Thursday, March 06, 2008

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What makes a good Trading Strategy?

Ask most NEW traders, and they will tell you about some moving average or combination of indicators or a chart pattern that they use. This is, as the more experienced trader knows, an entry point and not a strategy.

Any trader who is more experienced will say a strategy should also include money management, risk control, perhaps stop losses and of course, an exit point. They might also say that you must let your profits run and cut your losses short. A well-read trader will also tell you that your strategy should fit with your trading personality.

BUT there is one other vital ingredient that many traders forget - and that is to fully understand the "personality" of what you trade. Some traders specialise in say, gold or Brent crude or currencies or they might specialise in a particular index such as the FTSE 100 or the Dow but many traders choose to trade shares. Indeed some traders dabble in a bit of everything. I think this is the area that causes many traders to fail or at least not reach their full potential.

In my view: You absolutely MUST specialise.

I am sure that on the surface most people would say that sounds sensible but here is why it is a MUST!

Superficially, many charts look the same. I bet if you had not seen the charts for some time and someone where to show you a chart of Brent Crude over 6 months and then a chart of Barclays PLC over the same 6 months you would be hard pushed to say which was which purely on the look of the chart.

However, I bet that if you found a trader who trades ONLY Barclays day in and day out and also found someone who trades ONLY Brent Crude day in and day out, both of them would easily identify which was which. WHY?

Because every share, index or commodity has it�s own "personality".

Some will be volatile intra-day, some will follow their sector or the main index (market followers), some will do their own thing, some will spike up and down regularly, some will stop at key moving averages and some will just plough through. Some will move by 5% on average before they retrace and some by 2%. Some will gap up or down regularly, some will not. You get the idea!

Therefore, no matter how good you are at analysing indicators, moving averages, trends and patterns, the same strategy WILL NOT work for everything. I would go so far as to say that a strategy that works well for Bovis Homes, for example, is likely NOT to work for BT Group - they have very different "personalities".

So let�s return to our question: What makes a good trading strategy? Let me answer with a series of ten questions that you need to find answers to, in order to build a REALLY GOOD strategy.

1. What do you want to trade (share, index, commodity, currency, etc)? If your answer is shares (plural) I would urge you to pick one typical share at this stage to really specialise. You can add more later.
2. What "personality" does that share, index etc have?
3. What entry system is the most reliable for that share?
4. What stop loss system is the most effective for that share?
5. What average risk will a typical trade carry?
6. What exit system works well for that share?
7. What is your trading personality (attitude to risk, losses, discipline, how much do you worry etc) and can you trade that strategy without overriding it?
8. What timescale do you want to trade? (Using intra-day or end of day data)
9. How much data do you keep on past trades to help identify strategy weaknesses?
10. How does all this fit with your trading objectives?

Once you have an answer to each question you need to do one final thing. Make sure all those things fit together and complement each other. For example, if the ideal stop loss position represents a big average risk and conflicts with your own attitude to risk, you need to start again. If you will override your exit point because greed makes you hang in for more, you need to think again. Perhaps you shouldn�t trade that stock in the first place - look for one with a different "personality" which will lead to a strategy you can trade comfortably.

It is a long and sometimes painful iterative journey. You might need to go round and round in ever decreasing circles over a long time. Testing and refining, testing and refining before you can truly have a reliable and repeatable strategy that REALLY WORKS for you.

THEN, you can look for other things to trade that have the same "personality" as your specialist stock, index, commodity or currency.

But if it were easy, everyone would be doing it right?

Good luck and enjoy your trading.

David Graeme-Smith
Short Swing Trading

Forex Snippets

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So which online forex trading training course is right for you? First off, decide what your level of expertise is. If you are a beginner, then you will benefit the most from a training program that defines and explains all of the operative terms as well as introduces you to the basics of forex trading.

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On the technical side of Forex trading, the first thing to do is to find out the trend in one?s trading time frame and the proper trading strategy for that trend. Some ride positions for months, while some ride positions for less than an hour or a day and their views of the trend obviously differ. For a trader who is running a position for months, a daily fluctuation may be just a meaningless noise while for a daytrader or an hour trader, a daily fluctuation could be a monstrous tsunami. Having a precise definition and a technique of identifying a trend and the turn of a trend in a trader?s time frame, and adopting the right strategies for that trend is the first elementary step in a hard school of trading. Imho.
I keep my technical side on any pair as simple as possible largely relying on other?s moves to see how I can take advantage of the situation. So for me the strategy is to "range trade". Please always give stop order per your risk profile when you open any new position. Medium-term reversals can be confirmed only in monthly, weekly and daily charts. Chart reading is not to predict the tops or bottoms of any move, but to confirm the change of trend as soon as they are made and adopt right strategies in that new trend. Good trades.

Headline News About Forex

European Mid Morning Update 6th March 2008

Thu, 06 Mar 2008 03:11:53 -0500
Lack of releases should keep the market waiting for tomorrow’s U.S. unemployment data

Releases from Europe:

February Forecast Actual
Swiss Unemployment Rate 2.8% 2.7%

Following two months of less than positive numbers from Switzerland a drop in unemployment will be welcomed. It shouldn’t have any real impact but will encourage the SNB that there is no great fall out in the economy.

The following economic releases are due today:

U.S. Mortgage Delinquencies (QoQ)

German Factory Orders (MoM) - 0.4%
German Factory Orders (MoM) +9.9%
U.S. Pending Home Sales (MoM) - 0.8%

U.S. Continuing Claims (23rd) 2805K

U.S. Initial Jobless Claims (1st) 360K

The Bank of England and European Central Bank will be announcing their rate decisions

The releases of the day are without doubt the rate decisions from the ECB and BOE though frankly the likelihood of any significant response to what is a 99% chance of being no change is highly unlikely.

Later there are the weekly jobless claims data which does raise a little chance of movement if the releases are significantly away from consensus forecast. The market will prefer to wait for tomorrow’s non farm payroll.

The employment data has not been a strong catalyst for a long time but given the sensitivity to jobs losses that will trigger further consumer uncertainty a bad number has the potential to trigger another bout of Dollar weakness.

And that leaves the market to digest overnight events with the news overnight that Ambac Financial will not be able to raise funds from investors but instead will issue US$1 bn in common stock to boost its balance sheet. The dilution of existing shareholder’s shares will disappoint those who had been hoping for a bail out for a larger institution.

The lack of news will leave the market in limbo until tomorrow and this should mean that the recent range trading should continue for another day and thus the Dollar should once again drift higher into the week’s range.

Note resistance at 1.5322 Euro that should cap on the day.

Note important support and resistance areas:

Res: 104.74-92 1.5427-72 1.0456-86 2.0073-98
Res: 104.17-40 1.5322-50 1.0390-10 1.9965-83

Spt: 103.20-50 1.5227-38 1.0307-33 1.9868-90
Spt: 102.60-97 1.5144-74 1.0216-48 1.9800-10

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