8 Things You're Doing Wrong in Your Forex Trading

So you’re new to forex? Or perhaps you’ve been trading for a while now and things just aren’t working out for you? Maybe you’re committing one of the errors below. Whatever you do, don’t be too hard on yourself. Many traders at one point make one (or all) of these mistakes.

Mistake 1: Risking too much

This is a mistake that all too many forex traders make. Sometimes people view the forex market as a get-rich-quick market and get burned as a result of it. With sensible risk management techniques, trading currency is great way to diversify your portfolio.

Professional traders recommend that you should not trade more than 2-5% of your equity per trade, and the max-draw-down (the absolute maximum amount you’ll let a trade lose) be no more than 5%. Invariably this limits your gains, but most importantly it limits your losses.

The fact is you’re going to have a bad trading day; it happens to the best of the best. But what separates the men from the boys is how they handle the bad days.

Don’t let a bad trading day be your last trading day.

Mistake 2: Improper risk-reward ratio

Did you know that you can have a losing trading strategy (meaning your strategy is wrong more often than it’s right) and still be profitable? In reality it seems that the inverse is more common: a winning forex trading strategy that is not profitable.

The culprit? Improper risk-reward ratios.

For example, assume you have a strategy that is right 80% of the time. Awesome, right? Well, if the average take profit is 15 points yet the stop loss is set at 75 points the strategy isn’t as awesome anymore.

Having good risk-reward ratios – letting your winners ride and cutting the losers early – just might turn an otherwise losing strategy into a winning strategy.

Mistake 3: Never admitting you’re wrong

Whenever you catch yourself saying, “It just can’t go any lower!” it’s time to step away from your trading. Don’t beat yourself up though; it’s human nature: we all hate being wrong and we hate cutting that losing trade.

Try this: instead of setting a normal stop loss when placing a trade, ask yourself, “at what point am I wrong?” This point might be market support or resistance, or when your indicator of choice reaches a certain point.

You might find that the point you are “wrong” isn’t as far away as what your stop loss would have been, meaning it could end up saving you a lot of pips.

Remember, the question is not, “how much am I willing to lose?”

The question should be, “when am I wrong?”

Mistake 4: Trading live before demo

Always, always, always! test your strategy out on a demo account first. Even if you’re implementing a winning trading strategy used by someone else you should still test it on a demo account.

When testing on a demo account, remember that back-testing is good but forward-testing on a demo account is best. Back-testing is great for getting a general idea of accuracy, but it can’t duplicate live market conditions nor evoke possible trader emotions (more on this later).

At a minimum you should forward-test a strategy for a few months. The longer the better.

Mistake 5: Too much leverage

The forex market is leveraged like no other market (which is one reason why forex is so popular). Many traders come to the forex market fantasizing about making huge gains overnight, but at the same time forget that they are more likely instead to sustain huge losses.

This leverage definitely can be used for good, but it requires first an intimate understanding of the effects of leverage and an absolute diligence with risk management: for leverage knows no mercy.

Leverage makes for larger profits, but also larger losses.

Mistake 6: Pulling trades out of thin air

We often think there are two different kinds of trades: buy and sell. But in reality there is a third kind that often gets neglected: hold. In other words, you can buy or sell, or you can do nothing.

Novice traders often think that they have to be trading in order to be profitable, and when their trading strategy isn’t giving any signals they go off looking for opportunities. More often than not, what happens is traders pull trading opportunities out of thin air and end up getting burned.

Raghee Horner said it best: Don’t look for reasons *to* trade; look for reasons *not* to trade. By having this mindset traders can (hopefully) prevent talking themselves into a bad trade and can (hopefully) look for possible reasons why a trade signal may not work out.

Sure, this cause you to not take some trades that would have ended up being profitable; but you might also find that you miss trades that would have ended up negative.

Mistake 7: Investing money you can’t afford to lose

No matter how good you think your trading strategy is, you should never invest money you can’t afford to lose. The saying “hope for the best, plan for the worst” definitely rings true here. What if your strategy had a horrible day? It happens. You may tell yourself that it’s extremely unlikely that such an event would happen to you, but don’t think for a second that it’s not possible (and if you’ve been trading the forex market long enough you know that the “extremely unlikely” just might happen sooner than later).

And if that happens will it affect your standard of living? Will your spouse want a divorce? If so, then you are investing money you can’t afford to lose.

