Automated Forex Trading Systems | Do They Actually Work?

I have been around the block in regards to forex products and forex systems and as many of you are probably aware, I am no fan of Automated Forex Trading Systems, although some do work. Now before you get your panties in a bunch and ask the question "if they work, why don't I like them?", hear me out. Every Automated Forex Trading System that I have messed around with has made me money and lost me money as well. And for you newbies out there who are looking for a slam dunk in terms of making consistent profits, if you live by automated software, you will, in fact die by automated software. And worse still, you will have no idea why your automated trading system didn't work.

Here are the reasons why I don't think that Beginners of forex online trading should use an automated system:

• One of the supposed benefits to automated software for the forex market is that you don't have to know how to trade. The jargon in the sales letter used to promote these systems pander to the beginner. "You can set it and forget it and watch as the profits roll in daily". Well, anyone that has been in the forex market for even a few months can attest to the fact that given the volatility of the market itself, different situations make for different strategies.
• Because of the fact that you can "set it and forget it", many beginners to forex trading take way too many risks- A couple years ago, the japanese market dropped its interest rates causing the USD to drop rapidly. One of the "automated forex systems" that was working had many of its members suffer margin calls. Bear in mind that these people were probably not aware that with great risk comes great reward. And since up to that point, many were making a killing using this automated trade software, they started thinking that if they ramped up the leverage, they could make even more. One small move can change everything folks...everything. And when the news came out, there were many margin calls from people who had no idea what they were doing. Another one bites the dust!
• Automated Forex Trading Systems are geared for people who don't know a thing about Forex Trading- I have a serious beef with this. If you don't know how to ride a motorcycle, it probably isn't a good idea for your first drive to be on the autobahn. Same thing applies to trading. If you have never traded online, then it is probably good to acclimate yourself to trading first before you start to work on someone else's revolutionary system. Then again...it is your money...I guess if you don't mind not understanding how things work then you won't mind not knowing why a system failed you, right?
• If you use an Automated Forex Trading System and don't understand how the system works (what numbers are getting plugged in to establish entry and exit points, for example), then you will likely never know how to augment your system. If you are a beginner, then this should apply to you doubly.

I don't want anyone to think that I am poo-poohing automated systems for forex. On the contrary, I do occasionally use other people's systems from time to time. I am actually testing Forex Killer right now for some shorter term trades (I do mainly long term trades). Automated systems actually have a place for those who want to do trades without having the headache of sitting computer side all day long. And if you are a day trader or forex scalper, then a system may be what you are looking for.

Just be aware that an automated forex trading system is likely not going to make you fabolously rich. Just like anything else, it is a tool. And if you are going to use the tool, you should go underneath the hood of the system to see what indicators are being used in order to understand the methodology of why the system is trading the way it is trading. Anything less and you are simply cheating yourself of a potential wealth of knowledge behind the system.

Plus, if you understand how a particular system works, you can always augment it to suit your own personal trading personality...and that my friends, is money in the bank. An automated forex trading system can work for you if you know what you are doing in the first place.

How to Trade Forex- Where Should I Place my Stop-Loss points?

Learning how to trade forex is easy...implementing trading strategies is a completely different story.....One of the biggest learning experiences for me was the proper places to put what is called Stop/Loss for my forex trades. For those of you that are green, a stop/loss is simply a point where you are willing to surrender your trade to try to control the bleeding. As you can probably imagine, this is important and should be implemented anytime that you go into a trade, regardless of whether you are learning how to scalp forex, or are simply do longer, more stable forex trades. Bottom line is if you want to learn how to trade forex AND make it profitable, you need to understand this important concept.

If you are new to forex, you probably look at stop/loss points in the simplest fashion....your strategy may be to control the losses by deeming a point in the trade where you are willing to surrender. However, if you are doing this, you are one of the many that will likely be on the losing end of almost all forex trades.

How to locate a proper stop/loss point for a trade

First of all, I am going to say that you have a ton of things going against you. There are some that believe that some "bigger" traders such as banks use a tactic called "stop-loss hunting" to force us "small fish" out of the market. I will get that later but for now let's take a look at how most experienced traders locate proper stop-loss points in their trades.

1. Locate your support and resistance points-This is important because as you know, the market will generally stay inbetween a certain frame UNTIL it breaks them. Now I am being kind of vague because finding support and resistance points aren't so cut and dry, especially if you are day trading (something I don't recommend). As a general rule, I typically put a stop/loss nearly 20 pips below this line but understand that I don't day trade. There is a reason I do this...

