Test Your Forex IQ

The following questions test the knowledge you’ve acquired by reading this book. You are able to take this quiz, place your responses, and find the answers, as well as new questions IQ. E-mail Abe Cofnas with any questions you may have. Good luck! 1. What is the index that tracks U.S. dollar as an instrument for trading? 2. Which currency pairs are closely related to movements in gold, and which commodities are closely related to movements in the U.S. dollar? 3. Can you name the heads of the world’s key central banks? 4. Which time interval...

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GAUGING PERFORMANCE: KNOW THYSELF

Central bank of New Zealand The path to success in forex trading is not measured by profitability alone. Those traders who become profitable have the challenge of consistency. Can they do it over a sustained period of time? The duration of successful trading also requires adaptability. Conditions change in the geopolitical world and its global economic cycles that significantly impact forex. Those who are successful during periods of global growth...

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FACTORS IN CHOOSING A FIRM

While strategies and tactics are important, ultimately, the trades are placed at a forex firm. The industry is growing rapidly, and forex firms are available throughout the world. Selecting the right broker can make a difference. While there are essential features at most firms, the most important criteria for selection for a trader include the pip spread, dealing desk, customer service, and trading resources. Pip spreads are rapidly becoming much narrower. Just a few years ago, five-pip spreads were the standard. Today two-pip spreads are available....

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The Path to Success in Forex Trading

Ultimately, the knowledge gained in this book and in training in general needs to be applied to the real world. This involves taking practical steps and choosing a brokerage firm to trade with. Competitive pressures in the industry are narrowing the difference between firms in terms of pip spread, platform, and technology offered the trader. The really important determinants of success will involve how well traders are prepared before they start real trading, and whether the trading itself follows a sound action plan. By Abe Cof...

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LEVEL 5: THE $100,000 TRADING CHALLENGE

There are several challenges here within this level of account size that will enable a trader to prepare for full-time and professional trading. This level should be used if traders have achieved at least a 55-to-45 win-loss ratio. At this level, the trader has evolved to handle the pressures of trades that can result in gains or losses of $1000 per trade. For example, a 50-pip loss on a two-big-lot trade results in a $1000 loss. At a level of $100,000 in the account, such a size loss is 1 percent of the total. If the risk per day is 2 percent,...

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LEVEL 4: THE $50,000 75-TRADE CHALLENGE

A $50,000 account provides a serious capability to generate results that could provide a path to professional trading. The steps required to meet the challenges of a $50,000 account focus more on being able to handle the psychological pressures that emerge when more money is at stake. Many beginning traders put on too much leverage without first testing their skills in handling the larger risks per trade. 1. Scan all majors and cross-pairs to select to trade. 2. Raise your lot size to maximum of 30 mini lots (two standard-size lots). 3. For the...

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LEVEL 3: THE $25,000 FIRST-50-TRADE CHALLENGE

This level of capital presents new opportunities and new challenges. A $25,000 account offers the opportunity to trade a combination of more pairs, larger sizes, and longer durations. More sophisticated strategies can be put to the test. The trader at this level of capital can trade more than one strategy. Therefore, we divide the trade challenge into two phases. 1. Phase 1: Intraday Trading a. Select two currency pairs to start trading. b. Raise your lot size to maximum of five lots. Remember to use five lots only when you have a high confidence...

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LEVEL 2: THE $10,000 FIRST-50-TRADE CHALLENGE

Whether one starts with a $10,000 account or grows to that level, one gets the ability to test and train with more strategies than at $5000. The biggest difference is to trade with two currency pairs at a time. The $10,000 account should still trade with mini lot sizes, but we increase the lot level to a maximum of three lots. The strategy for effectively phasing into a $10,000 account requires that you first select the currency pair or pairs you...

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LEVEL 1: THE $5000 FIRST-100-TRADE CHALLENGE

In beginning to trade forex, the account size should not be less than $5000. At $5000, one has the ability to put on trades and strategies that can be used in any size account. In a $5000 account, one should put on a standard lot amount ($100,000) only when they recognize a very high probability setup. A 20-pip loss in such a trade would represent a $200 decline, which is a 4 percent decline. In the early stages of trading experience, a sequence of losses with big lots could wipe out the account. The best approach for a $5000 account size is to...

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Strategies and Challenges for Different Account Sizes

The experience of trading can be greatly affected by the size of an account. Traders starting with relatively large amounts of money often have the belief that more money in the account leads great success. Often, the opposite is true. Having a large account before you have acquired proven skills is an invitation to simply losing more money. Yet, size does matter in trading forex because alternative account sizes generate different combinations of strategies and tactics. In a sense, each account size could be seen as presenting different challenges...

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PREPARING TO TRADE

Preparing to trade is not a linear process; you’re always preparing to trade. But we are focusing here on key steps to take that promote a winning mind-set. These steps are effective because they are rituals of behavior that reinforce practices: 1. Scan yourself. The most important scan to undertake is a self-scan. When you wake up in the morning or right before you come to the screen after a break, observe your own state of being. 2. Take a walk and clear your thoughts. 3. Read the Financial Times while you’re having a cup of coffee or your favorite...

