Whatever you do in life, including Forex trading, the one thing that will do more than anything else to make the difference between success and failure will be goal setting.
It's a simple fact that the human mind works best when it has a clear roadmap to follow and, once you set yourself a goal, you clearly mark the destination on your roadmap. But a destination by itself is not enough and the way in which you go about goal setting is vital to filling in the route to follow to reach your destination. Let's look at an example.
You might decide that you want to make a fortune as a Forex trader. Well who doesn't? But this won't help very much unless you define just what you mean by a fortune.
Goals must be measurable. Your goal has to be concrete and you must be able to measure it if you're going to be able to assess how far away from it, or close to it, you are.
So, let's say you decide to set yourself a goal of making $1,000,000 in the next year. Now you have a destination. The problem is that, since you're probably new to Forex trading, are still learning the ropes and have relatively limited capital to play with at this stage, making $1,000,000 in the next twelve months is probably not realistic.
Goals must be realistic. Whatever goal you set yourself, and in whatever walk of life, it must be within your capabilities. There's little point in deciding that you're going to win this year's US Open Golf Championship if you've never even picked up a golf club.
So, let's rethink our target and instead of $1,000,000 let's aim for say $120,000. Next we need to break this down and put some marker posts on our roadmap. This first thing that we can do is to look at our target on a monthly basis rather than an annual basis. We've now got a series of $10,000 markers. Great, let's keep going and break it down further into weekly markers of $2,500. At this point we've got something that we can examine in the light of our current experience and it's simply a matter of asking whether or not this figure is possible. Can you make $2,500 trading Forex in the next week?
Goals must be attainable. It's one thing to be capable of reaching your goal (setting a realistic goal) but you also need to have the right tools, in the right place at the right time. If you're currently making $500 a weeks then it's unlikely that you're going to turn this into $2,500 overnight so your goal would not be attainable and you need to go back to square one and start again.
Assuming however that $2,500 is attainable, then there's just one last step you need to take before you set off on your journey. You need to paint yourself a mental picture of your destination.
Although you've set yourself a goal of making $120,000 the money itself is not really what you're aiming for, it's what you can do with the money that's important. You don't do to Las Vegas because it's Las Vegas you go to see the shows and play the tables. So, having got your $120,000 what are you going to do with it? If you're going to buy a new car then paint yourself a picture of yourself driving down the coast road into the sunset with the roof down. Now you've got a goal.
Set yourself a goal that is measurable, realistic and attainable and keep the picture of your goal clearly fixed in your mind and you'll surprise just how easy it is to reach your destination.
Forex trading strategy is becoming more the domain of the individual trader as sophisticated software continues to level the playing field in the currency markets. Forex is short for foreign exchange and are the markets where currencies are traded. Plainly stated, it entails the trading of the various versions of money found around the globe. When you go on a trip overseas and exchange your US Dollars for the local country's money, you are in reality participating in the currency markets.
The difference between this type exchange and that in the forex markets is that you are not primarily looking to book a profit from this exchange of currencies. One simply requires the native currency in order to having spending money with which to enjoy their trip. However, let's assume that you retained a few bills of the local currency left over as your trip ends and you go to board your flight back home. You go to the foreign exchange booth at the airport and swap the local currency back into dollars. That action completes a full fledged currency trade.
Those who participate in the forex markets are seeking to purchase a chosen currency and subsequently convert it back to dollars thus yielding a short term trading profit. If one is bearish on a given currency, you are able to engage in what is called shorting a currency. This is in essentially betting that the targeted currency will decline against your core currency. The currency markets can be thrilling and lucrative. Forex trading also comes with additional lifestyle benefits.
Forex traders enjoy the liberty associated with being able to work from home or wherever else they desire. Unfortunately, a significant majority of the plethora of work at home programs come with high fees and little income. The forex markets have been in existence for centuries. The various forex markets around the world are legitimate enterprises which attract the most sophisticated of institutional and retail investors. Abundant proof has been established in the form of large fortunes generated through the trading of currencies.
