logical, on the surface. But when you look deeper, you see that these events actually set people up to do things that they wouldn't do otherwise.

Like jump into a treacherous endeavor unaware of what they're in for and unprepared to deal with the traps and pitfalls that await them.

Like putting substantial sums of money at high risk, without properly planning the trades out and having an exit strategy fully in place.

Like I said, I know how you feel. I've been there and felt the anguish of watching my money disappear in trading. Like you, I got lured into trading naive of what really happens and what it takes to truly trade profitably.

Fortunately, after considerable research and reflection, I was able to see the forest for the trees and discover the truth of what happens and why so many smart people don't make money trading.

When I first made the discovery and thought on the matter, it almost sounded like a mental and emotional trap that would be part of a conspiracy, although it could never be proved.

It sure does seem like a lot of good people get sucked into trading and their money taken by a very small few.

If you're considering trading or if you've already begun and you're finding difficulty, then you'd better get your guard up and think twice before continuing.

You have real money at stake, and the odds are more against you than you realize. You can turns those odds around, if you can get out of the "get rich quick" frame of mind and take a more realistic look at trading, with some good guidance from someone who's already been down that road.

The Size Of The Forex Market

Most of the experienced traders around the world consider the Forex market as the best and most profitable of the capital markets. During many years forex trading had been the great and exclusive domain of major banks, very large financial institutions and the countries central banks; a good example of such a bank would be the U.S. Federal Reserve Bank. But over the last few years, thanks to the internet era, the market has been opened to anyone willing to learn the right techniques in forex trading and with the intentions of making substantial profits as the above mentioned institutions, that annually and consistently make pretty high profits from trading in the Foreign Exchange market.

The foreign exchange market (FOREX) will exist wherever one currency is being traded for another. This market, also known as “currency market”, is by far the largest market in the world in terms of all the cash value traded per day, this trading includes all that is being performed between large commercial banks, central banks, currency speculators, governments, and other financial markets and institutions. The trades taking place in the forex markets across the globe it’s known to exceed on average $1.9 trillion/day. Retail traders, this is, small speculators are only a small part of this market, but this doesn’t mean they can’t grab huge profits if they have learn the right way to trade the Forex. These individual traders participate in the market through broker firms.

According to many experts, the foreign exchange market will have doubled in size in just three years, this thanks to increased participation by fund managers and pension funds. A financial services research firm said it expected the total global average daily volumes on the forex market to exceed $3,000bn next year (2007). Forex volumes, which rose from $1,770bn in 2004 to $2,000bn last year, were set to rise to $2,600bn this year and $3,600bn next year.

Day Trading - Why 98% of People Lose Money in the Markets

Almost all people that venture into the world of Day Trading do so with grand thoughts of wealth and easy money. 99% of these people will wind up handing their hard earned money to myself and others which have figured out the game. Yes, it is a game that is extremely hard to master and has endless dead ends. It can begin to feel as if you are a mouse in a never ending maze. You can spend years running around the maze working on endless ideas and methods all of which lead to the same inevitable end.. Losing money!

You might be wondering, who is this guy writing this article? How did supposedly he, and others learn the secret to the game. I would like to claim that I have superior intelligence but that would not be true. Like Edison the inventor of the light bulb, once you have done things wrong long enough, lost enough money, and have been beaten down to the point of giving up, only then, if you can muster the fortitude will you finally begin to see through all of the hyped claims of the failed systems and unyielding methods from your past.

The plain truth is, the sooner you stop looking for the easy money the quicker you will begin to understand why and how those that do win the game take an unfair advantage over those that don’t.

Each person's first introduction into the game of trading is always because someone has been sold on the idea that trading is simple and easy if you purchase the “right system” or methodology from the guru of the hour. These marketers are relentless at taking your money. They are system/methodology designers which understand exactly how to manipulate the various system components to fit anyone‘s taste and temperament. How many times have you been told that you simply need to find a system that fits you and your personality. This is a half truth as no system will fit you for very long if it is not consistently profitable.

Most systems being sold on the internet today clearly explain a entry set-up, but are so vague in regards to exit that they are completely useless. I can’t tell you the number of systems/methods that I have personally purchased that are nothing short of out right fraud in regards to their advertising. Most systems have been back-tested and optimized to the point that on paper they look unbelievable, but in real time they simply fall apart. It seems that people are willing, even anxious to hand over their hard earned money to anyone claiming to hold the key to easy riches.