Most of the time (but not all the time), once a resistance line is broken, it is followed by a retracement period in which the traders are testing the line itself. I have already spoken briefly about trader's remorse but if you don't know what I am talking about, then you should take a look at this theory.

Once again, I don't day trade and most beginning forex traders do (and do so with great risk) so this may or may not apply to you.

Oh, and for you day traders...the resistance and support lines are very hard to define in these shorter time frames because the movement is a lot more volatile. If you are a beginner, you should focus on the longer time frames, as you will be able to identify trends more easily.

2. Understand what the general trend is for the currency pair- First of all, if you are trading using one or two time frames, chances are you won't be in the game long. Even if you are day trading with 5 minute or 1 hour charts, I implore you....take a look at the daily, weekly, monthly and quarterly charts. You should know the general direction that the currency pair is going. For instance, as I am writing this rant, the USD is falling to the euro and has been for months. However, if you were simply using the shorter time frames and ignoring the primary trend, you may think that the USD is rebounding.

3. If you are a forex day trader, the quickest (and easiest) way to make a little profit is to short your trades- What I have learned is once you have defined the market's R & S points, if a pair breaks one of these barriers, chances are you can expect a retracement of some sort rather than a steady climb upward. Grab some quick profits by trading the Resistance and Support lines. I don't do this because I am a set it and forget it kind of guy (I like to profit over the course of a week or month rather than daily) however, it is one of those weird things I have noticed.

4. If the support or resistance line is too long (60+ pips) and you can't afford to play the line, lower the leverage until you can play- No surprise here, right? I know you want to make a ton of money trading but you have to understand that ultimately, you want to stay in the forex game, right? Understand that in most cases, currency pairs that do make money are extremely volatile meaning that they will shift down or up on a dime. While recognizing and identifying the S & R lines isn't totally fail-safe, it is a relatively safe bet to bet on. Reduce your leverage and take less profit until you are in a position to play with higher leverage.

Now, while a stop/loss will protect you and your forex account from suffering losses that would make it hard to rebound from, you also are going to want to place an exit point where you can exit the trade ( I will talk about this at a later date).

Now for the realities of forex trading and this will most likely get your goat, so to speak. So, let's say that you have done all those things I have spoken about...you have:

• Identified the trend
• Identified the support and resistance levels.
• Have an entry point strategy.

The hardest part to realize is that even if you do all these things, you can still lose quickly if your stop-loss point is not in the right spot. Why? Because of stop-loss hunters.

What are stop-loss hunters?

Stop-loss hunters are simply bigger entities (such as banks and other institutions) that trade forex as well. You have to start looking at trading in the same way that a gambler would look at sports gambling. Your competition are other traders, just like in gambling, you competition will be other gamblers. There are only two sides that you can take...the winning side or the losing side. Movement of the forex market is determined by volume.

These stop-loss hunters simply determine a point where they think the majority of traders have put their stop loss point and trade enough volume to move the market down (or up) to that point. That is a good strategy for them (and most of the time, the forex brokerage firms that manage the losing trades) as they basically reap the losses of their competition. And perhaps the most frustrating part of this is that the trader that just lost because his point was hit, gets to watch the market climb back up in the direction he thought it was going to go.

And it is for that reason, that I will place my stop loss point at a much lower point than simply hovering around a support or resistance line. I want to be assured that if I think that the market is moving in a certain direction, that my trade won't get "stopped" out prematurely.

Oh well, I am done with this rant. If you want to learn to trade forex, you need to not only know the rules but understand some of the nuances of the market and some of the dirty tactics that your competition will employ to know you out of the game. Thanks for stopping by forex trading for beginners.

Forex Trading And Scams

Because Forex Trading is relatively new in terms of the average investor being able to make money in the currency markets, there is a lot of speculation as to what kinds of returns are considered to be the status quo. In fact, if you look on any forum that deals with forex or yahoo answers, you will find the it will be peppered with questions such as "how much can I make with forex"..."can I make a living trading forex?"....."is forex trading good for beginners?". If you continue reading over a period of time, you will find even more ridiculous questions like "could I double my money in a month with forex trading?".....or...."I was at (insert scam website name here) and it says that I can expect a 4% per day return on my investment..is this possible?"

For those of you who are completely new to forex trading, I implore you...use some common sense...the old adage 'if it sounds too good to be true...' should be employed here. I know that many would love to think that making huge returns quickly is possible (these are mostly wishful thinkers or complete forex newbs), it simply isn't. And because forex trading is fairly new arena, you are going to find a lot of con artists that can't wait to separate your money from your ignorance.

