Arguably, the stop loss and take profit orders are the two most important order types for foreign exchange traders. The two orders are essentially orders on top of another order. The stop loss allows you to determine at what price you want to cut your losing trades and the take profit allows you to enter what price you’d like to close a position for a profit.
The Stop Loss
A stop loss should be entered for each and every trade you ever make on the foreign exchange market. A stop loss prevents you from runaway losers, due to the fact that it will automatically close a losing position before your account balance is depleted. It would never be recommended to trade without a stop loss as doing so is like risking your entire account balance on one trade.
If you were to buy a lot of GBP/USD but wished not to lose more than $250 on this single trade, you would set your stop loss 25 pips below the price at which you entered the trade. If you bought GBP/USD at $1.50, you’d want to enter a stop loss at $1.4975, thus preventing a loss greater than $250.
The Trailing Stop
The trailing stop is a different kind of stop loss order offered by a few brokerage accounts. Many investors, particularly momentum traders, like to use trailing stops to both limit their losses, and also to lock in gains. The trailing stop lags the current price by the amount set. For instance, if you were to buy EUR/USD at 1.3150, and wish to lose no more than 50 pips, your trailing stop would sit at 1.3100. If the price were to advance to 1.3175, your trailing stop would then move to 1.3125, lagging the market by the 50 pip differential that you set.
The trailing stop is a more advanced type of stop loss but can be used by any trader. Ultimately, the trailing stop will activate at a price that is X number of pips lower than the price you set. If the EUR/USD was to advance from 1.3150 to 1.3350 without ever dipping more than 50 pips at any given time, you would be in the position all the way to 1.3350. If it had dipped deeper than 50 pips, your stop loss would have been executed.
Take Profits
Take profit orders are the opposite of a stop loss. The take profit is a price at which you would like to close your position for a profit, above or below the current price of the currency. Just like a stop loss, you can enter this order either during your initial entry to buy a currency, or after, and it can be changed at any time.
Wednesday, 5 May 2010
BASIC PRINCIPLES OF FOREX TRADING
We feel that there are a few basic forex principles that separate successful traders from those that fail:
1. Trading is an investment not an income.
It is important to have a realistic expectation of what you can achieve through forex trading. The nature of trading is such that you may make a good return on your initial capital over an annual period, but during that period you may have a number of consecutive losing months, with only a few bumper months inbetween. Therefore, even daytraders cannot claim to make a fixed amount per month which equates to a salary. You need to have another source of income to support yourself while trading forex. NEVER borrow money to trade with.
2. You can't predict the forex markets.
The forex markets are influenced by billions of traders, economic and political events. You simply cannot predict the direction and manner in which the markets will move.
Technical and fundamental analysis does much to provide a more educated guess than a simple coin toss but it is important to realise that each of these techniques will have a large failure rate. You will lose a large percentage of the time. Sometimes you will lose on more trades than you gain on. However, it is still possible to make money under these conditions by employing sound money management forex principles.
3. Let profits ride and cut your losses
The only way to make money from forex trading (or any form of trading) is by making enough money on your winning trades to cover your losses and to gain additional profit to grow your capital. This means letting your profitable trades ride and cutting your losses early. It is harder to put into practice than it sounds as psycologically it is much easier to "marry" your losing trades in the hope that the market will turn in your favour and grabbing your profit too soon when you see your hard earned gains slipping away as the market temporarily turns against you.
4. Trade according to a tried and tested system
This is one of the most important forex principles. The only way to cut out emotion in trading and adopt a more business-like and informed approach is to use a system of rules that have been developed and tested on market data. In this way, all the trade decisions have already been made before you even enter the forex market. This is a much less time consuming and less stressful way to trade for a living.
5. Employ a sound money management strategy
In our opinion, money management is the single most important aspect of any trading system and is badly neglected by forex beginners. It enables the trader to fully utilise their capital to grow their money as fast as possible while protecting them from excessive losses and final account blow out.
