The Importance of Trading Psychology

Why is trading psychology so important? Trading psychology is so important because day trading can be a very emotional business. The wrong emotional state can make it difficult if not impossible to trade effectively.

Trading psychology is critical because there is so much emotion in many of us that is linked to money. We also know that many who enter into the trading arena fail. Why is that? There are numerous reasons why a large percentage of traders fail. The main reason has been cited as lack of discipline. Discipline is defined as, orderly or prescribed conduct or pattern of behavior, or, a rule or system of rules governing the conduct or activity. Discipline is necessary to accomplish any goal.

Discipline comes into play when combating fear and greed. Fear is typically based upon a fear of loss. No one really wants to lose money in the market. We've all heard the horror stories of people losing the money in their trading account or their entire trading account.

Fear of loss or fear of a further loss makes traders scared. Scared traders are very typically not profitable traders. The objective is to be a profitable trader.

Fear in many situations is triggered by not knowing what is going to happen next, basically this may be fear of the unknown. We feel much more confident when walking down a familiar street in our neighborhood than if we walked down an unfamiliar dark alley in a strange place. We can eliminate or minimize a great deal of fear by becoming more familiar with exactly what we are to expect. In other words, we need to have a trading plan, basically a trading roadmap so that we can know what we are to do each and every day. With a plan we also what the likely outcomes of those actions may be each and every day. In this way, we'll be met with far fewer surprises, and unknowns, which may trigger the fear.

The trading plan is a great way to start and maintain trading discipline. With this plan as a roadmap it will be much easier to get from point A, which is where we are now, to point B, which is where we want to be.

In your trading plan you may have notes written to yourself about what to expect. It is your expectation level that will dictate your satisfaction with your progress. Expecting a consistent return of 1000% per month will have you abandoning your trading very, very quickly. Having realistic expectations about the returns of your trading system and it's ups and downs will help you to maintain discipline in the long run.

One of the most difficult things for a trader to do is to continue to trade his trading system when it is going through a series of losses. A series of losses is a tough period of time for many, many traders, especially those who are unprepared or unwilling to accept the fact that all trading systems and methodologies have losing trades. If you do not have faith in your trading system when it does start to go through a series of losses it will make you nervous. If you had not studied the previous trades and do not have faith in your trading system fear will lead to a lack of discipline. Lack of discipline will eventually lead to not following your trading system. Not following your trading system will eventually lead to loss. This is another reason why carefully choosing a trading system is extremely important.

Conclusion

Controlling your emotions is critical to maintaining discipline while trading. Maintaining trading discipline is essential long-term trading success.

FOREX Day Trading - Brokers Love Day Traders For One Reason

FOREX Day traders are loved by brokers these are the traders they simply want more than any other type of trader.

FOREX day traders are wary of brokers, because they think they pick their stops off and that’s why they love them – but the real reason is:

Day traders are guaranteed to lose their money without any help from a broker. I used to work in the back office of a broker and we factored them in as losing straight away and a big fat profit for us.

So here are the reasons we loved them and other brokers do to:

1. Day trading by its very nature doesn’t work

Trying to trade in short time spans of a few hours or a day and to try and measure where prices are going is ridiculous.

All short term volatility is random and prices can and do, go anywhere.

We traded several thousand day traders and not one made money, they all lost.

The logic FOREX day trading is based upon is totally flawed.

Try this simple test:

Ask any vendor selling a system on the net and ask for a real time track record and see if you get one – You won’t.

Many of them are simply writers or failed brokers.

They make up track records sell them and then do a deal with a broker for a kick back commission and believe me the commission is good – we paid out tens of thousands every month!

2 Great commission

Day trading is the best commission to equity you can get and for a broker that’s great.

Lots of trades, eroding account equity to zero and paying commission every day.

Much better than a trader coming in and blowing his equity in a couple of trades.

Market makers are equally happy.

As they want the traders deposit lost and on their book.

They are trading against the client and don’t need to worry it will soon be in the bank. Furthermore, as day traders never make any big profits (running profits is totally alien to them)

The risk of carrying a day trader on your own book as a broker is low.