Now that you have been warned about the fraud and false claims within the industry lets discuss one of the primary reasons that most people lose money. It is the bid/ask spread of entering and exiting the market along with the cost of commissions that stack the deck heavily against those that use methods which try to scalp small profits out of the market. These costs can easily cost you any chance of being profitable. Let me explain, if using the S&P 500 e-mini contract, the minimum tick size is .25 point or $12.50. When you enter and exit a position you will be giving up 2 ticks or $25.00 plus commissions to the spread. Lets say you are using a method in which you are trying to achieve a 2 point target or $100.00 with a limited risk of also only $100.00. Your spread give-up and commission will run you at least $30.00 per contract. This means that the position is already deep in the hole before you begin. The market will have to move and extra $30.00 before you will achieve your target. Theoretically in price movement terms, a win is worth $70.00 and a loss will cost you $130.00. You must win almost 2 times to every loss just to breakeven.

How To Read Forex Currency Pairs

The Forex market is known by its immense volume of transaction per trading day, and it is because of this that it’s impossible for a single of the market’s forces to noticeably control the market direction for any considerable length of time, opening many opportunities for traders of any size.

Among the most important factors that influence currency prices you must consider the economic and political conditions in the home country of the particular currencies you are willing to trade. There are three important factors influencing the price f any currency: Inflation, political stability, and interest rates. All this factors fall into what’s known as “fundamentals” in the trading world. Additionally, governments will always be a factor in the currency markets, they will often try to establish some kind of control over the price of their currency by either intentionally flooding the market, to lower the price; or buying large quantities, to raise the price.

The first thing you should know if you want to read currency quotes correctly is that each particular currency is given a three letter code which is used in forex quotes. The most common currencies are: European euros (EUR), US dollars (USD), United Kingdom pounds (GBP), Australian dollars (AUD), Japanese yen (JPY), Swiss francs (CHF) and Canadian dollars (CAD). One more thing you must learn when you start trading forex is that the foreign exchange prices are indicated by quotes in a fraction like mode, and this are called currency pairs. The first currency is called the 'base' and the second is called the 'quote' currency. In the following example: USD/EUR = 1.1896

This currency pair is formed by US dollars and European euros. The base currency (USD) is always considered ‘1’ and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar will cost you 1.1896 euros.

By examining the data of any trading software, you will notice that forex quotes are shown in a 'bid' and 'ask' prices format. What ‘Bid’ means is the price that buyers will pay for the base currency, while at the same time selling the quote currency, and ‘Ask’ is the price at which the sellers will sell the base currency, while at the same time buying the quote currency.

Mindset of Trading

Here the 5 areas to share about the mindset and how to become a better trader and the articles below serve as a reminder to me just as important (maybe more important) than learning the technical indicators.

Develop Consistency - We should try to create a mindset of consistency by developing beliefs which support us in obtaining this result. In order to develop consistency, try to objectively identify your edges, defining the risk in each trade in advance, and accepting the risk to be able to exit a position when a defined loss level is realized.

Trading is a Probability Game - You can't be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.

In Too soon or getting In Too Late - These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increases the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

Not taking profits on winners and letting winners turn to losers - Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.

Great traders don't place their own expectations on to the market's behavior - Poor traders expect the market to give them something. When conditions change, a smart trader will recognize that, and take what the market gives.

Does Your Forex Strategy Include The Fibonacci Two-Step?

Fibonacci can be a very valuable addition to the tools in your Forex strategy, even if you are a reasonably new trader. Experiment with the guidelines below and learn to do the Fibonacci two-step:

Fibonacci levels indicate more often than not how far price is going to go before it stalls and pulls back. It also provides a number of levels where price can pull back or retrace before moving on in the direction of the trend.

The 4 most common retracement levels are (figures rounded off) 1. 38%, 2. 50%, 3. 62%, and 4. 79%.

The two most common extension levels are 1.27% and 1.62%.

Using the Fibonacci tool that comes with most charting packages, simply drag the tool from the most recent swing high/low to the previous swing/high or low and take special note of the 50% retracement level.

In a nutshell, the Fibonacci Two-Step means you set an entry order to be pulled in if and when price touches the Fib50% retracement level, and you set your target at the Fib1.27% extension level.

However, for these trades to be high probability with minimal risk a couple quick calculations are necessary.

