First let's look at the most common errors.

1. Buying success

In forex trading there are plenty of vendors who will sell you a worthless course with no track record for a few hundred dollars and promise you un-told riches and guess what?

The vast majority are junk, have no real track record (a hypothetical one is not worht the paper its written on as its done in hindsight knowing the closing prices) and rely on hyped up advertising and lies to appeal to the greed and naivety of the reader.

Let's face it, if these vendors could do what they said they could, they shut up and not bother you.

2. Using tools that will NEVER work

Most traders use tools that will never work and here are just a few:

- Scientific Systems

Elliot wave and Fibonacci are the kings of these tools. Both believe that markets are scientific - well there not.

A child in school knows that if they were, there would be no market as we would all know the price in advance. A market is a market, because it depends on opinions of humans and they DON'T think logically or to a scientific theory.

- Day trading

The time period is to short. All short term volatility is random and you can never predict support and resistance in a matter of hours or a day. You may as well flip a coin.

Ever seen a day trader with a real time long term track record of profits? - Neither have I - Let me know if you find one.

- Lack of confidence and discipline

Even traders with good methods can lack this - You need to have rock solid confidence in your system to help you trade through periods of losses.

This is the HARDEST part of trading and most traders simply cannot do it.

It really is a learned skill but it takes time a total understanding of your method and knowing what your trading edge is - If you don't know what your edge is you don't have one!

The Truth About Forex Trading Is

The way to make money is not to follow others, or think its easy - its not.

The way to succeed is to work smart and hard and the rewards are immense.

Accept the reality that you need to devise a mindset to deal with an entity that is all powerful - only you can be wrong as the market price is right.

Learn to trade it by accepting this fact.

It's going to make you look stupid at times, but accept its power and work within its rules and treat trading as an odds game and you can win and win big.

Most traders are naive greedy or stupid - or even all three combined looking for an easy dollar and that's why they lose.

Get the right mindset work hard, understand yourself and understand the market, treat it as an odds game and you could win at forex trading.

Everything about forex trading success can be learned the rest is up to you.

What is Stop Loss Hunting?
As you know forex brokers make money when you take a position. They charge you some pips when you buy a currency pair. This number of pips that brokers charge when you buy currency pairs is called spread. Different brokers have different spreads for different currency pairs. Spread is almost the only way that the forex brokers make money.

Good and reliable brokers are happy with the money they make through the spreads BUT there are some scam brokers who are not satisfied with this and want to make more money. Stop loss hunting is one of the ways they use to do that. They have some special robots or hire and train some employees who monitor the clients trades.

When a client takes a position and sets a stop loss and the market goes against the position and becomes so close to the stop loss, the robot or the stop loss hunter employee increases the spread manually to help the market hit the stop loss sooner. For example you take a short position with EUR-USD at 1.3180 and you set your stop loss at 1.3280. You have a short position and to close this position you have to buy. So your stop loss is in fact a buy order. You pay the spread only when you buy. So you don’t pay the spread when you go short. You pay it when you want to close your short position and so you buy.

Ok! Back to our example. You have a short position at 1.3180 and your stop loss is at 1.3280. The market goes against you and goes up to 1.3275 which is only 5 pips away to trigger your stop loss. As your stop loss is a buy order so the amount of the spread has to be added to the market price and if the result is equal to your stop loss value, it will be triggered. So the market is against you and is only 5 pips away from your stop loss value but it doesn’t mean that it has to go up 5 more pips to hit your stop. If your broker charges you 2 pips for EUR-USD, this 2 pips has to be added to the market price which is 1.3275.

So in fact your buy price will be 1.3277 which means it is only 3 pips away from your stop loss. If the market changes the direction and goes down at this stage, your stop loss will not be triggered but this is the opportunity that the scam brokers wait for it. As soon as the market becomes so close to your stop loss, the broker increases the spread. So while the spread is 2 pips and so the market is only 3 pips away from your stop, the broker adds at least 3 more pips to the spread to hit your stop loss. You think that you have lost your money in the market and because of the bad position you had taken, but in fact you have not lost it in a real trade. The broker has increased the spread to pretend that your stop loss is triggered but in fact it is not. The money you have lost is in the broker’s pocket.


I have experienced this myself. One day I have been watching the market through a very famous broker platform. I was checking both the live and demo account and I had one position with the demo account and one with the live account, both at the same time and price and with the same currency pair. Suddenly I saw that my position with the demo account triggered the target but the live account position was still open. When I checked, I found out that when the price became so close to the target, the spread was increased to prevent my position from hitting the target. The spread jumped from 4 to 14 in one second. It attracted my attention and I kept on monitoring the broker and I found out that they do the same thing when the price becomes so close to the stop loss. While the demo position is still open and has not triggered the stop loss, the live position becomes closed by the stop loss. So a trade that could make only $400 for the broker through charging 4 pips as the spread, made $10,000 for hitting a 100 pips stop loss. Easy money!

Why don’t they let the target to be triggered by increasing the spread?

If they let your target to be triggered, your trade will be closed and you will make a profit but if they keep your trade open, it is possible that the market goes against you and then they can hunt your stop loss.
As soon as I became 100% realized that they hunt my stops and don’t let the targets to be triggered, I enlightened all traders I knew. If you Google for it you can still find some of my posts on different forums. It also caused me to get some infractions from some forums because they work for those brokers. I think two of them even banned me and many of them deleted my post completely.

Can they succeed to hunt your stop loss or prevent your target all the time?
Not all the time. They try their chance. When the market goes to your direction strongly they can not do anything and your target will be triggered. Also when your position goes to your direction right away and doesn’t get close to your stop or when you have a wide stop loss, they can not do anything.
What should you do?

• Choose a reliable and well-know broker. Always check the reviews before you sign up. Do not be deceived by those brokers who are proud of having no dealing desk. Some of them may have no dealing desk but they do have stop loss hunter employees!
• Do not set tight stop losses and always consider the maximum spread.
• Try to take the best positions at the right time.

read more

Foreign exchange is simply the largest market today. Like any market, foreign exchange trading materialized to allow buyers and sellers of goods - particularly in foreign exchange, goods refer to currencies. Transactions and exchanging of assets can be done in foreign exchange currency trading. The foreign exchange market could be anywhere in the world accessible through phone or Internet. Physical markets come as financial exchange centers (e.g. Chicago Board of Trade).

Foreign exchange trading can be a very profitable game to be involved with. The bigger the amount in play, the greater the opportunity to gain more profit. But foreign exchange can be an expensive game just like other sports - there is equipment and training to think about. A potential foreign exchange trader needs capital and trading implementation.

Who are the main players in foreign exchange? There are at least six of them: commercial and investment banks, central banks, hedge funds, corporations, high net-worth individuals, and just simple individuals.
Commercial and investment banks are the natural players in foreign exchange for all other foreign exchange trading participants must deal with them. Foreign exchange currency trading began as an added service to deposits and loans offered by commercial banks. The profitability of foreign exchange trading is a perfect characteristic for banks to be involved.

