The Golden Rule of Forex Trading

Last week I was at a Bible study class and the priest there mentioned that Hillel, a famous rabbi was asked to sum up the Torah in one sentence and he said "Do not do to others what you would not want done to yourself." This sounds very much like the Golden Rule said by Confucius rather than by a rabbi. So in the same vein I would like to give you the Golden Rule of Forex Trading in just one sentence.

"Enter the market near the beginning of a trend after it has started and exit before it reverses or soon after." How does it sound? Very simple, right? And that's just what every trader will want to do but it is easier said than done. It is even simpler and more obvious on hindsight when you look at charts that have happened but try doing that during a live market.

So all the study of the charts and technical analysis is to enable one to make an early entry once a trend has started, wait for the trend to continue, the longer the better; and exit before the trend reverses or soon after the trend has reversed. Note that we are not trying to catch the trend when it first starts and exit at the highest (or lowest) point to harvest the maximum number of pips. This is call trying to catch the tops and bottoms and it is too difficult since we do not have a crystal ball to see when the trend will start and when it will end. It would be great if we can get just maybe 70% or 60% of the trend since we are depending mainly on lagging indicators which can only show the trend after it has started or reversed.

The Forex market will set traps along the way and the common ones are known as retracement and false breakout. A retracement is a price movement in the opposite direction after the trend has started, after which the price will continue in the direction of the trend. Depending on which point you enter the market and the stop loss set, you may be stopped out during a retracement. It is most frustrating to see the price continuing in the original direction again after you have been stopped out during a retracement and counting what could have been your profit.

A false breakout is a false trend so to speak. It looks as if a new trend is forming but after a while, the "trend' reverses and move back to where it was or even in the opposite direction. If you get stopped out in this case, it does not feel as bad as in the retracement since the stop loss prevented you from suffering a higher loss while in the other case, the stop loss prevented you from making a profit. It is because of this that there are some gurus who propose not setting a stop loss at all or set at some ridiculously high values. But for beginners, it is always a must to set a stop loss since you will be knowing before hand exactly how much your loss will be if the price moves against you and you can calculate you risk reward ratio from this. Most importantly, this will protect your capital in case you lose your internet connection for whatever reasons. And there can be many reasons.

So for newbies, the advice is always to trade with the trend or as they say, "the trend is your friend" and "trend till it bends". That's Forex trading in a nutshell. Looking at old charts and in hindsight, even a blind man can show you the trend; the challenge is how to identify a trend in the midst of the ongoing price action.

(By the way, what Hillel actually said was "What is hateful to you, don't do to others. This is the whole Torah; the rest is commentary." So this post is the whole Forex Trading and the rest will be commentary!)

Ronald Kwok
http://ronaldkwok.atomicblog.hop.clickbank.net/

Technical Analysis

In my last two posts I have touched on Fundamental Analysis so it is now time to talk on Technical Analysis, the other major branch of analysis that most traders carry out.

Technical Analysis (TA) can be defined as the study of historical price movements to predict future price movements or looking at the market past behaviour to see what is most likely to happen in the future. There is this standard disclaimer that "past performance is no guarantee of future results" and also the equally common "history repeats itself" so which one do the Forex market follow? Well, it is a bit of each and a combination of both and that makes the market both predictable and unpredictable the same time. So nothing is 100% certain in the market and we can only talk of high probability and TA provides the tools to help traders make decisions with a high probability of success, hopefully.

Two factors make TA a viable tool for traders - the market is made up of human and thus follow human crowd behaviour and TA is used by the majority of traders and thus it has a self-fulfilling prophesy aspect. This is more so in the Forex market than the other trading markets and it makes TA an important tool for Forex traders.

There are hundreds (if not thousands) of books written on Technical Analysis and you can get loads of information on the Internet so I'll just give a brief summary here and mention only the common items. Broadly, TA can be broken into the following main areas but these are not clear divisions and there are overlaps.

1. Chart Analysis
2. Pattern Analysis
3. Trend Analysis
4. Momentum Analysis
5. Predictive Analysis.

Chart Analysis
Briefly, this is looking at the charts and price to see the movement in the market and this forms the basis of all the other analysis. The two main types of charts are the Bar Chart and Candlesticks and the latter is gaining popularity since it gives a record of the price movement that is slightly easier to interpret visually that the traditional Bar Charts.


Pattern Analysis
Over a period of time, the Bars or the Candlesticks will form certain patterns and from pass experience, certain patterns will behave in a certain way. Past gurus have given names to these patterns such as Double Tops, Head and Shoulder, Flags, etc. In the case of Candlesticks, a particular candle or a certain combination of candles will occur before subsequent behaviour in a certain way and they also have names such as Doji, Morning Star, Harami, etc.

Trend Analysis
The price will sometimes make higher highs or lower lows and by joining some of these points, you will will be able to form a trend line. Sometimes the price will stop repeatedly at certain points and by joining these stops, you will have the support and resistance lines, akin to the ceilings and the floors of a room. To smooth out the choppy price movements, Moving Averages are normally used and they can also come under trend analysis since after being smoothed out, the MA will show some kind of trend, especially over longer periods. There are two main types of MA, the Simple (SMA) and the Exponential (EMA).

Momentum Analysis
Apart from moving sideways, prices will move up or down and the momentum will show how fast or slow it is moving and there are technical indicators that show this momentum and they tend to oscillate between 0 and 100%. Such oscillators include Relative Strength Index (RSI) and Stochastic. You will meet Overbought and Oversold areas in these oscillators and also the somewhat predictive Divergence.