6. Don't ignore the fundamentals
Fundamental economic principles drive the foreign exchange rates of the world over the long term. However, they have minimal effect over the short-term and are thus not reliable to use for daytrading decisions.
Having said that, economic announcements sometimes have a profound effect on the markets, causing movements of hundreds of pips in a matter of hours. Therefore forex beginners ignore them at their peril!
7. Don't put your faith in the expert's recommendations and comments
There are literally hundreds of forex companies providing trading signals, daily commentary and trading recommendations. While it may be useful to read some of these to get an outside opinion, it can just be information overload for newcomers to the forex market, creating indecision and stress! Believe in your system and trade accordingly.
1. Trading is an investment not an income.
It is important to have a realistic expectation of what you can achieve through forex trading. The nature of trading is such that you may make a good return on your initial capital over an annual period, but during that period you may have a number of consecutive losing months, with only a few bumper months inbetween. Therefore, even daytraders cannot claim to make a fixed amount per month which equates to a salary. You need to have another source of income to support yourself while trading forex. NEVER borrow money to trade with.
2. You can't predict the forex markets.
The forex markets are influenced by billions of traders, economic and political events. You simply cannot predict the direction and manner in which the markets will move.
Technical and fundamental analysis does much to provide a more educated guess than a simple coin toss but it is important to realise that each of these techniques will have a large failure rate. You will lose a large percentage of the time. Sometimes you will lose on more trades than you gain on. However, it is still possible to make money under these conditions by employing sound money management forex principles.
3. Let profits ride and cut your losses
The only way to make money from forex trading (or any form of trading) is by making enough money on your winning trades to cover your losses and to gain additional profit to grow your capital. This means letting your profitable trades ride and cutting your losses early. It is harder to put into practice than it sounds as psycologically it is much easier to "marry" your losing trades in the hope that the market will turn in your favour and grabbing your profit too soon when you see your hard earned gains slipping away as the market temporarily turns against you.
4. Trade according to a tried and tested system
This is one of the most important forex principles. The only way to cut out emotion in trading and adopt a more business-like and informed approach is to use a system of rules that have been developed and tested on market data. In this way, all the trade decisions have already been made before you even enter the forex market. This is a much less time consuming and less stressful way to trade for a living.
5. Employ a sound money management strategy
In our opinion, money management is the single most important aspect of any trading system and is badly neglected by forex beginners. It enables the trader to fully utilise their capital to grow their money as fast as possible while protecting them from excessive losses and final account blow out.
6. Don't ignore the fundamentals
Fundamental economic principles drive the foreign exchange rates of the world over the long term. However, they have minimal effect over the short-term and are thus not reliable to use for daytrading decisions.
Having said that, economic announcements sometimes have a profound effect on the markets, causing movements of hundreds of pips in a matter of hours. Therefore forex beginners ignore them at their peril!
7. Don't put your faith in the expert's recommendations and comments
There are literally hundreds of forex companies providing trading signals, daily commentary and trading recommendations. While it may be useful to read some of these to get an outside opinion, it can just be information overload for newcomers to the forex market, creating indecision and stress! Believe in your system and trade accordingly.
TECHNICAL ANALYSIS
Charting price data is very important. Charts shows you the history of the currencies behaviour over time and therefore provides much more information than simply looking at a single quote of the present rate. Adding technical indicators to the charts allows you to view the price data in an alternative manner which yields even more information. Therefore, it is important to know at least the basics of technical analysis and the information you can gain from it.
There is a multitude of information available about technical analysis on the Internet. Therefore, it is not necessary to rush out and buy a number of books on the subject. On this web site we seek to provide an introduction to the subject only to enable readers to research the subject themselves more fully.
What is technical analysis?
Technical analysis comprises a number of different techniques:
* Price data can be represented as lines, candles, bars or point and figure (P&F) charts. Each representation yields unique information about the data.
* Trend, channel, Fibonacci, Gann and other lines can be plotted on the charts to delineate and clarify price trends, ranges or other patterns.
* Technical indicators can be calculated and plotted on or under the charts.
