FOREX TRADING

It’s very important that if you’re exploring forex trading or already trading that you have a trading system. One aspect of that trading system are the actual setup rules which usually contain entry and exit techniques. Traders put a lot of time and effort in developing these setup rules too often neglecting other aspects such as position sizing or relative size of your profits compared to losses. Therefore it’s important to find a comprehensive forex trading system.

Where can you find a comprehensive forex trading system? Throughout the last three years, I’ve been through many trading systems obtained mostly from books, forums, or other websites. I’ve found that almost every time, I’ll mold that system into something totally different than the original incarnation, something that fits my personality and style of trading. Many times, the original system will also need to be expanded to include things that were neglected or forgotten. Those of you searching for the perfect system may find this method of modifying existing forex trading systems desirable. There are places where you can find the whole package without any need for modification.

This brings me to the question, "where did you get your forex trading system?" I think there are four main ways of getting a trading system.

1. Buy it. There are tons for sale out there on the net but heed caution. Many were just copied from forums, books, or other websites. Sometimes when you buy forex education, part of the package will include a trading system. For instance, Rob Booker provides his Arizona rules as part of his mentoring program.
2. Get a free one. There are many free systems that can be found in books, forums, or other websites. I guess one can question whether a system found is a book is free since you paid for the book.
3. Create an original system yourself. My main trading system is an original creation. There may be other systems out there that are similar to it since it’s a culmination of years of exposure to other systems and experiences.
4. Modify someone else’s system and make it your own. As I stated above, I have done this many times.

I’ve created a poll that asks you this question here. http://www.forexproject.com/forex-polls/

The September issue of Currency Trader Magazine was released today. Some of the highlights include:

• A look at an advanced carry trade strategy involving the Swiss Franc.
• The CFTC gains jurisdiction over retail forex fraud.
• What will drive the forex market in Q4.
• Yen crosses on the move.
• U.S. dollar rockets higher, Euro tumbles.
• China changes forex regulation.

The magazine can be downloaded for free by signing up at http://www.currencytradermag.com

I’ve read a lot about how automated forex trading systems just don’t work in the long run but I can’t conclude this from personal experience. I’ve never seriously traded forex using automation. The following is an email from a trader who can conclude this from his experience. I found it totally worth sharing.

I came across your blog this afternoon whilst casually surfing the various forums in lieu of watching rubbish on TV.

I find your search for trading success an interesting one as in many respects it mirrors my own experience in many ways.

I spent well over two years, pretty much full time, searching for automated solutions to trading, having been in the process automation business for 25 years. To summarise, I have concluded it is a futile exercise with the technologies currently open to the average retail trader. I have yet to find any expert that is reliable enough to be left trading on its own and have pretty much concluded that most are really curve fitting solutions. I have seen no strategies posted anywhere that are consistent or reliable and capable of being automated without significant risk. I see some that pertain to be profitable (Artemis would be an example) but it needs constant adjustment and tuning which makes it akin to semi automation, not full automation.

However, there are manual strategies that are available that are profitable; they just do not lend themselves to automation due to the ability of the human braoin to make decisons based on proce movement that are pretty much impossible for any expert to make. So I abandoned my search for full automation solutions a year ago and concluded semi – automation was probably the right route. I trade manually today, with a few automated aids.

Linked with that, money management and certainly trading psychology are massive keys to success, the first to ensure you are alive to trade tomorrow and the latter because it takes time to get your mental state right to be able to trade at all, and that is what takes the time Rich. Sure, you need to understand the basics of trading, but without the right mental state, you’ll never be consistently profitable.

Your target of 50% per annum is achievable so keep up your search.

This is a question I receive often and unfortunately I can no longer give an honest answer which is the only answer that I ever want to give. This is due to the fact that I haven’t dedicated myself to Rob Booker’s training since 2006 making my experiences outdated. The good news is that over the coming months, I will be able to give you an honest opinion because I am in the initial phases of giving his tutelage another go. This is possible because he has no expiration date on his training. According to his training contract, "You have as long as you need. You never have to pay me anything again…."

At first glance, there have been many changes to his training. His chart school, which are Rob’s trade ideas for students in video format appear to be more interactive. He provides a web conferencing platform where any of his students can attend and ask questions via messenging or voice. Other basic course materials seem unchanged such as the course introduction, FX basics, backtesting, support and resistance, moving averages, and similar topics. These are really basic though and I don’t see any reason why these would ever change. The course materials are also for the totally inexperienced forex trader, someone who has really never explored Forex outside of this course.