Last, but definitely not least:

Mistake 8: Letting emotions control you

There is a theme to this article, that being that many of the pitfalls of trading are emotion-based. Emotions wanting us to risk it all; emotions wanting us to keep that losing trade in hopes that it willl become a winning trade; emotions rushing us to a live account instead of slowing down and testing on a demo account first; emotions wanting us to take that trade even though the signal isn’t that good.

Emotions may be the hardest thing for amateur traders to control, but the fact that it’s difficult highlights its importance.

One of the most important things you can do to combat emotions is to develop a well-rounded trading plan and stick to it. Having a trading plan can help you establish do’s and don’ts (i.e., do enter a trade when certain criteria is met, don’t let a losing trade lose more than 5%, etc.), thus helping to remove emotions that make us second-guess.

Another way to help you control emotions is to utilize fractional lot sizes available with all Interbank FX accounts. The emotions that come with trading are usually different between live and demo accounts, but traders can transition from demo to live by essentially trading cents. Even though you’re only dealing with nickels and dimes, the profit or loss is still real. And no matter how hard you try, that is not an emotion that can be duplicated with a demo account.

As discussed in Mistake #4, we recommend you start with a demo account, then transition to a live account by trading 0.01 lots and slowly work your way up to a proper risk level (as learned from Mistake #1).

Share this! Help prevent your friends from making these mistakes.

Economic Indicators

An economic indicator or business indicator is recorded data that gives insights into the stance of the economy as a whole .Economic indicators are recorded and used for the analysis of the current economic situation and also for the prediction of future economic changes. Forex indicators are used to analyze Forex performance and play a major role in future Forex forecasts and future Forex performances. Forex traders use forex indicators to dictate major entry and exit points.

Economic indicators may include various elements recharging profit and loss reports and summaries of economic activities. These can be subdivided into summaries of unemployment statistics, measures of inflation, production results, bankruptcy reports, gross domestic product summaries, broadband internet penetration, retail sales, forex market prices, and money supply events. Economic indicators are identified and named in three categories: Leading, Lagging and Coincident.


Leading Indicators
Leading indicators are foreign exchange indicators that change before the change in the market or economy has happened. Examples of leading indicators may include unemployment index, inventory variations, stock prices and insurance claims. Economic institutions and central banks analyze leading indicators in anticipation to changes in expected interest rates. A forex leading indicator is an indicator that tells the trader to buy before new trend in the market begins. Leading indicators, by nature, are difficult to identify and might lead to misleading results if not analyzed by an experience trader. Major profits are made in the beginning of market trends, and leading indicators are therefore invaluable for experienced traders.


Lagging Indicators
Lagging foreign exchange indicators are those that indicate on events that took place after a change or pattern has already occurred in the economy or market place. Examples of lagging indicators may include unemployment, corporate profits and even changes in interest rates. The interest rate is a lagging indicator because it will change only after important market variations. The media is an important lagging indicator to both the economic and forex market. News always breaks after the actual event that will bring variations in market prices.

A Forex lagging indicator is a technical indicator that informs the trader that a new trend in the market has already begun. They are more trustworthy than leading indicators as they show the new market trend after it has begun. The disadvantage is the loss in profit as the trend has already matured.

Related to Forex, a lagging indicator is a technical indicator that follows behind the price variation of an underlying asset. This indicator can be used to attract transaction interest or be used to test the strength of a given trade.


Coincident Indicators
Coincident indicators consist of indicators that change in time with current major economy variations and therefore provide insights into the current state of the economy as a whole. Example s of coincident indicators includes Gross Domestic Product results, personal income figures, industrial production results and retail sale figures. Coincident indicators are used as records to analyze peaks and troughs that occurred during a previous economy cycle. All three types of the above Business indicators must be explored by traders, to equip them with the vision needed to excel on the forex market.

Ten Common Failures When Buying GOLD

Buying gold has long been touted as a terrific way to diversify your investment portfolio and protect yourself against downturns in global currency values and financial markets.

At first glance, the process seems simple enough. You just find a couple of coins that look good, fork over your cash, and store your loot in a safe, right? Wrong. There's much more involved in gold investing than browsing through a coin catalog and picking out your favorites. Unfortunately a lot of people actually take that approach-and end up losing quite a bit of money while doing so.

But you shouldn't let the fear of making mistakes prevent you from taking steps to solidify your financial standing. All you have to do is be aware of potential pitfalls so you can avoid them when the time comes to buy. Here are 10 of the most common mistakes to look out for prior to purchasing this precious metal.

