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Forex may seem like it is easy at first but it is not as simple as it looks to be to the new trader. If you are serious about making money with FOREX, you are gonna have to pay your dues and hit the books and get some chart time. Trade demo account for awhile and so on. Learn TA, learn which news affects what pairs. Learn where to find the news at, Research brokers to see who has the best spreads and so on. Learn to cut losses quickly, learn to control emotion (it can kill you). There are so many different aspects involved in trading that are not apparent when you first start out.
Rule #1 tho, if your new to trading, you should not be on this board looking for tips period!! Trading isn't something you just learn by watching or following others. Its something that you develop on your own. You make mistakes, you learn from them, you lose money, you learn how you lost it, you get too attached to a trade, you learn to not get attached. You hold value to money, you learn not to hold value to money. Money is a tool when it comes to trading, that is all it is, a tool. That is how you should think of it. Your account will rise and fall and rise again over and over. Don't let that bother you, don't get angry or greedy. Take what the market gives you and roll on to the next trade
Yes it works but here is something you need to understand about robots. They are usually based around one strategy. That strat may work for a little while, but eventually the market will change and the bot will lose everything that it made you plus more. I would not recommend using them at all. My advice would be to learn how to chart, learn what indicators are hot, some price action education would be a huge help as well.
If it worked everyone would be using it. Learn how to trade the news and exit with TA.
Hey never traded forex before. Does anyone know about the automatic trading for forex, 'robot trading'? I am skeptical that it actually works. Any feedback would be great, thanks!
Just wondering which indicators people have been using and seem to be helpful just starting out and just need some ideas
I read this strategy at Edward's website:
http://forex-strategies-revealed.com/advanced/rsi-fullstochastic
27,820 pips profit since 2003? meh...no thank you.
Hi mohmed.......
If you want just post your signal here,let us check them out first..
TYIA....
thanks silvaer,
Ino TV we are familure with ..great stuff..
Thanks for the link!
Answers to the Exercises on the education board....
USD/JPY
USD/JPY TRADING PAGE
SPOT TECHNICAL SIGNIFICANCE RECOMMENDATION POSITION
110.10(S) Daily Highs Jan 10 & 11 Flat On A Failure
FLAT at 107.70
open 14/02/08
time 23:11
target
stop
109.70(M) Jan 11 Hi, 50% Fibo Take Profit, Buy Break
109.00(M) Jan 14 Hi, 78.6% Fibo Take Profit/Buy Breakout
108.65(M) Daily Low Jan 11, 38.2% Flat On A Failure
107.82 23:50 GMT THU 14 FEB
107.30(M) 10-Day MA Buy A Bounce
107.00(M) Daily Low Feb 13, 20 SMA Buy A Bounce
106.35(M) Daily Trend Support Sell A Break Below
105.90(M) Daily Low Feb 9 Cover On A Bounce
Overnight longs were stopped on the dip in Asia for a 25 pt loss, giving back earlier gains. Our bias remains up, with the gently rising trend that began on January 28th and our strategy is to buy a down side bounce, using a tight stop, starting at the 10 day moving average. Dailies remain net bullish, though momentum is slow, while the hourlies are mid range.
