CUT LOSSES

The single most important characteristic found within successful Forex traders is the ability to exit losing positions quickly. Losing trades are inevitable for high volume traders. Many novice traders are unwilling to recognize and accept when a position goes against them. Seasoned traders have learned to cut their losses on an adverse trade quickly. A reduced loss is no less valuable than a gain from a winning position. However, human psychology skews our perspective making a loss infinitely more painful than a gain is pleasurable. Overcoming this inherent human flaw is the first critical step towards becoming a Forex pro.

MONEY MANAGEMENT

Professional Forex traders employ detailed and strict money management regimens. Novice traders often get overly excited at the prospects of a given trade and plow into it full force. This behavior almost always translates to account blow-ups and Forex losers. Forex winners learn quickly that there isn’t any trade, no matter how attractive, that is worth risking more than 4% of your account balance. Those just starting out are advised to limit the risk associated with any single trade to 2% of the account balance. Forex professionals manage their risk assiduously.

KISS

Follow the famous advice of McDonald’s found Ray Kroc who said to “keep it simple, stupid!”. Many Forex traders fall victim to information overload, especially with many of the trading “command centers” available today which can display hundreds of data points. A Forex pro becomes a specialist in trading given pairs or spotting a specific group of indicators. By keeping it simple, you are able to become an expert in your Forex niche able to outwit other traders who do not possess your level of experience and knowledge within it.

PRACTICE MAKES PERFECT

The best Forex traders rigorously test their trading strategies before putting real money at risk. Myriad simulation programs exist, and most Forex brokerages provide for a “testing mode”. Overly anxious traders jump right in and often take losses while refining their strategy. A Forex pro fully tweaks the strategy in practice mode avoiding these initial losses thus positively impacting their net ROI.

KEEP YOUR COOL

Emotions are the enemy of all traders. Fear can often prevent a trader from executing upon a correct thesis at the right time. Greed can lead a trader to deviate from their money management rules in pursuit of the proverbial grand slam. Frustration can cause traders to chase losses and engage in the mortal sin of averaging down on losers. Impatience can cause traders to take positions before their strategy would otherwise dictate. All of these emotions prove detrimental to professional level Forex trading. Pro Forex traders execute their strategies remaining cool, calm and collected despite the often chaotic nature of the Forex market.

USE STOP LOSSES

A stop loss order is one which you define an amount of acceptable loss on a given trade. Pro traders religiously use stops and do not rely upon manual executions when it comes to limiting loss. Without a stop loss already in place, novice traders often allow the trade to keep going against them in the misguided hope it will soon turn thus preventing a loss. A stop loss works hand in hand with the rule dictating that traders seek to cut their losses on their bad trades. A stop loss is an effective tool which can be used towards enforcing discipline in this arena.

SET UP A POSITIVE RISK/REWARD EQUATION

Forex professionals ensure that each trade entails a positive expectation. The likelihood of success and potential pay-off must outweigh the odds of failure and the commensurate amount of loss. Shrewd Forex traders do not engage in coin flips. They seek trades where their research and strategy indicates that they have an edge. If you are able to maximize reward while minimizing risk, then mathematics dictate that you will profit nicely over the course of time.

LEVERAGE: YOUR BEST FRIEND OR WORST ENEMY

Many are drawn to the Forex market due to the extreme leverage that can be deployed within it. When the trade goes your way, leverage can produce obscene profits from only a small investment. Conversely, if a trade using 400:1 leverage goes against you, then it can wipe out your account in the blink of an eye. New traders should use leverage with extreme caution. Using leverage sparingly in order to juice your ROI is the sign of a pro Forex trader.

STUDY YOUR LOSSES

A normal human reaction to a loss is to try to forget it and put it behind you. However, pro Forex traders study their losses in order to derive lessons which can prevent the same scenario happening again. Oftentimes, analysis of your losing trades can help you glean critical information used to further tweak your trading strategy. Losses obviously aren’t fun, however, the ability to learn from them is the sign of a pro trader.

