The Forex Nitty Gritty

The most commonly traded Forex currency pairs are the US Dollar and Japanese Yen or (USD/JPY), the Euro and US Dollar (EUR/USD), the US Dollar and the Swiss Franc (USD/CHF) and the British Pound and the US Dollar (GBP/USD). The Canadian Dollar and Australian Dollar are also traded as major currencies. In developing a Forex strategy you will need to decide which Forex currency pairs you want to trade and why. There is Forex opportunity in trading both major and minor currencies but you need to know about technical analysis patters, tight spreads, and whether you want to always trade the US Dollar in Forex currency pairs or deal in “cross pairs” which do not include the US Dollar.

When you have your trading station and software up and running you can quickly learn to rudiments of technical trading. The software on your trading station will guide you in choosing your trades, your buys, and your sells. In trading the first currency in Forex currency pairs is the “base currency.” The second currency in Forex currency pairs is the “quote currency.” The base currency is equal to “1” and the quote currency is valued as a function of the base currency.

You will want to do a lot of simulation trading in Forex currency pairs before you go live. You will want to learn the basics of technical analysis. You will want to stay with the major Forex currency pairs to start with because they trade in higher volume with tighter spreads making your technical analysis software more effective.

Individuals do trade in minor Forex currency pairs and do cross currency trading in minor and major Forex currency pairs. However, the volume in these trades is substantially less and you always run the risk of not being able to get out of a trade when it goes bad. This is where discipline comes in. You don’t want to risk any more than a percent or two of you capital on trades where you cannot easily get out and do not have a very clear idea of what you are up to.

There is purely technical trading in Forex strategy and there is fundamental trading as a Forex strategy just as in stock market trading. The more you know about the economies and politics of the countries whose Forex currency pairs you trade the more successful you will be in fundamental trading.

In trading minor Forex currency pairs, especially cross trading in minor Forex currency pairs you need to have intimate knowledge of the factors that will affect both the “base currency” and the “quote currency.” This situation is usually reserved for those who come from or do business in one or both of the countries whose currencies you are trading.

In technical analysis the base currency appears before quote currency on charts. Also quote currency will show your profits and losses. There is Forex opportunity in both technical and fundamental trading as Forex strategy. Success is based upon knowledge, discipline, and work.

The forex scalping strategy has something of an aura of mystery surrounding it. Some believe that it is the worst nightmare of brokers who have to suffer losses as their clients make good profits. Others think that it’s the safest way of trading the market, due to the small size or short lifespan of different trades. But how true is this belief that scalping involves minimal risk? And do brokers really dislike scalpers that much? We’ll take a look at this issue in this article.

The main principle of a successful trading strategy is cutting losses short, and letting profits run. In other words, your profits should be sizable, while your losses are small. We evaluate any trading strategy on the basis of its adherence to this basic rule even before checking the actual trading results generated by it. So the question that we’ll ask is, does scalping really adhere to this basic principle?

In scalping you do not let your profits run for the most part, because each trade is supposed to last for only a limited time. Regardless of the direction taken by the price action, the scalper will rarely let his profits run because the strategy dictates that a scalper realize any gains or losses as early as possible. On the other hand, while the same is also valid for losses, traders are not always in control of the market action, and the software may not always perform has expected. So although there is a stop-loss order in place, if the price gaps (common in short term trading, and in the time periods preferred by scalpers), or if the software fails to execute the order of the trader in a timely way, the result may be that the realized losses are much greater than intended. In consequence, the scalper will sooner or later encounter a situation where his losses run, while his profits are cut short.

The other point is about the profitability of scalpers, and how brokers fear and hate that. We have already seen that in principle the scalpers have little reason to boast much about a great deal of profitability. And indeed, most brokers have their policies stating that they are totally fine with this kind of trading. The firms that refuse to accommodate brokers are mostly those that do not possess effective, up-to-date technologies in trade execution. These firms suffer from latency issues that make scalping a dangerous style for them, regardless of the ultimate profitability of the scalper himself.