1. Lack of knowledge. There is no excuse for being uninformed. As long as you have access to the Internet, you should be able to find out all you need to know about the basic ins and outs of gold investing. You should start by reading a glossary of terms related to this activity before moving on to articles and other resources so you know exactly what the experts are talking about.
   
   
2. Misunderstanding the value of gold. This mistake goes hand in hand with lack of knowledge. In order to invest wisely, you must understand how the metal-especially in coin form-derives its value based on things like history, scarcity, rarity, indestructibility, and global recognition as a desired commodity.
   
   
3. Indecision about your investment amount. People who are new to buying gold frequently make the mistake of either ordering too much or too little of the metal. If you buy too much, it defeats the purpose of diversifying your portfolio. If you buy too little, you're not doing enough to protect your other assets. Most experts agree that your coin holdings should equal from 5 to 30 percent of the combined value of the stocks, bonds, and mutual funds in your portfolio.
   
   
4. Expecting big short-term gains. Gold investing is not going to make you rich overnight, so if you're interested in short-term gains, you should check out other options. The point of putting your money into investment grade coins is to hold onto them for a long time while they appreciate in value.
   
   
5. Linking gold markets to the stock market. Some would-be investors are under the mistaken impression that gold prices are somehow linked to the stock market, and that fluctuations in one will lead to corresponding reactions in the other. But it's important to understand that the two markets are largely independent of one another, so your purchasing decisions shouldn't be based on illusory cause-effect relationships.
   
   
6. Substituting gold stock or ETFs for the physical metal. Buying gold to protect your assets against unstable market conditions, inflation, and other economic problems is a smart move-but only if you get the metal itself instead of stocks, exchange traded funds, or other unworthy substitutes.
   
   
7. Skipping Rare Certified Gold in favor of bullion. Not all gold investments are created equal. Bullion, for example, will not appreciate in value based on age, rarity, or other variables. It will only be worth what the commodities market dictates. By contrast, Rare Certified Gold coins that are held for many years can end up being worth far more than what their weight would command on the commodities market, since their value is driven by supply and demand.
   
   
8. Looking for cheap prices. Although getting a bargain is usually considered a good thing, that's not necessarily the case when it comes to buying gold. Abnormally cheap prices are typically an indication of inferior quality, and are therefore a clear sign to stay away-unless you don't mind getting stuck with something that you won't be able to resell when you need cash.
   
   
9. Working with multiple dealers. Because of the large sums involved in gold investing, it would be worth the time and effort to seek out a reputable dealer and stick with that person for each transaction you make. You will get to know and trust each other a bit more after every deal, which will in turn pave the way for discounts on bulk purchases and similar goodwill gestures.
   
   
10. Failure to understand premiums over spot. Buying gold coins always involves a dealer markup or premium. This is what you're expected to pay over the spot price, and varies from dealer to dealer. It's critical to have some knowledge of fair premiums over spot in order to be able to identify any good or bad deals that might come your way.

In order to make sound decisions when buying gold, it is imperative that you first learn all you can about gold investing. There are lots of factors that impact each transaction, so the more you know, the better your chances of being successful.


Source: Ezine Articles

With Which Currency Should You Trade the Federal Open Market Committee (FOMC) News?

The answer to the question above depends on the outcome of the event: In case of a dollar-bullish outcome, vulnerable currencies should be traded against – this will result in stronger moves. In case of a dollar bearish result, the stronger currencies would be a better bet. And what about an outcome that is in the middle?


Trading the FOMC is never easy: the market usually takes time to analyze the sometimes obscure statement and pick a direction. This event is special – it consists of both the regular statement and then the first ever press conference by Ben Bernanke. So, things might seem more complicated.

On the other hand, when facing questions from the press, Bernanke won’t be able to hide behind carefully crafted statements. So, currencies will move in real time.

In the FOMC preview, after laying out the background to this event, I listed out three possible scenarios. Let’s see them.

1. A definite Yes,:the dollar will rise as speculations will end. The Hawks will celebrate a victory and the road to future rate hikes will finally be opened, although not so soon. Probability: low. The doves seem in control.


2. No – a hint of extension: There’s a higher chance of him saying something like “probably not” and that extending the program is possible. This means that he opens the door for QE3. Such an over-dovish policy will result in another plunge in the dollar, as QE3 seemed to be off the table. Probability: Medium. QE3 might eventually happen, but big hints are unlikely to be provided now.