DO BROKERS HUNT STOPS?

The answer is no.

Day traders believe this, but the real reason is they set their stops to close.

Support and resistance are meaningless in day sessions and that’s why stops get hit all the time.

Its not the brokers fault, it’s the day traders for being stupid and placing his stops in meaningless time frames where volatility is random.

There you have it.

The reason brokers love day traders is their great money earners for the house and guaranteed to lose as well, which is perfect for market makers.

Technical Analysis - Using Support & Resistance Correctly

If you are trading with technical analysis one of the keys to making longer term profits is being able to use support and resistance to make profits.

Most novice traders however fail to trade with support and resistance correctly so here are some tips.

1. Support and resistance does not work in short time periods

Most novice traders try using support and resistance in daily periods – Forget it, you will lose.

Why?

Because these levels are totally meaningless.

Trillions of dollars a day are traded by millions of participants and to say that support and resistance is valid in such short time frames as a day or a few hours is laughable.

The only people who take notice of these levels are the small losing minority of day traders.

Don’t believe me?

Ask any day trader for a real time track record of profits using support and resistance and you won’t get one.

Volatility is random in short time frames and therefore any technical indicator you try to use wont work.

Novices try day trading and lose and wonder why, they need to get educated study volatility and standard deviation.

2. Support and Resistance Test and Time Span

Generally you want several tests (the more the better) and gaps between the tests.

The more tests you have the better, this means that traders will generally pay attention to them and when they hold are or broken.

However, when looking for support on resistance don’t just use the daily chart – Look at the weekly chart which will give you the bigger picture.

3. A Great Trade set up

Is when you get critical support and resistance on the longer weekly chart lining up with similar levels on the daily chart – These levels are very significant and you should look to trade them.

4. The Biggest mistake made by novice traders

The biggest mistake made by novice traders is they simply see support and resistance levels and trade into them and “hope” the market reacts in the way they want.

You will never make money this way -you must have price momentum in your favor.

Price momentum must support the way you are going to trade and we will look at this in more detail in part 2 of this article.

Canadian Dollar Performance Update - Spring 2007

During recent months, the Canadian dollar traded a tight range against Sterling between 2.2500 and 2.3000. This follows a sharp uptrend in GBP/CAD from a low around 1.9737 (02/03/06) to a recent high at 2.3567 (23/01/07) caused by expectations of higher interest rates in the UK, coupled with interest rate stagnation in Canada. At the same time, the US$ has weakened, forcing the exchange over US$2 per GBP and down to US$1.11 per CAD giving UK customers a boost while detracting the value for our southern neighbours.

In the UK, the Bank of England left interest rates on hold in April, however, expectations of higher rates in the months ahead continue to offer support to Sterling. With a buoyant housing market and strong levels of consumer spending, the market is expecting that the Monetary Policy Committee (MPC) will be forced to raise rates at least once more in an attempt to dampen down inflationary pressures. The headline Consumer Price Index (CPI – the most recognised measure of inflation in the UK) is currently running at 2.8% y/y against a target rate of 2.0% and raising interest rates is the most obvious way of combating rising prices.

Meanwhile, Canada has been faced by interest rate stagnation following the rise to 4.25% in May 2006. Risks to the Canadian economy remain finely balanced with the threat of an economic slowdown filtering across the boarder from the US. As its biggest trading partner, any signs of a struggling US economy may impact the Canadian economy although this has not really been the case so far in 2007. In similar fashion to the UK, the Canadian housing market remains robust with The Canadian Real Estate Association reporting strong sales of existing homes in February and record high average house prices. The Canadian Dollar is also likely to remain well supported against the US$ by rising oil prices given that oil exports represent a large percentage of the Canadian economy.