Another player, the central bank is separated from commercial and investment banks because it is not after the profitability of foreign exchange currency trading. The main purpose of central banks is to provide adequate trading conditions. Central banks intervene in economic or financial imbalance in the foreign exchange market.

For corporations, another player in foreign exchange market, they were not interested in foreign exchange trading but the trend of companies going international and the tight competition among other companies made them think twice about not going into foreign exchange trading.

High net-worth individuals engage in foreign exchange through accessing commercial and investment banks. Individual players in foreign exchange are mostly tourists using their local currency to purchase foreign-made products and services (such hotel accommodation).

A relative new player in foreign exchange currency market is the hedge fund. Hedge fund is a partnership of high net-worth individuals that invest at least a million in foreign exchange trading.
Even with six major players, the potential of foreign exchange has not yet been consumed entirely. And so investment and commercial banks together with some trading companies have paved a way for individual investors to participate in foreign exchange currency trading. Also foreign exchange information is made available to most individuals through personal computers and Internet so as to attract more individual investors into foreign exchange.

"You made how much?" I screamed down the phone to the calm voice on the other side of the Atlantic. Tapping away at my calculator, I continued in disbelief, "but that means you earned for Salomon Brothers an average of $250,000 each and every single trading day for eight years!" I resisted the urge to faint, or swear.
I had spoken to many successful traders, but the conversation with Bill Lipschutz, with whom I had had the above conversation, former global head of foreign exchange and managing director at Salomon Brothers, stuck in my mind for the size of his trading successes.

This was my point of arrival, after having spoken and interviewed, even cross-examined and interrogated, the world's leading traders. The original quest was to find what, if anything, they had in common despite their differences. I did not want the trite and over-used "cut your losses short, set stop-losses, etc., etc." type of insight. Traders know to cut their losses short, they want to know they are cutting it short and not cutting a potential profit short. Too often the trite rule has missed the real difficult issue.

Nor did I want advice which only the professional trader could use or understand. I wanted to discover something for professional and private traders alike. I wanted to rip out and hold in my hand for close inspection the very heart of trading success.

Any conclusions would be irresistibly and irrefutably strong (as well as hopefully being insightful and original ) because it would relate to trading itself, not just one product, or technique or tool or country. I was not disappointed.

The common element that linked them all, and separated them from their less successful colleagues was their frame of mind; their attitudes to trading, to losses, to open positions, to profits, to success and failure. Indeed, they redefined success and failure itself. Their perspective was unlike that exhibited by any less successful traders. They had a way of viewing trading such that if you were to force them to trade according to a particular system, they would still be more profitable than their colleagues using the same system. They added a value to any potentially profitable trading technique and tool to turn it into a superior profit maker.
A list of the main traits these leading traders exemplified follows:
Opportunity Knocks the Door Down
Since kindergarten each of us is taught to grab opportunities for they do not knock twice. It is precisely that type of advice, which is so useful in other walks of life, but detrimental in trading.
Many traders, armed with their trading plan or strategy, will often hastily and prematurely enter a trade. Their decision is often driven by fear; the fear of the missed opportunity. Their mind will be screaming, "quick get on the trade, you're going to miss it, so what if all your criteria for entering a trade have not been met? Most of them have, so get on the trade. The big traders wouldn't hang around."
The inevitable result is that the trade will not be profitable or as profitable as it would have been had the trader waited for the precise moment to strike.

In trading, the fear of the missed opportunity leads to many avoidable losses. And the game of trading is as much about avoiding losses as about capturing profits. The leading traders have a different perspective on opportunity. Counter-intuitively they know opportunity knocks once, twice and then kicks the door down. They know that if this trade does not feel absolutely perfect, there will be another one along in a short while. That knowledge alleviates and over-rides any fear. That knowledge is the key to unlocking greater profits by waiting for all the trade entry criteria to be met and not cutting corners.
Bill Lipschutz summed it up when he said, "Out of 250 trades in a year, it comes down to five, three of those will be wrong and you will lose a fortune and two will be right and you will make a fortune; for the other 245 trades-you should have been sitting on your hands."

Great Traders Tend to be Risk Averse
There is a general perception, once again more propagated by life and not trading experiences, that one needs to risk a lot to profit a lot. Every one of the traders I interviewed stated unequivocally that they were risk-averse. As Bernard Oppetit, global head of equity derivatives at Banque Paribas put it, "you do not need to risk a lot to profit a lot." Jon Najarian, CBOE director and the chairman of Mercury Trading put it similarly, "making money today is not more important than being able to come back tomorrow."
Pat Arbor, chairman of the Chicago Board of Trade, warned against going for the "home-run." His trading philosophy is based on "una fagiola;" one bean, at a time into the bag. As one of the most experienced and successful traders on CBOT, he insists trying to put lots of "beans into the bag" at once will result in most not going in. He counsels that the steady approach will result in far more profits in the longer run.
The message is to wait, and wait for a high probability trade in the knowledge that they do exist and can lead to as great a profit as more risky trades. Moreover the danger of riskier trades is not only a loss, but also such a loss that you have no funds left.

Luck: Stacking the Odds
Following on from the nature of traders as being risk-averse, they have a knack for stacking the odds. As Lipchutz puts it, "I happen to believe that by far the biggest component of trading success is luck, it's not the rolling the dice type of luck, but stacking the odds." These top traders practice their risk aversion by ensuring the odds of a successful outcome are heavily stacked in their favor.
This is not only done by ample research and planning, but also recognizing that when they are in a good trade to "push their luck." As David Kyte, chairman of the Kyte Group and the largest local on LIFFE put it, "you do not step in the way of a train that's going at full steam." Najarian and Kyte both said, "You make your own luck in this game" meaning that you stack the odds of making a profitable trade by planning and waiting until all your trade entry criteria are satisfied, if then the trade does prove to be as lucrative as it promised you "push your luck" by perhaps adding to the position and riding it for all it is worth.

The Emotional Problem
Trader's attitude to their potential and existing positions is often a great determinant of success. As every trader knows, the moment a trade is executed, everything is different. That is the point at which it becomes real, no longer digits on a screen and numbers in an account. Now expectation is joined by anticipation. The brain is joined by the heart. Reason is joined by emotion. You exchange detachment for attachment.
When you have an open position and you are looking to close it, you will either have a profit or a loss. The emotions relating to each are quite different. For instance, when sitting on a loss many traders experience hope that the position will turn around because they fear and deny that it may not. It is for you to recognize these emotions and to discard them. Your judgment has to be based on detached reason relating to your analysis of the company.

How you behave once you have an open position is all important. Without clear thinking you could exit too soon or too late. Your key concern with an open position is timing your exit. Of course there are times when you are deciding whether to add to a position, but generally you are concerned with exit. With an open position, you are concerned with closing the position. In order to do that, an open position requires an open mind.
"The key is to be intellectually honest. You have to think of every day as a clean slate. You've got to forget about your loss or how much you paid-you have to treat each day as a completely new day. You have to start everyday with a blank page. Mark to market should be the rule so you start each day afresh. There is no expected profit or loss on the book so you have to start from scratch each morning," says Oppetit.