Am I being too hard on these poor individuals? Probably...but the point I am making that most of the forex beginners aren't asking the right questions. They have the dollar signs in their eyes. Their vision is clouded and the money that they think they will make has already been spent before they have made it.

I think rather than asking "how much can you make trading forex?", the inquisitive should instead be asking "how much can you consistently make with forex trading?" And that is the key.

Five years ago, I was one of the ignorant that I am currently bashing. I got into forex trading after suffering some losses from a scam operation (based in the Asia) called PIPS "traded" away nearly $2,000 of my money. I learned of this company from a friend of a friend who actually flew to the country and met the owner (Bryan Marsden). He was convinced that what Bryan was doing was legit and actually had collected over 100k from his investment over the period of year.

Just to let you know exactly how stupid I was, I thought that Bryan was actually trading forex and consistently making 4% COMPOUNDED daily. I wasn't alone. There were nearly 100,000 of the "bungled and botched" out there hanging their hopes and dreams on the shoulders of this con artist.

And the sad thing was, the longer that the company existed, the stronger the belief that he was doing the trading was. And even after the supposed company was defunct and Bryan was gone, there were still hordes of people who believed that their ever growing account would eventually be theirs for the taking.

When PIPs disbanded, I started looking into trading. I didn't want to get hoodwinked again. At the time, I still believed that you could make a ton of money trading the currency markets. I still had visions of making a killing, quitting my day job and purchasing an island in the bahamas. Five years later and although I have made money (and lost money), I have learned that just like everything in life, nothing good comes from easy.

Currently, there are probably 2,000+ sites that claim to trade the forex markets. Some these supposed "forex traders" claim to be able to make as much as 100% ROI in one day. Most fall between 1%-4% a day though. And I am here to tell you, if you think that you can make 30% per month ROI consistantly, then you really need to check your head.

Well, I know that this rant is abit winded so without further ado, here are some realistic expectations that all of you forex trading beginners can look at:

• Expect to have some good luck initially out of the gate with your DEMO forex account- Call it beginner's luck or the god's trying to play tricks on you but most beginner forex traders wind up having substantial gains that kind of lulls them into believing that they are ready for a real account. Trading with REAL money will do some crazy things to your mind, especially if you are on the losing end.
• Expect to lose...initially- Best case scenario is that you don't drain your forex account within a couple months (what most will do) and actually learn from your mistakes. Worst case scenario is you lose really quickly and decide to throw in more money (can we say degenerate gambler?) to try to get back to even.
• Expect to become partially bald from pulling out your hair- My first year of trading, I had a semi-permanent bald spot on the side of my head made primarily from me yanking it out whenever I couldn't cancel a trade quick enough.
• Expect to become obsessed with new 'tricks', 'systems' and other con jobs out there- Over the years, I have tried a couple dozen guaranteed systems out there. The "system" I use now is what I consider the fundamentals of forex trading., such as dow theory and how it applies to forex trading, support and resistance bands in forex, how to use leverage when dealing with forex trades and understanding how risk and rewards work in forex trading
  
• If you are forex day trading, expect to be glued to the screen for hours looking for good entry points- The notion that you will be loosening the chains of that J-O-B is replaced with the shankles next to your computer.
  
• Expect months of great returns followed by streaks of no returns- This is for real...My second month of trading, I pulled in a whopping 20% ROI. I thought I hit the promised land (granted, my account was smallish). The next couple months after that, I gave it all back to the house and then some. Oh well, back to the drawing board.
• If you are lucky, expect to make more than your average mutual fund in a year's time- Yeah, you heard me right. There is money to be made in the forex market. But just like the stock market, it is a zero sum game. Everytime you are a "winner", there is someone out there wondering what in the heck just happened ("loser).

That is pretty much it for today. I was planning on getting into how to spot a forex scam, but figure that you can figure that out on your own (I may revisit this later). The bottom line is that because forex trading is fairly new (to the regular investor), the idea of what you could make trading forex is saturated with presuppositions and myths. The only way for you to truly realize what you can make is to get a trading account for yourself and test it out yourself. I'm out.

Forex Trading For Beginners | What all Traders Should Know

About 5 years ago, right before I decided to get into forex trading, I was like many who were on the outside looking in. After all, by all accounts, if you were to believe everything that you read, you would think that trading forex could be as easy as learning a few indicators and plugging in a "proven forex system" and then laughing all the way to the bank. However, forex trading for beginners is much more difficult...in fact, even after you bust your "forex cherry", you are still in for a bumpy ride. Below are some common myths about Forex Trading and what beginners want to believe....