TIPS ARE FOR HORSE RACES

Novice Forex traders scour message boards and other chat forums seeking “tips” from random posters telling them which currency to buy or sell. It is a truism for both stocks and Forex that if anyone truly had any information of value, then they would not be sharing it for free in the Internet. This is even more salient in the realm of Forex where “inside information” regarding the movement of major currencies is a complete myth. Many forums can yield valuable information about strategies, indicators and money management techniques. However, view any outright trade advice posted on them with a huge grain of salt.

In the coming weeks we will further explore differing forex strategies, software, and brokers.

Forex trading allows investors to achieve several objectives. Some participate within the Forex arena in order to hedge risk against US Dollar denominated holdings.  Others venture into the Forex market in order to capitalize on its volatility and the extreme leverage it allows. Short term traders seeking to scalp quick profits greatly benefit by increased volatility and leverage.

The primary tool necessary in order to delve into the Forex action is a Forex brokerage account. A plethora of Forex brokers has evolved since the advent of online trading.  Unfortunately, many of these brokers turn out to be scams who either offer an inferior service or exist solely to procure your deposit and disappear into the night.

Smart Forex traders stick with well established reputable firms like Finexo. Finexo has been providing superior service to Forex traders since 2003. This broker is unique in that it provides two levels of service. The Finexo “micro account” is perfect for new traders who are still within the initial learning curve. The Finexo “classic account” is suited for more experienced Forex traders and offers all the associated bells and whistles.

Opening a Forex trading account with Finexo is exceedingly easy. The micro account has a low $25 minimum deposit requirement, and you can fund your account immediately with Paypal, check or credit card. You can dive into the Forex excitement the same day you open your Finexo account.

Finexo is unique in that it brings the power of the Saxo Bank platform to the average trader. Saxo Bank is well known among large institutional traders and provides the highest levels of functionality within its trading platform. Finexo takes this core technology and makes it available to the average trader with their low minimum deposit.

Even with their micro account, Finexo still maintains very low spreads and allows for significant leverage. The spread on the micro account is 5 bips. The spread is the difference between the bid quote and the ask quote. Some Forex brokers charge spreads upwards of 25 bips. Finexo’s low spreads save Forex traders significant money over the course of time.

Finexo also offers a full 200:1 leverage even on its micro accounts. Many brokers limit leverage to 50:1 on their smaller deposit accounts. Finexo’s higher leverage allowance allows for traders to greatly increased ROI (return on investment) on their invested capital. The micro account also offers new traders protection against downside risk when using leverage. Automatic triggers are set in order to provide loss which exceeds deposit amount.

The range of “swaps” able to be traded with a Finexo brokerage account is unparalleled. Finexo offers traders over 50 different swaps to use as basis of their Forex positions. A swap is a pair of two currencies gauged against one another. An example would be a USD/Euro swap. Traders using this swap can invest based upon a thesis that the US Dollar will either go up or down against the Euro. A USD/Yen swap allows for investing based upon the relationship between the US Dollar and the Japanese Yen. With Finexo’s large universe of swaps, a Forex trader is able to capitalize on the movement of any major currency against any other one.

Be very wary when selecting a Forex broker. Do your due diligence to make sure you are dealing with a reputable firm who has established their reliability over time. Compare the spreads, minimum deposits and leverage ratios. Odds are your research will eventually center on Finexo allowing you to use the same broker as some of the most successful traders in the Forex market. Open a Finexo account today.

Monday

Monday started off with a boost to the Euro from a strong October EU Manufacturing PMI. This follows mixed data from the previous week and encourage Forex traders to take more aggressive Euro positions. The salient question remains if the EU Zone can continue to exhibit economic strength while keeping inflation at bay.

The British Pound initially traded down against the USD and Euro, but it recovered after release of the UK PMI figures which indicated expansion within Great Britain’s manufacturing base. Forex trader’s eyes will remain fixed on the BOE gauging whether further stimulus will be deployed.

Tuesday

Tuesday saw the Euro fall off sharply after revelations of further European bank troubles. This brought into doubt a future hawkish position on behalf of the ECB hoped for by many traders.

The Australian Dollar fell sharply on Tuesday even after an interest rate hike by the Australian Central Bank. Forex traders because skeptical of an additional December hike which sparked the sell-off.

