2Bull Forex Blog

Big money is made trend following in forex markets however most traders are reluctant to do it and instead try and trade for small profits - but it’s a fact the big profits are made following the longer term trends. So why don’t traders want to follow the big trends? There two main reasons…

They think they can make more money day trading and fall for the huge industry that has grown up selling short term day trading and scalping systems.

All these systems come with simulated track records and all will lose you money.

Why?

It’s obvious - you can’t predict what millions of forex traders are going to do in a few hours - all short term volatility is random and if you try and predict what will happen, you will lose.

The second reason is more complex.

It comes down to the fact that most traders can’t accept big gains!

This may sound a bit of a paradox, as all traders are in forex to make money - but they have problems accepting profits, here’s why:

Its obvious if you look at a chart that there are long term trends that last for months or even years. This is simply because they reflect the economic cycle of the country they represent and economic cycles last for these periods.

Now if you can lock into and hold these trends, you can make huge profits but most traders don’t have the discipline to do so.

Why?

Because markets are volatile and a typical scenario unfolds in the following way.

A forex trader enters a trade and is pleased to get a profit but the bigger the profit becomes, the more tempted he is to take it. Swings in equity start to eat into his open equity and eventually his nerves get the better of him and he snatches a marginal profit - even though he knows the trend will probably continue.

What happens next?

The trend carries on piling up $10, $20,000 or more and he’s not in but he knew the trend was going to continue! He just didn’t have the discipline, or the courage of his conviction.

There is no doubt that if you lock into the big trends you can make huge profits.

I know traders who trade less than once a month but make triple digit gains, holding positions for weeks or months.

They know that you have to sit through short term equity dips - but if you have the right forex trend following system that doesn’t matter - you have your eyes on the bigger prize of mega profits.

Big profits are made trend following the currencies but very few traders have the confidence and discipline to do it, although it’s the best way to trade and can make you huge profits longer term.

Big profits are there to be made trend following forex longer term so forget short term trading and look longer term!

If you trade the foreign currency market professionally or as a way to earn more money at home, there is a good chance that you have devised a trading system for yourself that creates buy and sell signals. If you do not have a trading system then you should probably consider creating one (or at least keeping a notebook of your trades), but even the best trading systems can sometimes give false signals.

While it is possible to create a technical trading system using anything from moving average crosses to candlestick formations that will run entirely on autopilot, it is also good to throw human supervision into the mix since an autopilot trading system may not be able to take into account things like prevailing market sentiment. Remember that it is *people* and not computers that create market movements, and all these people make trading decisions based upon their emotions and where they think the market will be headed next.

One of the ways to make sure that the trading signals that you receive are valid is to use a momentum indicator in conjunction with your charts and signals. One of the most popular momentum indicators is called the Relative Strength Index (RSI), and the most typical settings for this indicator is either a 14 or 21 day period setting. This indicator sits above or below actual price data, and it should be available on literally every charting package out there. The reason you will probably want to keep your RSI set to either a 14 or 21 day period is that most other traders will be using these settings as well, making the data that the RSI puts out a kind of “self-fulfilling prophecy” since so many other traders will be following it.

In this instance, the term “momentum” can best be defined as the speed at which prices are moving, and momentum indicators like the RSI will reveal whether the market is considered to be overbought or oversold. The best way to understand what an overbought or oversold market means is that prices have been going up or down too fast relative to recent prior activity.

On the RSI, you will be given a value ranging from 0-100. Any level above 70 will typically mean that the market is considered to be overbought, and a level below 30 will mean that the market is considered to be oversold. For you to understand the way that you can use this data in order to determine how valid your trading signals are, I will give an example of a possible trade.

Let’s say that your trading system is based on holding open positions from anywhere from two hours up to two days. This falls a bit in between the categories of day trading and swing trading, but since it still tends towards the shorter side then you would probably want to use the shorter period of 14 on your RSI indicator. You can see on your chart that your system has just created a buy signal, and you are wondering whether it would be a wise decision to enter the market.

On the RSI indicator, you can see that there is a value of 77. This tells you that prices have been moving up faster relative to previous trading activity over the last 14 units of whatever time frame your chart is using (if you had a 15 minute chart open then it would be the past 210 minutes), and that the market is considered to be overbought. This is where you can see why this type of indicator is called a “momentum” indicator, because it is revealing to you that the market has recently been rapidly moving upwards.