1. There is a such thing as forex automated software that works- I see account after account talk about a forex system that claims that you can plug in a couple variables and profit month after month without a hitch. The problem is that there is NO AUTOMATED FOREX SYSTEM that exists that is profitable month after month. Think about it for a second...if you could develop such software, would you sell it? The problem with automated forex systems and their claims is that most forex traders like to think of trading like it is a "us" vs. "them". It isn't. When you trade forex, you are competing against all the other traders out there...which means the market is getting moved by emotions as well as technical data. I am not sure you can write a variable for the human trader's emotions and this is why an automated system would not work.
2. There is a such thing as a "Proven Forex System"- Books are great for learning stuff. And there are many books that claim that their system will work without fail. The problem is that most of these proven systems are based on the trader's knowledge and since the trader writing the book most likely knows Forex Fundamentals, then he can fine tune his system on the fly...which is something that a beginner in forex can't do. I would like to add that systems do work sometimes, but you most likely will not hear about them. After all, why would a trader want you to know his secrets if he was profitable month after month? Books are meant to be sold, folks. Learn from them..test the systems out there and then apply what works for you.
   
3. Leverage is Great..You can double your earnings in a month- Sure, this is true. But understand that the same high leverage position can just as easily wipe out your account.Leverage is something that most new forex traders don't quite get. All they see are dollar signs and the potential upside to trading with leverage...they don't see the other side, which typically is the side that most beginning traders end..that being the losing end...
4. Trading Forex is easy- Trading Forex is not easy. It never has been and it most likely never will be. Don't believe me? Try talking to some of the newer guys out there..you know, the ones not selling the systems and books on how to make money trading forex. Most of the guys who are making money trading have spent years tweaking and testing their trades AND (drum roll please)........they understand the basic fundamentals of finance and trading in general; Things like how to find trends, support and resistance, and the dow theory. Too many newbies think that all you need to do is slap up a couple forex indicators on their platform and get a feel for the market...that, my friends, is gambling.
5. Trading Forex is not Gambling- Alright, this is for all of you puritans out there that think that just because the banks have decreed currency trading as NOT gambling, that therefore it isn't. As a sports gambler, I am going to tell you the similarities are astounding, from how human emotion plays a part in the trades and volumes, to the "spread", a term that gives the brokerage two pips on either side of the trade. And if it smells like a rose, then it most likely is a rose. The key is understand your risk to reward ratio when making forex trades
   

That's it for today. I don't want anyone to think that I am hating on forex trading. I make money with forex trading. However, just like anything else in life, if you don't learn the fundamentals of whatever investment vehicle you are in, then chances are you will come out on the short end of the stick. Tomorrow, I am going to go over a strategy that many forex beginners get all caught in...scalping..how to make money with the forex markets by "scalping" trades.

Technical Analysis and Forex Trading | Tools for Forex Traders

While there are many who claim that trading stocks OR Forex Currency is nothing more than a random walk, there are far more who incorporate technical analysis into their forex trading. That said, there are a lot of different ways to go about analyzing charts. The methods of technical analysis and forex are all over the board with different traders claiming that their method is better than the other.

Real quickly, here are the various technical analysis tools that a forex trader would have at his disposal:

• MACD- This tool basically takes a 26 day average and subtracts it from a 12 day moving average of the price. What essentially happens is the price oscillates above and below zero. The School of thought here is that if the MACD rose above zero, it would indicate that investor's believe that the market is rising as well and therefore, it would be correct to BUY. Likewise, if the MACD was below zero, it would indicate that investor's are leaning to a bearish market and someone using this indicator would consider SELLING.

• Momentum Indicator- This indicator measures the momentum of a currency pair over a given period time. There are two common ways that someone would use this indicator........1. Investors could use this indicator much in the same way you would use a Moving Average Indicator (like MACD) to find trending in their currency pairs. Basically, you would BUY when the bottoms out and turns back up and Sell when the market peaks and looks to head downward.....2.You can also use the momentum tool as a leading indicator- In other words, you assume that the market tops are easily identifiable by a quick price increase OR on the other side, you assume when the market bottoms, it will be easily identifiable by a fast sell-off from investors.
  

• Moving Averages- This is probably one of the most used analysis tools, primarily because it is very easy to understand. A moving average is nothing more than an average of a price over a period of time. One of the best methods to using a moving average is to compare a moving averages closing price with the actual closing price (use NY markets as the close in this 24 hour market). Basically what advocates of this indicator will do is to buy when the actual price rises above the moving average and SELL when it falls below. Of course, this has some problems in terms of technical analysis- everyone has 20/20 hindsight and when a beginner forex trader is looking over data, they will find entry points in which they could have profited. The key to using a moving average is to find a system that is consistantly profitable. Another problem that people who emply moving averages is that Trader's Remorse often enters after a resistance or support line is broken.