Orders Board
04:03 GMT February 14th USD/JPY heavy ahead of 108.50 on Japanese exporter sales, option player defense of presumed barriers at 108.50. Stops mixed in above 108.40, 108.50 and 108.65 tech level. More offers ahead of presumed option barriers at 109.00, stops above. Bidding interest up to around 108.00, trail lower. Light stops mixed in on break, more down at 107.70-80. (hi)
03:58 GMT February 14th EUR/USD sold early by US names, UK name good buyer at low. Bids around 1.4540, stops below 1.4535 from funds, more bids below. Offers around 1.4600, stops above 1.4610 from CTAs and funds. (hi)
03:59 GMT February 14th EUR/JPY stops above 158.00. Light stops below 157.00, more below 156.70. (hi)
03:58 GMT February 14th EUR/USD sold early by US names, Uk name good buyer at low. Stops below 1.4535 from funds, bids below. Stops above 1.4610 from CTAs and funds. (hi)
03:56 GMT February 14th GBP/USD option barriers tipped at 1.9700 and 1.9750. Standing offers ahead and towards more presumed barriers at 1.9800. (hi)
03:55 GMT February 14th AUD/USD charges higher after good jobs report, offers ahead of 0.9020 absorbed, stops above tripped. Good offering interest noted thereafter between 0.9025-50. (hi)
03:53 GMT February 14th NZD/USD stops below 0.7790. (hi)
03:52 GMT February 14thNearby option expirations today include vanilla USD/JPY 106.50, 107.00, 107.50, 110.00, EUR/JPY 157.25 and EUR/CHF 1.6050 strikes. Talk some of the 1.6050 strikes are barriers. (hi)
21:17 GMT February 13th USD/CAD Bids 0.9950; Offers 1.0010-30; buy stops 1.0050. PCW
21:17 GMT February 13th EUR/USD Bids 1.4525/35; Offers 1.4600; buy stops 1.4610. PCW
Strategy:Sell@107.90 A volatile session overnight saw a choppy 107.20/106.35 dip followed by a 107.05 bounce, as the consolodation of the last month continues. The price action leaves the daily studies showing bixed signals in neutral territory and the hourlies mid range. We are going to lay low until the 105/108 range extremes are retested. (FXCM)
A fresh lower top is now sought out by 214.00 to be confirmed on the break below 204.75 which is fast appraoching. Only back above 214.00 negates.
Strategy:Sell@1.4700 The price collapsed through range support at 1.4790 overnight, stalling around 1.4625 and we netted 110 pts on intraday shorts. The price action leaves the daily studies heading lower, with room to extend and teh hourlies marginally oversold. Our bias is lower and our strategy is to sell a topside failure starting around 1.4700.
Prices overnight broke out beyond the hourly downtrend from 107.90, now support at 106.90, and then cleared the Jan 30 high at 107.45, with a long taken in the event. First run at the 107.90 swing high came up short and prices are consolidation. Stop adjusted to below the broken downtrend line. Hourlies a bit top-heavy. Target adjusted to 109 hurdles.usd/jpy..
fxcm.
The pairing extended lower in Asia and Wednesday"s short remains in play, with the stop lowered to lock in a reasonable profit, worst case. Daily studies continue to fall, with plenty of room to extend to our target, though the oversold hourlies are a concern intraday. Our strategy is to further tighten the stop on a 1.4470 break.
Orders Board
05:02 GMT January 18th USD/JPY bids in the 106.35-50 area strong on early move down. Market bounces as buying interest continues. Mix of Japanese and offshore players tipped buying, some to cover shorts. More bids around 106.00. Initial line of offers around 107.00 absorbed, more trail up to 107.55 and sub- 108 double top.(hi)
05:00 GMT January 18th EUR/JPY stops tripped on break below key Fibo level around 156.35. Bids at 155.70-80 heavy, market pushes up from here. Standing offers at 157.00.(hi)
04:58 GMT January 18th EUR/USD seen well-bid down at 1.4590-1.4600. Sovereign name tipped bidding there overnight. Stops sub-1.4550. Offers trail up from 1.4700 to 1.4750.(hi)
04:56 GMT January 18th AUD/USD sees good buying on way down to 0.8712 early. Some of the buys seen related to possible M&A flows.(hi)
04:55 GMT January 18th AUD/USD and NZD/USD plow through stops early. AUD/USD stops sub-0.8730 and 0.8720 tripped. NZD/USD stops below 0.7600 taken out. Both later rally. AUD/USD stops remain below 0.8700 and 0.8680.(hi)
04:53 GMT January 18thNearby option expirations today include vanilla USD/JPY 107.00 (large), EUR/USD 1.4600, 1.4650 (large), GBP/USD 1.9690 and AUD/USD 0.8860 strikes.(hi)
18:27 GMT January 17th USD/CAD Fresh bids now building between 1.0200-50. Offers seen capping by 1.0300-40.