Poor Planning Produces Pathetic Performance
Although an SAS motto, the above is equally applicable to trading. The top traders did not trade "by the seat of their pants." Planning and its benefits was a key aspect to the way they viewed the markets. The top traders plan "what if" scenarios and think about their response to each probable outcome. The main benefits were that with plan in hand or in mind the trader's confidence is enhanced, fear of loss reduced and that in turn assists clear thinking and removal of hope so ensuring the trader stays focused on his original reason for entering the trade.

Oppetit summed this up well when he said, "whether I get out at a profit or loss does not matter." Martin Burton, founder and managing director of Monument Derivatives and former director of NatWest Markets was talking about the same thing when he said, "it is not a 90 minute game." They both know that sticking to their plan is far more important than temporary blips in their profit and loss accounts.
Losses-A Curious View
The top traders were totally at ease with losing. This is not something one expects from those at the top of their profession. Although true in other walks of life, that perfection is to be sought, in trading, perfection is not an option. Paul RT Johnson, vice president at ING Securities and a director at CBOT said bluntly, "You are going to be wrong. You are not perfect."

The top traders would cut their loss and move on. The issue was not whether the market may turnaround if they hung in there. They cut their loss if it is what they had said they would do in their plan. They would get out at the predetermined level. The discipline of sticking to the plan was primary and the real issue. To say "cut your losses short" missed the whole point and was of no help to anyone. By cutting their loss, they would free up capital to place in more profitable positions elsewhere, and free up mental energy to focus on new opportunities. Arbor summed it up by saying, "your first loss is your best loss."

Conclusion
It is not possible to do justice to the wisdom and accumulated experiences of the world's leading traders in a short article. However, I have tried to convey how their minds work in a way that apparently runs against common intuition. These differing perspectives ensure that with the same tools and products everyone has to trade with, they make far more in profits because their minds are different.



By :Alpesh Patel , is an attorney turned trader and the author of The Mind of a Trader: Lessons in Trading Strategy from the World's Leading Traders published by Financial Times Pitman Publishing (order number 800-462-6420). He operates his own derivatives fund concentrating on traded equity options. He has extensive experience in both the U.K. and U.S. derivatives markets and holds equities in the U.K., India, France and the U.S. As a former chairman of the University of London Finance Society, he has lectured extensively on trading techniques. As a lawyer he advised banks, building societies, and pension funds on financial services. He can be reached at alpesh-patel@msn.com

With the markets trading at mind boggling ranges, it really makes sense to discuss a part of trading that won’t be found on most charts – and that’s called Trading Psychology. It’s one thing to have a trading plan and system, but actually following it, especially when things aren’t exactly going your way, is something else entirely. Following the key trading success rules can help you improve your plans when it comes to real life trading.
Let’s face it, losses are part of any business – especially trading. Losses have to be accepted before a business even begins its operation. Here are a few things to remember about losses and how you can make them part of your trading business.

Losses

1. Remain mentally and emotionally focused while trading.
2. Losses are part of all systems; knowing when to take losses is important.
3. Always try to be extremely disciplined, and exit your losing trades when your system requires you to do so.
4. Not taking losses when indicated is dangerous.
5. Riding losing trades for too long usually results in larger losses and risk of ruin increases.
6. It’s not a good idea to keep changing stops to avoid a loss.
7. System traders use stops consistently.
8. Separate yourself as a trader from yourself as a person.
9. No system can trade the markets without taking losses at times.
10. Clumping can happen on the losing side as well as the winning side.
11. Your ability to take losses quickly is a great asset to your trading.

Discipline

Now this is vital to trading success. Imagine a person trying to become a pro athlete, but he or she sleeps in every day, eats excessively, stays up late and parties every night. Is this person going to become an elite athlete or not? The answer is no, and the reason why has everything to do with the amount of discipline. Discipline, in my mind, is like homework, only it’s homework that pays off in dollars in the trading industry. Here are a few rules that I use when it comes to discipline in my life as a trader:

1. Good trading discipline is vital to my success.
2. My three successes to the market are: doing my market homework, following through, and using my stop losses.
3. I train my mind every day to be disciplined and focused.
4. I see myself every day doing my market homework and following the signals, setting stops.
5. I track my system exactly as it dictates.
6. If my system gives me daily signals, I follow them every day.
7. If my system gives me intraday signals, I follow them during the day.
8. I do not allow outside influences to affect my discipline.
9. Placing my orders correctly as my system dictates increases my odds for success.
10. Discipline to follow through with my system is my friend.
11. A system without stop losses puts me in a position of unlimited or unknown loss.
12. I understand that a major aspect of being disciplined is using stops.

Negativity

Negativity is in all aspects of life. I got enough of them in my family. I remember when I told my family that I wanted to be a trader. Now they didn’t call me stupid or an idiot-the rolling eyes said enough. The ability to think positively and block out negativity is key to having consistent profits. The biggest thing negativity can do in your trading business is to keep you from taking that next trade, which, ironically, could be a grand slam in profits. Here are my rules to fighting negativity.

1. My best tool against negative influences is my system.
2. Being consistent in my trading means following my rules.
3. As a consistent trader, I place my orders each day at the same time.
4. Through consistency, negative influences go away.
5. I follow through on scheduled assignments, such as order entry, exit, and adjustment.
6. I plan my trades and trade my plans to facilitate consistency.
7. I use a trading partner to achieve consistency in my trading.
8. Fear and Greed are the enemies of consistent trading.
9. My commitment of consistency blocks greed from my goals and objectives.
10. Keep goals and objectives realistic to combat fear and greed.

Focus

The ability to focus in any business is important. The ability to focus as the president of your own business is vital to its success. This is true in Trading because your report card reveals your focus in daily account statements. Here are a few things that I believe will help your focus as a key to success:

1. Focus is the opposite of distraction.
2. Choose to stay on the winning path by focusing on the markets during your market time.
3. Environment can cause distractions, so remove all distractions such as noise, visual distractions, and clutter from the workplace.
4. Self discipline, follow through, and consistency are the keys to trading success.
5. An organized workplace can keep away distractions.
6. Focus on one trading aspect at a time in small bites.

Success

Success in your trading business is contagious. Having a plan for success, as well as following through and readjusting your goals over time, is highly important. Here are my rules for success:

1. Success in trading is achieved by working on goals that are specific.
2. Success is comfortable and positive, not exciting and emotional.
3. The past is over and done with. I move forward!
4. I complete trades according to the rules of my trading system. Doing this achieves success in my trading.
5. Success means seeing my profit goals as well as my security in stops, and I know where my trade will be closed out at any time.
6. I visualize myself as a master of market skills and as a profitable trader.

