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Why Trade Forex?

Right now, forex trading is the most popular home based business. Forex trading is the recession proof answer to the today’s stock market crisis. Anyone can trade forex now from home by going online. Do you know you can trade forex with a forex robot on autopilot?

Forex market is quite different from the stock market. The stock market is less liquid as compared to the forex market. Stocks were traditionally seen as long term investments, where people buy stocks or a group of stocks in mutual funds and wait for them to appreciate and build in their retirement accounts. By using a proven, tested and simple forex system, you can recoup your losses no matter what the condition of the economy.

Forex markets are open 24 hours, five days a week except on weekends. You can trade forex online anytime of the day. On the other hand stock markets are open only from 9 AM to 5PM. After the stock market closes, you have no way to buy or sell a stock.

Forex trading is a highly liquid market. Most of the participants in the forex markets are either hedgers or speculators. Big institutions are looking for hedging their forex exchange risk whereas small traders are looking for speculating opportunities and willing to take on risk. Stocks are considered to be a long term investment.

In the US stock markets there are more than 50,000 stocks listed on the different stock exchanges. As compared to that in forex markets, mostly five major currency pairs are traded: USDEURO, USDGBP, USDCHF, USDJPY, USDASD.

Forex trading offers you the advantage of lower trading costs as compared to stock trading. In forex trading, there are no commissions, only the spread between the bid/ask price that you have to pay. In stock trading you have a pay a commission to your broker per trade.

During the year 2008, investors have taken a severe beating in the stock markets. This is the worst bear market after 1929. Even blue chip stocks could not weather the financial storm. Many people lost more than 70% of their retirement accounts during 2008.

There is a bear market in stocks right now. This bear market may take a few more years to recover. On the other hand, forex markets are always bullish. SInce, currencies are always traded in pairs. If one currency loses, the other currency gains.

Forex markets are huge. They dwarf the size of all the stock exchanges of the world combined. Daily $3.2 trillion get transacted in the currency markets. Currency markets are so big that no one has the ability to manipulate them or control them. Not even, the governments or the central banks. Even FED cannot control dollar.

Now, most of the people are wondering how they can recoup their losses in the stock market crash and build their retirement accounts again

Forex trading is the answer. Many people are afraid of forex trading and think it to be too risky and difficult. No doubt, it is for those who do not try to educate themselves and learn from others. But if you have the discipline and commitment, within a few months you can become a successful forex trader.

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Learn To Trade Forex Options

You must have heard about George Soros; the man who made a cool $1 Billion profit in just a few days with a single currency bet. In the early 1990s, he speculated on the price of British pound being too overvalued.

He decided to purchase $10 Billion of puts and calls options by using all their funds assets as collateral. George Soros was willing to gamble everything on a single bet.

His knowledge of the currency markets was perfect. He was sure that his conviction that the Bank of England cannot sustain the overpriced British pound would come off right. Soon other currency speculators also joined. A huge selling pressure on British pound developed. Bank of England could not sustain the selling pressure too long and in a matter of 24 hours had to take British pound out of the European Monetary System and let it float freely.

British pound plummeted in the currency markets. George Soros had won his bet. He became famous as the man who broke the British pound with his pictures in all the famous newspapers and magazines.

Currency markets are huge. Everyday roughly $3 trillion gets transacted in the forex markets. There are many methods, the traders can use for profiting from the volatility in the currency markets.

You as a retail forex trader can trade any one of these contracts: spot, futures and options. Two more contracts are traded in the currency markets primarily for hedging by large institutions like banks, corporations and hedge funds. These are forwards and swap contracts. Many traders do forex scalping.

Let’s discuss trading forex options. Options are derivative products that give you the right to buy or cell or certain underlying asset at a predetermined price known as a strike price before or on a certain date known as the exercise date.

Currency is the underlying asset in forex options. You can purchase a forex options on payment of a certain premium. This is the price that you pay for getting the right but not the obligation to buy/sell a certain currency.