14:26 GMT January 17th GBP/USD Offers are touted at 1.9740 & 1.9750.
09:06 GMT January 17th GBP/USD Offers are touted at 1.9720. RH
09:33 GMT January 17th USD/CHF 1.1085 hit as stops above 1.1055 fuel rally. Price now consolidating morning move higher with buyers into 1.1050 expected to help prop on any pullbacks.
Strategy:Sell@157.70 The close below the major 61.8% Fibo of 149.25/167.70 at 156.35 was a significant bearish signal, so we sold the sustained break, but have been stopped this afternoon, as the price rebounded off 155.70. Daily studies are heading lower, though at highly oversold levels and the hourlies are coming off oversold levels. "from FXCM"
Fib along with EMA's......& MacD.
Orders Board
05:07 GMT January 17th USD/JPY down from early highs around 10765 on reports of sales from a large Japanese bank. US investment bank also a seller later, presumably on behalf of model funds. Bidding interest around 107.00, below from option gamma players and Japanese importers.(hi)
05:07 GMT January 17th EUR/JPY down from early highs around 157.70 on reports of interest repatriation from a large Japanese semi-government entity.(hi)
05:07 GMT January 17th GBP/USD buy-stops above 1.9740.(hi)
05:07 GMT January 17thSome AUD/JPY and NZD/JPY sales out of Tokyo from early session highs.(hi)
05:04 GMT January 17th AUD/USD option gamma-related bids towards 0.8780, gamma-related offers towards 0.8840.(hi)
05:01 GMT January 17th AUD/NZD demand from longer-term real money players takes cross up from 1.1394 to 1.1480.(hi)
05:00 GMT January 17thNearby option expirations today include vanilla USD/JPY 107.90, EUR/GBP 0.7535, AUD/USD 0.8750, 0.8900 (large) and NZD/USD 0.7850 strikes.(hi)
18:59 GMT January 16th EUR/GBP Fresh offers now building by 0.7500-20. Sell stops seen below 0.7440.
14:14 GMT January 16th GBP/USD Offers are touted at 1.9710 & 1.9720. RH
14:14 GMT January 16th GBP/USD Offers are touted at 1.9710. RH
I have been trading with only Fibo's and Bolinger Bands for the past week or two and have been doing extremely well. I'll elaborate on my strategy a little later on with some charts and such.
Short taken overnight when the hourly uptrend off recent trend lows was removed. The breakdown found support just under 160.00, jumped to 161.00 and is now back above our entry point. We tightened our stop to just above the 161.10 rebound high to improve risk/reward. Some risk of a daily double-bottom while 159.75 holds.FXCM
Here is a link to my demo we just launched today. 2 pip spread. http://www.globalforexnow.com/ptdemo.php
help_me
NZD/USD:
Strategy:Sell@.7810 Latest topside failure sets up potential for a an hourly double top to open drop back towards 0.7725-40. A break below neckline at .7812 confirms.
EUR/USD
Strategy: Buy@1.4750 Daily uptrend remains capped just shy of the Jan 4 high and 78.6% of 1.4965/1.4310 slide at 1.4825. Bullish momentum has been waning since Jan 4, so a breakout beyond 1.4825 will be needed soon to revive the mildly overbought uptrend and to target the 1.4965 all-time highs. Support below 1.4765 o/n low is at 1.4750. Buy bounce or breakout.
Orders Board
18:57 GMT January 11th NZD/USD Offers seen below 0.7810 with sell-stops at those levels as well. Decent bids not seen until 0.7700-50.
13:21 GMT January 11th USD/CAD Corporate sell interest is touted ahead of 1.0250 (an exotic option barrier level).
13:22 GMT January 11th AUD/USD Offers are touted at 0.9000.
13:21 GMT January 11th USD/CAD Corporate sell interest is touted ahead of 1.0250.