Predictive Analysis
Under this would be the Fibonacci Retracement, Fibonacci Extension, and Elliot Waves since traders use them to predict what the future price will likely to be or where it will likely to change directions.

There are some common indicators that do not fall clearly into any of the above analysis. One is MACD (or Mac-D) that is a combination of moving averages and oscillators that do not oscillate between 0 and 100% but around the zero point. Another one is the Bollinger Band, a combination of moving average and the standard deviation. When the bands contract, a breakout is imminent.

A successful trader will use a combination of all or some of the above analysis before making a trade. Some are used to trigger a trade, some used for confirmation and some used to set stops or profit targets. If you enter with too little analysis, it will be like gambling; if you make too much analysis, you may never enter at all or miss the opportunity. As they say this is "Paralysis by Analysis"

So it has to be a practical compromise between the two extremes and this will come with experience and it depends on the individual as a certain combination of indicators are best suited for a certain trading style. In summary, all these tools are used in combination to time when to enter the market and when to exit for high probability trades with the best results.

Ronald Kwok
http://cbpirate.com/s/cbp/ronaldkwok

Top Ten Forex terms you must know

Before I move on to discuss the local Forex seminar market, I think I should give you the Top Ten Forex terms that a Forex trader must know. Once you understand these terms, you can start trading Forex but whether you win or lose is another matter. You can trade but you'll probably lose and that's where you'll need to learn the finer points of trading in order to be a winner.

Among the terms here, the most important is the Stop Loss Level (SLL). Every trade must have a Stop Loss Level set and this is the insurance for the Forex trader. It doesn't mean that you will not lose by having the SLL but it will allow you to stay in the game longer and you will not be wipe out in a single trade, which can easily happen if the SLL is not set. You can still be wiped out but it will at least be a slow death after many trades and you will gain experience in the process, that's the pessimistic view. On the optimistic side, you will conserve your capital so that you can have more trades and some of them can turn into winners.

So here goes, the Top Ten Forex terms.

1. Currency Pair – Whenever you trade currencies, you always trade in pairs and the pair of currencies is called the Currency Pair, e.g. EURUSD. (Euro/US Dollar) Note that the order of the currencies is fixed and in this example, you’ll never see it as USDEUR or otherwise there will be utter confusion. Other popular pairs are GBPUSD (British Pound/US Dollar), USDJPY (US Dollar/Japanese Yen) and USDCHF (US Dollar/Swiss Frank). When you see the value of EURUSD given as 1.3856, it means that 1 Euro is equal to 1.3856 US Dollar. The value of all major currency pairs are given to 4 decimal places, except for those involving the Japanese Yen where it is given to 2 decimal places e.g. the value of USDJPY is 92.83 which means 1 US Dollar is equal to 92.83 Japanese Yen.

2. Pip – the smallest unit of price for a currency. In the example above for the EURUSD, one pip will be 0.0001 while for USDJPY, it will be 0.01 since it is the smallest unit for this pair. If the value of EURUSD moves up from 1.3856 to 1.3859, it would have gone up by 3 pips. If the value of USDJPY moved from 92.83 to 92.81, it would have gone down by 2 pips. (Not to be confused with PIPS, the Plug In Profit Site that is my website for internet marketing.)

3. Trend – the general direction in which a currency pair is moving in relation to time, it can be moving up (value increasing with time), moving down (value decreasing with time) or moving sideways (value moving within a range with time).

4. Long – when you long a currency pair you buy it with a view that in will increase in price, usually when it is moving in an uptrend. You’ll sell it when it reaches a certain higher value and you profit from the difference measured in number of pips.

5. Short – when you short a currency pair, you sell a currency pair with a view that it will decrease in price, usually when it is moving in a down trend. You’ll buy it back when it reaches a certain lower value and again you profit from the difference measured in number of pips. This is equivalent to short selling in the stock market.

6. Spread – When you change your local currency to a foreign currency, the money changer will sell the foreign currency to you at a higher rate than when he buys it back from you, that’s how he make his profit. It’s the same in the Forex market and the difference between the buy and the sell price of a currency pair is called the spread and is measured in pips. The spread will vary from pair to pair and from broker to broker. The more popular pairs will have a smaller spread as compare to less popular pairs. Typically, the EURUSD will have a spread of 2 pips while the GBPJPY will have a spread of 9 pips.

7. Lots – Traders buy and sell shares in the stock market while in the future market, they buy and sell contracts. In the Forex market, they buy and sell lots. If you have a mini-account, you can trade any number of lots from 0.01 upwards depending on the capital that you have.

8. Stop Loss (level) – The preset level that you set for the trade to close automatically when the market is moving against your favour, i.e. the trade is not moving in the direction that you wanted. Once this level is reached, the trade will close and this will limit you loss to a predetermined number of pips.

9. Take Profit (level) – The preset level that you can set for the trade to close automatically when the market is moving in your favour, i.e. the trade is moving in the direction that you wanted. Once this level is reached, the trade will close and this allows you to take profit in a predetermined number of pips.

10. Instant Order – an order that is executed the moment you click the buy (a long trade) or sell (a short trade) button at the current price level.

11. Pending Order – an order that will be executed sometime in the future when the price reaches the pre-determined level in your set-up. It can either be a buy or a sell order.

Oops, there are more than 10; can't help it as some of them occur in pairs; consider it a bonus.

Ronald Kwok
http://ronaldkwok.atomicblog.hop.clickbank.net/