• Relative Strength Index- With a name like this, you would think that the RSI would compare the relative strength of two currency pairs, but instead it actually measures the internal strength of the currency pairs themselves. The RSI can be used to find the support and resistance levels of a currency pair.

• Stochastic Oscillator- To understand what stochastics are, it is best to define the term stochastics...designating a process having infinite progression of jointly distributed random variables...what??!! Layman's terms, please...to use a stochastic oscillator, you need to set some variables...%K variable is basically the number of days that you want it to "oscillate". A real common %k variable is 3 days. Here is the math behind the stochastic oscillator-
  

(today's close)-(lowest lows %k periods) divided by (highest high %k periods)-(lowest lows %k periods)

I will go more into detail about these different indicators at a later date, since all deserve a page exclusively made for each.

So, the magical, million dollar forex question is what technical tools work best in forex trading? When I first started out, I tried them all with a varying degree of success but one of the things that I realized was that the theory known as the random walk really foiled most of my attempts at finding a consistent profitable indicator, long term.

About 2 years ago, I put all my indicators to rest and started to really graph things out by hand and using fibronacci numbers as a way to analyze retracements (which I will get into at a later date).

That said, I have spoken with a number of forex traders that claim that simple things such as EMA's work for them. The key is to open up a demo account and play around with them until you find what works best for you.

Dow Theory and How it Works for Forex Trading

Here is yet another ramble about some forex trading concepts that you can use, if you can understand them that is. Today, we are gonna focus on Dow Theory and how you can use this to your benefit in your forex trading....

But first, a little ramble about Dow theory, how it became known as the "Grandfather of Chart Analysis Theory" and what is about...

The History of Dow Theory

Way back in the early 1900's, a fella by the name of Charles Dow started putting together a series of editorials which would define technical analysis as we know it today. The editorials (which are unfinished due to his health), were comprised of his thoughts on how the stock market behaved and how to use the market to judge the health of businesses and their environment.

Like I said, Dow never actually finished his theory but nevertheless his six theories are still used today by technical analysts. And while most of these theories are done with the Stock Market in mind, trust me, they can be transferred to literally any other market out there....the foreign exchange market included....

So without ado, here are the 6 theories...

1. The Market Discounts everything- This theory is basically built on the notion that all things...past, present and future are discounted and reflected in the prices. All things = emotions, inflation, interest data, ect.
2. The Three Trend Market- I will actually discuss this later in this rant because this theory can be immediately applied to forex trading. Basically, this theory deals with trend analysis and Dow believed that there were 3 main trends, the Primary Trend, the Secondary Trend and finally, the minor trend. Like I said, hold your horses...I will be expounding on this later....
3. The Three Phases of the Primary Trend- The Primary Trend is the long term trend. For instance, in forex terms, the dollar over the past couple years has been shrinking. Although there are rallies here and there, the dollar is continuing to shrink. There are three phases that Dow identified in a bullish market...Accumulation Phase, the public participation phase and finally, the excess phase. In contrast, Dow also noted that there were three phases in a bearish market...The distribution phase, the public participation phase, and finally, the panic phase.
   
4. Market Indexes Must Confirm Each Other-This is not relative to forex trading (although, I guess you could analyze a currency with other similar pairs)but in this theory, Dow basically says that both the indexes (the dow industrial and rail averages) would need to be in agreement with each other. So, in other words, if one of the indexes is indicating an uptrend while the other isn't, then there is no way to determine whether an uptrend is actually happening.
5. Volume Must Confirm the Trend- This theory basically implies that you should look at the volume of sales to confirm that there is a trend started. I kind of went over this in my forex trading support and resistance tutorial and understanding trader's remorse. It is no joke...The amounts of volume is critical to knowing when to buy and when to sell.
6. Trends Remain in Effect Until Clear Reversal Occurs- The trend is your friend..heard of that saying? It is true. The theory implies that the trend stays until proven that it is going in the other direction.

Great, you say...but what does this have to do with forex trading? After all, isn't the Dow Theory tailored to the Stock Market mainly?

Well, yes it is....but the Dow Theory deals with technical analysis and guess what? Most forex traders learn...technical analysis. So what parts of the Dow Theory can we glean and use to our benefit?

What You Should Immediately Understand about Dow Theory and Forex Trading

I mentioned that I would get back to the three different trends and which way they are going. As forex traders, we tend to get enamored with the here and now and many of us use the 5,10, and 15 minute charts. However, if you were to exclusively use these charts to identify overall trends in a market, you would likely be surprised when things whip saw back on you in your forex trades.