Wednesday

The Euro rallied against the US Dollar and other currencies on Wednesday on the back of a positive EU PMI Services report. Forex traders remained bullish on the Euro going into Thursday’s ECB meeting.

The Japanese Yen displayed weakness on Wednesday as a result of the Bank of Japan’s indication that it will remain dovish on interest rates for some time to come. Furthermore, a Japanese short fall in tax revenues was a harbinger of more government issued debt to come.

The British Pound trended slightly higher on Wednesday on the back of increased British consumer confidence. Forex traders on Wednesday were getting into Pound positions ahead of BOE’s Thursday meeting surrounding the future of their asset purchase program.

Thursday

The Euro made slight gains on Thursday as the ECB predicted a pickup in future EU productivity. Forex traders secured positions betting one way or the other pending the US nonfarm payroll report due Friday.

The BOE decided to expand its asset purchase program leading to a small rally in the British Pound.

A sell off in the Asian stock markets caused a flight to safety causing the Japanese Yen to trade higher on Thursday. A fight between the BOJ and the Japanese Government seems to be brewing over future economic policies.

Friday

The Euro traded slightly higher on Friday on the back of the much awaited US nonfarm payroll report. The main numbers were disappointing, however any potential Euro rally was muted as investors sought refuge in gold as opposed to Forex assets.

The British Pound did not react to the US employment report and traded mixed in advance of next week’s critical British unemployment report.

The Japanese Yen was the main beneficiary of the weak US jobs report and traded much higher on Friday. Yen traders accumulated positions ahead of next week’s slew of Japanese economic data reports.

Various Forex trading strategies have different objectives. Those who eschew Technical Analysis rely upon fundamental analysis and macro-economic acumen in order to accurately predict future currency movements based upon a nation’s economic and political policies. The most famous Forex trade predicated on this strategy type was when George Soros “broke the Bank of England” by heavily shorting the British Pound. His ability to correctly analyze the nuances of the British economy at the time allowed for what some would term obscene profits.

Those who employ Forex trading strategies based upon Fundamental Analysis must be constantly attuned to the economic and political policies of the major nations of the world. Furthermore, they must be of a patient mindset, willing to hold positions for a long duration while waiting for their thesis to play out. Most Forex traders seek quicker profits and must turn to Technical Analysis to formulate their Forex strategies.  Fundamental Analysis cannot predict moment-to-moment volatility.

Technical Analysis seeks to identify what short-term traders are most apt to do in the near-term future. Technical Analysis combines math with psychology and attempts to predict the behavior of crowds. In essence, the Forex market is a large crowd that consequently exhibits behaviors that have been quantified by research conducted by sociologists and psychologists. Technical Analysis involves the ability to quickly read and recognize chart patterns, which serve as signals to either buy or sell a given currency.

Several decades ago, large institutional Forex trading firms decided to employ a large staff of PhD’s to develop and run sophisticated software, which served to constantly analyze both technical indicators as well as fundamental developments. This endeavor cost millions of dollars and was available only to the highest net-worth investors. Over the course of time, the expense of these sophisticated Forex trading software programs has come way down. The best of these software packages, even including names like <product>, are now well within the reach of even the smallest trader.

Forex trading has a diverse range of benefits and can be educational as well as lucrative. By following the various domestic and international events that drive the value of your Forex positions you become a more knowledgeable and worldly individual. Adding a good Forex trading software to the mix prevents you from having to stay glued to the computer screen hour-after-hour; you devise the strategy and let the Forex trading software do the grunt work. The availability of sophisticated software and the convenience of the Internet have created a prime time for individual Forex warriors.

It is theoretically possible to manually discern the multiplicity of Forex signals that emanate from the currency markets on an hourly basis. What you need to know about trading using Forex signals ranges from macro-economic events and trends to technical expertise in reading charts and spotting patterns. Traditionally, small retail traders had no choice but to manually formulate their trades and were at a great disadvantage trading against institutions that could avail themselves of automated trading software.

Fundamental Analysis is when Forex signals are influenced by a given sovereign’s economic circumstance. There are many factors that go into determining the strength or weakness of a particular country’s currency, including inflation outlooks, trade deficits, unemployment rates and GDP estimates. Substantive information and statistics are released around the world in a never ending news flow.