Avoiding Bad Habits

You might think this falls into the negativity category, and it will be if you don’t block out bad habits and follow the rules below:

1. Have the capability of reversing any bad trading habits that you may develop.
2. Accept the fact that as a human, you may fall victim to bad trading habits.
3. Remember that you can change losing and destructive trading habits.
4. Know exactly what your bad trading habits are, make a list of them, and refer to them often.
5. Keep a checklist off all your trading rules and follow all procedures each and every time.
6. If you are unclear about a trade, simply do not make the trade.
7. Keep a diary of all your trades and what rules you follow, and follow up on both the winners and losers.
8. If you have an emotional day, no matter if it’s high or low, don’t trade that day.
9. Many errors are subtle, so keep a close eye on your errors and fix them as soon as possible.

Getting Cocky and Overconfident

Overconfidence can soften your focus and throw you into a state of mind where nothing can go wrong. It is at this stage in trading that everything can go wrong. Really learning the following rules will help you avoid falling into the trap of being overconfident:

1. Understand that overconfidence can occur if you have too many winning trades.
2. Catch yourself when you have thoughts that your trading system can do no wrong.
3. Catch yourself when you say you need to leverage up because you are “never wrong.”
4. Catch yourself when you think you can guess the direction of the markets.
5. Do not allow overconfidence to cause you to overtrade and bring about losses.
6. Overconfidence can lead you to a fantasyland of 100% profits, and that leads you to lose your discipline.
7. If this happens, stop trading and redirect your mind to your trading system.
8. Live in the reality of your trading system. If you have many winning trades in a row, remember to check the long term results of the trading system, including losses.

Winning Attitude

Following the rules above is great, but it’s not enough. Developing a Winning Attitude will stop negative thoughts from creeping in, and outside influences from changing your plan. Here are my thoughts about developing a winning attitude:

1. A positive attitude enhances your market performance.
2. Don’t dwell on losses if they are part of the system’s performance.
3. Attaining a goal starts by having a goal. Avoid setting goals that cannot be achieved. Achieving your goals means sticking to your system each day.
4. Achieving your goals means doing the homework before the market opens.
5. Achieving your goals means placing all of orders ahead of time.
6. Understand how your system is constructed and its maturity before you take the first trade.
7. Achieving your goals means following through from start to finish.
8. Focus on the next winning trade, and leave the last trade behind.
9. Be organized, consistent, set goals and follow through.

Trading Psychology, in my mind, accounts for half of my trading profits. It doesn’t matter how good your system is or how great your trading strategy might be. If you cannot follow both the winners and the losers, then you will not be able to duplicate the system’s success.
Learning and following the rules above will help you follow the rules of your system, and that will help you stick to them.

source :  Written by Tom Gentile

Kathy Lien

 by Kathy Lien the Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications. She also appears regularly on CNBC – US, Asia and Europe and on Sky Business.
 
According to an April 2007 report by the Bank for International Settlements, the foreign exchange market has an average daily volume of close to $3 trillion, making it the largest market in the world. Unlike most other exchanges such as the New York Stock Exchange or the Chicago Board of Trade, the FX market is not a centralized market. In a centralized market, each transaction is recorded by price dealt and volume traded. There is usually one central place back to which all trades can be traced and there is often one specialist or market maker. The currency market, however, is a decentralized market. There isn't one "exchange" where every trade is recorded. Instead, each market maker records his or her own transactions and keeps it as proprietary information. The primary market makers who make bid and ask spreads in the currency market are the largest banks in the world. They deal with each other constantly either on behalf of themselves or their customers. This is why the market on which banks conduct transactions is called the interbank market.

The competition between banks ensures tight spreads and fair pricing. For individual investors, this is the source of price quotes and is where forex brokers offset their positions. Most individuals are unable to access the pricing available on the interbank market because the customers at the interbank desks tend to include the largest mutual and hedge funds in the world as well as large multinational corporations who have millions (if not billions) of dollars. Despite this, it is important for individual investors to understand how the interbank market works because it is one the best ways to understand how retail spreads are priced, and to decide whether you are getting fair pricing from your broker. Read on to find out how this market works and how its inner workings can affect your investments.

Who makes the prices?Trading in a decentralized market has its advantages and disadvantages. In a centralized market, you have the benefit of seeing volume in the market as a whole but at the same time, prices can easily be skewed to accommodate the interests of the specialist and not the trader. The international nature of the interbank market can make it difficult to regulate, however, with such important players in the market, self-regulation is sometimes even more effective than government regulations. For the individual investor, a forex broker must be registered with the Commodity Futures Trading Commission as a futures commission merchant and be a member of the National Futures Association (NFA). The CFTC regulates the broker and ensures that he or she meets strict financial standards. (For more insight on determining whether you're getting a fair price from your broker, read Is Your Forex Broker A Scam? and Price Shading In The Forex Markets.)

Most of the total forex volume is transacted through about 10 banks. These banks are the brand names that we all know well, including Deutsche Bank (NYSE:DB), UBS (NYSE:UBS), Citigroup (NYSE:C) and HSBC (NYSE:HBC). Each bank is structured differently but most banks will have a separate group known as the Foreign Exchange Sales and Trading Department. This group is responsible for making prices for the bank's clients and for offsetting that risk with other banks. Within the foreign exchange group, there is a sales and a trading desk. The sales desk is generally responsible for taking the orders from the client, getting a quote from the spot trader and relaying the quote to the client to see if they want to deal on it. This three-step process is quite common because even though online foreign exchange trading is available, many of the large clients who deal anywhere from $10 million to $100 million at a time (cash on cash), believe that they can get better pricing dealing over the phone than over the trading platform. This is because most platforms offered by banks will have a trading size limit because the dealer wants to make sure that it is able to offset the risk.

On a foreign exchange spot trading desk, there are generally one or two market makers responsible for each currency pair. That is, for the EUR/USD, there is only one primary dealer that will give quotes on the currency. He or she may have a secondary dealer that gives quotes on a smaller transaction size. This setup is mostly true for the four majors where the dealers see a lot of activity. For the commodity currencies, there may be one dealer responsible for all three commodity currencies or, depending upon how much volume the bank sees, there may be two dealers.

This is important because the bank wants to make sure that each dealer knows its currency well and understands the behavior of the other players in the market. Usually, the Australian dollar dealer is also responsible for the New Zealand dollar and there is often a separate dealer making quotes for the Canadian dollar. There usually isn't a "crosses" dealer - the primary dealer responsible for the more liquid currency will make the quote. For example, the Japanese yen trader will make quotes on all yen crosses. Finally, there is one additional dealer that is responsible for the exotic currencies such as the Mexican peso and the South African rand. This setup is usually mimicked across three trading centers - London, New York and Tokyo. Each center passes the client orders and positions to another trading center at the end of the day to ensure that client orders are watched 24 hours a day. (To continue reading about currency crosses, see Make The Currency Cross Your Boss and Identifying Trending & Range-Bound Currencies.)

How do banks determine the price?Bank dealers will determine their prices based upon a variety of factors including, the current market rate, how much volume is available at the current price level, their views on where the currency pair is headed and their inventory positions. If they think that the euro is headed higher, they may be willing to offer a more competitive rate for clients who want to sell euros because they believe that once they are given the euros, they can hold onto them for a few pips and offset at a better price. On the flip side, if they think that the euro is headed lower and the client is giving them euros, they may offer a lower price because they are not sure if they can sell the euro back to the market at the same level at which it was given to them. This is something that is unique to market makers that do not offer a fixed spread.