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HOW TO USE A SIMULATED ACCOUNT

Even if the critique of simulated trading is correct, the benefits far outweigh the costs. Let’s proceed with how to use the simulated or virtual account. 1. Set the account size to the level anticipated for opening an account. 2. Apply the sequence of trading challenges that are outlined in the previous chapter and test them in the virtual account. 3. Test yourself in the following challenges: a. Sequential wins. Try to get 9 sequential wins in a row of 10 pips or more. b. Stop loss test. Place an extra lot on each trade and place a stop loss...

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WHEN SIMULATION DOESN’T WORK

The major weakness cited in relationship to simulated accounts is that they cannot reproduce the emotions associated with trading real money. The fear and pain of loss, the anxiety of anticipation, and the joy of winning are not produced by the simulated account. The simulated account may be a clone of real trading, without a soul. Yet, this is a narrow view and, in fact, misunderstands even the drawbacks of simulation. Not being able to reproduce the emotions associated with the trading situation may be simulating the best psychological state...

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WHY SIMULATION WORKS

Training and simulation, when applied correctly under a well-planned sequence of instruction, work very well. It is inconceivable for airline pilots to fly jets without extensive simulation. Simulation allows for testing one’s strategies and tactics to discover weaknesses and does not have discovering strengths as a priority. War games are designed to discover the strategic vulnerabilities of the battle strategies, not to predict a particular battle. It is essential, in preparing for forex, to correctly use a simulated account to test-drive your...

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The Right Way to Use Simulation Accounts

One of the most useful tools to prepare for forex trading is the demo or simulated account. All firms provide these accounts. They enable a person to practice trading without the risk of loss. The trades go through an identical platform that would be used in real trades, but they do not execute. Instead, the profit and loss are hypothetical but tracked in the account history. The demo accounts are viewed and used by the forex firms as marketing tools for converting prospects into customer accounts. They are not designed to train people on trading....

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Putting It Together

At some point in time, you need to transition from observing the market and acquiring knowledge to applying that knowledge in putting on real trades. Some accelerate the process by quickly opening a forex account and beginning to trade. Many start a demo or virtual account and then proceed to trade. Both approaches are deeply flawed. Immediately starting a real-dollar account provides the realism of facing emotions in real trading, but the result is usually large and quick drawdowns. Those using demo accounts often experience beginner’s exuberance...

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MULTILOT TRADING

Putting on more than one lot is a milestone in the evolution of the trader. Multiple-lot trading provides enormous efficiency for the same effort. But it comes at a price. The risk of quick and large drawdowns is proportionally greater. Multilot trading becomes a double-edged sword. The new trader needs to learn how and when to put on multiple lots. The first rule of multiple-lot trading is the rule of three. Each trading decision can be broken...

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PROFIT LIMITS

Profit limits are orders that are designed to close a position with a profit. Technically, if the ongoing trade was to buy, for example, the EURUSD at 1.3200, then the profit-limit trade would be a sell limit at 1.3220 if a 20-pip profit was desired. The price would have to go through it to execute the trade. The limit order guarantees that price or better, but not worse. But the price has to go through the position. Many new traders see the price hit the limit and think it should have been executed. The question arises of how to form profit targets....

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TRAILING STOPS

The question of trailing stops is always a topic of controversy. Should one have trailing stops? Where should a trailing stop be placed? There are a variety of approaches that provide different answers. First, the trader is new to trading and has not accumulated many trades, and putting on a trailing stop could be detrimental to improvement in performance. This may not seem obvious. However, a trailing stop is a predetermined pip increment that is distant from the price. If the price moves further by 10 pips, a trailing stop set for a 10-pip trail...

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STRATEGIES FOR STOP LOSSES AND PROFIT LIMITS—ESSENTIAL COMPONENTS OF RISK CONTROL

Even if you mastered all of the elements of fundamental and technical analysis, trading success would still require risk control. The most frequent question asked is: Where should I put my stops? There is no definitive method for stops, but the most important first step is to determine the risk per day that a person wants to tolerate. For example, if you have a $10,000 account, and the risk per day is 2 percent, this means that the trader will tolerate a loss up to a limit of $200. Any level of risk has the consequence of providing a boundary...

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Alternative Setups and Trading Strategies

This book is designed to provide traders new to forex knowledge that helps shape trades. This knowledge includes fundamentals, charting analysis, technical indicators, and market psychology—to name just a few. The act of trading becomes the application of these areas of knowledge with the forex trading mixing-and-matching techniques and tactics. The setups used will vary along with the trader. Charting companies such as eSignal, VisualCharts, TradeSignal, and Prorealtime are examples of current excellent forex chart providers. These providers...