08:42 GMT January 11th USD/CHF 1.1010/20 offers look to cap rebounds with more offers into 1.1050. EUR/CHF test 1.6250 support overnight but bounces on initial failure to break lower. Fresh offers into 1.6285/90 & 1.6300/05. MFS
08:22 GMT January 11th EUR/GBP Dip-buying interest may emerge at 0.7567 (yesterday"s high). Today"s Asian session top was 0.7565.
08:20 GMT January 11th EUR/USD Offers into 1.4815 overnight highs seen trailing back to 1.4825 (the 2008 high).
07:27 GMT January 11th GBP/USD Option-related demand is currently helped to prevent the rate breaking below 1.9500 (an exotic option barrier level). RH
05:36 GMT January 11th USD/JPY offers around 110.00 back in. Bidding interest out of Tokyo towards 109.00. Importers tipped. (hi)
05:35 GMT January 11thLarge semi-government Japanese entity tipped buying EUR/JPY early ahead of Tokyo fix.
USD/CHF:
Short remains in play with only modest risk between the entry and stop above recent hourly swing highs in the 1.1045-55 range. Hourly studies rebounded to midrange from an oversold and are slipping again. Some daily studies are oversold, while others show space for the modern-era low at 1.0890 to be retested. Our target is just above at 1.0900.
USD/CAD Sharp rally through yesterday"s 1.0151 highs and 1.0200 figure resistance in favor of the long trade. Such price action has also negated yesterday"s Doji pattern on the candles. We have raised the stops again to lock in more profit on the trade and the pair now sits just shy of of our objective by 1.0250. Fresh upside to be triggered on a break of the latter.
Strategy:Sell@162.40 As has been the case all week, prices made new daily recovery highs, fell back to just above the previous day"s low and bottomed out again. There is some concern, though, that prices already rallied to within 10 pips of major resistance at 162.40 overnight, perhaps weakening the r/r for new buyers. 160.00 key support. Hourlies midrange.
EUR/JPY
Strategy:Sell@.7810 Latest topside failure sets up potential for a an hourly double top to open drop back towards 0.7725-40. A break below neckline at .7812 confirms...NZD/USD
Strategy: Buy@1.4750 Daily uptrend remains capped just shy of the Jan 4 high and 78.6% of 1.4965/1.4310 slide at 1.4825. Bullish momentum has been waning since Jan 4, so a breakout beyond 1.4825 will be needed soon to revive the mildly overbought uptrend and to target the 1.4965 all-time highs. Support below 1.4765 o/n low is at 1.4750. Buy bounce or breakout.
Hey Board, anybody here know of any good sites that gives forex recommendations, sort of like sites that give good stock picks? TIA
I'm almost embarrassed to divulge my strat...in fact I am...lol
1st off I need begin with a few disclosures....
1) I consider myself a Newbie to 4x & after reading this I'm sure it will be quite easy to tell....lol
I've really only been doing this for approx 7 mos...but having respectable results as my return has improved over each month.
2) I know very lil t/a...the very basic of the basics...& that's on a good day...thus
3) I have only been demo'ing....sadly...cuz over 7 mos now I'd be up approx 20-35% per month....& that's is a conservative figure..the last 2 mos I've realized 190% & 75% +/-...the months prior I was closer to a more realistic long term 15-20% per month.
OK..having said all that this is all I really do....
I look at the 1,5,15 & sometimes the 30 min chart.....if they all look ripe for the picking as in overbought or oversold for those time frames I take the plunge. But before taking a position I do look at the very short term ticks...5,10 & 30 seconds....once those begin to tick my direction I enter the trade.
Over the last few months (up until maybe a few weeks ago) I have been primarily using one overall strat which is to look for short dollar trades w/in a few pairs only...primarily vs the chf, aud & cad. I've also been lookin for long gold trades as well.
Of course once a trend begins to show true signs of a long term reversal then my trades will become harder & harder to spot....which would then of course tell me to adjust this strat & maybe begin to go the other way...as in looking for long usd trades & short gold. As of late however this genl short greenback strat has gotten a lil more difficult as the dollar has found some support here. I must admit tho that I don't necessarily go short vs the dollar 100% of the time....if it seems to be getting oversold...especially down past the 30 min chart I have been known to go long....but if so, I set tighter stops & profit points.