His primary trading system which has many components to it is called the Arizona Rules. He was just developing this system back when I lost interest in his training so I haven’t really explored it. If anything, it seems like Rob’s attempt is to provide his students with a well tested and possibly profitable trading system while also providing a comprehensive trading plan and system that one can take knowledge from to develop their own forex trading system.

I’m just getting involved again so I cannot comment further at this time but keep checking back here in the upcoming days and weeks for more details on Rob Booker Training. You can also read my previous and new experiences at http://www.forexproject.com/category/rob-booker-training/.

Forex on Top was updated today with the latest traffic rankings for what has now grown to 500 forex websites. Their is no doubt that Google is the best place to search for specific forex content but if you’re looking for websites that you can sink your teeth in, this is the place to find them. You can also browse the top 20 movers to find upcoming forex sites that might be worth exploring.

http://www.forexontop.com

Welcome Ryan, the author of this Forex Project guest post. Ryan trades from a quiet country lake house and helps traders through his blog at http://www.ryanokeefe.com.

Does your trading plan encourage you to over trade?

Recently I started a survey on my website asking traders to answer this question:

“What is holding you back from trading successfully?”

Currently the number one answer is “I make some money, and then I give it all back.”

Multiple factors contribute to this result however over trading is the most frequent concern struggling traders email me with. I have some thoughts to avoid over trading I hope you’ll find useful.

Consider Your Trading Plan

Over trading may be baked into your trading plan without you realizing it. I received an email from a concerned trader who struggled with taking too many trades although they were following their trading plan. I asked to look at their trading plan and found it was built around the 60 minute chart, the opening of each trading session, support and resistance levels plus the MACD indicator. How many opportunities do you think their trading plan generated on a daily or weekly basis?

I’m a big fan of slowing things down with longer time frames. Using a longer time frame automatically reduces the number of trades you will consider which reduces your trading plan’s built in propensity for over trading. You won’t be tempted to take a “valid signal” 10 times a day trading a daily chart. The vast majority of my trades are planned on the daily chart with the entry taken on a four hour chart.

Consider a Weekly Goal

In my trading plan I have a weekly goal of 50 to 100 points. This is a realistic goal for me to achieve and having the number written down reminds me that once I’ve made my weekly goal there is no reason to place it at risk. When the goal is achieved it is time to do anything other than trade. If you’re trading a lower time frame I think setting a weekly goal is even more critical because as we have discussed, shorter time frames offer more “trading opportunities” which place your profit at risk. I’ve had this weekly goal established for years and it works well against over trading.

Some traders may think a goal of 50 to 100 points a week is too low but keep in mind there are as many ways to configure a trading account as there are ways to trade it. With the right mix of leverage, lot size and risk capital you can do a lot with a goal of 400 points a month. Most important is to set your goal according to your personality; whatever you believe you can achieve and doesn’t stress you out in the process is best.

Do you really need to take that trade?

Before I open a trade I ask myself this question every time without fail. It seems obvious but so is lowering the landing gear before landing yet some pilots still manage to land with the gear up. Consider your emotions before you take a trade. Are you tired? Are you angry? Did you miss a good trade and now desperate to make some pips? Have you made your weekly or monthly goals? If you have met your goals you don’t need to trade, period. If you can honestly answer this question with a “yes” then pull the trigger but if not, don’t put your capital at risk.

Be accountable to somebody other than yourself.

Rob Booker pitched this idea in a presentation I watched online and I believe it is the strongest action you can take to eliminate any propensity you have to over trade. Whoever you report to had better have a basic understanding of your trading plan and be able to question you on each trade in a constructive setting. This is a full disclosure exercise so find somebody you can trust.

I report to my Wife every Friday morning with a print out of our account statement. We go through every trade while I explain what system I used, why I took the trade, what mistakes I made and what I could do better next time. We also discuss what I had better be doing during the upcoming week if goals are already exceeded.

If knowing you need to explain why you put hard earned profit at risk for an unnecessary trade at the end of the week can’t keep you from pulling the trigger, nothing will.

I’ve received positive and negative feedback from a lot of you who have experienced forex automation. I don’t want to talk about the bad news quite yet. So what’s the good? Unfortunately, the good news mostly involves available API’s for developing your system and brokers that support automation. I haven’t heard of many success stories relating to forex automated trading. Here are some recommended API’s and brokers and some comments on whether I will explore them further.

Interactive Brokers has a free C++, Java, and .NET API. The C++ API does not come highly recommended from the one trader I received an email from but the API’s are free. He also goes on to say that, “Interactive Brokers is also good from a fund safety point of view, given they are one of the bigger brokerages. Commission is very cheap and they basically offer anything you can trade.” This seems to be the best option I’ve seen and definitely worth exploring further.

