Finding Your Way Around For Ex

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Forex trading is highly speculative in nature and can mean that currency prices can become extremely volatile.
Forex trading is highly leveraged, since low margin requirements are normally required, an extremely high
degree is obtainable in foreign exchange trading. A relatively small market movement will have a proportionally
larger impact on the funds you have deposited. You may sustain a total loss of your funds. Since the possibility
of losing your entire cash balance does exist, speculation in the Forex market should be conducted only with risk
capital you can afford to loose and not adversely effect your lifestyle.
Learn More About Automated Forex Trading

Finding Your Way Around Forex Trading

Table of Contents
How to Get Started in Forex
Forex Basics
A Popularity Contest
The Forex Market
Before You Begin
All About Trends
Multiple Time Frame Strategy
Normal Trading Strategies
Flags and Filtering
Rounding Off
Interest Rate
The Boomerang Effect
Scoring Big Gains
A Level Playing Field
Summing it Up


Basically, Forex, or currency market or foreign exchange market, is a market

wherein one currency is traded for another. Additionally, Forex is one of the
largest markets in the world. The goal of some participants in the Forex
market is to seek an exchange of a foreign currency for their own use. A
large part of the market is made up of currency traders, who speculate
movements in the exchange rates, similar to others who speculate
movements of stock prices.
Learning Forex
The investments placed on Forex markets normally deal with the four major
pairs, namely EUR/USD, USD/JPY, GBP/USD, and the USD/CHF. These pairs
are also considered as blue chips.
Additionally, the foreign exchange market is unique due to several aspects,

such as: the trading volumes, extreme market liquidity, the large amount

and variety of traders, geographical dispersion, 24-hour trading, the factors

affecting the exchange rates, and the low margins of profit with other fixed
income markets.
The exchange-traded foreign exchange future contracts were first introduced

in the year 1972 at the Chicago Mercantile Exchange. Future volumes of
Forex have grown rapidly in recent years, and accounts for about seven
percent of the total Forex market volume.
From Stocks to Forex
Most traders in the United States are involved in stock trading. Within that
environment, a trader who is following a trend for as long as possible would
not have any difficulty in making money. The stock market is also a very
forgiving market, which can bail out even poor traders. The only trick is to
understand the difference between the good and the lucky. There are
several talented traders and even they can falter when the conditions of
trading become less then ideal.

Although both the stock and Forex markets involve risks, the latter is not
conducted on a regulated exchange, thus there are additional risks
correlated with Forex trading. However, many traders previously involved in
stock markets are transferring to Forex markets due to a number of
benefits.
One is the availability of greater leverage. Forex trading provides greater

leverage when compared to traditional stock trading, which only allows
traders to be leveraged and in charge of larger positions with smaller
amounts of capital. The availability of greater leverage in Forex allows an
individual to trade the same size positions that he or she might take with a
stock broker, while leaving them with more available capital to trade more
markets.
In Forex markets, there are no middlemen. When trading directly in Forex

markets, the only players are the dealer and the primary market maker, or
the trader and the buyer or seller of the currency pair; no outside parties are
involved. On the other hand, the stock market involves the trader, broker
and the exchange, all of which charge commissions and fees.

Stock Market Headaches
There are a number of unpleasant events that a person must learn to deal
with in life. After a while, these problems are no longer considered as a
burden but instead a norm. Likewise, for traders, there are also unpleasant
occasions that can be considered as normal or a part of the job.
One of these problems is the partial fill. The partial fill is a normal incident in
stock trading. It occurs when a trader puts an order for a definite number of
shares and instead receives only a portion of the order. The market will not
be able to absorb an entire order if there are not enough shares available at
a defined price. This can be frustrating for the trader, especially if he or she
wants to pursue large orders. Still, this kind of event is considered as normal
for equity traders.
Slippage is another problem that futures and stock traders encounter every
day. By definition, slippage is the difference between the anticipated
transaction costs and the amount actually paid. Slippage tends to cut into
the traders profits and is a major headache for futures and stock traders.

Aside from those two, another hurdle that a trader must overcome is the
specialist. A specialist is an individual who controls all the trading activity of
a listed stock. More so, the specialist also controls the spread; he or she can
widen or narrow the spread at his of her discretion. Hence, the specialist can
either make your trade successful or make your life miserable.
The uptick rule is another frustrating obstacle that faces the success of an
equity trader. Stock traders can place a trade that will become profitable if
the stock rises whenever they wish. However, if they desire to place a trade
that will become profitable if the stock falls, the traders must go through
several machination processes that can be both costly and problematic.
Stock Market Headaches in Forex
Fortunately, the Forex market is less problematic compared to the stock

market. The currency market is considered as highly liquid or thick. This is
the reason why the partial fill headache evident in the stock market is
extremely rare for all but the largest traders in the foreign exchange market.

Additionally, the slippage is also rare in the Forex market. Several foreign
exchange market makers have a one slippage policy, thus giving currency
traders a superior degree of certainty regarding the price.
As for the specialist, there are no specialists in the foreign exchange market.
More so, the spread is often fixed in the currency market. This allows the
trader another greater degree of certainty.
Lastly, the Forex market has no uptick rule. The trader can buy or sell at his
or her own discretion. Conversions, bullets or married puts are not required
to be purchased.
Forex Basics
Forex Basics
Whenever people travel outside their home country, there is good chance
that they have performed currency transactions. Travelers, in many cases,
are required to exchange their home countrys currency for the currency of
the country they are visiting. Much like the Forex market, there are two
currencies involved in such occasions but only one exchange rate.

The U.S. Dollar and the Canadian Dollar
Back in the year 2002, travelers would have received an estimated C$1.60
in Canadian currency for every U.S. dollar. It is safe to say that the
exchange rate during that year for the U.S. dollar and Canadian dollar was
about 1.60 Canadian dollars for each U.S. dollar.
Years that followed resulted in a dramatic change in the exchange rate and
by the year 2006, the rate had fallen to 1.10. This means that a traveler
from the United States would only receive about C$1.10 in Canadian
currency for every U.S. dollar exchanged. The measurement of very small
changes in this exchange rate can be expressed using 1.1000. If so, the U.S.
dollar significantly depreciated against the Canadian dollar during the early
part of the twenty-first century.
Eventually, the rate of the Canadian dollar approached parity with the U.S.
dollar. U.S. citizens were also less likely to visit Canada, because if they did,
they were more likely to spend more than they would have in the past, when
the exchange rate was more favorable. On the other hand, travelers from

Canada were more likely to visit the United States, since their currency
bought more U.S. products than it had previously.
The U.S. Dollar and the Euro
The rise of the Euro also created a similar situation to that of the Canadian
dollar. In 2002, 2003 and 2004, the Euro achieved dramatic gains against
the U.S. dollar. Additionally during those years, the value of the Euro rose
from US$0.85 to above US$1.35. Because of this movement in the exchange
rates, citizens from the United States found that vacationing in Europe
became very expensive. This kind of shift caused a huge influx of shoppers
from Europe traveling to the United States, especially during the Christmas
season.
There is no doubt that fortunes were made and lost on huge movements,
such as those mentioned. However, it is important to remember that even
the tiniest shift in the exchange rates can also result in substantial gains and
losses.