How does a bank offset risk?Similar to the way we see prices on an electronic forex broker's platform, there are two primary platforms that interbank traders use: one is offered by Reuters Dealing and the other is offered by the Electronic Brokerage Service (EBS). The interbank market is a credit-approved system in which banks trade based solely on the credit relationships they have established with one another. All of the banks can see the best market rates currently available; however, each bank must have a specific credit relationship with another bank in order to trade at the rates being offered. The bigger the banks, the more credit relationships they can have and the better pricing they will be able access. The same is true for clients such as retail forex brokers. The larger the retail forex broker in terms of capital available, the more favorable pricing it can get from the interbank market. If a client or even a bank is small, it is restricted to dealing with only a select number of larger banks and tends to get less favorable pricing.


Both the EBS and Reuters Dealing systems offer trading in the major currency pairs, but certain currency pairs are more liquid and are traded more frequently over either EBS or Reuters Dealing. These two companies are continually trying to capture each other's market shares, but as a guide, the following is the breakdown where each currency pair is primarily traded:

EBS	Reuters
EUR/USD	GBP/USD
USD/JPY	EUR/GBP
EUR/JPY	USD/CAD
EUR/CHF	AUD/USD
USD/CHF	NZD/USD

Cross currency pairs are generally not quoted on either platform, but are calculated based on the rates of the major currency pairs and then offset through the legs. For example, if an interbank trader had a client who wanted to go long EUR/CAD, the trader would most likely buy EUR/USD over the EBS system and buy USD/CAD over the Reuters platform. The trader then would multiply these rates and provide the client with the respective EUR/CAD rate. The two-currency-pair transaction is the reason why the spread for currency crosses, such as the EUR/CAD, tends to be wider than the spread for the EUR/USD.

The minimum transaction size of each unit that can be dealt on either platform tends to one million of the base currency. The average one-ticket transaction size tends to five million of the base currency. This is why individual investors can't access the interbank market - what would be an extremely large trading amount (remember this is unleveraged) is the bare minimum quote that banks are willing to give - and this is only for clients that trade between $10 million and $100 million and just need to clear up some loose change on their books. (To learn more, see Wading Into The Currency Market.)
ConclusionIndividual clients then rely on online market makers for pricing. The forex brokers use their own capital to gain credit with the banks that trade on the interbank market. The more well capitalized the market makers, the more credit relationships they can establish and the more competitive pricing they can access for themselves as well as their clients. This also means that when markets are volatile, the banks are more obligated to give their good clients continuously competitive pricing. Therefore, if a forex retail broker is not well capitalized, how they can access more competitive pricing than a well capitalized market maker remains questionable. The structure of the market makes it extremely difficult for this to be the case. As a result, it is extremely important for individual investors to do extensive due diligence on the forex broker with which they choose to trade.

Predicting the next move in the markets is the key to making money in trading, but putting this simple concept into action is much harder than it sounds. Professional forex traders have long known that trading currencies requires looking beyond the world of FX. The fact is that currencies are moved by many factors - supply and demand, politics, interest rates, economic growth, and so on. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices.  Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss franc and the Japanese yen. Knowing which currency is correlated with what commodity can help traders understand and predict certain market movements. Here we look at currencies correlated with oil and gold and show you how you can use this information in your trading.

The three forex pairs which include currencies from countries that possess large amounts of commodities. The commodity pairs are: USD/CAD, USD/AUD, USD/NZD. These pairs are highly correlated to changes in commodity prices, therefore traders looking to gain exposure to commodity fluctuations often take advantage of these pairs.

Although there are many countries with large natural resource and commodity reserves, such as Russia, Saudi Arabia and Venezuela, the commodities of many of these nations are usually highly regulated by their domestic governments or thinly traded. The Canadian, Australian and New Zealand dollars are traded at high volumes and are therefore very liquid in the forex market.

Commodity Pairs Analysis

AUD/USD ( Australian dollar / U.S. dollar )

Because Australia is the world's third largest exporter of gold, the Australian dollar has an 80% positive correlation with this metal. If you believe the price of gold will continue to increase, you could favor a commodity-based economy like Australia because if gold rises, the Australian Dollar is very likely to follow it's lead.

1) If you think Gold will keep rising, it might be a good strategy to buy the Australian dollar because it's 80% positive correlation to Gold.

2) Since the AUD/USD pair tends to be highly correlated to gold, it might be a good idea to compare both AUD/USD and gold charts in order to predict future moves.

NZD/USD (New Zealand dollar / U.S. dollar)

The health of New Zealand's economy is closely tied to the health of the Australian economy. This explains why the New Zealand dollar and the Australian dollar have had a 92% positive correlation over the past four years (2003-2006). The New Zealand dollar has an even stronger correlation with gold than the AUD/USD does - the correlation has been approximately 88% over the past three years. If you believe the price of gold will continue to increase, you could favor a commodity-based economy like New Zealand because if gold rises, the New Zealand dollar is overly likely to follow it's lead.

Trading Ideas

1) If you think gold will keep rising, it might be a good strategy to buy the New Zealand dollar because it's 85% positive correlation to gold over the past years.

2) Since the NZD/USD pair tends to be highly correlated to gold (together with the AUD/USD), it might be a good idea to compare both NZD/USD and gold charts in order to predict future moves in the New Zealand dollar.

 USD/CAD (U.S. dollar / Canadian dollar)

The USD/CAD is the single biggest beneficiary of rising oil prices. Canada which is already the biggest exporter of oil to the US, will experience a boost to its economy when oil price continue to increase. Therefore, if oil rises the Canadian dollar is likely to follow. Over the past years , the correlation between the Canadian dollar and oil prices has been approximately 81%.

Trading Ideas

1) If you believe the price of oil will keep rising, it might be a good strategy to buy the Canadian dollar because it's 81% positive correlation to oil over the past years.

2) Since the USD/CAD pair tends to be highly correlated to oil, it might be a good idea to compare both Canadian dollar and oil charts in order to predict future moves.

Trading foreign exchange on the currency market, also called trading forex, can be a thrilling hobby and a great source of investment income. To put it into perspective, the securities market trades about $22.4 billion per day; the forex market trades about $5 trillion per day. You can make a lot of money without putting too much into your original investment, and predicting the direction of the market can be a real rush. You can trade forex online in multiple ways.

Part 1 of 3: Learning Forex Trading Basics

These questions are probably familiar to you:

    How long do you think it will take to grow an account from $1,000 to $50,000?
    How long before we can quit our job?
    How long until we can make $20,000?