In short, the principles of money management are generally accepted by most traders, and as such, any strategy that claims to be successful has to abide by them. It is clear that in most cases the scalping strategy fails to follow the rules. Although scalping is popular with those who just begin to learn forex, due to the reasons that we just discussed scalping is not good for beginners in general. Still, if you do want to use this strategy, make sure that you are relaxed and at ease when trading. Scalping is even more stressful than ordinary trading styles, and you don’t want to practice it when you’re already under the pressure of other emotional issues.

Forex risk comes in two parts. Forex trading requires a set of skills that one needs to attain in order to compete. There is Forex risk in Forex trading without the necessary skills, strategy, and maturity. In addition there is Forex risk in Forex trading in a world of increasing demand coupled with increasing scarcity. Both types of Forex risk can be dealt with successfully by learning the necessary skills for Forex trading, developing a Forex strategy, and staying current with the factors that influence the relative values of the currency pair or pairs that you routinely trade.

Forex trading always comes with a disclaimer. It goes something like this: Trading on margin carries a substantial risk, and may not be suitable for all investors. Before you decide to engage in Forex trading it is best to carefully consider your experience, objectives, and willingness to risk your capital. It is possible to loose all of your capital in Forex Trading so do not invest money in Forex that you absolutely cannot afford to lose.

This type of disclaimer should be considered sober advice and not a scare tactic. It is entirely possible to engage in successful and highly profitable Forex trading using a well thought out and practiced Forex strategy. Forex risks are manageable and decrease as you progress along a learning curve.

The Forex skill set is something that you will develop over time. The point is to manage your risk while you are learning. Forex trading is not a movie where they actor puts all of his chips on 25 red and wins at roulette. Using the game analogy, trading Forex is more like a poker game that goes on for years. You opponent will never run out of money but you could. The point is to win more than you lose and to walk away with a pot of money. The point is to “play” like a professional gambler where poker is not a game but a business!

To develop your skill set, get to know your trading station with lots and lots of simulation trading. Get to know the technical terms of trading until they are part of you. When you start out, “for real,” don’t risk any more than a percent of your money and never leverage your account or deal on credit. And review your trades, critique yourself, make notes and read your notes. Develop a Forex strategy and get organized from the start of your trading.

You will need to know how to read charts even if you consider yourself a fundamental trader. There is never too much knowledge or skill involved in successful Forex trading. With each new piece of knowledge you learn about charts you need to go back to simulated trading to practice. You will learn lots about technical analysis which will help in minute to minute Forex trading.

You will develop the ability to forecast future market moves, pivot points, by doing your homework. This has to do with knowing the macroeconomics, politics, and trade relationships of the countries whose currencies you trade.

Successful Forex trading requires a developed skill set and the discipline to use it. Sometimes a successful Forex strategy is to sit out a day or two when you do not understand the market. Sometimes it means spending the day reading about events in Tokyo or London instead of following the market on your trading station.

Whether a nation’s currency value goes up or down will depend upon its strategy for getting out of the recession. Traditionally, nations like the United States spend their way to recovery, with injections of cash into the financial system and, especially, by offering incentives to increase consumer spending. However, looking to the future, a better choice for getting out of the recession and creating the groundwork for a competitive society in the 21st century is by investing in improvements in infrastructure.

The long term trend for a given currency pair depends upon the economic strength and stability of a nation. The world is now emerging from the worst financial downturn in nearly 80 years. Huge amounts of money have been injected into economies in order to keep credit markets stable and the world seems to have avoided the worst, namely another Great Depression.

From the view of one’s Forex strategy, however, how a country deals with the short term problem is not enough. The question is which nation will use its “stimulus money” to improve its competitiveness in the coming decades. That nation will see its currency grow in value into the distant future.