The international character of the forex trading markets translates to trading going on virtually around the clock. Night owls are able to trade currencies into the wee hours of the morning. Early birds have the ability to commence trading long prior to the time normal stock markets open. Forex traders can make their own schedule and trade from any location with access to the Internet. A successful forex trader has a lifestyle which is universally envied.
Cutting edge automated software programs is able to grant an even higher level of freedom through the automated execution of currency trades. One simply has to select their given trading strategy and acceptable risk levels and let the robot go off to work. There is no longer a need to remain fixed to your monitor for endless hours.
The biggest error that many novice currency traders make is to engage in the arbitrary predicting of the movement of various currencies without the assistance of software. Fluctuations of valuations of currencies within the forex markets often are rapid and based upon convoluted events. Traders who strive to engage in this challenge alone often find themselves outmatched. Fortunately, there is now publicly available sophisticated automated trading programs which help in combat against other forex warriors.
Forex trading strategy executed by robots presents a prominent advantage relating to a robot's ability to eliminate the adverse impacts many traders experience when emotions come into play. Novice forex participants many times experience the undesirable results when emotions begin to dictate trading decisions. Automated forex trading robots do not experience emotion and coldly trade guided by numbers and logic. Traders who are attempting to navigate the forex markets by intuition and guesses often don't stand a chance against these machines.
Let's start with a fact
If markets were scientific then we would all know the price in advance and there would be no market - it is the unpredictability of market behaviour that makes a market move.
So if markets are not moving to a scientific theory its pretty obvious that no scientific theory will work but its not all bad news you can make money which we will return to in a moment.
Popular Scientific Theories
The king of the scientific theories is Elliot Wave (and we will ignore the fact he died poor and never made any money with it) its not scientific you have to decide what to do! This means its subjective and not a scientific theory at all.
You do however get objective advice with the Fibonacci number sequence.
This says markets retrace by certain percentages and you can trade off these levels - Try it and see how quickly you get wiped out.
This theory always amuses me as it was not designed to be applied to financial markets it was devised to solve a theory to do with the copulation of rabbits in the 12th century!
There are many more but apart from the fact they don't work you have to wonder if anyone had found the key to market prediction with science, why they would sell it for a few hundred bucks on the internet!
HOW TO MAKE MONEY IN FOREX
Ok so forex markets cannot be predicted with scientific accuracy but they can be traded for profit you just have to see them for what they are an odds game.
Like the successful blackjack or poker player you simply increase your bet size when the cards are in your favour and decrease betting or don't bet at all, when their not.
Of course, just like the card player doesn't win every hand, you wont win every trade but over time you will win more than you lose and that's what trading is about.
It is no coincidence that some of the top traders ever came from the blackjack and poker tables and many made huge profits.
One thing that you always should be thinking about as a forex trader is forex risk management. Managing your risk can take many forms, but one form is to do hedging.
Hedging is essentially reducing or leveling your risk by making trades that potentially cancel each other out to some degree. Some newer forex regulations have removed the ability for direct hedging with US Forex traders. It used to be possible to go long and short on the same pair in the same account. This is still possible with accounts not based in the US, but in the US it's no longer allowed.
However, there is a workaround of sorts that is not quite as clean but still exists as a hedge.
In Forex, all trading is done in pairs. There are two currencies involved with each trade. Let's say you wanted to go long on EUR/USD, but you were concerned in the short term about USD strength. You could actually go long on the USD/CHF pair as well. This would give you a long USD position to offset any losses in your EUR/USD position. The downside is that you'd have CHF exposure. This is a never ending circle, there is not really any such thing as a perfect hedge. It will always be a hedge of sorts. However, you do lower your USD risk by making these trades.
The main thing to remember is that you are offsetting at least one side of your trade. Let's say you had been more concerned about your Euro exposure. In that case you could have opted to go short a pair like EUR/CHF.
The skill in creating these types of hedge trades is to look for a pair that contains the currency you want to hedge against, but has it paired with another currency that has a lower volatility level. For example, hedging with EUR/USD and EUR/JPY may not be a very good idea. The JPY has been known to be very volatile on its own. It's would be risky to have naked exposure to it.
