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6 Forces of Forex [message #2043] Tue, 24 June 2014 17:28
hill4j  is currently offline hill4j
Messages: 13
Registered: May 2014
Location: lagos
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Trading forex is like watching a school of fish move. One minute is total harmony, the next, complete chaos. As the observer of this school of fish, do you believe you can accurately predict the direction the school of fish will move each time? Would you bet on it?
What causes the fish to move the way they do? Why do they work together in one moment, moving with force and precision, and move in what seems to be an infinite number of directions the next? There's no way to know unless you can sense what the fish sense each time they move. The fish have an instinct about the nature of their environment. They understand the context of all things around them natively and can react accordingly. Surely if you shared this understanding you'd be a much more accurate predictor of fish movement!
Trading forex is not much different - we need to develop that keen sense of what is happening around us. Will we ever be able to predict every move in the forex markets? Absolutely not. But we can use our understanding of the context of the market the six forces of forex to make better, more profitable trading choices. Once we understand these forces, we can create and operate within a comprehensive trading plan:

Far more important than knowing who trades forex is knowing who trades forex successfully, and how they do it. The players in the forex markets operate with widely varying perspectives. When one of these players enters the market, a force is created that is proportional to the perspective of the trade initiator. That force can play a role in the short term, creating radical price changes, and it can play a long term role, defining trends.
Of course there are sophisticated and non-sophisticated banks, governments, corporations, investment funds, and traders. But among these segments it is the individual trader who has the least amount of external governance. Whereas governments, banks, corporations, and investment funds adhere to regulations and restrictions (to a certain extent), traders are only restricted by their level of capital.
In the absence of these external restrictions, traders fall into two groups: those who can impose internal restrictions discipline - on their trading strategies and those who cannot: the fence-swingers, et al.
Those who can impose this discipline we will call the sophisticated investor. In the zero-sum game of forex trading, the sophisticated investor uses tools and strategies that emulate those of the highly sophisticated institutional participants to extract profits from the novice participant. It is only the sophisticated investor who has the ability to extract positive returns from the forex markets.

Forex trading has surged in recent years, as more individuals earn their living trading and the popularity of riskier investment vehicles like hedge funds has increased. The bottom line for these investors is superior returns, and in foreign exchange four major factors create a unique investment environment:
􀂃 Liquidity
􀂃 Leverage
􀂃 Convenience
􀂃 Cost
In no other market can you find a playing field that is so biased to the investor, at least on the surface. But to take advantage of these factors you have to be constantly aware of their downside.

It is one thing to choose a dealer, and quite another to choose the correct dealer. Dealers' service offerings can take many forms, and each dealer usually has one or two major features that they highlight above all others. When analyzing dealers, first understand and rank all of their service offerings, then apply those findings to your trading style to arrive at your optimal dealer.
They learn about the dealer, visit the site, register for a demo, then scale the learning curve to grow comfortable trading with that dealer, using their charts, etc.
Frequently, the dealer with the best marketing is not the best dealer for the trader, or perhaps, for any trader. Traders use systems that work in the short term, mid term, or long term, with varying holding times and strategies. The type of dealer needed for each approach is quite different.
For every trader there is an optimal dealer. For many, the path of least resistance leads to the dealer who makes first contact, not the dealer who will provide the best trading outcome. The sophisticated
investor optimizes returns by matching his trading style to his dealer.

A comprehensive trading plan is framed by three main elements: the trading vehicle, or currency pair, the events that trigger market entry and exit, and the overall approach to trade management.
All of these factors work together. Trading a high spread currency using short interval entry signals and highly leveraged positions will probably be a failing strategy. Conversely, trading a tight spread currency using mid- to long-interval entry signals and little leverage has a better chance of success.
In the final analysis, the currency, signals, and money management approach must all gel together and exist without contradictions. Novice investors make critical errors by trying to patch together strategies from various sources, rather than systematically building, testing, and deploying a comprehensive trading plan. The sophisticated investor, who does this difficult work, operates with a complementary trading plan that creates consistent profit opportunities.

Forex is a 24/7 market but is the market action the same at all times? Of course not, but not many traders stop to consider the impact of this fact on their trades.
One of the best ways to validate a technical indicator is volume. When volume is strong, indicators tend to be more accurate.
Consider a trade in EURUSD at 10 AM EST vs. one at 10 PM EST. The first has an average trading range of 30 pips, the second, 10 pips. Entering the market during the morning trade creates some interesting possibilities the market may go against you or with you, but you should be prepared for a ride in either case. On the other hand, if the market goes against you 10 pips at 10 PM, how concerned should you be? Probably not as much as if it was 4 AM.
Anybody can trade based on technical indicators. The novice, in particular, ignores the importance of "when" as he makes trading choices. The sophisticated investor is the one who uses timing to his advantage creating profit opportunities and limiting losses by observing the market with more perspective.

Once an understanding of the external elements of trading is completed, the hard work begins: the trader must understand his own mind. The external elements are easy they are usually rational, factual, consistent, and ordered. The trader's mind, however, is far from all of that.
Emotion, or lack of discipline, is the greatest enemy of every trader. This is so true that one could argue that discipline is a more precious trading commodity than capital itself, since capital can only be sustained with discipline.
Emotion has no place in trading. Emotion causes the trader to act differently following large wins or losses. Emotion causes the trader to act irrationally when large moves occur. Emotion causes the trader to apply his trading system inconsistently.

If you took a survey of successful traders you would find many similarities. The traders would understand and apply all of the forces of forex. They would usually trade incredibly simple trading systems. They would trade using conservative, well thought out money management philosophies, and they would trade with absolute consistency.
For the institutional investor, absolute consistency is not a problem, since they have an array of personnel and resources at their disposal. For individual investors, there are three groups. Those who trade without consistency, those who trade with manual consistency, and those who trade with automated consistency. The novice, of course, is the trader who thrashes from trade to trade. The individual investor who uses consistent discipline or automation as the foundation of his trading activity maximizes his level of sophistication.
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