You may or may not exercise your right to buy/sell the currency. If the market price of the currency is above/below your strike price, you can buy/sell that currency by exercising your option.

In case, the market price is not above/below the strike price of your forex options contract, you can simply let the options contract expire. You only lose the premium that you had paid for purchasing the options.

If you want to try forex options then there is a very good forex options strategy that lets you profit regardless of the direction in which the currency market is moving. Use a forex system that is simple and risk free.

This is a risk free method but it only guarantees 30-50% ROI. If you are satisfied with this much sure shot return you can try this method.

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Trading The Crosses

You should try to learn forex trading using a proven and tested forex system. Finding the right currency pair to trade should be of utmost importance to you as an individual trader. As an individual trader you will only have $1000 to $10,000 at the most as equity in your trading account. Opportunity cost is a real cost for most individual traders. Funds committed to anyone position are funds that cannot be used for in other possibly more profitable trades.

In forex markets, every currency pair is linked to the other one way or the other. As a trader if you adopt a dollar centric view, you risk missing promising trades and opportunities offered by other currency pairs.

Most of the trading is done through the direct buying/selling of US dollar. You should always keep an eye on the crosses in order to gauge the strength/weaknesses of a currency. This will tell you which currency pair is the best to trade.

What are the crosses? Any currency pair that does not involve the dollar is known as a Cross such as EUR/JPY, EUR/AUD, CHF/GBP, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded involve the US dollar. Simply put, over 90% of the all the currency trades have US Dollar on one side of the trade. So why trade a cross?

Let’s make it clear. A reasonable way to trade equities is to trade from big to small. Suppose, you determine that the stock market is expected to rise. But since you have limited funds as individual investors, you need to choose your stocks carefully.

It would be good to look at the sector specific indices. Find the most promising sector. From there, you should look within that index. Find the most promising companies that are expected to perform well over the coming months. This big to small thinking is very solid. You need to think in the same manner while trading forex.

Cross movements should never be overlooked. Cross movements can often hide the footsteps of large players. A major investor may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Swiss Francs, Pound Sterling, and Yen etc.

Crosses are extremely important to swing or momentum traders! They are used as forecasting tools to predict which currencies lead the pack. Ignore the crosses and you will be often stuck with currency pairs that do not move much.

With limited funds, you should always try to choose the currency pair that is expected to move the most. But, how exactly you come to a reasonable conclusion? By looking at the crosses!

Cross movements either work to amplify the move of a major currency pair or minimize the effects. For example, in EUR/USD, if Euro is dropping against US Dollar but rising against the Pound, the net effect would be to limit the size of the EUR/USD fall. If ERU/GBP is rising, it is telling us that the Euro is outperforming the British Pound.

Since you have limited funds, which currency pair is the best to chose? Any EUR/USD selling pressure is likely to be offset by the buying pressure of EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.

Since, EUR/GBP is rising; it is a better bet to short Pound instead of Euro. This means you should choose the pair GBP/USD. If we had randomly picked one of the two currency pairs for shorting, we may have missed a great trade.

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Trade Like A Hedge Fund Manager (Part I)

Learn Forex trading from Hedge Fund Managers. Develop a forex system that is purely mechanical and rules out emotional trading.The difference between a professional trader and an amateur trader is that a professional trader never goes into a trade blindly. You see hedge fund managers have to show good results to their investors in order to solicit their investments into their funds. Hedge fund managers have to convince their clients that they have a battle tested strategy.

As retail or individual traders, our $10,000 account is just as important as any $20 million hedge fund. In fact, our $10,000 account is more important. We are staking our own hard earned money on trading compared to a hedge fund manager. He is most likely trading with other people’s money.

Most of the hedge fund managers follow a step by step process to develop their forex trading strategies. There is no reason why should we as individual traders also not follow that step by step process to develop our own trading strategies. We can’t afford to lose our hard earned money in unsuccessful trading.