When your RSI gives you an overbought value, you can judge this one of two ways: either that the market has been moving upwards recently and that it is going to continue to do so, or that the market is “running out of steam” with this upwards movement and that it is likely to reverse. The longer that your RSI tells you that the market has been overbought, the more likely it becomes that this trend is going to reverse. So in this instance, the value of 77 (especially if the RSI only recently moved into overbought territory) would indicate that there is still a lot of room at the top for more upwards movement, and it may be a wise decision to follow this trading signal.

But let’s say that when you checked your RSI indicator, it gave you a value or 42. This would probably indicate that the market does not have ver much upwards momentum, so unless you begin to see the RSI rise then it might be a good idea to pass on this buy signal and not enter the market.

In a third possibility, let’s say that the RSI gave you a value of 10. Since this is below 30 then the market would be considered to be oversold, but this could still be a good time to enter the market. If the RSI has been in oversold territory for a long time, it may be time for a reversal. If you feel that the market may be running out of steam on it’s downward movement and likely to retrace it’s movement upward, this may be an excellent time to enter the market.

All in all, you should make your forex trading decisions based on a number of different factors and never make trading decisions based upon only one signal or indicator. While you are sitting at your computer and deciding how best to enter and exit the market, try not to lose perspective of the fact that it is banks, hedge funds, and other individual traders just like you that are moving the market by creating capital flows, and everybody is making trading decisions based on their emotions. So if every indicator in the world is telling you to buy, but you still felt reluctant because you know that there is a prevailing market bias against the currencies involved, it might probably still be a good idea to pass on the trade.

Here are 10 common forex mistake that if made will ensure an equity wipe out. 95% of forex traders lose and most make these common errors, so if you want to learn forex trading correctly avoid them at all costs.

1. Not Having Confidence

An obvious one - if you don’t have confidence in what you are doing you won’t have the discipline to execute your trading plan. Most traders never get confidence in what their doing, as they never learn the right education and trust a guru, e-book or news story. If you want to win, you must fully understand what you’re doing and why it works - so you have the confidence and discipline to trade your method.

2. Believing Simulations

How many traders buy a mechanical forex trading system off the web with a simulated track record and expect it to make them money?

The bulk of novice forex traders fall for this but of course, a simulation done in hindsight, knowing the closing prices is easy - but trading not knowing them is the hard part!

All simulated track records make money in hindsight and 99% lose in real time trading. Most are simply made up by vendors and combined with some copy to appeal to the greedy naïve investor who buys the system and gets a wipe out in the market.

3. Predicting Forex Prices

If you try and predict forex prices in advance you’re going to lose, as it’s really another word for hoping and guessing. Never predict what might happen, trade the reality of what is happening on your forex charts.

Predictions in forex will be as accurate as your horoscope and forget anyone who tells you they have a scientific theory of market movement - They don’t. If such a theory did exist, we would all know the price in advance and there would be no market - Period.

4. Using Invalid Data

How many novice traders try forex day trading? The majority.

How many lose? ALL of them.

Day trading is simply a way to wipe out equity quickly.

All short term volatility is random and you cannot get the odds on your side so you will lose. If you want to trade successfully trade valid data and trade longer term.

5. Trading The News

If you could get rich listening to the news then a lot more traders would make money - but you can’t.

News is discounted instantly and furthermore reflects the greed and fear of the majority, who always lose. News stories are simply opinions and you won’t make money trading them.

6. Trying To Be To Clever

On the one hand there are forex traders who don’t do enough work and on the other hand, there are traders who think they can make money being clever or working hard - neither however will ensure your currency trading success.

In forex trading you get paid for being right with your forex trading signal and not for how clever you are, or how much effort you put in.

The fact is the best forex trading systems are simple and they always work better than complicated ones, as they are more robust and have fewer elements to break.

FINALLY YOU MUST KNOW THIS!

If YOU ARE trading the major error most traders make is NOT Knowing their trading edge. A trading edge is the reason you should succeed at forex trading when 95% of traders fail.

It doesn’t matter what your trading edge is but you must clearly define it and have confidence in it to lead you to currency trading success. So if you don’t know what your trading edge is - its back to your forex education until you do.

Quite a number of shrewd American investors have been buying foreign stock these last couple of years, and made good returns in the process. It was a good decision, especially since the dollar started to fall and fall.