Understanding the Exchange Rate
An easy way to understand the exchange rate is to think of the base

currency as the number one. For instance, assume that the exchange rate
for the EUR/USD pair is 1.2904. Since the base currency is Euro, that is also
the first member of the pair. Thinking of Euro as the number one will only
mean that one Euro would be worth approximately $1.29 U.S. dollars.
But how do these movements in the exchange rates translate to the Forex
traders bottom line? With trading a pair, like the EUR/USD, the U.S.-based
trader will note that the pair has a fixed value of $10 per pip. This is also
true for all pairs that have USD as the second currency. Hence, in any
currency pair containing USD as the second currency, a flattering movement
in the exchange rate of 10 pips will make a gain of $100; unfavorable
movement of 10 pips would cause a loss of $100. In the case of the
EUR/USD pair, a gain or loss of 10 pips can happen easily since the pair
moves about 100 pips each day on average.
Terminologies in Trading

A non-trader or a beginner can get easily confused around traders, since

they mostly use their own language. This kind of language is easily
synonymous to a secret handshake, which would let others know that they
are a member of the group.
First trading terminology is going long. Whenever you hear this come out of
a traders mouth, it only means that he or she is placing a trade that will only
be profitable if there is a rise in the exchange rate. selling short, on the
other hand, means that the trader will be placing a trade that will only be
profitable if the exchange rate falls. Flat means that the trade is neither long
nor short. More so, the trader saying this has no open positions in the
market.
Another trading term is the pip. By definition, the pip is the smallest
increment of price in Forex markets. It is also an acronym for the phrase
percentage in point. An example for this term would be when supposing the
exchange rate for a pair rises from 1.1000 to 1.1001. It is safe to say that
the rate rose by one pip.
Included within the trading terminologies are the major currencies, such as:

EUR for Euro, GBP for Great Britain pound, JPY for Japanese yen, USD for
U.S. dollar, CAD for Canadian dollar, CHF for Swiss franc, AUD for Australian
dollar and NZD for New Zealand dollar.
Nicknames are also used in trading. These are slang terms that several
traders like to use. Several examples of these nicknames are: cable or
sterling for the British pound, greenback or buck for the U.S. dollar, single
currency for the Euro, Swissy for the Swiss franc, kiwi for the New Zealand
dollar, loonie for the Canadian dollar, and Aussie for the Australian dollar.
Over the years, more and more investors grew dissatisfied with the
performance of markets relying on domestic stocks. Because of this they
began to venture into other options for international investments. There are
many available opportunities for investing in foreign markets but foreign
exchange trading is becoming one the most popular. The primary reason
why investors like Forex is that trades are quick and trading comes with
minimum hassles.

Previously access to this kind of market has only been available to hedge
funds, major corporations and other institutional investors. Some of the
worlds major banks have been involved in foreign exchange markets for
years. In the past the individual trader had no way to access Forex since
there were no methods of competing with the big boys on an even playing
field.
The foreign exchange market finally opened its doors to retail clients in the
1990s. Makers of the online Forex market further opened the gates and
made a fortune by breaking huge trading positions into small-sized chunks
that several individuals could buy and sell.
What this means is that individuals can now make trades alongside the
largest banks in the world. More so, they can even use the same strategies
and techniques that other professional traders utilize. The landscape of
Forex trading has changed dramatically and traders have obtained a new
alternative to future and stock markets.
The Big Money and Forex

The Forex market, or sometimes called FX, foreign exchange, currency

market, and global market, may seem like the newest player on the trading
world. However, it has been the market of choice for institutional investors
and global hedge funds for many years. The big money investors have
always traded Forex since the large size of the market permits these kinds of
traders to enter and exit large trades without making price alterations and
upsetting the exchange rates.
During the past few years, the popularity of foreign exchange has taken off.
The daily volume of Forex market is estimated at about $1.9 trillion and still
growing. This number is still unmatched by any other kind of trading market
available in the world.
Moreover, traders in Forex have the capability to utilize remarkable

leverage, which can be bigger than 200-to-1. The leverage allows traders to
expand their trading positions and may also serve to amplify gains and
losses. Due to the superior leverage in Forex, the barriers for traders are
very low. Traders in Forex markets can open account with as little as a few
hundred dollars.

Making Money in the Forex Market
Traders of currency basically make an effort to profit from the changes in

exchange rates. Since Forex markets have tremendous leverage, a small
change in the exchange rate can create a large profit or loss. Wealth can be
made or lost rapidly in the Forex market; even a shift in the exchange rate
that is equivalent to a few hundredths of a penny can be amplified into a
significant loss or gain.
There are two kinds of traders in Forex markets: the technical and
fundamental traders. The technical traders main focus is on technical
analysis. Such analysis is mainly the study of charts and indicators. These
kinds of traders believe that all the pertinent information required to place a
trade is contained within a chart.
On the other hand, the fundamental traders employ fundamental analysis.

This can be loosely described as the study of economics with a particular
focus on interest rates. Such traders believe that the currencies will
eventually gain or lose strength depending on their economic strength and
weakness and because of the changes in monetary policy and interest rates.

Trading Currencies in Pairs
The subject of currency trading in pairs can be confusing for beginners.

Whenever an individual enters a currency trade, it entails two currencies.
However, even if there are two currencies involved in trading, there is only
one exchange rate. Thus, every transaction or trade involves two currencies
and one exchange rate.
The value of the currency itself does not change but its value relative to
another currency can change. For instance, a single dollar you may have
today would still be worth $1 dollar the next day; although, the value of that
dollar constantly fluctuates relative to other currencies. This is the main
reason why there is a need to trade currencies in pairs in the Forex market.
The 24-Hour Trading and Trading Sessions
Forex markets are seamless and exist on a 24-hour trading market; there
are no rigid schedules. The market allows traders to decide for themselves

when to trade regardless of the time of day. There are even part-time
traders, with full-time jobs, who can trade Forex. No matter wherever the
individual is located or whatever hours he or she keeps, this individual can
still trade in the Forex market.
Since the market is open 24 hours each day, no one can really tell when the
market opens and closes at a specific time of day. It is important for traders
to designate a particular time of day as a benchmark.
Mostl traders begin trading at 5:00 p.m. Eastern U.S. or New York time,
10:00 p.m. London time. Since the Forex market trades 24 hours, the
trading day also ends at the same time of the day.
During this period the three largest Forex trading centers, namely the United
States, Great Britain and Japan, are quiet. However, the New Zealand and
Australian dollars may witness some serious action during those hours.
The trading sessions for Asia starts a few hours later, at around 7:00 p.m.
Eastern U.S. time, London midnight time. For the European session, the

trading begins at around 3:00 a.m. Eastern U.S. time. Lastly, the U.S.
session starts at 8:00 a.m. New York time, which is halfway through the
trading session of London.
The Forex Market