Trend Lines
Trend lines are drawn by joining the lows (support line) or the peaks (resistance line) of the price data. This helps to clarify existing trends and produces clear exit criteria as the trend has ended when the price breaks through a resistance or support line. The problem with trend lines is that you are only able to draw them once a trend is well established, by which time it is too late to enter a trade. Also, trend lines are very subjective, no two people will agree on exactly where they should be drawn. This allows emotion to creap into your trading.
There is a multitude of information available about technical analysis on the Internet. Therefore, it is not necessary to rush out and buy a number of books on the subject. On this web site we seek to provide an introduction to the subject only to enable readers to research the subject themselves more fully.
What is technical analysis?
Technical analysis comprises a number of different techniques:
* Price data can be represented as lines, candles, bars or point and figure (P&F) charts. Each representation yields unique information about the data.
* Trend, channel, Fibonacci, Gann and other lines can be plotted on the charts to delineate and clarify price trends, ranges or other patterns.
* Technical indicators can be calculated and plotted on or under the charts.
Trend Lines
Trend lines are drawn by joining the lows (support line) or the peaks (resistance line) of the price data. This helps to clarify existing trends and produces clear exit criteria as the trend has ended when the price breaks through a resistance or support line. The problem with trend lines is that you are only able to draw them once a trend is well established, by which time it is too late to enter a trade. Also, trend lines are very subjective, no two people will agree on exactly where they should be drawn. This allows emotion to creap into your trading.
TRADING PSYCHOLOGY
Trading, and currency trading in particular, is associated with a high level of risk. It is not uncommon to lose thousands of dollars in a matter of seconds. Therefore, success in trading largely depends on controlling your emotions and adopting the right attitude.
Trading is an emotional rollercoaster
It is a very natural human tendancy to want to stay in a losing trade in the hope that the market will turn in your favour and you can regain your losses to close your trade at a more financially acceptable level. Similarly, when you are making a profit it is very hard not to grab what you can get while you're up, instead of riding out the trend even if the market temporarily turns against you.
However, as our basic principles state, the only way to make money in forex trading is to let your profits ride and to cut your losses quickly. This is because there is a very narrow margin between making an overall profit and blowing your account since you will have a large number of losing trades, no matter how good your trading system is or how lucky you are. How you manage your losses and gains makes the difference between a successful and unsuccessful trader.
In our opinion, the only way to control your emotion is to trade according to a system or set of rules. Your system should be comprehensive enough to cover any eventuality arising in the markets so that you never need to make any decisions while in a trade. You simply follow a set of predetermined rules.
Chat Forums
Forex trading is a very lonely occupation as you sit behind a computer terminal all day, isolated from the world. This in itself is enough to make you feel very depressed and despondent. Subscribing to forex chat forums will help to alleviate some of the loneliness. At least then you get some insight into the lives of other traders around the world and you can get an opportunity to interact with them.
Trading is an emotional rollercoaster
It is a very natural human tendancy to want to stay in a losing trade in the hope that the market will turn in your favour and you can regain your losses to close your trade at a more financially acceptable level. Similarly, when you are making a profit it is very hard not to grab what you can get while you're up, instead of riding out the trend even if the market temporarily turns against you.
However, as our basic principles state, the only way to make money in forex trading is to let your profits ride and to cut your losses quickly. This is because there is a very narrow margin between making an overall profit and blowing your account since you will have a large number of losing trades, no matter how good your trading system is or how lucky you are. How you manage your losses and gains makes the difference between a successful and unsuccessful trader.
In our opinion, the only way to control your emotion is to trade according to a system or set of rules. Your system should be comprehensive enough to cover any eventuality arising in the markets so that you never need to make any decisions while in a trade. You simply follow a set of predetermined rules.
Chat Forums
Forex trading is a very lonely occupation as you sit behind a computer terminal all day, isolated from the world. This in itself is enough to make you feel very depressed and despondent. Subscribing to forex chat forums will help to alleviate some of the loneliness. At least then you get some insight into the lives of other traders around the world and you can get an opportunity to interact with them.
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