Finding Your Forex Trader
I have not traded currencies in more than 20 years. I am not sure if the Forex brokerage houses that proliferated in the early 1990’s are still around. One of the reasons I resigned was many fly-by-night companies were operating as Forex houses.
The industry was deeply tarnished; there was regular television coverage of broker houses being raided. The SEC moved to clamp down on these illegal brokerage firms.
But today there are online brokerage houses that you can connect with. When searching online consider the following:
- Make sure the brokerage firm is registered with the SEC and subject to other regulating bodies such as CySEC or Cyprus Securities and Exchange Commission, which is part of the Markets in Financial Instruments Directive or MiFID.
- The broker should be in business for at least ten years.
- The larger the number of instruments traded, the larger the client base and the more reputable the broker.
- Conduct due diligence; look for online reviews.
- Visit their website. If the design, functionality and content look like it was haphazardly done, stay away.
- Compare transaction costs, bank charges, availability of customer support and transparency in details.
You should ask for recommendations from friends who have traded in Forex.
When you trade in Forex, you are doing margin trading. This means you can still engage in the big trades with a little money. Think of margin trading as a gigantic pie with several slices. The size of your slice will depend on the amount you invest.
But this is also why Forex Trading is risky. Gains are magnified; but so are the losses. If we assume the pie is worth US$100,000, and you invested US$1,000, your slice is worth 1% of the amount of the pie. If the pie loses 25% of its value, your US$1,000 will only be worth US$750 and much less once you deduct commissions and other fees.
If the pie loses 50% of its value, you could end up losing more than you originally invested. This is when your trader would advise you of a “Margin Call.” Margin Call is additional capital infusion so you can trade again. Many Forex and Commodities investors wind up losing more money because of continued capital infusion.
Thus, finding a credible trader is important for the success of your trading. He or she should show greater concern for protecting your interest. Personally, I would not contract traders who recommend day trading.
This is the practice of going in and out of the market multiple times in the market. Traders will tell you they are taking small profits out but what they are doing is increasing your risk and making money at your expense. Traders get paid a commission whenever they exit the market.
Trading is subject to probabilities. The more frequent you enter the market, the greater the probability of hitting a losing trade.
A Position Trader takes a more conservative approach. His purpose is to run profits and cuts losses. When he enters the market, he has a profit objective and has included stop loss orders to make sure risks are limited.
Ask your prospective trader what his preferred approach is for trading. If he prefers Day Trading, take it from me and look for another trader.
How to Analyze the Forex Market
Market analysis is a crucial aspect of having profitable trades in Forex. When choosing your trader, you have to make sure he or she has a system for designing trading plans.
Regardless of what traders tell you, no trading plan will guarantee you a 100% success rate every time. If a trader tells you that, take your business elsewhere. Every trader has their approach to trading, but there is no perfect system.
Ask the trader to give you an overview of his/her system and to present his portfolio. If he/she does not want to present any evidence of performance, again, take your business elsewhere.
Given the high-risk levels of Forex, you should take some time to study the two most popular methods of market analysis:
1. Fundamental Analysis
As stated earlier, this refers to economic, social and political factors that could influence buying and selling decisions. A big part of my morning routine as a trader was to read wire reports from Telerate and Bloomberg. I looked for data and information that could affect currency movements particularly the US Dollar. These includes:
- Federal Reserve policies, i.e. rate cuts or hikes, currency depreciation
- Economic Data: unemployment, housing sales, payroll data, manufacturing data, retail sales, oil price hikes/declines.
- Political News: Wars, election-related items.
- Social Developments: incidents of unrest
Fundamental analysts use these types of information for positioning. From my experience fundamentals are only good for sales presentations and explaining the market to clients. Using fundamentals as your primary trading tool will get your client killed in the market.
2. Technical Analysis
This is the approach of using charts, graphs, and technical indicators to study the market. The purpose of Technical Analysis is to determine the underlying sentiment of the market.
An experienced Technical Analyst uses technical trading tools to paint a picture of the market. He gets a better idea of the trend, establishes profit and risk levels then pinpoints entry and exit points.
Every Technical Analyst starts out by learning Dow Theory, which uses chart patterns to determine market sentiment. From Dow Theory, the trader can proceed to learn other techniques such as:
- Elliott Wave Theory
- Fibonacci Ratios
- Relative Strength Index
- Moving Averages
My most successful trades came from technical analysis. I was fortunate to have had an amazing boss who took me under his wing and trains me in Elliott Wave and Fibonacci.
We used Elliott Wave to determine the market structure and find out trends and corrective movements. My boss always told me to have a primary reading and a secondary reading. The primary reading would be the most likely of all possible scenarios. Elliott Wave chief proponent Robert Prechter would say, “If you eliminate all the improbable scenarios, then what is left would most like be the most probable scenario.”
Once we are confident of our market structure, we would apply Fibonacci Ratios to determine profit objectives and cut-loss points. These numbers would be the basis for the cut loss instruction that would accompany buy or sell entry orders.
After the structure, profit and cut loss points have been established, it would be time to find the entry point. The much vilified Relative Strength Index or RSI was valuable in finding the entry point. The key was to find a divergent point. This is the level whereby continued declines in price would not deter RSI levels from rising above the 20% or the oversold zone.
We would also use RSI to confirm an exit point by looking for a convergent point. This is the level whereby a continued ascent in price would not deter RSI levels from falling below the 80% or overbought zone. RSI calibrated on an hourly basis was particularly powerful. If the divergence or convergence occurred within a period of 9 hours, you had a high probability of getting the best entry and exit points.