One thing must be clear from the start; every trader has to find his/her own edge. We can and should learn from others. But, it is our own methods and insights that will make us succeed as forex traders. Let’s discuss the step by step process of developing our own trading strategies like the hedge fund managers do.

Start by properly defining your trading strategy. Every hedge fund manager like every individual trader follows a different methodology. Some traders use fundamental analysis. Other traders use technical analysis.

The first thing that you need to figure out is the style of trading that best suits you and what type of trader you are. Are you a short term trader like most day traders? Are you a long term trader and want to swing trade or position trade?

From the start, figure out whether you want to trade based on fundamentals or technicals or a combination of both. Hedge fund managers develop their trading strategies by defining clear cut trading rules and coding them. This way the hedge fund managers avoid the pitfalls of emotional trading. [spin]

[spin]Trading based on emotion is dangerous and can and will ruin you as a trader. Make your forex system rule based to make your trading as unemotional as possible.

You need to decide whether you want to be a news trader or you will use technical indicators in your trading. You need to pick a few currency pairs and become master of their behavior. Not all currency pairs are created equal and you need to focus on only a few to become a successful long term trader.

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Trade Like A Hedge Fund Manager (Part II)

Learn forex trading based on a forex system that is proven, tested and easy to use.You must have read Part I of how hedge fund managers trade forex. You need to understand that hedge fund managers are always on their nerves edge. They constantly look for strategies that work.

Hedge fund managers want to make good money while always on their guard if things go bad, how to get out of a bad position before it really hurts. You as individual investors also want to bet your own hard earned money in the hope of making capital gains.

There are two primary trading methods; ranging and trending. You should decide whether you want to focus on range trading or trend trading? Many hedge fund managers like to follow the trend. If you want to become a trend trader, than you need to understand how to predict and anticipate trends in currency pairs. If you want to be a contrarian trader and do range trading, you should understand what best times when currency pairs are ranging and how to scalp.

You should also decide the time frame that you will trade most. You should decide whether you will use the 5 minute charts, 30 minute charts, 4 hour charts, daily charts, weekly chart etc and why.

Do you want to hold your position overnight? If you are in a job, do you have time to trade in the evening or the night? What time best suits you? Make these things very clear in your mind before you start trading.

Learn the art of entry and exit. It is essential for your success. Should it be single entry, single exit? Should it be multiple entries, single exit? Should it be single entry, multiple exits? Should it be multiple entry, multiple exits?

You should understand the money management principles. It is good money management that will make you survive in the long run. Never ever put more than 3% of your equity at stake at one time. Understand how to calculate the risk/reward ratio.

Now, take a test drive of the forex system by back testing and forward testing. Back testing can be done on Metatrader and other platforms that are freely available. Forward test your strategies on a demo account with live data.

A better method would be to open a mini account and try to test it live with a small amount of money. You will not lose much money this way but will be playing against your emotions.

In the end, trading is all about developing discipline and controlling emotions. You don’t get this feel in demo trading when you know nothing is at stake and you are under no stress.

Get intimate with your strategies. There are two primary types of trading strategies—one that has a high percentage of profitable trades and one that has a high profit factor.

The key here is to know exactly what type of market environment your strategy performs well in and what type of market environment your strategy fails in, because only then will you know when it is time to pull the plug.

Know how much drawdown you can afford on your account. You can establish a bench mark figure using a back test for each trading strategy. Decide before hand how much drawdown is acceptable before you need to pull the plug out of the trade.

The last step of thinking or trading like a hedge fund manager is self reflection. Oftentimes we become so absorbed with trading that we do not notice the obvious.

This is why it is important to spend some time on a weekly or monthly basis to go over or reflect on your trading. You need to establish a certain ROI level for yourself and keep on tweaking your trading strategies until you start achieving that figure.

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