The Forex Market -- Technical Analysis
Many former equity traders and futures traders have chosen to trade in the
Forex markets. They have learned that technical analysis works
exceptionally well in the foreign exchange markets. But how does this
technical analysis work?
Technical analysis is merely utilizing the analysis of past price movements to
aid in predicting the movements of the future price. In most instances, the
trader, who uses technical analysis, is simply looking for the repetition of
past cycles.
The Theory of Technical Analysis
Long-term movements in the Forex market are usually related to economic

cycles. These cycles tend to repeat themselves and can be predicted with a
reasonable degree of accuracy. The key is repetition since the entire premise
of technical analysis lies in utilizing historical price movement to foretell
future price movement.
Within the environment of the stock market, the fundamentals of one

company can change radically in a short period of time. This fact makes past
stock prices irrelevant in the prediction of the movement in the future.
Moreover, there is no predictable economic cycle in the life of a company or
an individual stock. As a result, the technical analysis becomes a hit-or-miss
proposition in the stock market.
On the other hand, within the Forex market environment, the traders are
trading the economies of entire countries. The rudiments of these countries
adjust relatively slow, thus making the boom-bust nature of the economic
cycle easier to predict.
The Statistical Survey

It comes down to this, a survey performed in an even-handed and fair

manner will produce larger samples of information, which can produce more
accurate results. The larger size and liquidity of the foreign exchange
markets provide technical analysis with a greater sample of data from which
to draw. There are also more trades and more money changing hands in
Forex markets compared to any futures or stock market. In addition, the
Forex market contains several data points, thus making a statistical
sampling, like the technical analysis, more accurate.
Additionally, the vast liquidity present in the foreign exchange market makes
it much less likely that irrelevant players will upset the market and
momentarily skew technical indications, a situation which is common in
other liquid markets.
The Trend and the Fear of the Unknown
The main reason why traders who like to follow trends are drawn to the
currency market is due to the prevalence of trends in Forex. Since currency
pairs have a tendency to create strong and persistent trends, the Forex
market is relatively famous for these trends. For instance, the Euro trended

constantly superior against the U.S. dollar over a three-year period. This
uptrend also occurred during a time when the United States was
experiencing a period of economic weakness.
Knowing the current trends can help overcome the fear of the unknown. It is
normal for an individual to have a fear of the unknown; this is a typical
human behavior. Entering the Forex market can create several concerns that
may weigh your mind. These concerns are common to traders who desire to
experience the advantages of Forex, but are still reluctant to leave their
comfort zone.
If you are concerned about charts, it is important to realize that the charts
used for Forex exchange rates are not very different from the charts of other
vehicles for trading, like commodities or stocks.
The Trading Patterns and the Technical Indicators
The good news for experienced futures and equity traders is that nearly
everything that they already know about technical analysis can be applied to

the foreign exchange market. Charts used in Forex contain familiar patterns,
including the head and shoulders, double tops and bottoms and the
symmetrical and asymmetrical metrical triangles.
Traders in Forex use Bollinger bands, moving averages and MACD or moving
average convergence/divergence, which are the same indicators that futures
and equity traders use. There are also similar breakouts and pullbacks,
ranges and trends, and retracements and consolidations used.
Forex traders also use resistance and support levels in order to determine
the best location for entry and stop orders, similar to traders involved in
stock and futures markets. Also, the strategies involving trend lines and
channels are also popular in the Forex markets.
Before You Begin
Before You Get Started
Foreign exchange, or Forex, has been in the forefront of possible business

profiles ever since small investors were given the chance to join in the realm
of currency exchange. Even though there is always the presence of pressure

and the rigors of a day job, many traders still aspire to enter and profit from
foreign exchange markets.
However, before starting any kind of trading, including trading in Forex

markets, you should know what you are getting into; you will enjoy gains
and suffer losses. In every venture, it is important to know the risks involved
and the techniques to use in order to stabilze the possible outcome of every
trade.
The Triple Threat Trader
Any trader who masters trading strategies and technical analysis can
pinpoint profitable entry and exit points. Mastering the fundamentals of
analysis can help one anticipate turning points in the markets when
economies shift. More so, the trader who understands solid risk
management can defend and protect their account against loss in any
trading climate. A trader that masters all skills, namely technical analysis,
fundamental analysis and risk management, is called the tripe threat trader.

Anyone can become the tripe threat trader. It is important to learn tried and
true techniques which can be utilized to successfully trade in the Forex
market. Learning to identify the current situation and trends of the market,
apply the appropriate strategies for trading, and adapt to changes in the
market can help anyone master the technical analysis.
It is also important to be fully educated in fundamental analysis although it

can be intimidating. What separates a good trader from a great one is the
solid realization of the fundamentals of the Forex market.
Risk management is one element that all traders, who are successful, share.
Having good risk management fundamentals can help you to evade trouble
and allow you to survive even in the tough times and even gain valuable
experience while doing it.
Acquiring Experience
Having a good trading education can help anyone to anticipate some of the
situations that may occur in Forex; none the less it does not provide

experience. Fortunately, gaining experience in trading the Forex market,

without risking money, can be done by enlisting a practice or demonstration
account. There are several Forex market makers who offer such accounts
and they often include real-time charts, news feeds and price quotes. This is
one opportunity a beginner can now enjoy. In the past traders had to learn
and make errors using their real money.
An excellent method for potential Forex traders to familiarize themselves

with the market is demo trading. It is recommended for a beginner to use a
demo account for at least several months before even taking a shot at live
trading.
Aside from demo trading, mini accounts are also available, which helps
neophytes place live trades with minimal risks. These kinds of accounts can
be opened with as little as a few hundred dollars. They create one of the
lowest barriers to entry for any type market for trading.
As for the transition, it is important to trade using a demo account for

several months before advancing on to the mini account. Being lucky is not
the same as being successful in trading. Even if you turn profit on the demo

account, but still exposed yourself to too much risk that profit probably
would not be maintained for long when you are live trading.
The Pair to Trade
If you are starting to trade Forex, it is necessary to begin with just one
currency pair. Moreover, an excellent way to start is with a pair that has a
narrow spread, like the EUR/USD pair. The spread of this pair is the
difference between the buy price and the sell price.
Additionally, the spread is considered as a formidable obstacle, and there

are pairs that have wide spreads, which are suitable only for long-term
trading. Overcoming the spread can help you to reach the point in the trade,
called the break-even. Thus, using a pair with a narrow spread can help
achieve this level much quicker.
When using the demo account, begin with the EUR/USD pair and after you
feel comfortable with the way the pair moves, you can then branch out and
try trading the GBP/USD pair. The GBP/USD pair is similar to the EUR/USD

pair but with a higher volatility.
Always remember that no two traders are exactly alike. Your decision on
choosing the pair only relies on your personal style. However, any time you
want to test a new trading technique or currency pair always remember to
do so with a demo account first. Choosing the currency pair best suited for
your personality is part of the learning process in becoming a Forex trader.
The Commodity Currencies
After knowing which pairs to trade, you can see if the USD/CAN is a pair that
you can enjoy trading. The relationship between this pair and the price of
the oil is similar because the Canadian dollar often gains ground as the price
of energy rises and falls when energy prices weaken. Commodity currencies
are the currencies that share a strong relationship with the price of a
commodity, like oil.
There are several other commodity currencies that you can explore. One is
the CAD/JYP, which has an even stronger relationship with the price of oil.