Another trader recommended Varengold Bank for trading via Metatrader. He says that he has “yet to find anything to come close to their service utilizing the Metatrader platform.” Varengold Bank is a German bank and has regulatory oversight by the German Federal Financial Services Supervisory Agency. Unfortunately I don’t have a lot of experience with brokers or regulatory agencies outside of the United States yet this may be worth exploring if Metatrader is the platform of choice.

Interbankfx with Metatrader comes recommended also. A trader who just recently started using IBFX states, “I just started live automated trading this week… They seem to be very EA friendly and come highly recommended.”

MB Trader comes recommended due to their “well documented API and you can develop and test your system on their demo servers for free. MB Trading is a relatively well-known firm inside the United States so this could be yet another option worth exploring.

Ninja trader comes recommended and could be a “good option that allows for testing and development for free.” It’s also broker independent supporting Gain Capital, Interactive Brokers, MB Trading, and more. I like options and with the multiple brokerage support, I may look into Ninja Trader further.

Other options include FXCM’s FSS or Forex system selector. Based on what I’ve read though, you really can’t design your own system. You can select from their own designed forex systems. I don’t see the benefit to this at all.

FXTraderLink provides a facility for automatically trading your account based on signals from a portfolio of signal providers. I don’t want to rely on a signal provider to “provide” me with wealth plus I don’t trust them. I’m not a big fan.

I haven’t even begun to explore any of these options yet but I will regardless of the bad news I’ve received from others. Is it possible to make money with forex automation? Unfortunately I cannot answer this. I’ve had a tough enough time making money manually trading but at this point, I’d like to try something else.

I’ll assume that you have some knowledge about Forex either from a book or website.  I’m not going to give definitions of a pip or explain what a base currency is.  There are plenty of places you can find this information.   What I want to provide are practical lessons for the beginner, lessons that can help straighten the learning curve.  

There’s a lot of information out there on forex, some of it good and some of it misleadingly bad.  Be careful.  Trading forex is many times portrayed as a way to get rich fast; a home-based business.  This is the furthest than from the truth.  Trading forex is risky and though it may be possible to turn it into a home-based business, you need a lot of capital and experience.  To give you an idea, a very experienced and respected currency trader had the following yearly returns: 71% in 2004, 433% in 2005, 53% in 2006, and 30% in 2007.  Let’s just say for a minute that you were as successful as this trader and started 2007 trading forex as a home-based business with $5000.  Could you live on the $1500 you made in 2007? I doubt it.  I’m not trying to discourage you from trying but I think it’s important to be realistic.  If you dive into currency trading with unrealistic expectations, you’re not going to get far.

Maybe you’ve read a book on forex, read something about trading forex on the internet or you went to a trading seminar.  This is something that interests you, something you want to commit time to, initially as a hobby and maybe one day for a living.  After you have this basic knowledge, where do you begin? 

1. I’d recommend buying a book on forex because it contains a little of everything.  It explains what the forex market is and answers other basic questions.  In addition it had better contain information on reading charts and technical analysis.  Read the book from cover to cover.  When you’re done, move on to step 2.
2. Download and install Metatrader which is a free trading and charting platform.  You will prompted to open a demo account after installation.  You can download Metatrader from any number of places.  One such place is http://www.interbankfx.com.  Start playing around with Metatrader to learn what capabilities it has. You’re not going to find a Metatrader book in your bookstore but you will find online manuals on the internet.  There is also a huge user community around Metatrader.  You can find any one of these communities by googling "metatrader forums."
3. Start applying some of the things you learned from the technical analysis sections of the book to your charts.  Draw some trendlines or add some indicators.  Start placing some trades also.  Don’t be concerned about how much you’re risking or whether you’re going to win or lose.  Just get a familiarity with how to place a trade.  There’s only two directions you can trade in, long (buy) or short (sell) but there are many currency pairs.  Try concentrating just for consistency on the EUR/USD, GBP/USD, USD/CHF, or the USD/JPY (the four most popular currency pairs.)

These three steps had better keep you busy for quite some time.  Take some time to get familiar with it all then you can move on.   

I have never traded a forex strategy live using any advanced automated methods.  At the most, I’ve placed a limit order.  Most, if not all of my experience has been with expert advisors in Metatrader.  