Looking back to March 2006 GBP/CAD traded a low of 1.9737 (02/03/06) indicating a difference of CAD 32,300 in less than twelve months when looking to transfer £100,000. Therefore, anyone looking to transfer funds between Canada and the UK should pay considerable attention to the GBP/CAD exchange rate as it can have such a dramatic impact upon their future wealth. Should you be looking to move large sums it definitely pays to monitor the markets and be aware of international factors that can affect which direction currencies will go. The debt and ongoing military interventions of the US will undoubtedly have some effect on the US$ against the CAD, though the weak US$ will most likely help boost the exports from their struggling economy. The recent trend of the Dow Jones to smash new records and factory orders starting to increase does point towards the start of a turn around for the US which, if fuelled by the exports will be another reason for the US to try to maintain a weaker dollar.

Advising migrants and businesses of currency movements and protecting them from the risks associated with fluctuating exchange rates is the speciality of currency brokers. Whilst nobody can guarantee future currency movements due to the sheer size and number of participants in the market, both personal and business accounts can increase their bottom lines in dramatic fashion by taking expert advice.

FOREX Trading - Make Money Fast a Novices Guide To Big Profits Quickly

If you want to make money fast in FOREX Trading this article is for you – Even if your novice trader you can build wealth quickly with low risk simply incorporate these simple tips in your trading plan.

Let’s look at how to make money fast in FOREX trading:

1. Follow long term trends

The big trends last for months or years and these are the best ones for making big profits – Use a simple long term trend following system.

2. Learn to buy breakouts

If you are not familiar with breakouts then you should study them and how to take advantage.

Fact:

Most major trends start from new market highs NOT market lows, so by buying breakouts, you will catch the really big trends and get low risk as well.

3. Be patient!

You don’t get rewarded for trading frequently you get rewarded with cash for being right.

The best risk reward trades don’t come around everyday, be patient and wait for them.

If you do your profitability will be considerably enhanced.

4. Don’t diversify

If you are trading a small account there is no point in diversifying.

Traders say it reduces risk that’s debatable, what’s not is:

That it restricts your profit potential.

Don’t diversify, back the trades that look good and you believe in and are confident of with as much as you can and risk 10 – 20%.

5. Don’t trail, stops to quickly

Another major error is to trail stops up to quickly.

If you are in a big move you are confident in then keep your stop back to avoid being bumped out by short term volatility.

In making money fast this is one of the hardest things to do, holding onto a trade when your open equity is being eaten into - sometimes by thousands of dollars a day.

Well if you want to make money fast get used to it.

Sure it takes courage and conviction, but when you eventually bank a 10 – 20,000 buck winner you will feel very good.

6. Success has you in it!

Forget trying to do this with other peoples systems it takes rock solid confidence and discipline and you need to have a system you have developed or someone else’s you know backwards.

To follow a system you must have confidence otherwise you will lack discipline and if you cant trade a method with discipline you have no method at all.

Use the above tips use a method you have confidence in and you will make money fast in online FOREX trading.

Good luck!

Can A Forex Trader Profit Greatly From The Presently Undervalued Yen

The Yen, the Japanese currency has come under scrutiny from the major developing countries for its weakness.

Its weakness should not come as a surprise since the country has kept it that way it order to encourage growth which was lacking due to the downturn that occasioned the pricking of the 1980’s bubble in the early 1990’s.

In 1995 when the yen reached the Y80 to a $1 rate, Japanese manufacturers were crying for help. Toyota estimated for every Y1 appreciation against the dollar, it lost $50million.

At that time, the hollowing out of Japanese industry to South East Asia was gathering pace and with a weak economy, the then government had no choice but to begin a weak yen policy.

To achieve the weak yen policy, government started splurging in order not only to keep the currency weak but to use demand to pull the economy out of the woods. It also slashed interest rates to zero when deflation raised its ugly head.

This policy however did not pull the economy out of the woods but it did make the currency weak. Also demand did not rise because both consumer and business confidence was low due to the weak employment market and the huge bad debts carried not only by the banking sector but by other financial and non-financial institutions.

Also the Japanese started buying dollars in large quantities to keep the yen weak. This worked spectacularly but at a huge cost.

The question now is whether the weak yen policy makes sense, its sustainability and when will the yen begin its appreciation to a more realistic level. This is of primary interest to any forex trader as any positions taken can yield enormous returns.