Another pair is the AUD/USD. The AUD or Australian dollar usually rises and
falls along with the price of gold. Such a correlation is extremely useful to
currency traders who frequently observe situations where the price of gold
appears to lead the Australian dollar.
All About Trends
All About Trends
Like some activities in our daily lives we often employ techniques to cope
with different situations. Trading is very much the same. In trading the
Forex market, there are numerous techniques available and no one of these
techniques will work all the time. Techniques are designed to help a trader
survive a specific condition within the currency market. It is an important
ability for the trader to cope and adapt to any circumstance and be able to
vary his or her own trading style using the particular technique appropriate
for a specific crisis.
In trading, there are three basic types of conditions, such as: Range-bound,
wherein the currency pairs bounce between support and resistance;
Trending, wherein the pairs have a definite direction; and Consolidating,
wherein the currency pairs are cornered in a narrow and tightening area.

Understanding these conditions begins by knowing that during range-bound

or consolidating markets, trending techniques are not applicable. More so,
when the market is experiencing consolidating or trending periods, rangebound techniques are inappropriate.
The key factor which can help a trader know which technique should be used
for what specific condition is to realize that markets constantly change.
Sooner or later a pair that is currently trending would begin to move into a
consolidation phase or in a range. Traders must be nimble and have the
capacity to adapt to this kind of changing environment by using the right
strategy at the right time.
Importance of Being Objective
When a trader first starts using new techniques for trading he may be lucky
and encounter success right from the start. However, there is an unfortunate
side to this kind of initial success. The trader has the tendency to continue
using that same trading technique even though the market has clearly
altered and the technique is no longer applicable. Falling in love with a

specific technique should be avoided since the results can be devastating.
If this happens to a trader you are advised to remain objective and

understand that short-term success is not the ultimate goal. Luck can be
enjoyed by anyone but it does not last for long. It is important to know that
the markets are not static and it is up to the trader to learn and cope with
the changes.
Starting With a Tendency
Market tendency is the core component of every good trading strategy. By

observing a market for a long period of time, there are noticeable tendencies
such as when the currency market tends to run in a long and strong trend.
Another example would be the markets tendency to look for support or
resistance at large round numbers. This tendency is often called the
psychological tendency and can happen in any trading market. There is also
another situation where the market often has the tendency for a strong
breakout to occur immediately following a tight consolidation. The trader can
use these tendencies and make them a foundation from which to build an
effective strategy.

An authentic tendency can often be identified by astute observation. For

instance a round number support and resistance point can occur when
people often set their stops and exits right at round numbers.
The truth of the matter is not all traders consult a chart before putting in a
trade and there are others who rarely analyze as to where they wish to place
their orders. These kinds of traders often place entry, stop and exit orders at
round numbers and the orders subsequently assemble at these levels. When
this happens, the round numbers frequently correspond with the key levels
of support and resistance in the futures and equity markets, as well as in the
foreign exchange markets.
Applying Trends
Traders can utilize trends to their own benefit. For example, when the
market is trending, it has clearly preferred direction. Traders can assume
that this trend will continue since history dictates that in the currency
market trends can last for several years. If the trader is able to get on the
right side of the trend they might have the opportunity to enjoy a

considerable gain.
It is easier and profitable for traders to allow their winning trades to run in a
trending market since the exchange rate has a clear direction. For as long as
the currency pair moves in the proper direction the traders defensive stop is
less likely to be executed.
Conversely, with the case of the sideways or range-bound currency pair, the
price has the tendency to return to the entry point. For this reason this kind
of pair has no real direction. A situation such as this makes it hard for
traders to hold on to their positions and may even force them to make quick
exits.
The Trending Market
Traders can use several techniques to determine whether a market is

trending. One method is to use moving averages, also known as proper
order of moving averages.

Another method is by using the ADX or Average Directional Index indicator.

This indicator shows the strength of the trend without regard to the trends
direction. High readings can indicate strong trends.
A trend line is also used to determine if a trend is in effect. Simply, the trend
line is a line drawn beneath an uptrend, or above a downtrend, and specifies
the general direction of currency pair.
The Formation of Trends
The reason why trends form is because of the economic cycles. In Forex
markets, traders trade on the economies of an entire nation. Normally, when
the economy of a country is either strong or weak, it remains that way for
years. More so the strength and weakness of an economy runs in a cycle
that is measured in years. There are four stages that traditional business
cycles undergo, including the expansion, prosperity, contraction and
recession, in that order.
The economic strength and weakness usually reflect in the currency. Since

currency markets involve matching two currencies against one another,

situations can arise wherein one currency is stronger than the other in the
pair, thus resulting in a trend, which can last for months or years.
It is a rule for a trend-following trader not to fight the trend. It may be

tempting to apply and deduce the point at which the trend will reverse. This
is exactly the behavior that traders should avoid. While it is possible to gain
on a countertrend move, a trader who always trades in this manner is
stacking the odds against himself.
Multiple Time Frame Strategy
Using a Multiple Time Frame Strategy with Forex
One of the most dependable features of the currency market is its tendency
to form trends in an assortment of time frames. Trends within the Forex
market can linger for weeks, month or even years and traders who support
themselves with these trends can improve their chances for success.
Why Does Multiple Time Frame Strategy Works

The multiple time frame strategy allows the traders to trade only in the
direction of the overall trend. Additionally, it requires the trades to be placed
only after the price has pulled back to a favorable entry point. In short, this
strategy does not allow the traders to enter long at the highs or short at the
lows.
This technique can also be utilized for shorter time frames. For example
when the active day trader uses the four-hour chart for long-term reference
and a 15-minute chart for short-term reference.
When playing the role of a trend trader your main objective is to use the
trend to your own advantage. If the currency pair is in a downtrend you
should only look for short entries and ignore any opportunity to go long.
Likewise if the pair is rallying you must find your entry point and locate a
greater resistance level for your exit.
The Tops and Bottoms
If the trader waits for the oscillator to turn before entry, he will not be able

to enter at the absolute peak. There are many traders who seem to be
overly concerned with achieving the ultimate entry point; they desire to sell
short at the peak and proceed long at the absolute bottom.
The problem in choosing tops and bottoms is that it is a dangerous game. No

one can really foretell the peaks and valleys in stocks, options, futures, as
well as Forex. Any trader who tries to achieve buying at the bottom and
selling at the top is simply attempting to get lucky.
If the trader waits for the momentum to turn, he or she has no chance of
entering at the very top or bottom which is fine. Always remember that an
experienced trader is willing to sacrifice a portion of the move, in exchange
for the enhanced probability of the success that patience grants.
The Entry Signal and Stop Placement
To know when to enter your short trade it is very important to refer to the
exchange rate slides as the RSI descends from overbought levels. The trader
can enter short within the vicinity or point at which the Relative Strength