Whether it is the nation or it is the business and industrial base of the nation that invests in its future, the outcome will be a more competitive and wealthier country. The outcome will be that within a given currency pair the better prepared country will see its currency appreciate and the nation which continually relies upon consumer spending and debt for economic recovery will see its currency depreciate in value in any and all currency pairs.

Although investment in economic infrastructure will show its effects over time, currency markets operate daily and the actions of nations and large economic entities are felt daily. Following the investment patterns of nations will allow one to formulate a more effective Forex strategy and to accomplish more in daily Forex Trading.

Following the investment activity of a nation will not only tell one whose currency will likely rise in the Forex market and whose currency will fall in the Forex market but will allow you to formulate a Forex strategy based upon an accurate prediction about where the action will be in the Forex market.

It is not just the fact that a currency will go up or down that allows for Forex trading profits but currency pairs vary continually, allowing the wise Forex trader to profit in both directions even when there is a steady upswing or down turn in a given currency.

Investment in hydroelectric projects, wind farms, biomass energy production and the like are likely to pay the USA dividends well into the 21st century and beyond as each barrel of oil that the USA does not import helps the value of the US dollar in all of the major currency pairs.

All of the improvements in weatherizing homes in the Northern USA will likewise lead to importation of less fossil fuel, a better balance of payments, and a stronger dollar in all currency pair relationships.

Trading forex online requires not just a mastery of technical subjects, but a reasonable command over the fundamental aspects of trends and market events which form the basis of market action. Comprehending the role of the US dollar as the world’s currency and the basis of international trade and finance is crucial to forming a fundamental grasp of the market action. Why is the dollar so important? Why does so much of forex action is denominated in the dollar? What is the secret of the importance of this currency to so many traders around the world? In this article we’ll take a look at the reasons behind this fact.

US is the world’s finance central

Few traders nowadays can fail to be aware that the U.S. is the world’s financial center. In spite of the important role played by Japan, despite the sophistication of London, contrary to the allure of places like the Cayman Islands, or Switzerland as tax havens to individual investors and hedge funds, the numerous financial centers of the U.S. remain the most dominant actors in the world markets. In spite of the importance of locations like Frankfurt or London, and rising centers such as Shanghai, New York, and the associated U.S. market remain the most powerful, sophisticated and deep ones in the world. The fact that the Chinese government seeks the expertise of U.S. firms for IPOs of public companies over their competitors in different parts of the world is one of the many evidences that can be shown to prove that the U.S. remains the center of the world economy.

US is the world’s largest economy

The U.S. economy is of course the world’s largest, and much of the influence and power of the U.S. currency is a result of the size of the American giant. U.S. is the major trade partner of many nations in the world, and although regional trade is increasing in importance with the rise of nations like India or China, America still remains the most important partner of many nations in the world.

US is the world’s greatest political and military power

Some nations prefer to support the dollar in return for U.S. guarantees of economic and diplomatic support. During the Cold War era, this was an even more important factor, but even today, nations in the Gulf Region, Australia, Taiwan, and even to a lesser extent in Europe, explicitly or implicitly support the dollar in exchange for political support, or simply traditions that have grown over the past decades.

The world financial system was built by the US

Finally, the international finance system as we observe it today was built mainly by the United States after the Second World War. Organizations like the IMF, or the World Bank are all sponsored by the U.S. to a large extent, and they were conceived and created to function best in a dollar-based international economic system.

Dollar is the trade and reserve currency of the world

As the world’s most important currency in economic, and political terms, the dollar is also the world’s reserve currency. Nations conduct international transactions in the dollar, and central bank reserves are mostly quoted and managed in U.S. dollar terms. No one has any interest in seeing a sudden collapse in the value of the U.S. dollar.

