Anyone who says you can
consistently make money in foreign exchange markets is being untruthful.
Foreign exchange by nature, is a volatile market. The practice of trading
it by way of margin increases that volatility exponentially. We are
therefore talking about a very 'fast market' which is naturally
inconsistent. Following that precept, it is logical to say that in order to
make a successful trade, a trader has to take into account technical and
fundamental data and make an informed decision based on his perception of
market sentiment and market expectation. Timing a trade correctly is
probably the most important variable in trading successfully but invariably
there will be times where a traders' timing will be off. Don't expect to
generate returns on every trade.
Let's enumerate what a trader
needs to do in order to put the best chances for profitable trades on his
Trade with money you can afford
Trading fx markets is speculative
and can result in loss, it is also exciting, exhilarating and can be
addictive. The more you are 'involved with your money' the harder it is to
make a clear-headed decision. Money you have earned is precious, but money
you need to survive should never be traded.
Identify the state of the market:
What is the market doing? Is it
trending upwards, downwards, is it in a trading range. Is the trend strong
or weak, did it begin long ago or does it look like a new trend that's
forming. Getting a clear picture of the market situation is laying the
groundwork for a successful trade.
Determine what time frame you're
Many traders get in the market
without thinking when they would like to get out, after all the goal is to
make money. This is true but when trading, one must extrapolate in his
mind's eye the movement that one expects to happen. Within this
extrapolation, resides a price evolution during a certain period of time.
Attached to this is the idea of exit price. The importance of this is to
mentally put your trade in perspective and although it is clearly
impossible to know exactly when you will exit the market, it is important
to define from the outset if you'll be 'scalping' (trying to get a few
points off the market) trading intra-day, or going longer term. This will
also determine what chart period you're looking at. If you trade many times
a day, there's no point basing your technical analysis on a daily graph,
you'll probably want to analyse 30 minute or hour graphs. Additionally it
is important to know the different time periods when various financial
centers enter and exit the market as this creates more or less volatility
and liquidity and can influence market movements.
Time your trade:
You can be right about a
potential market movement but be too early or too late when you enter the
trade. Timing considerations are twofold, an expected market figure like
CPI, retail sales or a federal reserve decision can consolidate a movement
that's already underway. Timing your move means knowing what's expected and
taking into account all considerations before trading. Technical analysis
can help you identify when and at what price a move may occur. We will look
at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade
and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx
trader a very large amount of leverage, trading at full margin capacity (in
ACM's case 1% or 0.5%) can make for some very large profits or losses on an
account. Scaling your trades so that you may re-enter the market or make
transactions on other currencies is generally wiser. In short, don't trade
amounts that can potentially wipe you out and don't put all your eggs in
one basket. ACM offers the same rates regardless of transaction sizes so a
customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of
the market is perceived to be feeling about the market and therefore what
it is doing or will do. This is basically about trend. You may have heard
the term 'the trend is your friend', this basically means that if you're in
the right direction with a strong trend you will make successful trades.
This of course is very simplistic, a trend is capable of reversal at any
time. Technical and fundamental data can indicate however if the trend has
begun long ago and if it is strong or weak.
Market expectation relates to
what most people are expecting as far as upcoming news is concerned. If
people are expecting an interest rate to rise and it does, then there
usually will not be much of a movement because the information will already
have been 'discounted' by the market, alternatively if the adverse happens,
markets will usually react violently.
Use what other traders use:
In a perfect world, every trader
would be looking at a 14 day RSI and making trading decisions based on
that. If that was the case, when RSI would go under the 30 level, everyone
would buy and by consequence the price would rise. Needless to say, the
world is not perfect and not all market participants follow the same
technical indicators, draw the same trendlines and identify the same
support & resistance levels. The great diversity of opinions and
techniques used translates directly into price diversity. Traders however
have a tendency to use a limited variety of technical tools. The most
common are 9 and 14 day RSI, obvious trendlines and support levels,
fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving
averages. The closer you get to what most traders are looking at, the more
precise your estimations will be. The reason for this is simple arithmetic,
larger numbers of buyers than sellers at a certain price will move the
market up from that price and vice-versa.