Index is no longer providing an overbought reading; this should also be the

point when the exchange rate begins to drop.
The RSI or Relative Strength Index is used to measure the activity of the
market an to indicate if the market is over sold or over bought. Additionally,
it provides the trader an indication as to which way the market is going.
Placing the stop is also important and must be immediately applied in order
to gain protection from any adverse movement. The trader must know how
to stop at a certain point, again by referencing the RSI. It is important for
the trader to consider the possibility that after his or her entry the exchange
rate could rally further. If the pair trades above the stop point it is advised
not to hold on to it as it could be breaking out to the upside. The stop should
be placed at a point where the trader will be taken out of the trade if a new
high is reached.
Knowing When to Stay Out
If the currency pair is rising up from support, the trader should not enter a

long trade and then try to gain from a possible bounce. In a multiple time
frame strategy, the main focus is to trade only in the direction of the trend
and to disallow trades that go against the trend.
This does not mean that the trades going against the trend are never
profitable because anything can occur in an individual trade. A trader who
constantly fights against the trend on steady basis will have difficulty in
finding success as opposed to someone that follows the trend.
When a trader properly uses the multiple time frame strategy they have the
capacity to see the exchange rate rising. This kind type of trader would not
be tempted to go long and battle against the odds. The correct attitude for
trading should be to allow the exchange rate to rise and hope that it creates
another opportunity for short entry.
Normal Trading Strategies
How To Use Normal (Non-trending) Trading Strategies
In the foreign exchange market there is no doubt that fortunes can be made
from following trends. However often the market fails to cooperate. The

trader must be able to develop solid techniques for times when the market is
not trending. This can be accomplished around specific tendencies that are
most common to the currency market.
The Key Indicator
In Forex trading, there are several indicators that people use, including the
RSI or relative strength index, the exponential moving averages of EMAs,
and the Bollinger bands. However, there is another indicator that stands
above the rest, which is the price. It has always been the ultimate indicator
compared to the other mentioned indicators which are merely equations or
formulas that are applied to the price.
A good example is the moving average because it encompasses the average

price of the trading vehicle over a selected period of time. The RSI or
stochastic oscillators are used to measure the difference between the current
price and the recent prices in order to determine if the pair is overbought or
oversold.

Technically, the Forex market does not have a price per se and instead,
there is an exchange rate. The rate allows the traders to compare two
currencies in one equation. Thus, the price is only another term for
exchange rate in currency trading.
There are two elements correlated with the price: the support and the
resistance. The support happens when buyers continuously step in at a
particular price. On the other hand, when sellers repeatedly execute at a
specific price, this is known as the resistance. The support and resistance
can be metaphorically referred to as the floor and the ceiling, respectively. If
the price can bounce from the support, it can also fall from the resistance.
The Intraday Breakouts
When the trader is participating in any kind of trading, like the intraday
breakouts, it is important them to remember to utilize every advantage
possible. Traders normally search for situations where the odds are in their
favor, and then take the necessary course of action.

There are several instances of false breakouts in all types of trading,

regardless of the trading vehicle. The false breakout only occurs when the
price appears to break below support or above resistance, only to rise back
above support or fall back below resistance.
There are negative effects of false breakouts and in order to reduce them,
and improve the chances of success, it is important to apply intraday
breakouts.
The Triangles
Triangles, in trading, can either be ascending or descending. They can create

great intraday breakout opportunities, due to their pattern, which creates a
directional partiality for the currency pair. Firstly, the ascending triangle is
formed by the combination of diagonal support and horizontal resistance. On
the other hand, the descending triangle is formed through the combination
of the diagonal resistance and the horizontal support.
The Trend Filter

Traders can increase their edge and take it to the next level. More so,
traders can also gain a further edge by checking the direction of the
currency pair preceding the information of the triangle pattern, when trading
ascending or descending triangles. This is for the reason that it is not
abnormal for a currency pair to trend in one direction, then consolidates and
then resume trending in the same direction. The pair trending in the same
direction prior to the formation of the triangle pattern can only cause the
trade to become all the more compelling.
In trading, when you notice that the pair has been trending steadily higher,
it is important to use the power of this trend to your own advantage. You
must do this in order to reduce false breakouts from happening and enhance
your chances of success. Through filtering the breakout trades, you are
again integrating the trend into your techniques.
Remember that the general rule for the trade is always to trade with the
trend and never fight it. Traders who fight against the trends often get
hammered by their actions.

The Time-Of-Day Filter
The time of day is anther edge that traders can utilize when trading intraday
breakouts. In trading, there is a saying stating that a breakout is believed to
be significant if it happens on high volume, and is considered less
dependable if it happens on low volume.
Within a high-volume environment, the move is deemed more significant

since the players are placing large amounts of capital to work. On the other
hand, an order that normally would not have a significant impact on the
exchange rates but does have the ability to move the market can occure
within a low-volume environment.
If the trader applies buying or selling pressure at the right moment, the
institutional traders can cause pools of orders to be implemented, thus
generating commissions. However, this is easier to accomplish when the
volume is light and the move tends to be succinct.
While traders do not have the capacity to easily access precise volume

figures, the trading is not equally liquid at all time of the day. Additionally,
there are certainly times of the day when large volumes are generated.
Flags And Filtering

About Flags And Filtering Entries
In Forex markets, there is a situation when the traders often witness the
price fall rapidly, then consolidates, and then continues its fall. In between
these two falls is a period of rest, also known as consolidation. A currency
pair consolidates its gains or losses before moving on. A rest period
indicating that the exchange rate will continue to move in its previous
direction is referred to as the continuation pattern.
The Flags
Flags, as well as pennants, are short-term continuation patterns. After the

formation of the flags, the exchange rate has the tendency to resume its
movements in the same direction as it was, preceding the consolidation.
Flags are usually found on intraday and short-term charts.

In the case of the flags, the preliminary move is a sharp, sudden directional
thrust. Whether the move is an advance or decline does not matter. What
does matter is the velocity of the move. This sharp burst generates a long
candle or even a series of long candles on a short-term chart; this is also
known as the flagpole.
Flag formations are also found in continuation patterns, which means that
the most likely end point of the consolidation will be a breakout in the similar
direction as the flagpole. Generally, flags contain two parallel lines sloping
away from the direction of the flagpole.
The Filtering Entries
Impatient traders often opt to enter when the price clears the upper line of
the flag instead of waiting for the price to reach the right entry point. This is
absolutely a mistake. Normally, if the exchange rate escapes from the
formation of the flag but fails to clear the top of the flagpole, there is no
reason to assume that the trade should be successful. However, by waiting
for the exchange rate to clear the top of the pattern by an amount equal to

10 percent of the flag, traders can filter out a poorer entry point that would
have been disastrous.
The Volatility Cycle
It is not unusual for volatility to run in cycles. Usually, periods of high

volatility are followed by periods of low volatility. An explanation for this
event is best described in a situation when the market is trending. The Forex
market often trends and the participants have a definite opinion regarding
the direction of the trade.
The cycle can be observed in any trading market though it is most closely
visible with options trading. Traders in this type of market write put and call
contracts during times of high volatility in order collect the cost of the
contract, or the premium. Premiums that are attached to the contracts have
the tendency to be bigger when the markets are volatile.
The option writer then assumes that the volatility will go back to normal
levels in the future. This would allow him to buy back the contracts at a

reduced premium. This concept is also known as selling volatility. This kind
of cycle in volatility can also be observed in the foreign exchange market.
Moving the Market through Perception
Traders show a strong preference for one currency over another, when a
currency pair begins to trend. When strong trends happen, the market is
volatile due to the price movement. The perception of value has been altered
and the price must move to reflect this change of opinion.
After a trend has continued for a while the pair will achieve a certain point
where the market participants feel that the exchange rate is valued fairly.
When this happens there will come a point when the bears and the bulls
reach an temporary agreement that a currency pair is reasonably priced.
This period of rest or consolidation will eventually come to an end. The bulls
and the bears may have attained a temporary agreement, but eventually
new information will be introduced into the market. Then the perception of
the value of the currency pair will modify as this news is absorbed.