These are some of the basic reasons that give the U.S. dollar long-term advantage over other candidates to the status of the world’s reserve currency. Among these the role of the currency in the global financial system, and the diplomatic and political power of the U.S. are the most important factors contributing to its prestige at the moment. No forex trading strategy can be complete in the long term without taking the important advantages of the dollar into account, and that is only achieved by a careful study of the factors that have made the dollar centerpiece of the world financial system today.

An averaging of economic forecasts predicts a 3 percent US economic growth for the current quarter. So, it appears that things are getting better. Now that the worst is supposedly past, what does the future hold for various currency pairs? Which currencies will slide and which currencies will thrive? And which currency pairs will experience extreme fluctuations? What will be your Forex strategy in the post recession era where bailouts occurred in virtually every economy? What will be your Forex strategy when both sides of every currency pair have taken on huge amounts of debt?

We read the other day about the Russian government bailing out a large company with virtually no clear set of rules about how they may or may not get any money back. Although the US is concerned about the “too big to fail” policy that may have set up the recent financial debacle, the Chinese apparently are embracing it with both arms.

Who will emerge strong and have the stronger side of currency pairs in the coming years? We saw recently that short and medium term US securities are selling well. It would appear that some have faith in the US system, with all of its failings, as being more transparent and likely to succeed. One thinks of Japan, seemingly, ready to conquer the world economically twenty years ago and then promptly going into a prolonged economic slowdown because of hidden debt.

How currencies are managed, and the degree of transparency of an economy, are important to take into account in a Forex strategy. Relative values of currency pairs do not just hinge upon gross national product and national debt. Currency pair relative values also hinge upon expectations of sound fiscal management and transparency in financial dealings. A Forex strategy that takes these factors into consideration will likely succeed while a more narrowly focused Forex strategy will be more likely to fail.

A Forex strategy that takes economic transparency and good governance into account will more likely be able to pick trends in currency pairs successfully. More importantly a Forex strategy that is more knowledgeable is more likely to anticipate seemingly abrupt changes in relative currency pair values as economic problems cause obvious problems in “non-transparent” economies. A knowledgeable Forex strategy will help keep you from being surprised and help you take advantage of swings in currency pair values whether the news is another bailout or the collapse of a country’s economy.

Bailouts in the full light of day in the USA are one thing and a bailout that mimics those in the USA but really just means a political payoff to the “good old boys” in a country with corrupt governance is another. It took Western Europe, Japan, and the United States well over a hundred years to come to workable laws concerning property, trading, economic policy and the like. A free press has a lot to do with success in these matters. Seeing into what was going on in China or Russia used to be nearly impossible. Now, with more open borders it is easier, but still nowhere nearly as easy as dealing with Great Britain, the European Union, or Switzerland.

Remember, Forex trading profits come from a sound and knowledgeable Forex strategy.

When one trades the Forex Market one’s Forex trading strategy has to do with small and medium market moves of the day. Forex trading software is designed to read the moves of the Forex market and give the Forex trader a much better than average chance of making money by buying or selling one side of a currency pair. Underlying the market moves and corrections that allow one to make money with a Forex trading strategy is the question of whose money in any trading pair will eventually be worth more.

This seems like stating the obvious. However, it’s not just the currency trader working with a given currency pair that moves the Forex market. An Australian ship owner paying in dollars to have a ship built in China is very interested in the eventual state of the USD/AUD currency pair while the ship builder will be more interested in the state of the Yuan versus the dollar. A Japanese company paying Saudi Arabia for oil in dollars will be interested in the eventual state of the USD/JPY currency pair.

Big players often hedge their bets by buying or selling within a currency pair as part of a Forex trading strategy in order to protect themselves against loss caused by a shift in the relative value of the given currency pair. Banks will intervene in the markets favoring one side of a currency pair or the other.

It’s the big money and the state of nations’ economies that drive the eventual values within all currency pairs. It is the psychology of where the value of money is going in a given nation that drives currency pairs. The Forex trading strategy of trying to anticipate where a given currency pair will be is affected by that psychology about the value of money, purchasing power, and eventual power of nations.