3. Confused answer: Bernanke will try to avoid a direct answer by saying that policy will be carefully measured according to the new data with a trembling voice (as seen a few months ago in 60 minutes) and will be asked about it again and again by reporters. This scenario is also bearish for the dollar. Without a straight answer, the market will assume that there’s a chance of QE3, and this will weaken the dollar. Perhaps not as strong as the previous scenario, but the dollar will still be hit. Probability: high. Confusing language is common at the Federal Reserve.

So which currency pairs will move most in each case?

1. EUR/USD, GBP/USD: The main driver of the euro, and the pound (at a lesser extent) was inflation. The Euro continues ignoring the upcoming default for Greece and the high unemployment, and moved forward on the preparations for the rate hike, and its realization. Britain hasn’t seen a hike despite much higher inflation, but it’s in the air all the time. The dollar fell against these currencies due to loose monetary policy. If the US begins tightening, these two currencies, the euro and the pound, will have no advantage. So, in such a case, they are likely to fall.


2. AUD/USD, USD/CAD: QE2 has had a huge contribution to rising commodity prices. Australia exports metals, and has felt rising prices at home as well, with quarterly CPI rising to 1.6%. More QE will push the country to more rate hikes, with its already high interest rate of 4.75%. Canada, which exports oil, will also enjoy such a scenario. More money printing means not only higher oil prices, but also higher demand from the US – Canada’s main trade partner. so, both the Aussie and the Loonie are predicted to be winners in such a scenario.


3. USD/JPY: In case of a “middle-ground” decision, the markets will shake. Of all currency pairs, dollar/yen has the best reaction – more calm, and within range. If you have to trade the event on a mixed scenario, this pair is likely to provide more sound movements.

Sources: Yohey Forex Crunch

Basic Sets of Data Affecting Forex Prices

A forex investor must decide how significant economic data is and its potential impact upon rate movement. There are nine basic sets of data to look for and each will be released at a regularly scheduled time:

1. Interest Rate Decisions by Central Banks/Financial Policy Makers
2. Gross Domestic Product (GDP) rates
3. Retail Sales
4. Inflation (Consumer Price and Producer Price)
5. Unemployment
6. Trade Balance (Surplus or Deficit)
7. Business Confidence/Outlook Surveys
8. Consumer Confidence Surveys
9. Manufacturing Confidence/Outlook Surveys

Not all of these figures will have the same effect upon currency rates.

Source(s):
www.investorguide.com

Q&A: Yen currency intervention

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen.



What have the G7 agreed to do?
Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen.

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.


What prompted them to act?
Since the earthquake and tsunami hit last week, the Japanese currency had been getting stronger, and after London traders went home on Wednesday night it hit its highest level against the US dollar since the second world war at ¥76.25.

Not only is that a damagingly high level for Japan's export-led economy, it risked triggering the "volatility" in currency markets that central bankers hate to see.


But why was the yen strengthening when the Japanese economy is going to be hit by the crisis?
There are three likely reasons. The first is that Japanese insurance firms and other corporations are "repatriating" cash – exchanging their foreign-denominated holdings for yen – to pay for the cost of handling the crisis.

The second reason is the unwinding of the so-called "carry trade" – a popular investment strategy in which traders take advantage of ultra-low interest rates in Japan, by borrowing in yen and reinvesting the proceeds in some other, faster-growing stock market overseas – exchanging the yen for Brazilian real, New Zealand dollars, and so on.

Nervous investors may have started to reverse this bet in recent days, bringing their overseas investments back home, and strengthening the Japanese yen in the process.

A third and more depressing reason for the yen's move is pure speculation — investors betting, George Soros-style - though these days through complex financial instruments - on how the yen would move as a result of the crisis. Japanese deputy finance minister Fumihiko Igarashi said that these speculators are 'like sneaky thieves as the scene of a fire', who are capable of ruining the Japanese economy.


Who's driving the carry trade?
Much of it is overseas traders, but a considerable proportion comes from ordinary Japanese domestic investors – "Mrs Watanabes" as they are colloquially known in the financial markets.

Amid the past week's dramatic events, analysts believe Japanese investors may be showing more of a "home bias" – a tendency to want to hold their savings in their own currency. This is a common reaction in times of crisis, and could bring a wall of money flowing back into the yen.

Overseas investors may also be tempted to reverse the carry trade, if they judge that the knock to confidence from events in Japan – and the Middle East – mean that growth in emerging markets will be weaker than expected.


