Look beyond ordinary analysis
The goal of any forex trader is to maximize profits. But it ain’t easy unless you have a solid strategy. In fact, 95 per cent of traders have no clear plan on growing their equity.
They often fail to apply the fundamental analysis, and end up making losses or smaller profits than anticipated.
A quote by John D. Rockefeller is apt in this regard:
If you’ve been unsuccessful in getting your trading right, and struggled to make consistent profits, the good news is that trading can be learned and improved over time.
Don’t let the lack of results and frustration resulting from the same pin you down.
There’s never a better time than now to reexamine your trading approach with a fresh pair of eyes.
This article discusses some essential and proven technique that can improve your chances of making money by almost 400 per cent!
By incorporating these approaches – which are used by successful forex traders – you can become a more enlightened and a better trader.
Don’t try to re-invent the wheel just apply common things well.
Steps to a clear plan going forward
You need a well thought-out trading plan that tells you how to spot and capitalize on market opportunities quickly. This plan should be based on trading fundamentals and empirical evidence.
You might spend year researching many strategies, indicators or patterns, the truth is, success in this game lies much closer than you can imagine.
Profits in the market are made by applying just few old approaches. These have not changed in decades and are the core of trading.
After reading this article, you will be in a better position to plan your moves and steer clear of common mistakes made by novice or less-informed traders.
The four fundamental keys below will help you manage your portfolio more proficiently and gain better returns in the long run
This is the first and most important piece of the puzzle.
It’s a result of the volume of orders being placed on either side of the market.
Successful traders have a full picture of the long-term currency outlook.
Traders position their portfolios in the long run based on macro analysis and Central Bank’s monetary policies.
Understanding the basics of the market and its biggest influencers will help you improve the probabilities of success and will ensure that you are always on the right side of the market.
This is also very helpful during short term fluctuations where the price tends to revert from the mean and might spook inexperienced traders.
You will be better poised to interpret the current market situation and predict where it could be headed if you study macro analysis and Central Banks’ outlook regarding policy and economics developments.
The best example of this is the recent downtrend in EURUSD.
The aggressive sell off in this market wasn’t a function of stochastic being overbought or moving average crossover and anything else like that.
It was purely a function of divergence in monetary policy between ECB and FED.
At the beginning of 2014 FED completed “Taper” policy. In short, FED stopped to inflate US Dollar and began a conversation about tightening monetary policy.
This is very bullish for US Dollar
At the same time, ECB announced expansionary policy to improve macro conditions in Europe.
This is very bearish for Euro.
The result was – EURUSD dropping like the was no bottom until early 2015.
Fundamental analysis also involves analyzing data sets that provide a view into a country’s economy.
Economics conditions force Central Banks to stimulate that economy via interest rates and money inflation.
Interest rates give incentive for investment.
Capital flow impacts demand on the given currency and the price moves.
Major economic report you have to be watching closely are:
• GDP – Gross Domestic Product. Overall output of the Economy in local currency
• CPI – Consumer Price Index. Measures inflation levels in the economy
• PMI – Purchasing Managers’ Index. Measures manufacturing potential of the economy
• Employment. Measures overall employment of the economy
• Average Hourly Earnings. Measures wage inflation in the economy
• Interest Rates. Bank Rates paid for lending the local currency
The demand and supply scenario can be measured by the Commitment of Traders Report issued by the weekly CFTC news report.
This report breakdown major players in the market and reports their positions once a week.
It’s a must for every serious trader
Once you position yourself on the right side of the market, you must learn to spot support and resistance. These levels comprise of a large number of orders and trades are entered near them.
Resistance is defined as an area where the price stalled or reversed in the past.
Support is defined as the area where the price stalled or revered in the past.
It’s important to think about S&R as an area rather than just an exact price. Market might move10-50 pip range and the whole range will be Support or Resistance.
The golden rule with regards to S&R are:
Never sell support: This is the price where the price can be considered a ‘bargain’. Upon hitting this price level, buyers are encouraged to purchase more, and demand (buying pressure) exceeds supply (selling pressure). As a result, the price increases.
Never buy resistance: At this level, the currency is believed to be expensive, and its price is expected to fall. This is where sellers move in, the selling pressure/supply exceeds the demand/buying pressure, and the price falls.
You should ideally buy at or close to support. In reality, many traders tend to give in to emotions and buy close to resistance with the hope/assumption that price will continue its upward journey.
What happens then, the price pulls back and long positions entered at the resistance get stopped out.
Similarly, you should sell at or close to resistance, which is the opposite of what traders do, thereby committing a common forex trading blunder.
Trading using support and resistance is a good way to enter the market at the low risk.
The markets are influenced by a range of factors and you may find the price action changing every day.
For instance, a long-term bull market can be bearish over the short term.
It is very important to understand these fluctuations to be able to keep your bias.
For a novice trader with no clear bias, pull back is scary. He will watch the price rallying and his profits diminishing. He will eventually close his position with a small profit. The price will then resume its long term downtrend.
Every trend is a series of new highs/lows with pull back between.
That means only entering positions after confirming the reversal pattern and all required retracements are in place.
The golden rule to remember in this case is:
Forex traders find themselves in a push-pull over reducing the size of a potential loss but also wanting to get as much as possible out of a single trade.
To get the highest returns, you will need to take big risks.
Whoever take big risks fails eventually.
Below is the chart of two approaches:
Risking 2% and risking 10% per trade. You clearly see that risking 2% per trade is much healthier/saver approach in the long run.
Have a few advanced risk management strategies up your sleeve to cut your losses and improve your gains.
Even if you are 40 per cent accurate and lose half of what you win, you will still make hell lots of money!
As you now know, all the above is not anything new.
This is a very simple approach which, once implemented properly will lead you to success in this game.
At the same time, it is also important not to fall into common forex trading traps.
You are probably wondering: Is that it? Well… It is!
The problem is, many traders don’t understand it and they commit their time and money to find this so called “Holy Grail”. They don’t exist.
They move from one technique to another but they never master basic principles.
I wrote Few Things About Smart Risk Management Every Forex Trader Should Know to advise on trade management in more details.
Hard work, understanding, learning and persistence are the keys to be successful in this game.
They all take time.
4,890 total views, 20 views today
4,891 total views, 21 views today