The second facet of Forex signals relates to Technical Analysis. Technical analysis involves the complex charting of small fluctuations of a given currency’s valuation against its peers.  Various patterns of recent activity trigger either Forex signals to buy or to sell. The trick is to recognize the applicable pattern quickly and take advantage of the short-term projected movement that the given Forex signal portends.

After reading this, you might come to the conclusion that trading based upon Forex signals is complicated and requires years of study.  You are both right and wrong within this conclusion.  As indicated, to manually track all the salient macro-economic statistics around the world while keeping eagle eye out for technical Forex signals requires both substantial time and expertise.  However, there is another alternative that allows traders to capitalize on Forex signals without the grueling work and years of study.

Experts have taken their years of experience and have crafted software that quickly captures all you need to know to trade based upon Forex signals. Automated trading systems can absorb macro fundamental events in addition to being able to recognize technical patterns and act upon them in nanoseconds. Nowhere is the old saying “the early bird gets the worm” more applicable than in the Forex markets. Those seeking to manually effectuate Forex signal-based trades often find themselves only armed with a slingshot in a battle against cruise missiles.

The most important thing you need to know about Forex trading signals is that you cannot go it alone. Unfortunately, many novice Forex traders learn this lesson the hard way. Many automated Forex signal-based trading programs allow for a free practice account, which allows you to quantify expected results before risking any of your hard earned money. The choice is clear between guesswork and science when it comes to Forex signals. Do not let yourself end up on the wrong end of that continuum.

Foreign exchange (Forex or FX for short) involves the buying and selling of the major currencies found around the world.  The salient currencies most often traded by Forex participants include the U.S. Dollar, the Euro, the Japanese Yen, and the British Pound.  Each currency is valued against another currency; this is no different than what you see at a typical currency exchange shop while on vacation.

This one-on-one currency valuation is termed a “swap.” A Forex trading swap is simply understood by thinking in terms of how much of one unit of a currency can be swapped for another currency.  For instance, how many Japanese Yen can be bought for one U.S. Dollar?  To use round numbers for this example, assume the current quote on that swap entails one U.S. Dollar being worth 100 Japanese Yen.

If you trade Forex utilizing a Dollar/Yen swap, you can invest with one of two theses.  You can trade hoping the Dollar decreases in value against the Yen.  In this scenario you are “long” the Yen against the Dollar. Conversely, you can trade with the goal of the Dollar increasing in value against the Yen.  In this instance you would be “short” the Yen against the Dollar.

Analyzing the first scenario, assume you invested $100 going long the Yen against the Dollar.  Assume further that the Dollar/Yen exchange rate dropped from 100 Yen to the Dollar to only 90 Yen for one Dollar.  You essentially purchased 10,000 Yen on your initial trade ($100 invested purchasing 100 Yen for each Dollar).  Now that the quote has moved to 90, you are able to exit the trade redeeming your 10,000 Yen for $111.11 USD.  Consequently, you made $11.11 profit on this Forex trading transaction.

When you are “long” one currency against another, your hope is that the currency you own improves in value against the one on the other side of your swap.  Alternatively, when you are “short” one currency against another, your goal is for the currency you are short to decrease in value.  Hence, with Forex trading you can effectuate trades to capitalize on either projected strength or weakness of any major currency as quoted against any other major currency.

Valuations within the Forex trading universe change by the second.  This volatility allows for quick profits for Forex traders who are able to adeptly move in and out of various positions.  Today’s best traders are armed with sophisticated trading and execution programs, which give them a leg-up against the strong competition within the Forex trading environment.

Additionally, most of these programmed Forex trading vehicles allow for practice accounts, which allow new participants to formulate and refine their strategies without risking real money.  Those who have tired losing money to CEO scandals and irrational stock market events should explore removing those uncertainties by transitioning away from stocks in favor of trading Forex.

Good Forex trading strategies will yield results over the course of time.  Within a given day’s, week’s or month’s trades, anything can happen.  Smart Forex traders understand this and devise money management parameters that allow them to absorb temporary adverse results retaining sufficient funds to remain in the game.  Money management often proves to be the most critical factor within an overall Forex trading strategy.