I realize more than ever that if I could automate my strategies, this may take me to the next level of trading and keep me more involved in the market.   At this point, I need the motivation. The subject of automated trading has always interested me but my issue has always been with trusting a broker and the platform with a live account using an expert advisor.  Therefore I’m calling on everyone who has experience with automated trading to share your experiences.  If you’ve used Metatrader, have you found success with any particular brokers? I know there are other automated trading software available that mostly allow trading via an FXCM API but are they any good? I know Oanda also has an API but it costs about $600/mo.  If you could, please send any experiences you have to my email address at rich@forexproject.com and based on what comes in, I’ll put the information together and post it here. Thanks.

Pretty much every brochure advertising forex trading highlights the fact there is no such a thing as a bear market in forex. Stocks, bonds, and commodities can all lose value simultaneously (as happened when Lehman Brothers declared bankruptcy in October 2008) but it’s impossible for all currencies to decline simultaneously. A bear market in the Euro might be offset by a bull market in the Dollar; or Swiss Franc; or Brazilian Real. Regardless, you don’t have to search far to find currencies that are outperforming, whereas a stock picker would certainly have his work cut out for him during an economic recession.

I remind you of this cliche because in the current market environment, it has apparently taken on new significance. Anecdotal reports of investors frustrated with stocks, or having been burned by China, or disappointed by the collapse in oil, are flocking to forex by the thousands. Angry about suspended trading rules on stock markets? This could never happen in forex (at least not under current rules), since currencies are traded on multiple exchanges linked through a decentralized system.

Here are the stats: at Forex.com, “New accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008….By the end of 2006 [the last year apparently for which this type of data is available], average daily trade volume reached over $60 billion, a 500 percent increase from 2001…Trading volume generated by ‘retail aggregators’ — electronic trading platforms that cater to individual retail traders — rose almost 43 percent from 2007 to 2008.” This dwarfs both overall growth in forex, as well as retail growth in the bread-and-butter securities markets.

One trend worth drawing attention to is that new investors are focusing on the most popular currency pairs. [See Chart below, courtesy of Wikipedia]. It has been proposed that this is because of widening spreads (i.e. more PIPs) on less liquid pairs, but it is just as likely being caused by investors applying the stock market logic of “buy what you know” to forex. It is understandable that those new to the game would want to get their feet wet by dabbling in the Euro/Dollar/Yen, rather than diving right in to niche currencies such as the Mexican Peso or even Korean Won, whose movements are both more volatile and more difficult for the average trader to understand.

As always, all investors are advised to be on the lookout for scams. In the last few months, it seems hundreds of low-profile forex ponzi schemes have been discovered, which means there are doubtless hundreds of more still flying below the radar of the authorities. If you are suspicious, check out the National Futures Association registry.

EUR/USD went up today after the yesterday’s decline as the U.S. fundamental reports showed some optimism for the global economy revival and the traders favored yield more than risk. It’s now trading near 1.4043.

Retail sales were reported with a growth of 0.5% for the month of May; the April’s decline was revised up from -0.4% to -0.2%. The reported value was the same as in the forecasts.

Initial jobless claims were at 601k last week — down from 625k a week before. The market participants and analysts expected them to be reported at 615k.

Business inventories dropped by 1.1% in April after falling by 1.3% in March (revised down from 1% drop). Median forecast was at 1% decline.
(…)
Read the rest of EUR/USD Up on Signals of U.S. Economy Revival (13 words)

Posted on Forex blog.

What’s wrong with a little optimism? Well, nothing, in theory. In practice, however, unbridled investor optimism usually spells disaster. Consider that emerging market stocks (based on the MSCI emerging-markets index) now trade for 15x-earnings, the highest level since December 2007. Does anyone remember what happened next? The index plummeted 22% in a matter of months.

Here are some more statistics. The MSCI index is now at an eight-month high, following a record 61% rise since February. $12 Billion have poured into emerging markets in the last four weeks alone. Consider this against the backdrop that “Earnings at companies in the MSCI emerging-markets gauge trailed analysts’ estimates by an average of 41 percent in the first quarter.”

Meanwhile, “The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries fell…to 4.19 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.” The index has now erased nearly all of its losses from the last year. In some ways, this is even more unbelievable than the rally in stocks, since it indicates that despite the current recession and strained finances, investors are just as willing to lend to companies in developing countries as they were prior to the downturn!

Who cares about stocks- tell me about currencies! “Unsurprisingly stock markets in Asia have been highly correlated with regional currencies over recent months, with almost all currencies in Asia registering a strong directional relationship with their respective equity markets.” The Indonesian Rupiah is up 11% this year and the Indian Rupee is now up 4%, to highlight only a couple. Only a few months ago, these currencies were tracking at double-digit percentage declines!