You probably notice a theme to all these questions:; money. Let’s face it the vast majority of people are attracted to Forex for the money. Forex can make you money. It can make you a lot of money, but it will not happen fast.
Reality Check

I am sure you already know that Forex is not a get rich quick scheme. Many people out there spout that line. However, what many people won’t tell you Forex trading is a career. And as with any career it can take a long time to master Forex. So, if you are considering Forex you need to ask yourself two simple questions:

    Do I have the passion needed to take on a new career and become successful?
    Do I have the patience needed to get through the bumps in the road to succeed?

If your answer is no to either of these questions perhaps Forex isn’t for you.

Getting Rich Slow

 I have yet to meet anybody who has gotten rich fast in Forex. I am not saying that it is impossible. What I am saying is that the vast majority of successful traders get rich slowly. Becoming a successful Forex trader breaks down into five steps:

    Learning the basics
    Planing & Preparing (write a proper trading plan and money management plan)
    Developing a trading method
    Testing your trading method
    Tweaking your trading method
    Nailing down your trading psychology.
    Getting rich!

Most new traders want to jump from step one to step five in the space of a few months. Realistically, you will have to go through each step to succeed and it will take you some time. So I am sorry to be the one to tell you this but Forex is very much a get rich slowly game. Some good news though is that Forex4Noobs provides a free video course that will guide you through step two “Plan & Prepare”. Forex4Noobs also has a fun and interactive forex education section that will help you with step one “learn the basics”.


Well the fact is that most people do not get rich quick in any career or business. So giving up on Forex because it will take you time to achieve success is silly. I personally feel that the best thing about Forex is the freedom it provides. Unlike most careers, once you become consistently profitable in Forex you can scale back your chart time.

Over the past two months, I set up a stop watch and timed the total amount of time I spend trading per week. I found that on average I spend six hours per week trading. Compare that against the 8-12 hour work day most people are forced to do these days. Forex is the obvious winner.

Forex certainly does have a lot of benefits and it can turn your life around. However, please do not fall into the trap of thinking that you will be rich within six months.

The Cruel Irony of Trading Techniques and Trading Systems

Professional traders already have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, but professional traders are not looking for a new trading technique or trading system (because they are already trading correctly). New traders do not have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, and new traders are exactly the traders who are looking for a new trading technique or trading system (and even worse new traders are often still looking for the holy grail of trading).
How to Determine Which Trading Techniques and Trading Systems Should be Avoided

Trading techniques and trading systems are the methods by which traders perform their market analysis and make their trading decisions (e.g. when to buy and when to sell). Trading techniques are usually used by discretionary traders, and consist of a procedure for determining when and where to make a trade. Trading systems are usually used by system traders, and consist of a set of rules that determine when and where to make a trade. Trading techniques and trading systems come in an endless variety of shapes and sizes, but most trading techniques and trading systems are complete and utter rubbish.
Without the knowledge and experience to determine which trading techniques and trading systems should be avoided, doing so would seem like an impossible task, but the following is some advice that should help new traders avoid choosing a trading technique or trading system that is nothing more than a trading gimmick

Trading Techniques and Trading Systems with Ridiculous Names

Trading techniques and trading systems with ridiculous (i.e. funny, obscure, dramatic) names should always be avoided, because they are so named purely for marketing purposes, not because the name makes them a good trading technique or trading system.

For example, a trading system with a name like "Foolproof Market Predictor Plus" will be one of the worst trading systems ever created, and while it may be a foolproof trading system (as in it will be very easy to follow), it will certainly not be a market predictor, and its use will result in a minus being applied to your trading account rather than a plus.

Trading Techniques and Trading Systems that Only Make Long Trades

Trading techniques and trading systems that only make long trades (or only make short trades, but this is not usually the case) should always be avoided, because even if they are based upon sound theory (which is highly unlikely), they would still only be profitable when the financial market being traded is moving in the appropriate direction (i.e. upwards for a trading technique or trading system that only made long trades, and downwards for a trading technique or trading system that only made short trades).

For example, it is often the case that a trading system that only makes long trades will be marketed using spectacular results, but upon closer inspection the purported spectacular results will only have been so because the financial market being traded happened to be in the middle of the strongest bullish market in its entire history. If the same trading system was traded during a combination of a bullish and bearish market, or in a bearish market, the spectacular results would quickly become unspectacular results (or rather spectacular in the opposite direction).

Packaged Trading Techniques or Trading Systems

Trading techniques and trading systems that are sold as a packaged system (meaning that the basis for the trading technique or trading system is unknown or incomplete) should always be avoided, because the basis for the trading technique or trading system could be based upon anything (quite literally, even random trades).

For example, even if a packaged trading technique or trading system is marketed using profitable results, the profitable results could be based upon an obscure combination of events that happened to exist during a very specific time (e.g. a particular company releasing specific economic data during the second week of March five years ago), and has never existed before that time, and will never exist again after that time.

Obvious Gimmicks

It should go without saying that any trading technique or trading system that is an obvious gimmick should always be avoided, because ... well, because the trading technique or trading system is an obvious gimmick.

For example, a trading system that had a ridiculous name, and that was based upon made up technical indicators, and that recommended not even looking at a chart of the market price movement, would be an obvious gimmick that was designed purely to attract unknowing traders, and should therefore be avoided.
Professional Trading Techniques and Trading Systems

Professional trading techniques and trading systems do not have ridiculous names (if they even have a name at all), they do not make trades in only one direction, they are never provided as a packaged mystery trading system, and they are never based upon anything that could be interpreted as a gimmick. Professional trading techniques and trading systems are always based upon the underlying principles of financial market price movement, and professional trading techniques and trading systems are the only method of financial market analysis and trading that have the ability to be consistently profitable (hence the reason that they are used by professional traders).

I have found wso to be in general very academic when it comes to trading, but also very quant based. The general theme is that more math = more money. Honestly I feel this is just not the case. Markets are nothing more than the average of all market participant beliefs at a given time.

The market is never wrong, it is always right. That does not mean that significant risk adjusted returns cannot be achieved. I pose this question to all of wso - What makes a good trader? The most essential trait I feel that makes a good trader is someone that is consistent. Consistency really is key, sure there will be guys that have terrific years but then give it all back the next year.

For the profitable traders they will fall somewhere in the extreme of great highs and lows. What creates consistency? Your ability to make decisions under extreme pressure and completely quell the anxiety. A good trader is one that is able to accept when they are wrong and move on to the next trade. Having a mental repitioure is crucial to building consistency.

The second most important trait is that you must come to truly accept the risks associated with trading. You must be willing to realize that any results from trading are the results that you created. Markets provide the ultimate freedom. In most cases (unless carrying extreme size) there is always a way to get in and out. Third, there needs to be a positive attitude and belief system in place. Good traders believe they have earned their return and do not attribute it to luck. Your ability to make decisions under extreme pressure and completely quell the anxiety. A good trader is one that is able to accept when they are wrong and move on to the next trade.

We all know how important it is to find our edge in the markets. Finding an edge could take months even years but once we have acquired such an edge, it is not the end and expecting windfall profits could only be a dream which is as good as wishful thinking. The next step is to work on yourself and develop the right mindset. Here are some tips that can help you Maximise Trading Performance:

 We all Know if everything is not for every ones, My wife is mine is not yours..:) can You imagine if all the people become a doctor, or an enginer, teacher and so on, Forex also i do believe it is not for every ones, this is a nature law, a person has his/her own job.