I do of course watch the Dow & gold for genl mrkt conditions as well....tho one things for sure....over the last few months, what we once knew as fundamental trading theory's (ie old school) has changed a bit...for example...when gold goes up the dollar goes down....or the dow up & gold down....not so much anymore. As we're now seeing, gold continues to rise even as the dollar has seemingly begun to find its' lows & has been appreciating over the last few weeks. In fact gold has gone bananas since busting thru 800 & now knocking on the door of 900...& in such a short time frame ta boot all the while the dollar has gotten a bit stronger. Man alive this must be giving the old schooler's fits.
So from where I sit...the mrkt seems to be evolving away from the position of the greenback being BMOC. Some say that gold is now the new currency benchmark & has been for quite awhile now (which I tend to agree with)...it's just that nobody really wants to admit it...especially the govt for if they did, they'd be admitting a econ policy failure of sorts.
I realize this all sounds quite simplistic (other than the old school comment of course that's been quite the challenge) but for 7 months now I keep waiting for the law of averages to catch up to me & it has yet to do so.
Is trading 4x really this simple? All I can say is, try not to cloud your mind thinking too much about too many t/a strats. Sure a few broad & basic t/a principals surely can't hurt (I'm doing my best to learn MACD & Fibs & a select few others)...but the more info you decide to trade with, the more confusing & inconclusive results you will tend to ...thus your returns may not be very consistent. Just remain conservative & never get too greedy....& be sure to take losses when needed...dont EVER let'em run past your risk/reward level of comfort. I've learned far more from the few losses I've taken than all of my demo gains combined.
As for me, I'm lookin forward to finally goin live w/a very conservative strat & bank roll later on this yr...maybe over the summer when I have much more time to follow along.
OK...that's this Newbie's 2 pennies worth anyways....which in US currency is now worth about 1.55 cents these days...lol.
BOLTA....& as always thx a kazillion to AtaGlance for all he's done for this community & continues to do. I've learned a wealth of info since being a reg here & much of it is thx to him.
Cheers!!
here's a pretty interesting short term stategy.
watch the first video..what for the 1 2 3 strategy..I think he's using the 5 min chart. also see how he uses the 5 and 8 ma to place his trade..
interesting.
http://www.theforexclub.us/bootcamp.htm
INTERMARKET Technical ANAlysyS
TRADING STRATEGIES
FOR THE GLOBAL
STOCK, BOND, COMMODITY,
AND CURRENCY MARKETS
"It's a tribute to Murphy that he's covered ground here that will become
standard within a decade. This is great work."
—John Sweeney
Technical Analysis of Stocks and
Commodities Magazine
Events of the past decade have made it clear that markets don't move in
isolation. Tremors in Tokyo are felt in London and New York; the futures
pits in Chicago move prices on the stock exchanges worldwide. As a
result, technical analysis is quickly evolving to take these intermarket
relationships into consideration. Written by John Murphy, one of the
world's lead ing technical analysts, this groundbreaking book explains"
these relationships in terms that any trader and investor—regardless of
his or her technical background—can understand and profit from.
• Reveals key relationships you should understand—including the relationship
between commodity prices and bonds, stocks and bonds,
commodities and the U.S. dollar, the dollar versus interest rates and
stocks, and more
• Explains the impact of intermarket relationships on U.S. and foreign
stock markets, commodities, interest rates, and currencies
• Includes numerous charts and graphs that reveal the interrelationship
between stocks, bonds, commodities, and currencies
Intermarket Technical Analysis explores the art and science of technical
analysis at its state-of-the-art level. It's for all traders and investors who
recognize the globalization of today's financial markets and are eager to
capitalize on i t .
http://www.theforexclub.us/Website%20books/strategy.pdf
My Strategy today will be on the short side of eur/jpy....
right now on the hourly chart its starting to look a bit on the heavy side..price movement stopped cold @161.47 which is a line of resistance and a major pivot line.One concern I have at the moment..on the hourly chart the 20 period MA is just starting to cross the 50.time will tell.