Of course, nothing lasts forever, and there is a whiff in the air of a change in the attitude towards the dollar. This is not without some reason albeit, that many think it is nonsensical to consider that the dollar should begin to appreciate.

The malaise with which USA has been dogged for some time now, is starting to reach the shores of other countries, notably Europe. It was inevitable that the problems of USA would affect others. The position of interest rates, falling house prices, the lot.

These consequences might be beneficial for the dollar, and those shrewd American investors may well decide to cut back on their investments abroad, and return to their currency with a profit while they can, because a rising dollar value would cut into their profit. This may be just one reason of several, to start a reversal trend.

For one thing, the British pound in particular, has been valued too highly, and whatever injections of support it has been getting, cannot last forever. Also, the high position of the euro is not easy to live with much longer.

It is well known that many factors have pointed to dollar weakness, and there are numerous people who will think the currency must weaken again in the long run.

It would certainly be nothing new, to see things turn out in a manner contrary to the book. The foreign currency game is prone to surprises. However, there are times when surprises, when put under the microscope, are in fact events which should have been seen as very real possibilities. Those, with that little extra foresight, may well be tempted and step in early by siding with the dollar.

So, is this the moment when the gamble might pay off and the dollar appreciation start?
Everybody would like to know the definite answer to that, and the best way may be is to ask the question whether the dollar has reached the bottom.

This is the point where the gambling bit comes in. The answer is not too easy this time. The prize is certainly a big one, because if caught at the right time, the dollar might earn big money. However, if caught wrongly, how much more could it fall?

So the question is, are we facing the possibility of making a lot or losing a little. Put that way, it seems that the odds favour taking a chance with the dollar albeit, with your fingers firmly crossed.

If you are going to take a plunge, make sure you get the best attention and the best exchange rates. For this, make several calls to the various foreign currency exchange companies and select the one who offers the best deal. Almost without exception, they offer better exchange rates than the High street banks, and do not charge any extras.
They will not run away with your money, as they would have nowhere to run without being instantly caught. Your money is sent to their bank and transmitted directly and at once, to your bank.

These days, movements of funds are carefully noted, because of money laundering risks, and all British companies dealing with any money transfers etc., must be licensed by H.M. Revenue and Customs, and display the Registration Number issued to them, which can be easily verified. Similarly, other countries have their own precautions in place.

There are many instances when we hear or read numerous words and phrases, but are rather uncertain of their exact meaning. The foreign exchange is only one part of the financial world of many sections, each of which seems to have its own expressions and jargon, as if it was all designed only for those with professional or specialized knowledge of the subject.

Of course, other trades have their own language, like the legal boys for instance.
It is not too difficult to get to know what it all means, and if one can learn some of the important words and expressions, it makes life that much easier.

Here are a few expressions you will run into, the answers to which you may find useful:

1. World Bank: The bank consists of IMF members, and helps by making loans to member countries, particularly when money from the private sector is not offered.

2. Bank Rate: This refers to the rate at which a central bank will lend to its domestic banks.

3. Basis Point: One per cent of one per cent

4. Cable: The foreign exchange market reference for the USD/ GBP

5. Consumer Confidence: This is an indicator of economic conditions run by the Conference Board. All over the country, some 5000 consumers are surveyed monthly, the degree of confidence being associated with the volume of consumer spending.

6. Covered Call: The Foreign Exchange Market uses this name for the rate USD/GBP

7. Cross Rate: This is a rate between two currencies of which neither is the USD

8. CHIPS: Clearing House Interbank Payments System.

9. Disposable Income: Money earned after tax.

10. Eurodollars: USD on deposit in a bank outside of USA.

11. LIBOR: London Interbank Offered Rate.

12. Liquid Assets: These are various assets which can be quickly converted into cash.

13. Easing: A price decline.

14. Economic Indicator: Data indicating economic growth, taking into account for example, retail sales, employment, rates, etc.

15. Liquidity: The competence of a market to undertake sizable transactions.

16. Resistance Level: A summit of a price level at which point the supply is greater than the demand.

17. Bull Market: A period of time when prices are seen to be rising.

18. Bear Market: A period of time when prices are seen to be falling.

19. Market Rate: Is the up- to- date quote of a currency pair.

20. Pip: refers to the 4th decimal point i.e.0.0001 of any foreign currency.

21. Fill Price: This is the price at which the order for buy or sell was executed.

22. Households Survey: The number of people that are employed, the labor force in general, and the rate of unemployment.