The good thing with forex is that you don’t have to be worried about competition. Unlike all other businesses that competition makes tougher conditions for everybody, the more people work on forex the more money everybody will make because it will make more volatility and movements in the market and volatility and price fluctuation is what we make money through it.
So forex is a good business but is it a suitable business for everybody?
To become a forex trader, first you have to learn it. It is not very hard to learn forex. There are enough free information over the internet. You just need to spend a few months to learn everything. But the more important part is the experience. You have to learn how to use your knowledge to trade and make money.
Forex is like driving. You can sit at home and read a lot of books about driving and know about it more than a driver who has a 30 years experience. But as long as you don’t practice and don’t drive, you will not become a driver. To be a good driver you also need to have a healthy body and mind otherwise you will make problems for yourself and the others. This is true about forex too. Not everybody who knows the techniques theoretically can be a good forex trader.
You have to have three things to become a good and successful forex trader:
1. Knowledge
2. Experience
3. Suitable mental and psychological condition
If you lose more than what you make in forex, you don’t have at least one of the above essentials.
As explained above, the knowledge can be gained easily and for free through the internet.
The experience can be gained through practicing with the demo account. Any of the forex broker companies offer free demo accounts that enable you to practice and learn to use your knowledge practically.
But what about the last factor? Suitable mental and psychological condition!
You can lose money in forex even when you have enough knowledge and experience. Why?
What kind of people, with what kind of personality, lose more in forex even when they have enough knowledge and experience?
1. Impatient people:
If you don’t have enough patience when you work or when you wait, you will have problems in forex. Forex needs a lot of patience. Sometimes you have to sit at the computer and watch the charts for several hours. Those who don’t have enough patience, get tired very soon and start entering to the trades while there is no clear and suitable signal and it is not the time to get in a trade. Then they will have to close a wrong position while they have already lost a lot of money.
2. Greedy people:
Those who are greedy are big forex losers. Greed cause you rush to enter to a trade when it is not the time because you think that the others are making money and you have to do it too. So you don’t wait for a clear signal and you just dive to a trade with this hope that you will make money whereas in most cases you will choose the wrong direction.
On the other hand, greedy people stay in trade for a long time and don’t end it when it is time to end. They keep the position to make more money but the market will change the direction suddenly and all the profit they had in their hand will be lost.
3. Fearful people:
Fear is the biggest problems in forex trading and generally fear is the biggest problem and obstacle in all the businesses. Fear keeps people from taking risks and those who have a lot of fear can not use the opportunities because they are always afraid of losing. They wait and wait and wait and lose the opportunities one by one and then get tired and try to overcome their fear and so they enter to the wrong direction before proper market analyzing and finding good signals. What will happen then? They lose money.
4. Emotional people:
If you are a person who makes his decisions emotionally and not wisely, logically, analytically, then forex is not for you because you will lose a lot. Forex is a technical and scientific business. It works according to the scientific rules and analysis. Forex traders use special indicators and signals to decide to buy or sell. They act only when they see proper signals and not when they feel that the price will go up or down.
Something you feel can be wrong and so if you trade according to what you feel, you lose.
Emotions are good but not in business, forex or stock trading. If you are an emotional person, you should not try forex trading unless you learn to control your emotions and use your knowledge.
How can you control your hastiness, Greed, Fear and Emotions in Forex trading?
This question can not be answered in just one article and I will write more articles about any of the above problems but here is some tips:
If you are a hasty person and this has made problems for you both in your life and forex, you have to practice Yoga, meditation or maybe hypnotism to become able to control your hastiness.
In case your hastiness can not be controlled at all, you may have to see a doctor and check your endocrine hormones like Thyroid, Adrenaline and Noradrenalin.
To control your greed, you have to make a strict discipline for yourself and try to be stuck to it. For example do not make more than a limited number of pips everyday or in each single trade. Tell yourself that you are not allowed to make more than - for example - 20 pips everyday or 5 pips in each trade and as soon as you reach the limit, turn off your computer or close your trade even if the market is still hot and you can make more or your trade is doing well and going to your favorite direction.
To control your fear, you have to spend enough time on learning and practicing with the demo account. You have fear because you don’t have enough confidence about your trading skills. You have to make hundreds of trades on the demo account to make sure that you have learnt the methods completely. Then you need to start with the real account and trading with your money but with a very small amount.
You have to keep on trading with a very small amount of money for several months and when you see that you can make profit and the number of your successful trades is more than your bad trades, you can increase the amount of the money little by little.
Keep in your mind that Forex and stock trading are all the matter of taking risk. The only thing that you have control on is the amount of the money you put in every trade and also the amount of the money that you let be lost. The rest is not in your hand.
Ok
- What do you think about yourself?
- Is Forex a suitable business for you or not?
- What are your weak-points?
- Are you greedy or you have a lot of fear that don’t let you trade properly?
- What is the reason of your fear? Is it because you think you have not learnt the techniques properly or it is because you have made a lot of bad trades and so you have lost your confidence?
Think about the above questions before you make your next trade and please make me happy and thankful with your comments.

Many new Forex traders think that successful traders have successful deals all the time. Most successful traders, as a matter of fact, trade with success rates about fifty percent and seventy five percent. Because of this it also means that they also fail fifty to twenty five pecent of the time.

If you add up all the losses made by a successful trader (in dollar terms) the losses are often much bigger than the gains or losses made by an unsuccessful trader. Therefore successful Forex traders are not only the bigger winners but also the biggest losers (in dollar terms). Trading activity is sometimes much more important to trying to get a hundred percent record at all times.


There are many reasons for this. Good traders have accepted the fact that losing is part of Forex trading. They therefore process and accept loses in a very constructive way. They are not distracted by failures or become emotionally upset. They view their losses as learning experiences and therefore get great value from loses. They also know that a trader's success rate is merely one of the components to a financially rewarding Forex trading career. They know that to succeed it take a balance between many trading skills and factors. These factors include sound money management, a positive and objective trading psychology, how many gains you make on gains, how much is lost on unsuccessful trades.

Using this constructive attitide allows them to trade more often (Not talking about over trading) as they are not distracted by trading psychology challenges such as depression and paralysis. They are also more confident at increasing the number of lots traded based on their past successes.

Successful traders therefore trade more and use more lots. Not only do they make more (in dollar terms) on their winning trades but at the same instance they lose more on their losing trades because their size of of lots are gradually increased.

Unsuccessful traders don't risk as much on their trading or don't trade as much due to their inability to deal with losses positively. This increases their insecurity and gives them a trading inferiority complex. Most unsuccessful traders are so distracted by their losses that they start their search for the Holy Grail over and over again every week.

You can save so much energy and time processing your losses positively. Almost all trading techniques can be made to be profitable by adding a number filters anyway (or reversing the trading direction on unsuccessful systems) so the trading system is the easy part.