Why does all this worry the G7?
The wrenching aftermath of the collapse of Lehman Brothers collapse in autumn of 2008 showed that rapid movements in financial markets can very quickly transmit panic throughout the global economy. If the carry trade abruptly unwound, it could cause what economists call a "sudden stop," draining capital from riskier markets around the world, with real consequences for business and consumers on the ground.


What does a stronger yen mean for the Japanese economy?
It's bad news: Japan is heavily dependent on exports for generating even the meagre economic growth of the past few years.


Will the G7 succeed?
So far, the Bank of Japan's buying spree seems to have worked - the dollar was trading at ¥81.83 by Friday morning, more than 7% lower than the peak hit on Wednesday.

Currency intervention tends to work best when the markets are already at a turning point, and the Bank of Japan has intervened a number of times in recent years with limited long-term success.

Even the most brass-necked speculators may feel that trying to bet against every major central bank in the world is not a great plan; but the G7 policy is a high stakes one, because if they are seen to have failed, the consequences for market confidence could be catastrophic, particularly when central banks' aura of omnipotence has already been severely shaken by the credit crunch.


What will happen to the yen when the G7 selling spree is over?
Many analysts believe there are plenty of good reasons for the Japanese currency to weaken anyway, once the immediate crisis is over and there is more certainty about the fate of the nuclear reactors at Fukushima.

The Bank of Japan has already injected more money into financial markets in an extension of its long-running quantitative easing programme, and the costs of the crisis are likely to mean a further painful increase in the Japanese government's debt, which already stands at 200% of GDP. That should keep interest rates ultra-low for the forseeable future.

And while large-scale reconstruction efforts should eventually boost Japanese demand, in the short run widespread factory shutdowns and the loss of industrial capacity in the devastated regions will mean the Japanese economy is extremely weak. None of that will be good for its currency.


What does all this mean for us?
Both the Bank of England and the European Central Bank were edging towards raising interest rates to clamp down on inflation. But with confidence in global markets being severely tested by events in Japan and the Middle East, the return to "normal" monetary policy from current emergency levels is likely to be delayed. City traders have already pushed back their prediction of the first rate rise by the Bank of England from May to August.


Sourced from Heather Stewart

Great Tools for Traders

Forex Factory just launched a great new tool. Trade Explorer enables traders to see basic and also not so basic statistical analysis of their trades, such as average trade return and average drawdown. Here’s a quick look.

It’s important to note that the synchronization with real time data from the brokerage account allows viewing data in real time. So it’s not only historical, anecdotal analysis, but also a t real time tool. I had the chance to examine the system and I must say it works fast – this is valuable when the market moves fast.

60 graphs are available to MT4 traders and quite a few important indicators. For example, the “Open leverage” feature shows how close the trader is to a margin call – what his actual leverage is. This is critical information that isn’t widely available. “Gap” shows how many pips away the order is from the market.

Sourced ForexFactory

Predictable Currency Pairs

Newcomers to forex trading usually start off with the popular pairs: EUR/USD or GBP/USD. While these pairs are OK, these might not always be the best pairs to start trading with. I’m fond of the Australian dollar – AUD/USD, and I find it the most predictable pair. I chose this pair based on my experience and my observations. Using these social indicators, I found that I’m not alone.

The British Pound and the Euro are popular currencies. Many forex traders start with these pairs since they hear about them all the time. You hear about them all the time from brokers who offer low spreads on these pairs. Also on the web, these pairs are talked about very often, sometimes too often.



This talk can be too much, even confusing. Well, there are other pairs out there. Brokers don’t offer the best spreads on them, but we aren’t here for gaining an extra pip on the spread, but making more winning trades.

In my post about the 5 most predictable currency pairs, I ranked AUD/USD at the top of the list, followed by EUR/GBP. This was based on my experience and my constant observation at the markets. More predictable currency pairs obey the rules of technical analysis better than others. A distinct support or resistance line, will be the spot where the currency turns around, or if it breaks the line, it will go further in that direction. Predictable pairs have less false breaks.

Now my observation is supported by Currensee’s social indicators. I took a look at the community’s activity, which is based on real trades, and saw that 91% were winning on AUD/USD, taking long positions. Such a landslide victory means that the this is a very predictable pair, especially when the community was trading with the trend.

As you can see, at the time of writing, EUR/GBP, my second pick wasn’t doing well. Also note that the popular pairs, EUR/USD and GBP/USD made unexpected moves, to say the least. At the time of taking this screenshot, no one was reading these pairs correctly.

As the community grows, more trades will be listed, and these social indicators will be of higher significance. Currently, the community does better with some pairs more than others – the more predictable pairs.