With the reforms carried out over the past few years by the outgoing Koizumi’s administration, the economy is now enjoying a recovery

Best of all, the first price rises in ages have now been confirmed and this has made the government judge the recovery as sustainable.

With inflation, the government policy of zero interest rates may now be over. Interest rates have now been increased for the first time in several years though - to a tiny 0.25% but it is still significant. As any trader knows, an increase in interest rates normally strengthens a currency. Interest rates will continue to edge higher as the Bank of Japan is hawkish about inflation remembering that it was cheap money that fuelled the 1980’s bubble.

Secondly, the government has since commenced a policy of mopping up excess funds in the economy and this led to a 4% plunge in the stock market in a single week in 2006. The days of both cheap money and excess funds may be over.

And to add to all this, the era of massive deficit spending to is coming to an end. This anyway is no longer needed now that the economy is recovering and inflation is in sight.

With a tight fiscal and monetary policy, the currency will definitely appreciate. The question therefore is when and by how much?

Within the next two years, I foresee the yen appreciating between 5-10% against the dollar and the euro. Such a surge will not adversely affect the manufacturing sector as consumer demand is now playing a positive role in respect of demand thereby reducing the dependency on exports.

The yen may eventually hit or perhaps surmount the Y100/$1 barrier in 4 years time if economic growth stays at 3% annually over a period of 5years and if interest rates hits the 4-5% mark.

My advice to traders- better buy yen as an appreciation of the currency will definitely occur.

Currency Trading - A Major Mistake Made By Novice Traders

There is one major error that novice traders make and continue to make.

Its not they lack a sound method, or they lack discipline, or even they can’t pick trade direction correctly it is:

They fail to deal with market volatility and the placing their stops correctly.

How often does this happen.

A trader sees a potential trade enters and then gets stopped out only to see the trade they had picked go the way they thought and pile up thousands of dollars and their not in!

It happens all the time – and the reason many novice traders lose is they have no understanding of how to correctly place and trail stops.

Let’s look at this in more detail.

We all know currencies exhibit long term trends but there are constant and frequent pullbacks within major trends and your aim is to stay with the longer term trend without being stopped out.

Let’s look at some ways to do this when engaging in online FOREX trading.

1. Forget FOREX day trading

All volatility is random in daily time frames so you have no chance of winning, so don’t try.

Ever seen a day trader with a real time track record of profits?

Neither have I and random volatility is the main cause – don’t even attempt it, unless you want to lose your money quickly.

2. Entering the trade and initial placement of stops

Quite simply the best way to enter a trader is to enter on valid breakouts and put the stop behind the breakout point.

Most major currency moves start from new market highs and buying breakouts tends to give good risk to reward and help you catch the biggest trends and profits.

3. Always look for confirmation

If you want to buy a dip don’t predict and hope - wait for confirmation if a change in momentum, this will increase your odds of success dramatically.

Use stochastics to do this – their ultimate timing indicator.

4. Don’t trail stops to quickly

Many traders try to avoid risk so much they create it.

If you start trailing your stop to quickly, you will simply be bumped out by volatility, so hold your stop back and have a target that has to be reached before you even consider trailing your stop.

5. You need courage

Many traders go on about discipline in relation to placing stops, but it’s just as important, or more important when trying to follow a profit.

It takes courage and discipline to hold a long term trend, when pullbacks eat into your open equity, sometimes by thousands of dollars.

You need the courage to take short term pullbacks in open equity in order to catch the big trends that can make you big profits.

Yes you have to be disciplined in restricting losses, but don’t forget this applies to making profits to!

Understand the following to increase profits and restrict losses

I am constantly amazed by traders who trade the market without any idea of volatility or an understanding of such concepts as standard deviation of price.

If you don’t know what standard deviation is, make sure you educate yourself.

An understanding of volatility is essential to making big profits in FX Trading

Your FOREX education should also include trading breakouts (for spotting low risk high reward trading opportunities) You also need to know about momentum indicators ( check out stochastics ) and targets ( study Bollinger bands)

If you want to trade FOREX, then you need to spend as much time on placing and moving stops as you do on getting a method that catches profitable trade direction.

