Succeed and win big in the Forex market
If you want to succeed and win big in the Forex market, take the time to learn technical analysis. In fact, I would strongly suggest learning 3-4 technical trading tools and modalities and do 2-3 months of mock trading.
I genuinely believe technical analysis is the best way to approach Forex trading. The news and information you read is available to everyone participating in the market and is subject to different analysis. If you trade using fundamental analysis, you will become a victim of your biases.
In economics, we have been taught that if a Central Bank cuts rates, money will flow out of that currency and move to another with better returns. In theory, this is correct, but the question is, “When will the market react?”
In the case of 3 May 2016, when the Reserve Bank of Australia cut its cash rate by 25 basis points, the market had already been anticipating the reduction. The Australian Dollar was already losing in value.
An analogy I like to use to differentiate fundamental analysis from the technical analysis is the martial arts. If you study forms-heavy martial arts, the instructor will teach you how to block and counter a strike “when it is delivered this way.”
In reality, when you get into a fight, a strike will not be “delivered this way” or that way. It could come in a variety of ways, and if you do not have the means to counter the number of strikes, you will get knocked out.
On the other hand, if you adopt a “fighting philosophy” of being able to adapt to different conditions, the chances of being beaten are less because you will be more prepared and have more skills available to counter different styles and situations.
Fundamental analysis is “forms-heavy martial arts” while technical analysis is the free flowing “fighting philosophy”. In a volatile market, you need to adopt less rigid strategies and utilize more flexible strategies.
Developing a Trading Plan
Before you enter the Forex market, you must always have a trading plan. While the trading plan is the responsibility of your trader, it should have your inputs. To a trader, a chart is like a work of art. The lines, points, angles and shapes that are found in the chart are a matter of individual interpretation. A good trader will not rush a trading plan.
Take as much time as you want. You should be comfortable with the decision to enter. If you miss an opportunity because you hesitated, remember that the Forex market’s high volume will always present opportunities.
Here are a few things to keep in mind when developing a trading plan:
- Validate the reason for your choice of currency. This is perhaps the only other value of fundamentals. Read up on the economic, political and social conditions of the currency. Identify potential developments in the future that may affect currency movements.
- Determine the amount of money you plan to risk. Always start out small. You can always increase your placement if you are on a winning trend.
- Conduct different time studies on the currency. An experienced trader takes time to study the historical trend of the currency and its underlying movement.
They use charts of a lesser degree to validate the movements of a chart of a higher degree. This simply means using a daily chart to validate a monthly chart, an hourly chart to validate a daily chart and a tick-by-tick chart to validate an hourly chart.
- Apply your analytical tools. If you have found your preferred tools of the trade, apply them consistently. Try not to use other tools into the mix as it may only serve to detract from your analysis.
- Come up with contingency plans. You should always keep the worst case scenario in mind and develop contingency plans.
Finally, implement Risk Management strategies.
The biggest reason people lose their investment in Forex is the absence of risk management strategies. Put simply; risk management strategies limit the amount of capital at risk in the investment.
Not having risk management strategies in place is like being Mr. Mega Bucks Hollywood Star and marrying the starlet you met during a Tequila-infused night on a beach in Cabo Wabo, Mexico. If you don’t have a prenup agreement in place, and things turn sour, she could legally run off with half of your money by next Tuesday.
When I do a trading plan, the cut loss points have to be established. I’m a very conservative trader. I follow the “2% Rule” in trading which states:
“Never risk more than 2% of your trading capital in any one stock.”
Thus, when I place a position in the market even after the cut loss points have been identified, I adjust it to comply with the 2% Rule.
If we get the right position, and the market moves according to our trading plan, I re-compute the 2% risk based on my client’s effective margin and adjust it upward. If the market moves against our position and the cut loss point gets hit, my client would still come out of the market with more money. In effect, my client would not lose more than 2% of his money.
Because 2% presents a narrow margin of error, it is possible that we could be taken out frequently even if our long term position is the right one. Again, I will have to validate the market studies and re-assess our entry point. If we are confident of our position, we could expand the risk to 6% of his trading capital.
Forex Trading is high-stakes trading; high-risk but high-reward. If you want to invest in Forex, approach it with a conservative mindset. Establish realistic profit objectives; do not be greedy.
If you attain the profit objective, cut your position so you can recover your initial trading capital plus some profit then ride the rest of the wave. But always remember to have risk management strategies in place even if you are trading on pure profit.
It is possible to win big in volatile markets if you know how to invest in Forex and manage with your mind and not your heart.