Currency: EUR/USD (preferred) or any other.
Time frame: 30 min.
Indicators: MACD (5, 26, 1) – draw 0 line,
Full Stochastic (14, 3, 3)
EMA 3
SMA 13
Trading rules: watch for divergence between the price on the chart and MACD or between price on the chart and Stochastic.
Once divergence spotted, wait for EMA 3 and SMA 13 to cross and enter the trade in the direction of EMA 3.
Set stop loss at 26 pips.
Take half of the profit at 20 pips; let the rest to run further with trailing stop in place.
Divergence on Stochastic can be found the same way as on MACD. The reason for using both MACD and Stochastic is that one of the indicators can show divergence while the other will not at given period of time.
Current strategy has won the hearts of many Forex traders. And why not when it has a great winning potential.
Strategy requirements/setup:
Time frame: daily
Currency pair: any
Trading setup: SMA 150,
RSI (3) with horizontal lines at 80 and 20,
Full Stochastic (6, 3, 3) with horizontal lines at 70 and 30.
Trading rules:
Entry for uptrend: when the price is above 150 SMA look for RSI to plunge below 20. Then look at Stochastic - once the Stochastic lines crossover occur and it is (must be) below 30 - enter Long with a new price bar.
If at least one of the conditions is not met - stay out.
Opposite for downtrend: when the price is below 150 SMA wait for the RSI to go above 80. Then if shortly after you see a Stochastic lines crossover above 70 - enter Short.
Protective stop is placed at the moment of entry and is adjusted to the most recent swing high/low.
Profits are going to be taken next way:
Option 1 - using Stochastic - with the first Stochastic lines cross above 70 (for uptrend) / below 30 (for downtrend).
Option 2 - using a trailing stop - for an uptrend a trailing stop is activated for the first time when Stochastic reaches 70. A trailing stop is placed below the previous bar's lowest price and is moved with each new price bar.
This strategy allows to accurately pin-point good entries with sound money management - risks/protective stops are very tight and potential profits are high.
Current trading strategy can be improved when it comes to defining the best exits. For example, once in trade traders may also try applying Fibonacci studying to the most recent swings. This way they can predict short-term retracements and make sure they will not be pulled out of the trade early and will continue pursuing profit targets at Fibonacci extension levels.
CURRENCY PAIR - GBP/JPY
4 CANDLES STRATEGY
- Draw horizontal lines on the highiest high and the lowest low of the first Four candles of the day.
- Trade the Valid Breakout of the eigther lines.
- Check Stochastic Slow on 4hours Time frame.
- Trade the direction of the 4hours stoch with higher quantity
- Trade direction against 4hours Stoch with lesser Quantity
- Target the first 50-100pips
- Your stop loss should be the other side of the tunnel
- If your stop loss is hit, set the pending order again.
- Close all pending orders by 5 hours to close of the day.
Use time frame and currency which respond the best (1 hour, 1 day… or any other).
Indicators: (multiple of 7) 7 SMA, 14 SMA, 21 SMA.
Entry rules: When 7 SMA goes through 14 and continues through 21, BUY/SELL in the direction of 7 SMA once price gets through 21 SMA.
Exit rules: exit when 7 SMA goes back and touches 21 SMA.
Advantages: again it is an easy set up and does not require any calculations or other studies. Can produce very good results during strong market moves, the system also can be easily programmed and traded automatically.
Disadvantages: System requires periodical monitoring according to a chosen time frame. SMA indicator signal can be confirmed after the current price bar has been fully formed and closed. In other words, when SMA stops changing and the signal is fixed, traders may rely on such information to open a trade.
Time frame chart: 1 hour or 15 minutes chart.
Indicators: 10 EMA, 25 EMA, 50 EMA.
Entry rules: When 10 EMA goes through 25 EMA and continues through 50 EMA, BUY/SELL in the direction of 10 EMA once it clearly makes it through 50 EMA. (Just wait for the current price bar to close on the opposite site of 50 EMA. This waiting helps to avoid false signals).