Forex trading in the USD’s various currency pairs is often tied up in guessing where the economy of the United States will be in a few years. Big money trying to hedge bets will sometimes take the Forex market up or down with no apparent Forex trading strategy as seen by the day trader. However, for the long term a particular buy or sell of the US dollar may be a perfectly sane Forex trading strategy.

The long term investor is interested in the eventual value of money while the day trader is interested in increments of the day.

Regarding the eventual value of money some of us can recall when 90 percent of the world’s gold reserves were stored in Fort Knox Kentucky. The economic power of the USA compared to the devastated economies of most of the industrial world was phenomenal. That situation was never going to last. Much of the bleating about the loss of US buying power as the dollar slides chooses not to recognize the fact that people all over the world are willing to work for a little money. Those with less are willing to work for less to get a start and those who are well to do will pass on low paying jobs.

India and China with their large, lower paid, labor pools will catch up to Japan, the USA, and Europe in industrial production, technology, and wealth. The relative value of the currency pairs represented here will reflect that. The question is, how fast?

The day trader still trades increments. However, an appreciation of the big picture always helps you be there when a big player starts a big move in the Forex market.

On the internet one sometimes finds Forex tips. What are Forex tips? Our belief is that Forex tips are little bits of someone else’s Forex strategy from their Forex trading. The world of Forex trading is a fairly transparent place so it is not as though someone has privileged information. Rather, someone else has done their Forex trading homework and has a Forex strategy. Our suggestion is that you forgo Forex tips from others and develop your own Forex strategy.

One of the problems with tips, whether for stocks or Forex trading, is that they are only useful for a short time and that short time may have expired by the time you get the tip. Someone’s Forex tips derive from their homework and their development of a Forex strategy. When market volume is such and such and when the news is such and such then a given set of indicators can be read in a given way. This distills down to concrete Forex tips to trade a given currency pair within a given range for the day. However, if all of the big traders know this, then Forex trading for the day will move out of the given range and following the Forex tip will only lose you money.

Forex tips are often an accurate subset of someone’s successful Forex strategy. A better thing to do with Forex tips is to study them. Come to understand the Forex strategy behind the Forex tips you see. Then incorporate the Forex tips, or their rationale, into your own Forex strategy. Then you will find that the Forex tips you read are in line with your own Forex strategy and your own Forex trading. However, you will be doing your Forex trading in line with your Forex strategy at the right time and not when the market has moved beyond the narrow confines of another’s Forex tip.

Another use of Forex tips is as a learning tool. When you see Forex tips or when you find yourself giving someone else Forex tips, follow up and see if the Forex tips worked and for how long in active Forex trading. In auditing your trading results there are process audits and results audits. In a process audit you look back to see if you followed your own Forex strategy in your Forex trading. In a results audit you look back to see where you were successful in Forex trading and where you were not. If you diverged from your Forex strategy it will show up in your process audit. If your Forex strategy is at fault it will show up in your results audit.

Follow Forex tips the same way. Do simulation trading using Forex tips and see if they work. Then you can file them under “mistakes I did not make” or add them to your own Forex strategy.

Our Forex tip for the day is that you should be continually auditing your Forex trading results and your Forex strategy. Our hope for the day is that your Forex trading becomes more and more successful.

Forex trading is a business. You need capital. You need to have the tools of the trade. You need to have the expertise the use your Forex trading capital and Forex trading tools and you need the patience and good judgment to apply what you know to trade the Forex market successfully.

In Tom Wright’s book The Right Stuff the author shows us the heroic risks that the early test pilots and astronauts were willing to take. The combination of skills, knowledge, and guts required of these individuals is referred to as “the right stuff.”

Forex trading is, like test flying, a solitary business. There is lots of technology involved in trading the Forex market and Forex trading takes a level of skill to be successful. Like test flying, Forex trading is done alone. Only one person sits at the trading station, you.