Hence where the three trends of dow theory come into play...

I already mentioned that the primary trend can sometimes take years to establish itself and is really a long term trend that you can identify the overall health of the currency pair. However, you wouldn't notice this if you were simply charting out hourly or even daily charts. You should always identify the primary trend of whatever currency pair you are trading.

How do you identify an upward or downward trend?

As you probably have found out, normally the market is nothing more than a series of rallies and sell offs. According to Dow, for a market to be trending, each rally point should be be higher than the previous rallies high. Each sell-off point, should be lower than the previous sell-off point.

In other words, for a market to be trending up or down according to Dow Theory, it must be consistantly moving upwards or downwards. I should note, that Dow didn't do much intra-day trading. Instead, he focused on the closing price each day.

The secondary trend is even more important to the forex trader who is trading for the quick buck because these trends tend to last from a couple weeks to a few months. Once again, the same theory applies....a market must be outpacing its previous highs or lows to qualify as a trend.

Finally, the minor trend....this trend can actually go against the primary trend and doesn't last very long. Typically these trends can happen from forex news but normally are quickly corrected.

That is pretty much it. If you can identify the primary trend of whatever currency pair you are playing around with, the rest is a cakewalk. Well....sort of....Dow's Theory might have been made for the Stock Market folks, but as you can see, it can be applied to the forex market as well....

Risks of Forex Trading | Understanding Risk vs. Reward

In the last post, I briefly went over how to use leverage in forex trading and more importantly what NOT to do when you are first starting to trade on the foreign markets. In this post, I am going to expound on this by going over the risks of forex trading...most notably how to use a risk versus reward ratio to exploit forex trading and actually not lose your butt in the process.

Do You Understand Your Risk Versus Reward?

I hate to beat a dead horse but understanding risk versus reward is probably one of the biggest (yet untraveled) roads out there and I actually learned how to do this several years ago when I first started doing sports gambling.

The reason why I ask this is because understanding this is paramount to how much money you will want to risk. Establishing and understanding the risk/reward ratios will help you with understanding exactly how much leverage you will want to use. Once you understand this, you will realize that not all trades are created equal. I will repeat this....

NOT ALL FOREX TRADES ARE CREATED EQUAL

One of the first rules that you will need to understand is that when you are making trades, you should always examine the risk/reward ratio. In sports gambling it is no different. You want to find the entry/exit points that will maximize your reward while limiting your risk.

The reason for this is simple. If you can stick to a disciplined plan of attack and know how to maximize your risk/reward ratio, then logic would say that you will come out ahead.

For instance, if you have measured the risk/reward ratio to be 3:1, then you can safely ascertain that all you need to win is 1 trade (with the spread in mind) and lose 2 trades to break even.

So, once again, let's use a real world example....

Let's say that you have found a good forex trade that looks like in all likelihood it will be profitable. All things point to the market moving in the direction that you want it to. Now, you ascertain that the risk/reward is 4:1. You have established that you won't enter a trade that is less than 3:1.

In layman's terms, you are betting that for every trade you make, you only need to win 1 out of 4 to break even (without a spread...it would most likely be 1 out of three with a spread).

Great, you say...but how do you determine what your risk to reward ratio is? What metrics and variables can you use specifically for forex trading?

To understand this, you will need to understand Fibronacci retracement levels. Since you probably haven't gone there yet (assuming you are an amateur forex trader), I will try to explain it in layman's terms.

Basically Fibronacci was this Italian mathematician that published a very important book on calculations. What Fibronacci did was create a series of numbers where if you added 1 (+1) to the previous number, you would get the next number. Here is an example...

1,1,2,3,5,8,13,21 and so on.....

Now if you divided two subsequent numbers on the list, you would get a ratio. The further along you go, the close to phi you get.

For our purposes, the three numbers that are most commonly used in forex trading are .382, .500, and .618.

These numbers will actually help you establish a risk/reward ratio...

So, let's use a real world example....

As you can see from the image above, I have a downtrend (this is a 30 minute chart). I have also added the Fibronacci numbers here. Notice how at the .382 retracement that it sits there for a second. Now take a look at the next jump....0.618.

How I would calculate my risk is by setting point A (which is the highest point) and then point B (which is the lowest point). I would then do the math (or in this case, my trading platform does the math for me) to get the retracement values. I would then go to the risk probability calculator (which is free by the way) and see whether me making the forex trade will be worth the risk.