What is your stop value? 25-30 pips? If it’s more can your equity cover it if you lose the trade? For many traders 25-30 pips is a reasonable stop.

So before entering the trade, measure the distance between the Fib50% retracement level, your possible entry point, and the Fib79% retracement or even the 100% level. If it is more than 25-30 pips, pass on the trade. The risk is too great. If price pulls back further than the Fib50% level even all the way back to the last swing high/low, you will be in trouble.

However, if the Fib79% or 100% level are within 25-30 pips of your entry at Fib50%, you have a possible trade.

Now calculate how many pips from Fib50% to the extension at Fib127% - this will be your profit ratio. Supposing your stop is set at 25 pips, perhaps somewhere between the Fib79% retracement level and the swing point, and your target at the Fib127% extension is 36 pips, that’s a good risk/reward ratio! You are risking 25 pips to get 36.

It is often advisable to set your target 3 or 4 pips above the Fib127% level as sometimes price doesn’t quite make it before it pulls back.

Use this strategy in line with your other indicators and trade in the direction of the trend for minimal risk.

Why is this strategy so successful? Because it’s not too ambitious. Price will often pull back to the Fib50% level and no further. It will often go to the Fib127 and no further. So using these two levels puts one on middle ground with a higher chance of getting taken into the trade with the target successfully met.

Forex Strategy: How The MACD Indicator Can Save You Anxiety

The MACD (Moving Average Convergence Divergence) indicator can add a degree of certainty to your Forex strategy.

As with any indicator, it is too risky to enter trades on this signal alone. However, as we will see, used with caution on higher time frames, it can help confirm you are going in the right direction and that your trade is higher probability.

First, let’s take MACD apart and describe it’s component parts.

The default MACD on most charting packages sets 2 EMA’s (Exponential Moving Averages) at 26 and 12 days.

This is represented by a colored line (color varies according to charting package) which crosses a different colored 9 EMA often termed the trigger line.

When MACD (the 12/26 EMA) crosses above the trigger line (9 EMA) upward momentum is indicated and vice versa.

A center line, or zero line, often called the water line is also shown in the MACD indicator. When MACD is above the water line an upward trend is indicated, when it is below the water line, a downward trend is indicated.

MACD also includes a histogram, small vertical lines that appear above or below the zero line, not unlike mountains and valleys in appearance.

MACD is a lagging indicator which follows price action.

The histogram is an indicator of MACD. So watching the histogram can give you an early indication of where MACD is going. The height of the histogram can be a good momentum indicator.

How can you use MACD to your advantage?

If you want to be very cautious in your Forex strategy, going only for high probability trades, then pay attention to MACD on the 4 hour and 1 hour charts.

Some traders will only enter a trade when the 4 hour and 1 hour MACD’s are going in the same direction. This will mean a lot less trades but the ones you do take are likely to be profitable. (Agreement of the two MACD’s is used in conjunction with other indicators, not by itself.)

MACD on the 1 hour chart is particularly powerful. If you want to stay out of trouble and avoid trades you might later regret, NEVER trade against the direction of the 1 hour MACD. To do otherwise is not necessarily foolhardy if you know what you are doing.

But for the newer, less experienced trader, only trading long when MACD has crossed up, or short when MACD has crossed down on the hourly chart when your other favorite indicators line up, will make for a higher success rate with your Forex strategy. It will also save you much anxiety!

Trendline Backside Forex Strategy: Getting In At The Optimum Price

Knowing how to utilize the power of trendlines as part of your forex strategy can make a big difference to your profits. Getting in at the right level results in more pips which can accumulate steadily.

Two methods of drawing trendlines are:

1. The common sense method. By just running the eye over a candle chart, it is easy to identify a series of lower highs or higher lows. Drawing a trendline across the tops or the bottoms will indicate where price is likely to bounce in the future.

It is not necessary to be obsessive about the trendline having to touch exactly all the highs and lows. In some cases they may touch the bottom of some candle shadows, in other cases, they may touch the bodies of the candles.

2. The Tom DeMark method. Tom DeMark, a highly respected market analyst, suggests connecting the last high with the previous high in a downtrend and extending the line past current price action OR connecting the last low with the previous low in an uptrend and extending the line past current price action.

Highs are candles that have lower candles adjacent to them on the left and right and lows are candles that have higher candles adjacent to them on the right and left.