Normally, the catalysts for this alteration of opinion are the economic
indicators. The exchange rate will break out of its narrow period of
consolidation and run until the price achieves a new level where the bulls
and bears can once again agree. Such a temporary break can be caused by
an unexpected news events.
Rounding Off
About Rounding Off
We perform rounding off numbers in our daily activities, be it going to the

market, considering the temperature, or buying a piece of property. All of us
are drawn to round numbers or those that end in zero. In trading, round
numbers play a major role.
The Reason Behind the Interest in Round Numbers
The Dow Jones Industrial Average approached the 10,000 mark for the first
time in March of the year 1999. The event interested index testing investors

for approximately two weeks before finally closing above 10,000. This event
was greeted with celebration because it was a significant milestone.
Seven years later, the extensively tracked index was trading at an estimated
11,000. The investors who frenzied during the peak of the Dow 10,000,
however, had little to show for it.
Back then, the success of Dow was highly publicized and filled the front
pages of newspapers and magazines. Channels for financial news ran fourhour television specials advertising the event. At the time, the whole market
was entranced by the 10,000 figure.
There are some scientists who believe that human beings generated a
numeric system called base-10 because we are born with 10 toes and 10
fingers. More so, we began to interpret things in terms of factors of 10.
The Effectiveness of Round Numbers
Traders and investors have a strong tendency to put in orders that coincide

with round numbers. For example, an analyst may have said that he would
buy a specific stock if it falls to a specific amount, for instance $40. If
several traders placed buy orders for that stock at $40 per share, since they
believe that the stock is a bargain at that price, the stock will encounter a
large pool of buy orders. When these orders are activated, they can unleash
an incredible amount of buying power. When buyers are more aggressive or
outnumber sellers, the price will surely rise.
Basically, the buyers have generated a support level at $40, since several
orders have accumulated at that level. Traders refer to this as the
psychological support level since it is not entirely based on any prior price
action.
This phenomenon is real and normally happens in all forms of trading,

especially in the Forex market. The reason why commodities, currencies and
stocks are all subject to the round number phenomenon is because it is a
part of the human nature to be attracted to round numbers. Therefore, the
event can occur in any market traded by humans.
Round Numbers in Forex

There is a profound influence of round numbers in the Forex market. For

instance, back in the early part of 2005, the USD/CAD currency pair found
support repeatedly at 1.2000. Another is in early 2006, when the EUR/USD
buyers stepped in repeatedly within the vicinity of 1.2700. Traders who use
such round numbers as entry points were rewarded handsomely.
A pool of large orders can generate an attractive target since banks can earn
commissions when their customers orders are implemented. More so, since
the orders tend to accumulate at round numbers, the trader can take this
tendency into consideration when creating their strategy.
The First Bounce is The Best
For a day trading strategy, time frames will be extremely short. This is
because the first bounce off of the round number support or resistance is
normally the best bounce and so traders desire to be certain that they are
seeing the first bounce. On the other hand longer time frames cannot also
be used for this kind of strategy since they can hide multiple bounces within
a single candle.

Every time the exchange rate achieves the round number orders are
normally executed and the pool of orders that produces that level of support
and resistance is diminished. Once the total of orders remaining is no longer
large enough to effect the exchange rate it is not unusual for the level of
support or resistance to break out.
This is why it is essential for the traders to trade the first bounce off of the
round number since it is at this point that the pool of orders is most
valuable. The traders can also trade subsequent bounces as well, though the
first bounce always has the greatest potential.
Interest Rate
Interest Rate
The ultimate traders dream is to enter a trade and turn a profit even though
the currency pair does not budge. There are others who desire to make
money off their trades, even though the market is seemingly uncooperative.
Although it may seem farfetched to those who are unfamiliar with the
methods of Forex market that is exactly how the hedge funds, banks and
other institutional traders play the Forex game.

The Interest Rate Differentials
The heart of this technique lies in the interest rate arbitrage and in the
reality that every currency has a matching rate of interest. The rate is
determined by the nations central bank or the nations that use the currency.
For instance, the Federal Reserve sets the U.S. interest rates, while the
interest rate for France, Germany and other nations of the European
Monetary Union are determined by the European Central Bank.
In the Forex marke, currencies trade in pairs and each currency has an
equivalent interest rate. For these reasons there are two different rates of
interest for every pair involved. Generally a disparity exists between the
rates and so in most cases one currency has yields higher than the other.
Large institutional traders seek to exploit this kind of edge. Additionally, the
trader can be long on one currency and short on one currency in every
foreign exchange market. The trader who is long on the higher yielding of
the pair collects interest on the trade.

In contrast the trader who is short on the higher yielding of the pair is
required to pay the interest. The amount of the interest that the trader
either pays or collects is based on the interest rate differential. This factor is
described as the difference in the interest rates between the two currencies.
How Does the Interest Rate Differential Works
Suppose that a certain trade is placed in the imaginary currency pair, say
ABC/XYZ. The rate of interest for the ABC currency is 4.0 percent, while it is
1.0 percent for the XYZ currency.
Thus ABC yields higher than the other. Traders who are long ABC and short
XYZ will collect 3.0 percent in interest, which is the differential between ABC
and XYZ. Note that the trader must be long the higher-yielding currency in
order to collect the interest.
However, traders who are long XYZ and short ABC must therefore pay the
same 3.0 percent in interest rate differential. Arbitrage traders who are long

the higher-yielding currency seek to collect interest every day, given that
they hold the currency pair.
For starters, this might seem at very simple. However there is more to this
strategy than merely matching up a currency that is yielding high against a
currency that is yielding low. Traders utilize this strategy when they are able
to identify a situation where the interest rate differential is likely to expand
over time.
Such event would result in an even greater payoff for the trader who is long
the higher-yielding currency. Normally traders would leave this strategy
when it becomes evident that the interest rate differential will stop growing
or become smaller in the future.
Changing the Differentials
By using the previous example provided assume that the traders are trading
currency pair ABC/XYZ, and they are collecting interest since they are long
currency ABC and short currency XYZ.