Hindsight...20/20 right? Sure. You can view this however you want. It is obviously easier for me to look at this after the fact and see that if I had made this trade at the lowest point, I would gain 40 pips if I stopped it at its current point (where the uptrend is seeming to meander). But that is part of the game....doing your homework, finding the trend and capitalizing on the trend.

If you are wrong, so what? You can't win them all but if you constantly temper your trades and only go after the ones with a high risk/reward ratio, then you can buffer the losses.

Oh, and by the way...here is the risk probability calculator for you.

I have rambled on enough for the day. To sum it all up, if you don't understand the risks of forex trading, then you are cheating yourself out of potential good money. If you don't understand how to manage your risk to reward ratio in your forex trades, then you might as well be at the casino betting on red or black. The risks of forex trading are just too high to be playing around with.

How to Use Leverage in Forex Trading

Understanding leverage and how to use it can be the difference between you going broke very quickly and you actually making money. I occasionally read a forum post where some guy claims that he made x amount of dollars trading forex with a 100:1 margin and while it is possible, it is also extremely risky. Most beginning forex traders simply don't understand what they are betting when it comes to leverage. Forex trading can be extremely risky and the higher the leverage the higher the risk. Hopefully after you have read this, you will understand why playing with a high leverage is alot like playing with a loaded gun.

I have one caveat to say before we enter this realm. Just like sports gambling (something that I know a thing or two), forex trading can be a goldmine for those that understand the risks associated with it. With just a little knowledge on how things are run and with a couple technical indicators, you can make money on the FX market. However, just like sports gambling, if you bet the farm on one game and lose, you are taken out of the race. The foreign exchange market is no different. And the fact that you can leverage large currency amounts (lots), makes this endeavor very risky. That said, those that profit the most understand when to take risks and when to sit it out. We are going to explore this today...

Understanding how Leverage Works

The forex market works in using PIPs. A PIP is worth roughly 1/100th of a penny. Needless to say, this little amount of money is hardly worth trading, right? Well, in the forex market, most traders will work with lots which is 100,000 units of currency. In other words, if the USD/Euro pair was currently being traded for $1.0054, then one lot would be worth over $100,000 if the trader was risking his own money dollar for dollar (1:1)

Now most traders don't have this kind of capital to trade with. This is where leverage comes in and the confusion begins.

Here is a real world example:

You have $1,000 (which is low by the way) and decide that leveraging at a 1:25 level would be good because you can make a ton of money quickly...pay off the mortgage and retire in the bahamas by next year. At least that is your dream. After all, by leveraging 1:25, you are essentially controlling $125,000 dollars (assuming you are trading lots, not mini-lots because after all, you are a dreamer).

So, you enter a trade, with those dreams of getting rich quick in mind. However, the market moves against you. How much can you lose before you get that margin call? If you answered 2%, you would be correct. So, of the market moves against you and you lose 2% of your bankroll, you will be standing on the sideline with all the other forex trading amateurs wondering what in the heck just happened.

The end result is you get a margin call and are left with two choices:

1. Liquidate Your Account and call it a loss.
2. Add more money to your account.

It is safe to assume that most beginner forex traders don't have the capital to add more money to their account. In fact, most people who begin forex trading just think that it is a way to get rich quick.

Now, while this is a hypothetical example, don't think for a moment that it doesn't happen. Forex trading is full of losers who bet their bankroll without fully understanding the risks. And the worst part is that this margin call that I used in the previous example is conservative....most forex traders trade with 50:1 - 100:1 leverage. Forex is risky folks but playing with such a high leverage and you would be better off taking your chances with jumping in front of a moving train and hoping to live.

How to Use Leverage in Forex Trading

Since we have established that using too much leverage can be catastrophic to your account, let's examine how much leverage you should use when you are trading forex (or any market).....

A good rule of thumb is to not use more than 60% of your margin on any one trade. I think that this is a bit high personally, but you can decide for yourself what kinds of risk you are comfortable with.

If you are just starting out and getting a feel for the market using real dollars, chances are you are going to want to start small. 1:10 leverage is a good place to start because:

• It allows you to actually lose a few trades and still be in the game.
• It allows you to get a feel as to how much leverage is too much leverage for your risk taking.

Pay special attention to point #1. Staying in the game should be your number one goal. If you don't know how to use leveraging in forex trading, I would say that your chances of staying in the game aren't great. Learning how to leverage and when to leverage will most certainly increase your odds of not going broke quickly.

Forex Pivot Point Tutorial | Forex Trading

In my last post, we went over why you should establish support and resistance lines for your forex trades. Today, I am going to show you one of the ways to predict where to establish these lines. We are going to use forex pivot points to get this done.