You can have a great method but it will fail if you keep getting stopped out by volatility.

Deal with it, or lose at currency trading.

Contrary Trading - A Live Example and Big Potential Profit Opportunity

Contrary trading if done correctly can give you low risk and excellent profits if you know how to spot them and time your entry correctly.

Here we are going to look at a contrary trade that looks a great opportunity which we looked at a few days ago.

Lets see how things are shaping up.

The US v Canadian dollar has given us some great profits from the downtrend now we have that banked profit and we are now long as per our articles realized at the weekend.

Right, let’s take a look at this trade.

Pull up a free chart service such as futuresource.com and let’s get started.

Key Support

Is 1.10 – This is key support on the daily charts.

Momentum is still down in the dollar longer term, but the Relative Strength Index (RSI) has turned up from oversold levels and is moving up. Yesterday’s we have a double bottom which is near term support and then key support at 1.10.

Stochastics have crossed and turned to the upside with bullish divergence and short term we are looking for strength.

We may now get a good bounce to correct the technically oversold position.

Target would be the middle of the Bollinger band at around 113.00, if prices can punch through this level look for higher prices to unfold

The key ( as we said at the weekend) is to always wait for confirmation before jumping in.

We have done this and are now long.

You ALWAYS need confirmation of a near term bottom and change in price momentum before trying the long side if you are trading against a strong down trend, you should never guess or predict if support will hold.

Stop levels at below 1.10 on a close basis.

When the majority think one way then:

A move in the opposite direction is likely! This is the art of contrary trading.

The dollar has had a lot of bearish news recently and in the short term prices should at least bounce - this is the opportunity outlined above.

Contrary trading is all about trading against the consensus and this trade is definitely that!

My in box is full of lots of reports telling me the dollar is in free fall and has no chance of recovery – but in the short term there is:

As all the bearish fundamentals are discounted and a bounce should therefore occur.

This is what contrary trading is all about – low risk high reward and trading against the majority.

Forex Traders - Speculating on The Presently Undervalued Chinese Yuan

The Yuan can yield tremendous profits to investors if it rises against the dollar. The article below will discuss fully about the subject.

China’s trade surplus has been a sore thumb with the American government over the past few years. The Americans believe that their massive trade deficit with China is fuelled by a cheap Yuan policy which the Chinese government is determined to pursue in order to keep its economy humming at break neck speeds.

In order to keep the Yuan weak, the government has been mopping up dollars at a frantic pace. This has made China the country with the most foreign reserves, now topping over $1.2trillion. This is equivalent to half it’s GDP and will easily accommodate over one year of imports- which is far higher than the acceptable four months.

The question is- can the Chinese accept a revaluation of the Yuan to more acceptable levels?

The communist government is terrified of social disorder. Its only claim to legitimacy is the fast economic growth that has lifted hundreds of millions out poverty over the past two decades especially in the last six years.

One of its primary tools of achieving fast growth is the weak Yuan policy which has created and sustained a manufacturing and export boom which in turn as lifted growth to dizzying levels.

Unfortunately for the government however, there is still discontent. There are over a 100million surplus farm hands seeking work and unemployment still exist in the cities.

Also large parts of China still remain very poor especially the hinterland.

To add to this, many farmers in the rural areas where most of them are based complain about official neglect and corruption.

China thus believes it still needs years of fast economic growth to arrest the above mentioned problems.

However, things are not as simple as they seem.

First and foremost, the weak Yuan which is tied to the dollar is causing liquidity to rise to dangerous levels within the economy. This is in turn swelling demand to horrendous levels. And deflation has now been replaced by inflation. Too high a level of inflation may bring- wait a minute- social disorder. Many analysts speculate that high inflation was perhaps the true trigger for the Tiananmen tragedy.

From high inflation perspective alone, the Yuan needs to strengthen

Anyway, the government has begun tightening credit, always preferring to use crude monetary instruments such as restricting the quantity of loans flowing to some certain sectors especially real estate and steel which are poster children of the boom.