If there is a strong economy for ABC, the central bank handling the currency
is likely to raise the interest rates to control inflation and contain growth.
When the bank takes this course of action the interest rate of ABC rises from
4.0 percent to 4.25 percent, thus causing the differential from 3.0 percent to
3.25 percent.
Similarly, if there is an apparent weakness in the economy of XYZ, its central

bank is likely to lower the interest rates in order to encourage demand and
promote growth. The interest rate for the currency will be lowered from 1.0
percent to 0.75 percent, thus the differential would have grown to 3.5
percent.
The traders who are encouraged by the growing interest rate differential go
long on ABC and sell short XYZ to collect the extra interest. If there are
enough traders tempted to go long on ABC and sell short on XYZ this event
will create a positive pressure on ABC and negative on XYZ. Thus, the
currency pair will begin to rise.
Collecting the Interest

There is an advantage to this technique which is the ability to turn a profit in

spite of whether the trade moves in the preferred direction. For instance, if
the trade maintains its flatness for several months the trader can still come
out ahead given that he or she collects interest. Moreover, this will provide
the trader an additional edge.
In this type of situation the trader who is on the other side of the trade must
pay the interest day by day regardless of the direction of the trades
movement. The trader who is short on the higher-yielding currency is
required to regain the interest lost in order to break even.
The Boomerang Effect
What is the Boomerang Effect?
The Forex market also has the tendency to be very quiet at certain times of
the trading day. There usually are a number of hours starting after the
United States Forex session ends and prior to the beginning of the Asian
session volumes tend to be smaller. Although the New Zealand and
Australian Forex markets are full swing during this time of day the entire
volume tends to be relatively slim.

The reason behind this is the inactivity of the three biggest Forex traders,
namely Great Britain, United States and Japan during this time of day.
During these periods currency pairs have the tendency to drift and any
movement in the market should be viewed as highly suspicious.
Fading of the False Breakouts
During these hours breakouts that occur are infamously unreliable since they
almost always occur on very low volume. Also using a trending technique is
also inappropriate due to the lack of direction from the market. Since any
movements that occur at this time of day are undependable and likely to
retrace themselves a trader can create a strategy that is designed to
capitalize on false breakout events through fading or trading against them.
This specific time of day is also considered as the beginning of the Forex
trading day. Due to this fact it is also the same time that a number of
market makers choose to charge or credit interest. Nevertheless, unlike a
strategy involving an interest rate arbitrage this kind of short-term trade is
not designed to collect interest.

The traders can integrate a defense against interest rate charges by

choosing to enter orders just after 17:00 Eastern time. This would normally
link to 22:00 GMT during standard hours or 21:00 GMT during Daylight
Saving Time. Either way, the time of day for this kind of trade will constantly
be just after 17:00 Eastern U.S. time.
The Strategy Used
This kind of strategy is exclusively designed for the EUR/USD currency pair.
The method is to enter both a sell order above the market to fade a move
higher and enter a buy order underneath the market to trade against a
move lower. In both of these cases the traders assume that any movement
in whichever direction is false and the exchange is likely to retrace.
Such a directional move can be caused by a large order which would not
have the ability to move the market under normal circumstances. Also since
the volume is extremely low during this time of day the orders have the
ability to generate market movement because of thin trading
circumstances.

How to Set the Parameters
The buy order will be situated 15 pips below the opening price, while the sell
order at 15 pips above. The traders stop will also be located 15 pips away,
thus creating a ratio of 1:1 for the trade.
Fixed-pip parameters can be set, since this kind of trade is only for the EUR/
USD currency pair. However, if the trader attempts to use this technique on
another currency pair the parameters should be altered and adjusted to
account for the difference in volatility. Additionally the trader is also required
to consider the kind of spread for most currencies which is wider than the
EUR/USD pair.
This kind of strategy is designed for quick profits thus it is perfect for the
EUR/USD pair. This currency pair tends to consist of a narrow spread,
making it ideal for short-term trading.
Entering the Trade

Entering a trade can be done by considering an example when the opening

price on a five-minute EUR/USD chart is 1.2593, at 17:00 Eastern U.S. time.
The traders must place order 15 pips above the opening price at about
1.2598. Additionally they must place a buy order 15 pips below the open at
about 1.2568.
If the trader does not execute the trade within two hours, he or she must
cancel both the orders. At that point there is no valid reason for placing the
trade since the Asian markets are starting to wake up and the volume and
volatility are about to increase. Moves are more likely to be authentic when
real volume enters the market. At this point the strategy that fades
breakouts would be inappropriate.
Scoring Big Gains
How to Score Big Gains
A trading neophyte does not have the experience which allows them to
anticipate and avoid trouble. This type of trader is more likely a prime
candidate to do damage to his or her own account. It is very important for
goals to be in tune with the traders experience. A first-time trader must not

have aspirations of doubling his or her account overnight.
Although big gains are possible it is more important not to expect everything
to fall into place overnight. Always start with an easily achievable goal and
once the first obstacle has been reached move on to the next one, and then
the next.
Setting the Goal Properly
It is not unusual for traders to get excited when they first get involved with
trading. Because the rewards of trading can be fantastic it is easy to get
excited and lose concentration and objectivity concerning trading.
Excitement can cloud good judgment and often leads to unrealistic
expectations. In trading participants are required to keep themselves free of
emotion in order to achieve clear and rational decisions.
There are traders who are constantly trying to change their lives overnight
and often do what is not advisable. These traders enter the market with high
expectations and are usually quickly annihilated. Always note that more

traders fail than succeed and the rate of failure is highest among new
traders. Thus when entering the currency market or any trading vehicle it is
important to have a commonsense method for setting goals.
Traders must rid themselves of unrealistic expectations. Even though you

have read about these incredible gains in books, watched them on the
television or heard about them from a friend, it does not necessarily mean
that you can do it too. In time you will note that a good trader rarely talks
about their gains.
Breaking down the Goals
An excellent way to attain superior results is to take an ambitious goal and

break it down into small, more achievable pieces.
When traders are asked if an annual gain of 100 percent is an aggressive

goal, they would surely say yes. However, when asked if a consistent 6
percent monthly return an aggressive target a no would be a sure reply.
What they do not realize is that if the trader that has the capacity to

increase the value of an account by just 6 percent each month on a constant

basis can achieve an annual gain of approximately 100 percent.
The calculation works by starting with a base number of 100 for the account,
then multiplying it by 1.06, which is the 6 percent gain. This would end in
the first months result of 106. Next multiply the result by 1.06 and keep
doing so until the calculation is enough for the entire years worth of results
or for twelve months. Isnt compounding wonderful!
Consistency
Consistency is the key. It is not hard to attain a six percent return in any
given month though it is considerably harder to achieve a minimum of 6
percent return every month. It is advisable to begin with a relatively easy
target, and gradually work your way to the next level.
Instead of starting out with a goal of 6 percent per month try starting with a
monthly goal of just 1 to 2 percent. Such goal is unlikely to place undue
pressure on the trader which is good since trading itself is stressful enough.

You dont need any extra pressure.
By achieving a goal of just 1 percent each month you would be well ahead of
most traders. Although a monthly goal of 2 percent may not be inspiring, if
done consistently, you can achieve an annual gain which is just shy of 27
percent. Additionally by achieving that goal you will have outperformed most
hedge and mutual funds.
When you have achieved your modest goal for three months in a row you
can then raise the goal to the next level: from 1 percent to 2 percent, or
from 2 percent to 3 percent and so on. Also, do not rush things and
remember that as you gain experience and confidence from achieving your
goal you will continue to become a better trader in the future.
After the Goal is reached
Once the trader has achieved their goal it does not necessarily mean that it
is the end of the story. Now you must take precautions in order to
safeguard your gains.