So before we get into the nuts and bolts of this, what exactly are forex pivot points?

A pivot point is a technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices. A technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices.

In layman's terms, all that means is that you establish pivot points from yesterday's averages (or whatever time line you are using) to "guesstimate" what the support and resistance line will be on the current day.

The reason I say "guesstimate" is because that is exactly what it is. There is no hard set of rules of what is right and what is wrong when establishing pivot points and therefore, forex pivot point strategies should be used with other technical indicators as well.

What makes analyzing forex pivot points so popular is because it is a leading indicator as opposed to a lagging indicator. As they say, we all have 20/20 hind sight and it is easy to look back and analyze what happened....It is a complete different story to be able to predict the future...

Forex Formula time

As you can imagine, there are some standard formulas to use when guesstimating the pivot points. The 5 point system is probably the most used.... You are going to need just 3 numbers in order to try to predict the forex trends of the day...

1. High- This is the previous day's high
2. Low- This is the previous day's low
3. Close- This is where the forex market actually closed at (since the forex market is 24 hours, typically forex traders use the New York Market as the close of the day).

Now that we have these three numbers, we can get to work. We will add up yesterday's High, low and close together, then divide this by 3. This will give us our pivot point.

High + Low + Close/3 = our Forex Pivot Point.

Now, that we have our pivot point, we can now start to crunch the numbers to accurately how the market is going to move....

Let's get our first resistance level....(we are going to call it R1)

R1 = (Pivot Point x 2) -Low

Now, let's get a second resistance level...(we are going to call it R2)

R2 = (Pivot Point + High) -Low

Let's move on and do the same thing with our Support lines...(S1)

S1 = (Pivot Point x2) - High

And do it again for the second support point

S2 = (Pivot Point -high) + Low

So, I am sure at this point you are wondering, 'I got the numbers, now what?'

Understand this, the three most important numbers for your forex trading (or any trading for that matter in relation to pivot points) is the actual pivot point and the resistance 1 (R1) and support 1 (S1) numbers.

In a perfect setting the R1 and S1 numbers will typically hold unless there is a breakout. The resistance 2 and support 2 numbers are both good numbers to aim for as both tend to be slightly lower than the first set of numbers.

I want to say that many beginner forex traders want to believe that there is a forex magic bullet. You know, a set of indicators that will accurately predict the market time and time again. If you have been trading for a any amount of time, you would know that. And these forex technical indicators are used to get a good idea of where the market is headed. A lot of newbie forex traders get into this frame of mind that they can find one set of indicators that will accurately predict which way the market is going to move...

That said, consider the pivot point as the average of the previous session's trading range combined with the closing price.

So, you probably have gathered that when you do the math, you can guesstimate (with decent accuracy) the range of the market today based on the past performance of the currency pair that you are dealing with. So, we aren't necessarily trying to predict the future of the forex market....we are just trying to get a good idea of where the market could go in the market based on where it's been.

In other words, you can use forex pivot points to find overall trends in the markets.



In closing, I am going to leave with a great quote from Arthur Sklarew who was a commodities broker....in this quote he mentions what most beginner trader's don't want to believe...that there is not one type of chart analysis indicator that is a magic bullet....However, chart analysis can give reliable forecasts of trends in the forex market. And that, my friends, is golden.

Technicians know very well that price chart analysis is not an exact
science. No single chart technique yet discovered is infallible. Despite
this lack of perfection, price chart analysis can very often give reliable
forecasts of trend direction . . . Confirmation is therefore an
essential component of every valid chart signal. In addition to comparing
price charts of different contract months and time scales, it
has been my experience that the accuracy of any technical price forecast
can be improved greatly by the application of a principle that I
call the “Rule of Multiple Techniques.”
The Rule of Multiple Techniques requires that the chart technician
not rely solely on one single technical signal or indicator but look
for confirmation from other technical indicators. The more technical
indicators that confirm each other, the better the chance of an accurate
forecast. The logic behind this rule is that, if individual timeproven
techniques tend to be right most of the time, a combination of
several such techniques that confirm each other will tend to be right
even more frequently.

It should go without saying that while learning how to establish pivot points can help you understand how the forex market works and give you the ammunition to develop a gameplan as far as predicting support and resistance lines, forex pivot points are just a small part of the equation....in other words, you will have to find and use other forex indicators in addition to establishing pivot points. It is all in understanding the how's and why's as far as market movement is concerned. And Forex Pivot Points is just a small part of the large jigsaw puzzle into forex trading.