2Bull Forex Blog

In an article a week ago “US Dollar Outlook - Dollar to Strengthen Further” we postulated that the dollar would have a good week and so it has proved. Our logic was purely based upon trader psychology NOT the fundamentals or news. This week’s action shows graphically how important trader psychology is.

Always remember this is the equation for market movement:

Fundamentals + Trader psychology = Price

The fundamentals are actually not as important as how investors perceive them.

We all have the same facts to look at but we all draw our conclusions, from what we see and that’s the price. The problem with humans is they are not logical. They always push prices too far, with greed and fear governing their actions. The dollar has been pushed down on a story that was just too bearish. Traders had convinced themselves that:

1. The US Economy would go into recession

Recent GDP and job data however has been good pointing to a recovery

2. Interest rates would fall up 1%

Last weeks FOMC put an end to that story.

3. Oil prices would go above 100 a barrel and keep rising

There is no shortage of oil and prices are destined to trade in the 80s

4. The credit crisis is confined to the US

It’s been overstated and other countries have problems to.

When traders realize they have pushed prices too far - they all try and get out at the same time.

This has caused a rise in the dollar as the investors who sold realize prices have been pushed to far. If you can learn to trade the psychology of the participants you will be able to get advance warning of the big turning points and the big profits.

We made the following comments last week:

“Euro - We would be looking for the bounce to end and think 1.48 is the most traders can hope for on the upside. We think the euro will trade to 1.44 this year and below 1.40 for 2008″.

Comment: The result is we are right - and we are now trading near the 1.44 target that’s 6 points from the highs. We think the euro may even move beyond our target.

The only currency see of the majors with good upside against the dollar is the yen and here is what we postulated last week.

“Yen - Is the only major currency that could strengthen against the dollar. At present we are trading near 112.00 with firmer resistance at 114.00. We would expect at least a good dip back from the 112 region as the dollar looks over bought on a short term basis”.

Comment: The dollar rally has gone further than we expected but looks like it will yield an entry point on a dip of momentum as it tests the 114.00 level.

IMPORTANT!

The important point to remember with trader psychology is never anticipate what the herd will do always act on the price action as it is - that way you are trading the truth, trading the odds and as we demonstrated last week this can give you trades that can give you low risk and great profits.

Many new forex traders think the core of a forex trading strategy should be predicting where forex prices will go. Try it and you will lose, you will win if you trade in a different way so why is prediction not the way to make money? Let’s find out.

If you are predicting you are in effect hoping or guessing which is not a way to make money in any venture let alone forex trading. You cannot predict the future and if you try, your predictions will be as accurate as your horoscope.

There is however a big market in people who say they can predict and many theories that say you can such as Elliot wave, Fibonacci and Gann.

They argue that as human nature is constant so the markets must be as well.

However if you think about it this logic is obviously not true, because if markets were predictable with science, we would all know the answer in advance and there would be no market.

Markets move based upon uncertainty and while human nature is constant, it is not predictable with science - trading is a game of odds not certainties.

If you want to win you trade the reality of price change and don’t try and guess in advance.

For example if you see a market testing a level of resistance you do not simply enter a trading signal - if you do you are trading against the trend and you could be wrong.

Instead you wait for prices to test resistance and wait for prices to turn back the other way.

Sure you miss the turn - but you couldn’t predict that anyway, so there is no point trying!

How do you know when to trade.

The secret of correct market timing is using momentum oscillators. There are many you can use and three of the best are: RSI, ADX and the stochastic indicator.

We don’t have time to go through exactly how they work here simply look at our other articles and make them part of your essential forex education.

The key advantage they give you with your forex trading strategy is they allow you to gauge shifts in price momentum. You can use these shifts, to allow you to trade the reality of a price change to achieve better market timing and more forex profits.

The forex traders who rely on prediction lose and are generally naïve or greedy traders who think forex trading is simply a walk in the park - its not and neither would you expect it to be.

The real pro forex traders don’t rely on hope or guessing or attempting to buy market tops or bottoms they look at and trade the reality of price change.

The way to succeed in forex is simply to look at support or resistance and time your entry on shifts in momentum and you should not just do this with a view to these levels holding.
You also need to buy or sell breakouts of new market highs or lows. It’s a fact that most markets develop their best trends from these highs and lows and you need to learn to go with them and enter the market.

It may look like your getting in at good levels and its tempting to wait for the pullback - but these moves tend to not pull back and accelerate and offer the biggest profit potential.

The market price is the right place and if you cut out prediction and trade the reality, you can have the basis of a forex trading strategy that can make big consistent profits.

Forex is an abbreviated name for foreign exchange. The Forex market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For many years, the Forex market was dominated by large institutions such as banks and brokerage firms. However, the Forex market has experienced a major change over the past several years, as a growing number of private investors and traders just like you have started to actively trade. The purpose of this article is to reveal 12 interesting facts about the Forex trading market.

1. What is a Forex trading system? According to Howard Abell: The trading system gives the trader the ability to control his or her emotional states rather than allowing them to control him. A system is a disciplined method for organizing dynamic, ever-changing market phenomena.

2. Forex is the most liquid market in the world, thus making it easy to trade most currencies.

3. Unlike equities or futures trading, you pay no commissions on the Forex deals that you make.

4. According to the Wall Street Journal Europe, the most commonly traded currencies on the Forex market are the U.S. Dollar (USD), the Japanese Yen (JPY), the Euro (EUR), the British Pound (GPB), the Canadian Dollar (CAD), the Australian Dollar (AUD), and the Swiss Franc (CHF).

5. The most commonly traded currency pairs are the U.S. Dollar and the Japanese Yen, the U.S. Dollar and the Euro, and the U.S. Dollar and the Swiss Franc.

6. The U.S. Dollar is involved in nearly 90% of all Forex transactions.

7. Ten financial institutions account for nearly 73% of the total Forex trading market volume. The Top 10 most active traders are Deutsche Bank (17.0%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J. P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), and Morgan Stanley (3.9%).

8. The five major Forex trading centers are London, New York, Tokyo, Sydney, and Frankfurt.

9. The three major Forex trading countries are the United Kingdom (32.4%), the United States (18.2%), and Japan (7.6%).

10. Currency market players typically use Forex analysis as a means of predicting currency price movements. Forex analysis is divided into two types: fundamental and technical.

A fundamental analysis uses economic and political factors, such as unemployment rates, interest rates, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements.

Technical analysis uses reliable historical data as a means of forecasting these movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.

11. Margin is referred to as the collateral needed to facilitate the Forex deal. Usually, this is a very small portion of the entire deal, say 1% or 1:100. Please note that margin is a double-edged sword. Without the proper use of risk management tools (for example, the stop-loss option), you can experience substantial losses as well as gains.

12. A stop-loss order is a market order to close a Forex position if or when losses reach a pre-set threshold. According to Bruce Kovner: Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I am getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.

Trading Forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.