A culling of analysts’ soundbites reveal the usual lack of consensus. On the one hand, “The pattern signals an ‘imminent’ drop;” “Fund flows at their extremes are contrary indicators;” and “Investors are starting to doubt the sustainability of how much longer this very sharp rally can continue.” But for every bear there’s a bull: “There’s a lot of money looking for decent returns and that’s going to continue driving emerging markets.” In short, you can find literally thousands of analysts and their respective forecasts to support either hypothesis.

I would argue that the sustainability of this rally (both in stocks and in currencies) hinges on a return to GDP growth in emerging markets. [The IMF forecasts 1.6% growth in 2009 and 4% in 2010]. But given the gap between share prices and earnings, I’m frankly not convinced that investors actually care about whether the rally is supported by actual data. Instead, investors have complacently been swept up by the same herd mentality that produced the bubble of 2008, and could potentially lead to a rapid and painful collapse in what looks to be the bubble of 2009.

Euro declined against the U.S. dollar today after growing during the early trading session and yesterday. The increased U.S. trade balance deficit didn’t help the Eurozone currency to advance against the greenback. Traders probably treated the drop in imports and exports as the negative factors for the global financial system. EUR/USD is now trading near 1.3918.

Trade balance deficit in goods and services was at $29.2 billion in April — up from $28.5 billion reported in March (revised from $27.6 billion). Consensus forecast was not far from the actual value — at $29 billion.

Crude oil inventories decreased by 4.4 million barrels last week after increasing by 2.9 million barrels during a previous week. Nevertheless, oil inventories are still above the upper boundary of the average range for this time of year.

U.S. treasury budget deficit reported for May was at $189.7 billion — up from $165.9 billion in May 2008. The forecasts showed $181 billion deficit.

Yesterday, a report on wholesale inventories for April was released. They fell by 1.4%, following a decline by 1.8% in March (revised negatively from 1.6% drop). Forecasts signaled a drop by only 1.1% for April.
(…)
Read the rest of EUR/USD Falls Despite U.S. Trade Balance Deficit Gain (13 words)

Posted on Forex blog.

In my experience, currency markets (and most other securities) markets tend to be governed by trends. There are short-term trends, long-term trends, and medium-term trends. Granted, this is an oversimplification, but generally speaking, if you were to chart a given currency pair, you could characterize its fluctuations in accordance with this paradigm.

Short-term trends are typically the focus of technical analysts, who ignore the broader forces affecting a given currency pair and instead try to discern slight trading patterns. Long-term trends, on the other hand, are the purview of economists, and reflect interest rate and growth differentials. Medium-term trends, meanwhile, unfold over a period of months (sometimes shorter, sometimes longer) and require a combination of technical and fundamental analysis to discern and trade successfully. With this post, I want to focus on the current medium-term trend, which is that of declining risk aversion.

I would not use the expression “old” news to describe the stock market (and accompanying) rallies that have taken hold broadly since the beginning of March, since it’s still be unfolding. Given that hindsight is 20/20, it now appears that the (perceived) stabilization of the US financial sector provided the impetus for the rally. In the weeks that followed, investors pulled an about-face and piled back into risky sectors and trades. The US stock market rapidly reversed course and is now trading around the level following the Lehman Brothers collapse last October.

The rally in March marked the end of one medium-term trend and the beginning of a diametrically opposed, but conceptually similar medium term-trend. Sorry to make it sound complicated, since it’s actually quite simple; in an overnight switch, investors went from being bearish and risk-averse to bullish and risk-seeking. These mindsets (and the switch between) is also reflected in currency markets. You can see from the chart below how the Australian Dollar, British Pound, and Down Jones Industrial Average have tracked each other closely over the last year, and moved in lockstep since March 3.

I suppose you could say that the correlation between US stocks and currencies represents one continuous long-term trend, and based on this chart, you would be making an accurate assessment. However, it’s equally important to unveil the underlying mindset that is driving both stocks and currencies, and is causing them to move in tandem. This is a nuanced distinction, and an important one to understand. There is a difference between a change in sentiment that causes investors to simultaneously pour money into risky investments (stocks and currencies, etc.) and a change in sentiment that causes a stock market rally and consequently, a currency rally. In the first scenario, both currency traders and stock market investors are in tacit agreement over risk-seeking, while in the second scenario, currency traders are uncertain, and hence taking their cues from the stock market.

Part of what makes a good currency trader is discerning which of these scenarios accurately describes the current reality in forex markets, so that a viable forecast and trading strategy can be implemented. Scenario 1 suggests that if the stock market rally falters, risky currencies will also decline. Scenario 2, meanwhile, suggests that currency traders would maintain their positions even in the event of stock weakness, which would cause the correlation between forex and the S&P to break down.