This is working to slow down growth both only slightly.

Growth can only be moderated if the Yuan rises. And the truth is that a rise will not lead to a downturn, but at most – a very soft landing. Growth may slow to 8% which is not bad but less than the double digit figures it has been enjoying of late.

The government has since 2005 permitted the Yuan to appreciate and it has consequent gone from Y8.28/$1 TO 7.71/$1. And interestingly enough, this did not cool the economy.

This indicates that further strengthening of the currency may not in reality have a dampening effect on growth.

The question now is- to what level must the Yuan rise before it reaches its real value?

Tying it with a basket of other currencies, the value will need to rise to between 6.50 and 7Yuan to the U.S currency. Whether the government will have the stomach for it is another matter.

The economy can still grow at 8% annually.

The probability of such a rate appreciation taking place may be plausible bearing in mind that the government has allowed the currency to appreciate slowly against the dollar in particular.

For the time being, however, I foresee the currency hitting 7.40Yuan to a $1 within the year or at the least 7.50.

This portends a fat profit for any trader that decides to make a move now. It may be one of the best pickings for the year.

Forex Trading Training- Rules For Placing Orders

If you have started your Forex trading training you may initially have a challenge with understanding how orders are placed. I remember when I first started reading about the Forex and practicing in a demo account, it took me a while to understand how stops and limits worked in relation to price.

This article sets out the main rules governing the placement of orders with a free graphic download in the resource box at the end which you can keep on your desktop and refer to at anytime until the rules have 'sunk in'. You will find this lesson extremely important if you are in the early stages of your forex trading training.

Here are the basics:

1. In each currency pair, the first currency is the base currency which you either buy or sell. For example, in the case of EUR/USD, if you believe the euro is going to strengthen against the US dollar you would place a BUY order (go long). If you believe the dollar will strengthen against the euro, you would place a SELL order (go short) for the EUR/USD currency pair.

2. In your dealing station you will notice two prices quoted for each currency pair, a BID price and an ASK price. The difference in the two prices is known as the pip spread the dealer takes from every trade. For the major currency pairs this can be between 3-5 pips. NOTE: When you place a BUY order you will enter the trade at the ASK price. When you place a SELL order you will enter the trade at the BID price.

3. There are two types of orders you can use to enter a trade:

* Market Order

* Entry Order

A market order is an order to buy or sell at the market price the moment you enter the trade by clicking your mouse button.

An entry order is an order to buy or sell when the market price reaches a certain target or level you anticipate from your technical analysis.

Note: Avoid market orders as they seldom give you the best entry point unless you really understand the market. An entry order allows you time to analyze key price levels and set the order to be executed only if price pulls back or reaches that level. This way you enter the trade at an optimum level.

Stops and Limits

Once you have calculated your trade and anticipated how far you think price will go, you need to enter a limit order so the trade will automatically exit at that profit level. In the case of a buy order, your limit will be set above the entry price. In the case of a sell order, your limit will be set below the entry price.

For your protection you then need to set a stop order. If price goes against you your trade will exit at a loss according to the number of pips you have calculated that you can afford to lose taking into account your equity. In the case of a buy order, your stop would be below the entry price. If the case of a sell order, your stop would be above the entry price.

As part of your Forex trading training, it is important to get very familiar with the software you are provided with from your online broker. Practice, practice, practice, making entry orders, and setting the entry price and the stop and limit levels.

It is easy in the early days of Forex trading training to get mixed up with direction. You may wish to place an entry order to sell (go short) and inadvertently put a buy order in instead only to get a shock when you see a minus figure under the pip column steadily growing.

The details explained above are available in a graphic you can keep on your desktop and refer to at any time you are trading. Just go to the link in the resource box below and get a copy.

Then as part of your daily Forex trading training, refer to it each time you place a trade in your demo account until your understanding of the rules of order entry, bid and ask price, stops and limits, come automatically without thinking.

You will be laying a solid foundation for more advanced Forex trading training steps so you can concentrate your mental energies on price and chart analysis rather than being sidetracked by confusion over basic order rules.