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POST-NEWS RETRACEMENT TRADER

This strategy is by far the most consistently productive and should be part of the initial set of strategies used by beginning traders. The idea is that after the break of the news, there will be retracement—the price will move from a high to a low, or from a low to a high and then retrace. The trader waits for the retracement failure and looks to enter a trade on the direction of the original break. The retracement failure point is most likely to be a Fibonacci-based pattern. After a news release, there is the initial move, but there can...

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NEWS TRADER

The news trader focuses on trading economic news releases. A great advantage is that the strategy offers effective trading in a short period of time. News trades should be considered seriously by those who cannot do forex trading on a full-time basis. The market patterns relating to the news trade display three distance phases. First, the price patterns go into a sideways pattern. This is because there is hesitation about the outcome. Then the news release occurs. A surprise result causes a sharp move in one direction or the other through the...

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CARRY TRADER

The carry trader is interested in playing the interest rate differentials for receiving income by buying the pairs that pay income to the account. The goal of a carry trade account is to get a superior return on the equity through interest. The carry trade will almost always be part of forex as long as interest rates around the world differ. Money tends to flow where it is perceived to get the best return. The most famous of the carry trade pairs is buying the New Zealand dollar–Japanese yen (NZDJPY). The NZD offers 8.0 percent interest,...

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SET-AND-FORGET TRADER

The set-and-forget trader is playing fundamental direction and is seeking very large moves of 150 to 300 pips. This trader doesn’t want to sit and watch the screen but play the longer moves and forces behind forex. This requires trading off 4-hour, daily, and even weekly charts and setting with risk control to target a 3-to-1 ratio of pip profits over losses. Trading cross-pairs such as the euro–Japanese yen (EURJPY), Australian dollar–Japanese yen (AUDJPY), and euro–Canadian dollar (EURCAD) provide wide ranges. One disadvantage is psychological....

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SCALPER

The scalper has the goal of a quick trade for small but leveraged profits. The scalper prefers to trade frequently for small moves instead of working for larger moves. The scalper focuses on the goal of taking profits quickly from the market and trades in a very limited time frame. Scalpers focus on the most recent price action and on small time intervals, from 10-minute candles to 1-minute candles. The trader seeing a high probable trade can decide to put on multiple lots and then attempt to obtain 5 to 10 pips or more. Parabolic patterns are...

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TREND TRADER

The trend trader (slide or hug trader) isn’t looking for reversals but wants to go along with the crowd. When a pattern confirms trend continuation, this trader enters into the trade. Many times, one hardly needs any indicators at all to recognize that a trend continuation pattern is intact. This occurred in a classic way on February 27, when the USDJPY pair proceeded to enter into a downtrend with increasing momentum (Figure 14.2). The chart reveals several shifts in the trend line, creating a fan of outer to inner trend. Trend patterns...

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BOUNCE TRADER

The bounce trader waits for prices to enter into sideways ranges. The price could be coming from an uptrend or a downtrend, but there are likely to be pauses along the way. The bounce trader will select a direction to trade and then wait for either the failure of the price to penetrate resistance or support. The price could in fact close above resistance or support but then proceed to fall back. Using a setup to confirm the reversal the bounce trader...

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Trading Styles and Setups

One of the major reasons that forex trading has such a wide appeal is the presence of different trading styles that can be applied. Those traders looking for very quick moves can adapt scalping strategies and tactics. A great portion of forex traders put on trades that have moderate-size intraday durations that allow the currency pair to move through a range. These traders go for 10 to 30 pip moves. Multiple day trades allow for larger profit objectives of 100 pips or more. Forex trading can also include the goal of trading for income. This goal...

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TIME AS A TOOL OF ANALYSIS: MULTIPLE TIME FRAMES

Once you become familiar with trading setups, using time as a variable of analysis is appropriate. In a real sense, the forex trader is a time traveler moving from the intrahour chart worlds to the outer reaches of weekly and monthly charts. The question often arises: Which time interval frame is the best to use to put on the trade? The answer is that each time interval generates trade-offs that the trader has to consider. A short time interval such as a 5-minute or 15-minute chart provides less risk exposure to wider moves, but also involves...

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FRUSTRATION IN THE CHARTS

When sentiment can’t find a release, the price compresses and waits for a break. The signature of such compression, frustration, and impending explosion of a breakout are the triangles. Triangles can be equilateral where the angles are all equal or shaped in an ascending or descending pattern. Figure 13.6 shows an ascending pattern because the largest side is trending up. The range is getting narrower, and there is no room for the energy to go. There must be a break. The strength of the break is not known in advance. But the trader seeing a triangle...

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SURPRISE, GREED, AND EXHAUSTION

When you see prices follow a parabolic path, trades will follow. The parabolic path is a general phenomenon of energy transfer. Figure 13.3 shows the general equation for what is called a “cubical parabolic hyperbola.” This equation closely models the path often taken by forex prices. This should not be a surprise because parabolic patterns are about energy flow and its subsequent loss. When you throw a ball, it follows a parabolic path as it loses energy. Parabolic paths of forex prices are patterns that show many emotions. First is surprise when...

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