A good initial rule of thumb is not to risk more than 3% of your entire account value on any one trade.  As you progress within the Forex arena it is acceptable to increase this threshold to up to 7%.  However, until you develop a higher level of expertise, it is advisable to strictly remain within this 3% limit and avoid the temptation to exceed it no matter how attractive any one Forex trade opportunity appears.

By limiting your exposure for loss to 3% of your portfolio from any one bad trade, you are able to have staying power and emerge from inevitable bad streaks fully able to capitalize on the good streaks, which are always sure to come.  Reckless new participants often risk too much, and after just a few initial bad trades, see their account balance depleted.  Ensure you do not fall victim to this scenario.

The next aspect of money management relates to what is termed as “leverage.”  In Forex trading, leverage can be either your best friend or your worst enemy.  To understand leverage, think of a traditional home mortgage.  Assume you are buying a house for $300,000.  You put down $60,000 down payment and borrow the other $240,000 from the bank.  Further assume you sell this house for $360,000.  You made $60,000 profit, and it was done with only investing $60,000 of your own cash.  This represents a whopping 100% ROI (return on investment).

However, assume that you paid for the house in cash.  In this scenario your $60,000 profit would be return on invested cash of $300,000, thus representing a much lower 20% return on investment.  The same exact phenomenon occurs in Forex trading; however, the levels of leverage that can be employed are much greater than seen in home mortgages.  In Forex trading, some accounts allow you to lever 400:1.  This means you can buy $400,000 worth of a given currency while only investing $1000 of your own cash.

In this scenario, the smallest of gains in the currency you bought can translate to huge profits.  A 1% movement would yield $4000 in profits coming from only a $1000 cash investment.  However, it is critical to analyze the other side of the equation.  A .33% movement to the downside would cause immediate loss of your entire $1000 investment.  Both gains as well as losses are magnified when using leverage.

New Forex traders are strongly urged to use leverage sparingly on initial trades.  Many Forex trading software packages have built in limiters to prevent you from creating too much exposure from any one given trade.  Before you make that first Forex trade, make sure you have fully thought out your money management plan

Fundamental Analysis, as its name suggests, involves scrutiny of the core underlying fundamental factors that impact the worth of a nation’s currency.  There is a long list of these factors, with the primary ones being inflation, unemployment, money supply and GDP.  Take for example a country’s money supply.  The law of supply and demand dictates that when there is more of something, then it is worth less.  If a country prints a large amount of money, then its value as gauged against other currencies will go down.

Fundamental Analysis requires both a deep degree of understanding of macro-economics, along with close attention to developing world economic events.  Political events, natural disasters and the foreign policy of a nation can also dramatically affect the valuation of a currency.  There is no quick money to be made using Fundamental Analysis since the various forces underlying fundamental currency valuation take a long time to play out.  Forex traders relying upon Fundamental Analysis need to be able to hold their positions for months, if not longer.

The second category of “Technical Analysis” does not take into consideration any of the macro economic or political factors upon which fundamental analysis rests.  Forex traders using technical analysis attempt to profit from quick short-term movements of currencies.  These second-to-second movements are not driven by tangible events.  Technical Analysis seeks to notice patterns and signals which, according to past occurrences, portend to a high likelihood of a future event happening.

Technical Analysis relies heavily upon the ability to read charts outlining recent movements of a currency and notice a pattern, which indicates a probability that the currency will move a certain way as it historically has after the given chart pattern emerged.  There are myriad patterns that have been quantified to be either a bearish (bad for the short-term prospects of a currency) or bullish (good for the short-term prospects of a currency) indicators.  The trick is to be able to quickly notice that a pattern or signal has occurred and rapidly act upon it.

The most sophisticated Forex traders have realized that Forex trading software is able to both track fundamental developments, as well as vigilantly be on the lookout for either bullish or bearish signals and patterns.  The human mind can only process so much information at once.  Forex traders who attempt to manually trade often end up missing the brief window that a good technical indicator presents.  Now that the prices associated with even the best of these Forex trading software packages are within anyone’s range, there is no excuse for trying to go it alone in your quest to conquer the currency market.