However if you find yourself encountering problems or not meeting your

objectives it may mean that your goals are too aggressive. Take a shot at an
easier target and if things get really tough stop live trading and switch to a
demo account until you are able to regain your footing.
A Level Playing Field
Creating a Level Playing Field
It is not a lie to say that Forex trading can be difficult. However, in an effort
to make it easier, traders often resort to taking quick exits sometimes by
trying to make 10 pips on each trade instead of earning 100 pips on one.
This kind of attitude may seem to be sensible, however, the trader seeking
to triumph by playing it safe is in fact making his life more difficult.
Evening out the Odds
The world of Forex trading is much like playing roulette. The zero slot
represents the spread and the odds are forever going to be to the advantage
of the house, which in Forex trading is the market maker. Similarly

additional zero slots lower the roulette players chances of success, every
additional pip in the spread can also lessen the chances of success for the
trader.
The house always determines the spread and the traders have no control
over it. It is determined by the market maker alone. However, in the world
of foreign exchange trading the traders can increase the size of the playing
field, thereby improving their chances of success in trading. This can be
done by using exits and stops, longer time frames, and trying for larger
gains.
Do the Math
Assume that a trader is trading a currency pair that has a 3-pip spread
which is a very common spread in the Forex market. If the trader just wants
to gain 10 pip it is understood that he or she can lose the spread upon
entering the trade. And so in order to turn a profit of 10 pips the trader
actually requires the exchange rate to move 13 pips in their favor in order to
make their 10 pip spread.

Knowing what is required to create a winning trade can help traders know
what would have to happen to create an equivalent loss. This is also the
method on how traders can determine the odds of success or failure.
To create a loss of 10 pips, the trader would only require an adverse move
of 7 pips. This is because that a loss of 3 pips is acquired automatically upon
entering the trade again due to the 3-pip spread.
It was also determined that the trader needs a positive move of 13 pips in
order to gain 10 pips but a move of just 7 pips can result in an equivalent of
10 pips. The so-called raw odds of the 10-pip win versus the 10-pip loss for
such a trade can be expressed by: 13/7=1.857:1.
Therefore the odds of the success in this example are 1.857:1. This goes to
show that trying to make money trading for small gains is very difficult.
However, traders can improve the odds of any trade by utilizing good
strategies and solid risk management.
Changing the Equation

The traders can rearrange the odds in order to have a better chance to win
at currency trading by expanding the playing field. If the trader isaiming for
larger gains the spread becomes less a less integral part of the trade.
Once again lets assume a spread of 3 pips only this time the trader will be
hoping to gain 100 pips instead of just 10 pips. To turn a profit of 100 pips,
the trader actually needs the exchange rate to move 103 pips in his or her
favor, thus 100+3=103.
Likewise, to generate a loss of 100 pips the trader would need an adverse
move of only 97 pips since a loss of 3 pips is incurred instantly upon trade
entry. The raw odds for this situation, which is a 100-pip win against a 100pip loss, can be expressed by: 103/97=1.06:1.
The odds are better because they are closer to 50-50. However if the trader
is using good trading techniques and risk management they can further
reduce these slightly negative odds.

The point of changing the equation is to understand that when the playing
field is larger the odds of success also improve significantly. So that traders
who are trying to achieve greater gains have the tendency to hold their
trades longer and consequently enter trades less frequently.
Reason Why Not Everybody Does It
Though the prospect of trading for larger gains is favorable not everybody
does it. Here are a couple of possible answers. First, these traders do not
understand that they are stacking the odds against themselves. Second,
they have faulty predetermined notions about the nature of trading itself.
The problem that most traders encounter is that trading is not always what
they believed it to be. Each trader has his or her own concept of trading or
even what they would like trading to be. Although it is ideal for trading to
provide people with riches through minimal effort trading strategies are not
often suited for the ideal - they should be applied to the real trading world.
Summing It Up
Summing it Up

Fixating on the percentage of winning trades versus losing ones is similar to

a disease that cannot be easily cured. In trading not all battles are won and
instead you need to be prepared to lose a few battles along the way. More
accurately as a trader you should be willing to deal with small losses in order
to avoid the creation of a large loss. Many trading fiascos begin with the
unwillingness of the trader to accept a loss.
The Amateurs And The Professionals
The ultimate judgment of your performance record as a trader will come

down to whether your results are due to your outstanding decision making
or from taking excessive risks. For example there are two traders both with
starting equity of $50,000. The first trader was able to double the initial
investment, thus resulting in a 100 percent gain, although he suffered a
drawdown of 50 percent along the way. The second trader rose only to
$60,000, which is only a gain about 20 percent, but his worst drawdown was
only at 2 percent of the accounts value.
Although the first trader had the larger return he is an accident waiting to

happen. Any trader who is willing to lose 50 percent is also an excellent

candidate to lose the entire account. Probably, the first trader was trying to
hold on to his losing trades or even add to them. This is normally a signal of
failure in trading the currency market.
The trader who can be considered superior is the second trader. This is
because he was able to attain considerable gains with minimal drawdown.
The Good Trade And The Winning Trade
In trading it is important to always remember that the ends do not justify

the means. This means that the outcome of the trade does not automatically
justify the method used to achieve that outcome. There are traders who take
the attitude that for as long as the trade wins it does not matter what rules
were broken during the process.
The truth is, winning trades are not always good trades and vice versa. It is
still possible to perform everything incorrectly and still achieve a triumphant
result on a specific trade, just as it is possible to do everything right and still

lose on the trade.
Remember that as a trader it is more important to strive to be a good trader

instead of a lucky one, since anyone can be lucky. Also do not judge the
trading by the result but rather on whether the process followed proper
protocols. If done correctly but still not profitable at least you will be able to
resolve that the problem lies not with the execution but with the plan.
Importance of Proper Execution
Take note that any good plan is useless without being executed properly.
Unfortunately this is the main area where most traders go wrong. Since they
desire to succeed they make a plan and then randomly change due to lack of
discipline. When failure occurs the blame is immediately placed on the plan.
In fact, the error is not with the plan but with the execution.
When a trader moves from one technique to the next they have no way of
knowing if their plan actually works. When you successfully follow a plan it is
important to do everything that can be done to reinforce that behavior

despite the consequences of the outcome.
Also never congratulate yourself for a successful trade outcome that came
about from an ignored plan or was unplanned at all. Instead, consider
yourself lucky and realize that it might be impossible for you to succeed in
this manner over the long term.
Taking Responsibility for the Actions
Many traders like to place blame. They would like people to think that their
unfortunate trading records are due to exploitation on the part of the market
makers, institutions, or other outside influence.
Although dodging blame may be effective in dealing with other aspects of

life, like work, it is not conducive to performing well in trading. Deflecting
blame only causes traders to remain the same place and leaves no
opportunity for change. Additionally by accepting that the fault lies with
someone else there is no need for learning and growth.

Always remember to accept responsibility for every trade that you place. If
you are very open in taking credit for the winning trades then you should
also be able to accept blame for any losing trades as well. Those individuals
who always fail to take responsibility for their own actions, or trades, have
the tendency not to succeed in the Forex market, or any trading
environment what so ever.
Good luck with your trading. Remember the old adage. Make a solid plan.
Plan your work and then work your plan. If you do you will succeed.
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