The ultimate way to do these hedges is to put them on during risky times and take them off when the risk lowers. For instance, during certain news releases, like employment, surprises can produce large movements. It would make sense to put your hedge on before the release and take it off after.
You have to remember though that when you put on a hedge you are neutralizing your profit and loss. Your gains will be as limited as your losses. This is what the US Congress thought they were protecting against when they legislated against direct hedging.
If you plan on using this type of strategy to help manage risk, you'll need to remember that lot comparison between different pairs will not always break even on pip value. It always depends on the currency conversion between your currency and the currency pairs in question, and on which pair is the base pair in the pairs you're trading. The lot size on the first pair may be 10k, but the second pair may be slightly off if you wanted to perfect the hedge, it could be a number like 10,200k to be perfectly even.
Hedging is really not a perfect science, just one that works well for lowering risk somewhat in certain situations. It should be used wisely and it should not be considered a full safety net. Hedging is a great tool when used wisely, particularly when combined with other risk management techniques like good stop placement, and setting targets, it can help minimize losses during surprises.
Albert Einstein called compound interest "the greatest mathematical discovery of all time". We think this is true partly because, unlike the trigonometry or calculus you studied back in high school, compounding can be applied to everyday life.
The wonder of compounding (sometimes called "compound interest") transforms your working money into a state-of-the-art, highly powerful income-generating tool. Compounding is the process of generating earnings on an asset's reinvested earnings. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.
To demonstrate, let's look at an example:
If you invest $10,000 today at 6%, you will have $10,600 in one year ($10,000 x 1.06). Now let's say that rather than withdraw the $600 gained from interest, you keep it in there for another year. If you continue to earn the same rate of 6%, your investment will grow to $11,236.00 ($10,600 x 1.06) by the end of the second year.
Because you reinvested that $600, it works together with the original investment, earning you $636, which is $36 more than the previous year. This little bit extra may seem like peanuts now, but let's not forget that you didn't have to lift a finger to earn that $36. More importantly, this $36 also has the capacity to earn interest. After the next year, your investment will be worth $11,910.16 ($11,236 x 1.06). This time you earned $674.16, which is $74.16 more interest than the first year. This increase in the amount made each year is compounding in action: interest earning interest on interest and so on. This will continue as long as you keep reinvesting and earning interest.
Starting Early
Consider two individuals, we'll name them Pam and Sam. Both Pam and Sam are the same age. When Pam was 25 she invested $15,000 at an interest rate of 5.5%. For simplicity, let's assume the interest rate was compounded annually. By the time Pam reaches 50, she will have $57,200.89 ($15,000 x [1.055^25]) in her bank account.
Pam's friend, Sam, did not start investing until he reached age 35. At that time, he invested $15,000 at the same interest rate of 5.5% compounded annually. By the time Sam reaches age 50, he will have $33,487.15 ($15,000 x [1.055^15]) in his bank account.
What happened? Both Pam and Sam are 50 years old, but Pam has $23,713.74 ($57,200.89 - $33,487.15) more in her savings account than Sam, even though he invested the same amount of money! By giving her investment more time to grow, Pam earned a total of $42,200.89 in interest and Sam earned only $18,487.15.
Editor's Note: For now, we will have to ask you to trust that these calculations are correct. In this tutorial we concentrate on the results of compounding rather than the mathematics behind it.
Both Pam and Sam's earnings rates are demonstrated in the following chart:
You can see that both investments start to grow slowly and then accelerate, as reflected in the increase in the curves' steepness. Pam's line becomes steeper as she nears her 50s not simply because she has accumulated more interest, but because this accumulated interest is itself accruing more interest.
Pam's line gets even steeper (her rate of return increases) in another 10 years. At age 60 she would have nearly $100,000 in her bank account, while Sam would only have around $60,000, a $40,000 difference!
When you invest, always keep in mind that compounding amplifies the growth of your working money. Just like investing maximizes your earning potential, compounding maximizes the earning potential of your investments - but remember, because time and reinvesting make compounding work, you must keep your hands off the principal andearned interest.
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