Successful trader have a good money management process and a positive trading psychology.

Good traders lose money because it is part of trading (the market will always do what the market will do) and they don't lose any sleep about these loses. How well do you deal with your trading losses?

The biggest difference between successful traders and unsuccessful traders is the ability to manage losses positively.

Statistics prove that more than 80% of traders are not making money from forex trading. So what can you do to ensure you are part of the rare band of profitable forex players?
Ask any pro trader and they'll cite money management as one of the main, if not the key, factors in separating the winners from the losers. So many of that 80% disregard these crucial techniques it would be laughable if it wasn't so sad.
I have been trading for over 10 years and having coached a large number of traders, I have seen that the ultimate cause of failure is the lack of awareness of the 3M’s of ‘Money, Mind and Method&rsquo.
If we distribute the 3M’s on a scale of 10, then:

• Money – ‘money management’ would constitute five parts.
• Mind – ‘discipline and patience’ would constitute three parts.
• Method – ‘technical analysis’ would constitute two parts.

This tells us that the Method — the technical analysis (or fundamental analysis) is the least important part of trading.
But let’s be fair here. It really is not the trader’s fault, since most of the information available says otherwise.
If you purchase a course or a book, they all talk about technical indicators, chart patterns etc., but rarely will you come across a book or course which tells you to concentrate on the Money and Mind.
Most new traders will purchase a book, open the charts, look at the indicators, and buy/sell based on the crossover of the indicator lines or moving averages etc.
What about money management? What about the discipline and patience to prepare a trade plan and follow it? Zilch! Is it surprising that these traders lose money?
As traders we are all here to make money from the markets. But what should be the first priority of the trader?
The first priority of a trader is to conserve the capital. The trader’s capital is his bloodline. Without it, one cannot trade, so preserving it becomes a matter of utmost importance.
Without implementation of proper loss control techniques, a sudden large drawdown can shrink an account to such an extent that the possibility of attaining profitability becomes remote.
A single loss is not only a loss of capital; it also puts a trader two steps behind in the quest to profitability.
This is because the percent gain needed to recover from a loss increases geometrically with every loss.
Table 1 illustrates the concept, and ultimately the importance of controlling the loss of capital.

Therefore a trader must have a money management policy. A money management policy is nothing more than a set of techniques that help a trader minimise the risk of loss, while still enabling him/ her to participate in major price gains. It is probably the most critical aspect of trading and the most overlooked.
A sound money management policy becomes an absolute must in the forex markets, due to the availability of high leverage.
As the popular saying goes “take care of your losses, and the profits will come by itself”.
I want to put down certain facts and some simple rules of money management which would help the trader achieve the desired success.

1. Expect losing trades

It is only natural that when we take a trade, we tend to focus on potential profits than dwell on possible losses. We are usually so convinced that the trade will be profitable, that we tend to ignore the possible losses that would occur should the trade go wrong. One must accept that losses in trading are inevitable, and a successful trader is one who manages and controls these losses.

2. Placing stops

Trading without stops is akin to walking a tightrope without a safety net. As far as possible, one must have stops in the market since this is the only way to control the losses. While this becomes a ‘double edged sword’ since a trader may get stopped out of a trade for no reason, it is still the best ‘safety net’.

3. Stop loss levels

The most important rule is that the stops should never be mere ‘dollar value’ stops, but technically correct stops. Which simply means that one cannot decide on the stop level based on his/her personal risk level. A trader cannot say, “I am going to risk only $50 for the trade.”
The market does not care about your comfort levels; it respects the technical levels. Hence a stop must be at a technical level, regardless of how far it is away from the entry. If one does not follow this simple rule, the ‘comfortable’ dollar values stop would probably get stopped out more often, which defeats the very purpose of placing a stop.

4. Trading is a business of probabilities

You are in control only until the moment of the entry. Once you are filled in the trade, the market will dictate where the price will go. You cannot control this, just like you cannot control with 100% certainty, the amount of profit (or loss).
But what you can control is minimising your losses and protecting gains through a well-defined money management strategy.
A sound money management policy is based on two simple concepts: the proper risk-to-reward ratio, and correct position sizing, where the ‘position sizing’ simply means the amount of capital that a trader should risk on any trade. In this article, we will have a detailed look at the first principle.

5. Risk-to-reward ratio

One must always keep the RR ratio at a minimum of (1:2).
Let us use simple mathematics to understand the concept of the RR ratios.
First and foremost, one must accept that losses are a part of trading and one will have losing trades.
Let’s assume that a trader has a win-loss ratio of 60%.This means that out of every 10 trades taken, a trader would get six winning trades and four losing trades.

The only way to achieve gains in the account is by maintaining the required RR ratio.
Hence, if a trader is maintaining an average stop loss level of 25 pips, then the expected profits from the trade must be at least 50 pips.
Scenario 1: The trader has four losing trades @ 25 pips = (-) 100 pips. The trader has six winning trades @ 50 pips = (+) 300 pips. Net result after 10 trades = (+) 200 pips.
Hence a trader can achieve gains in the account, even after getting four losing trades out of 10.
Scenario 2: Now change the RR ratio to (1:1) and the net result comes to (+) 50 pips, which drastically reduces the gains in the account.
Scenario 3: Now reduce the RR ratio to less than (1:1), say (0.50:1) which is what scalpers tend to do – look for a profit of 10 pips and keep a safe stop of 20 pips.
The net result comes to minus-20 pips. To be honest, if I do not get sizable gains in my account after  10 trades, I am simply wasting my time. To achieve a worthwhile increase in the capital (after spending the time and effort) one must maintain the correct RR ratio. Unfortunately this simple fact is ignored by most traders.
Let us have a look at a trade example, which was taken and managed by incorporating the above mentioned aspects. I have taken a trade example of a harmonic pattern, for the simple reason that these patterns give excellent risk-to-reward ratios.
Figure 1 was a live trade taken in our ‘trading room’ of a bearish Gartley pattern on the daily time frame on EUR/USD.
As seen in the chart (Figure 1), once the pattern confirmed with the formation of point D, we determined the precise entry, stop and exit levels.
• Stop was placed above point D.
• Expected price target was the Fibonacci projection ratio 127.2%.
• The entry is a very crucial factor and was decided on a combination of three different factors.
As one can see in the chart, these parameters gave a fantastic RR ratio of (1:4).
Not only does this give a highly profitable trade, it also enables the trader to take profits in between, thus locking in the profits as the trade progresses.
There are two reasons for mentioning this trade: 1. We can draw a simple conclusion that as traders we must look for techniques/strategies which assure the minimum RR ratio. 2. This trade will be used to explain the concept of ‘position sizing’ in the next article.

by Sunil Mangwani

 Sunil Mangwani has been trading and consulting in the forex market for the last 10 years and specialises in trading with price action and Fibonacci ratios. Sunil has contributed to numerous financial publications, spoken at trading conference around the world and conducts specialised workshops on technical analysis. He is also the founder of “London School of Financial Trading”. For more information, visit www.fibforex123.com