In The Right Stuff the author notes that Chuck Yeager, the prototype of test pilots often cautioned others regarding the dangers of a given airplane maneuver and then would comment, “But, it can be done.” Left unspoken was that you need “the right stuff” to accomplish the task.

The heroic aspect of test pilot work drives them to take the risks involved. However, a large part of “the right stuff” is years of learning, practice, testing, and retesting.

Forex trading takes “the right stuff.” Trading the Forex market, developing and staying true to a Forex strategy, and getting up at 2 AM to trade the London market when most of the rest of the USA is sound asleep takes “the right stuff.”

As heroic as Yeager and the rest were, they were engaged in the business of being test pilots. Those who did not do their homework, did not hone their skills, did not keep up with new information, ended up memorialized as photos on the wall of the bar outside Edwards Air Force Base.

“Past performance is not indicative of future results.” Does this look familiar? “Forex trading involves substantial risk of loss and it is not suitable for all investors,” is another Forex market caution. “Leveraged trading magnifies profits and losses,” they say regarding Forex trading.

You may not crash in the desert in Forex trading but you can lose your life savings in an afternoon. It takes the right stuff to develop, maintain, and improve your Forex strategy. It takes the right stuff to sit alone at four in the morning trading the London Forex market. If you have a successful Forex trading session in the Forex market, no one is going to take your photo next to your airplane. Forex trading, like being a test pilot or astronaut, is a business, and the more you learn, the better your judgment, and the more successful you will be.

In the end remember that having the right stuff requires that you earn it by learning, practicing, and changing course when conditions warrant. Then, when you have a successful session when others lost their shirts you can say that you would not necessarily recommend Forex trading to everyone but, with the right stuff, it can be done.

Yes, you will trade day by day, hour by hour and minute by minute in the Forex market. So, your Forex strategy is the short term fluctuation that will make you money, not the long term trend. Right? Maybe. Inflation is likely to set in as economies confront the huge amounts of debt they have taken on to provide stimulus to prevent a recession from getting worse. How does the expectation of steady inflation in one economy affect your Forex strategy of a given currency pair?

An accomplished poker player knows and plays all of the odds. Over a long night or a long weekend the player who knows and plays the odds wins more, on the average, over time. There is nothing spectacular in this just like many aspects of ones Forex strategy may not be spectacular but when trading in the Forex market over time, for the long haul every little bit helps.

This part of one Forex Strategy has to do with that little bit extra every so often that mounts up over time. It also has to do with staying contained and staying on plan with your Forex Strategy. By staying contained I mean not trading up to your limit, every trade, all the time in the Forex market but doing repeated small trades.

If you know that the dollar is in a long term slide against the pound or the yen or, more to the point, it is in a month long free fall then you can modify your Forex strategy accordingly. If you are trading in light volume and are trading in the direction of the dollar’s free fall (in this example) you might get stuck when the market shifts. Let’s say you sold dollars and bought pound sterling expecting to buy back cheap dollars at the end of the day. The market rebounds and if your Forex strategy is to trade in large amounts then you had better get out of the trade fast and accept your losses. However, if you are trading in a lower amount, a smaller fraction of your reserves, you can wait for the market to turn around.

If, indeed the market is trending, over time in a given direction then trading with that direction in mind will give you that little advantage that mounts up with days, weeks, and months of Forex market trading.

Obviously you will follow the advice of your Forex trading software. However, when the software recommends a trade that does not work out then let it be that you will profit when the market resumes its medium and longer term direction.

Long term success in the Forex market as in other parts of life is the details. Finding each mini Forex strategy that makes sense and adding it to your tool kit will give you that little advantage every day and that advantage will lead to a little bit more daily success which in turn will lead to excellent long term results. Knowing your currency pairs, knowing long term trends, and factoring in the long and medium term trends into your short term Forex strategy will enhance your Forex market success.