Exit rules: option1: exit when 10 EMA crosses 25 EMA again.
option2: exit when 10 EMA returns and touches 50 EMA (again it is suggested to wait until the current price bar after so called “touch” has been closed on the opposite side of 50 EMA).
Advantages: it is easy to use, and it gives very good results when the market is trending, during big price break-outs and big price moves.
Disadvantages: Fast moving average indicator is a follow-up indicator or it is also called lagging indicator, which means it does not predict the future market directions, but rather reflects current situation on the market. This characteristic makes it vulnerable. First, because it can change its signals any time, second – you need to watch it all the time, third - when market trades sideways (does not trending) with very little fluctuation in price it can give many false signals, so it is not suggested to use it during such period.
Learning Your Risk Tolerance
The Secret:
[This Paragraph is KEY to Understanding this course]
The secret to successful investing is learning your own style, or in other words trading method(s) that work for you. There is no correct approach that everyone should learn. However, every trader needs to assess how much risk they can comfortably handle. It is the single most important investment issue for long-term success in the Forex market.
Are you able to stomach the risk when the markets are moving up or down as fast as your nervous heartbeat? Do you carefully consider the various risks that are associated with each trade you make? The fact is, many people either don't have a clue how or don't feel they need to protect themselves from unnecessary risk. In most cases they don't even understand all the types of risk their investing is exposed to. We will be reviewing the various types of risk and proper risk management to maximize your personal performance, including:
- What is risk?
- The different types of risk
- The risk/Return Balance
- Diversifying your trading
What is Risk?
Whether it is investing, driving, flying, swimming, or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role on how much risk you are comfortable with. For most investors, risk simply means "losing money." But if your investment choices leave you unable to sleep at night you are probably taking on too much risk.
The dictionary's definition of risk is "The variability of returns from an investment or the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. It is usually measured using the historical returns or average returns for a specific investment. The greater the variability of an investment (i.e. fluctuation in price or interest), the greater the risk."
The enhanced daily price movements and the leverage available in the Forex market compared to other financial instruments like stocks is the reason the Forex market is categorized as a "high risk investment vehicle". As investors are generally averse to risk, investments with greater inherent risk must promise higher expected yields to warrant taking on additional risk. Others add that higher risk means a greater opportunity for high returns or a higher potential for loss. However a higher potential for return doesn't always mean that it must have a higher degree of risk. This is why identifying and adhering to a strict trading strategy is so important to the overall performance. Learn more about use of proper money management to minimize your risk exposure. Do you have a hard time giving money back to the market when you feel that you have worked so hard for every penny of profit? If so, you would find yourself amongst the "risk adverse" category of investors. On the other hand, super active day traders feel most comfortable making dozens of trades per day and are considered "risk loving". When investing in currencies, stocks, bonds, commodities, futures or any investment instrument there is a lot more risk than most investors think. Learn more about the different types of risk that effect your Forex trading.
The Different Types of Risk
There are two basic classifications of risk: Systematic Risk - A risk that influences a large number of currency pairs. Examples of systematic risk are global political events, natural disasters, or war. Unsystematic Risk - Sometimes referred to as "specific risk". Its risk affects a very small number of currencies and currency pairs. An example is economic news that affects a specific country or region, such as a sudden strike by employees or a change in the Canadian interest rate. Diversification across multiple non-related currency pairs is the only way to truly protect yourself from unsystematic risk.
Now that we've determined the two main classifications of risk lets take a closer look at more specific types of risk.
Default Risk - This is the risk that the company with whom you have your Forex trading account will be unable to pay out an investor's account balance when a withdrawal request is submitted. Many Forex traders remember the incident of Refco in the fall of 2005. Unfortunately Refco, one of the world's largest investment firms with brokerage arms within commodities, futures and foreign exchange filed for bankruptcy protection and each of the brokerages were auctioned off to competitors or former subsidiaries. Their clients were unable to withdraw profits and initial capital until the brokerages were sold off. As of yet the dust has not settled and it is still too early to tell if all former customers received complete compensation. Choosing a suitable, stable broker is more than choosing the biggest.