These trendlines can be regularly updated as new highs and lows are formed.

Many traders enter a trade on the break of a trendline as part of their forex strategy. That works for many.

However, there is a way to use trendlines to ensure an optimum entry point.

Often, not always, price will break a trendline and move away 10 or 20 pips. Then, it comes back to test the backside of that trendline. That’s where you enter the trade.

If the trendline break coincides with your other favorite indicators such as pivot points, Fibonacci calculations, set an entry order for price to take you in when it comes back to test that level.

That way you enter the trade at an optimum level and squeeze even more pips out of the move.

Of course, price may not come back to test the backside of the trendline so your order doesn’t get taken in and you miss the move. No problem. As a trader patience is an essential quality you develop as a part of your forex strategy. You simply wait for the next time!

Forex Strategy: How Do You Trade The Non-Farm Payroll Report?

In the development of your forex strategy do you wonder how you can trade the non-farm payroll report?

Seeing this is one of the most, if not the most, volatile announcement during the month (first Friday in every month) newer traders watch the huge movements and wonder how to make money from all that volatility.

Here’s an answer you may not fully appreciate until some explanation is offered. “How do I trade the non-farm payroll report?” The answer is: “By maintaining a neutral position!”

To put it another way, YOU DON’T!

The market is far too volatile at this time to expect a high probability trade. There may be some gamblers out there who relish the thought of ‘placing a bet’ to go long or short. But serious traders know better.

Actually, the professional traders I know all say the same thing: “Stand aside and wait for the market to calm down.”

This may take between 30 to 45 minutes in some cases and even then the direction of the market may be uncertain.

Some suggest you can trade volatile market movers such as the non-farm payroll report by waiting for the first leg of the move, up or down, then wait for price to pull back 10 or 15 pips, then enter a trade to catch the second leg of the move which often follows.

That’s one possibility but still very high risk. Personally I prefer to base my forex strategy on sound market assessment and carefully researched trades.

However, while many professional traders sit out the non-farm payroll report, that doesn’t mean they don’t trade afterwards. After the market has made a violent move in one direction you sometimes see price stalling and then give a clear signal that it’s momentum is exhausted.

This may be in the form of a candle pattern such as a hammer with a very large shadow which also happens to be on a key support or resistance level.

Now you can enter a trade with a small level of risk as you place your stop just above the high or low of the candle signal.

This advice applies to all fundamental announcements which are considered ‘market movers’. By developing a cautious forex strategy based on sound trading principles, you will enjoy this business and get the satisfaction of seeing your account equity steadily growing.

Making Money In Forex Trading Fact or Fiction?

Find out the real truth about making money in forex trading.

Recently theres been a surge of everyday, average investors choosing to invest the majority of their portfolio in forex trading. If you talk with those people, you'll find many feel making money in forex trading is much easier than using more traditional types of investing.

The process used for making money in forex trading has a different set of strategies, and plan that trading stocks, mutual funds or bonds. The forex market is a little more complicated to learn, but once you understand the forex market and currency exchanges the possibility of making money in forex is good.

Making Money in Forex Trading - The Advantages

There are advantages to the forex market not available when you invest in the stock market realm. First off, industry changes and changes in company profits dont affect the forex market. Bull and bear markets wont cause major fluctuations as in normal stock trading.

Another advantage is the fact forex trading is open twenty-four hours a day, six days a week. Its not like learning about a major industry event in the evening news and not being able to do anything until the market opens on Monday. You can make your trades anytime of the day.

Learning about making money in forex trading has never been easier. Many online brokerage sites offer free information and education about learning how to invest the forex market. You can also train in real-life" trading without using any money. Its the online version of paper-trading. Youll be able to fine-tune your market strategies and analysis before you actually risk any of your own money.

As with any form of investment there is the potential for loss. Setting your stop points and minimizing your loss potential is not at all difficult, once you understand the forex lingo, and how currencies are traded.

Making money in forex trading occurs by buying and selling once currency for another. The trading is done in pairs. Quotes are displayed in the same manner. The money you make is determined by the change in pips.

Simply put forex (foreign exchange) trades are made according to the value of one currency as compared to another. These values of currencies are constantly changing. Quotes on prices are quoted in pips (percentage in point). If a particular currency quote goes higher, it means that currency is stronger. If it goes lower it means the currency weakening.