Country Risk –This refers to the risk that a country won't be able to honor its financial commitments. When a country defaults it can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options, futures and most importantly the currency that is issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit.
Foreign Exchange Risk – When investing in foreign currencies you must consider that the currency exchange rate fluctuations of closely linked countries can drastically move the price of the primary currency as well. For example, economic and political events directly tied to the British Pound (GBP) have an effect on the Euro's trading (i.e. the EUR/USD might have similar reaction as GBP/USD even though they are both separate currencies and are not in the same currency pair). Knowing what countries effect the currency pairs you trade is vital to your long-term success.
Interest Rate Risk - A rise or decline in interest rates during the term a trade is open will affect the amount of interest you might pay per day until the trade is closed. Open trades at rollover are assessed either an interest charge or interest gain depending upon the direction of the open trade and the interest rate levels of the corresponding countries. If you sell the currency with the higher interest rate you will be charged daily interest at the time of rollover based on your broker's rollover/interest policy. For more specifics on understanding your interest risk, please consult your broker for complete details of their policy including time of rollover, interest price (also called swap) and account requirements to receive interest paid to your account.
Political/Economic RiskPolitical/Economic Risk - This represents the risk that a country's economic or political events will cause immediate and drastic changes in the currency prices associated with that country. Another example of this risk is government intervention that we typically see with Japan and the need to maintain low currency prices to bolster their exports.
Market Risk - This is the most familiar of the risks we have discussed, and according to some, really the main risk to consider. Market risk is the day to day fluctuations in a currency pair's price; also referred to as volatility. Volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament," of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money, volatility is essential for returns, and the more unstable the currency pair the higher the chance it can go dramatically either way.
Technology Risk – This is a particular risk that many traders don't think much about. However, with the majority of individual Forex traders executing trades online, we are all technology reliant. Are you protected against technology failure? Do you have an alternative internet service? Do you have back-up computers that you could use if your primary trading computer crashes?
As you can see, there are several types of risk that a smart investor should consider and pay careful attention to in their trading. Deciding your potential return (target profit) while respecting risk is the age old decision that each investors must make
The Risk Reward Balance
The risk/return balance could easily be called the iron stomach test. Deciding what amount of risk you can take on while allowing yourself to walk away from your computer without worrying and to get sound rest at night while you have long-term trades open is a trader's foremost important decision. The risk/return balance is the balance a trader must decide on between the lowest possible risk for the highest possible return. Remember to keep in mind that low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns. Trading is all about risk and probabilities. Understanding the inner functions of your trading strategy(s) and proper placement of entry and exit orders will assist in limiting your risk exposure while maximizing your profit potential.
What about how much of your account to place on each trade, or in other words the number of lots per trade? How much of your account have you lost in a single trade? Was it to much to swallow? If so you might not have utilized proper risk management and over leveraged your trade. Establishing the right level of leverage and corresponding margin requirements are a big part of managing risk. How are you doing?
There is Not One Correct Risk Level
Just as there is no single favorite food for everyone, there is no right risk level for everyone. Only you can determine what level of risk is right for you. You need to find the right balance between the amount of risk you are willing to take, and the amount of risk you can actually take. All too often investors think they are willing to take risk, but when it happens, they find out they aren't. Surviving in the market long-term is the most important way to make the market work for you. To do that, you need to learn your own risk tolerance ability. This could mean that you loose money during this learning process, but if this loss helps you achieve this level of understanding then you can financially afford the loss. This financial and emotional tuition is a valuable trading resource and something most experienced investors have paid through the process of trial and error.
In Conclusion
Different individuals will have different tolerances for risk. Tolerance is not static, it will change along with your skills and knowledge. As you become more experienced tolerance to risk may increase as your strategies or systems of trading become more and more proven in your mind and wallet. But don't let this fool you into still adhering to and thinking about proper money management practices. Achieving the right median between risk and return will ensure that you achieve your financial goals while allowing you to get a good nights rest.
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