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Frequently asked questions: 

Forex:

What is currency trading?

Simply stated, each country has its own currency.  Currency trading occurs when one country's currency is traded for another country's currency at the prevailing exchange rate.

How is currency traded?

All currency trading is traded in LOTS.  Each lot has a different amount of currency.  For example, a Swiss Franc lot has 125,000 Swiss Francs in it.  A trader does not buy lots in order to buy and sell it or trade it.  A trader opens a margin account, enabling him the right to trade it. 

What is Foreign Exchange / Forex / FX?

Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs.  International currencies are traded on floating exchange rates.  There is a daily average turnover of about US$1.5 trillion in the foreign exchange markets.  The foreign exchange market is known as the "Forex," or "FX" market.  It is the largest financial market in the world. 

Is there a central location for the Forex Market?

Forex trading is not managed through an exchange.  Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market. 

Who participates in the FX market?

Central, commercial and investment banks have traditionally dominated the Forex market.  Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors. 

When is the FX market open for trading?

Forex is a true global 24-hour marketplace.  The trading day begins in Sydney, and moves around the globe as each financial center comes to life.  Tokyo follows, then London, and finally New York.  Investors can respond in real time to any fluctuations caused by current economic, social and political events.   

What are the most common currencies in the Forex markets?

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks.  Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars. 

What is a margin account?

A margin account is a bond account. Before you can trade, you need to place a certain amount of money in what is called a margin account.  You are guaranteeing other traders that you can pay them all of the money deposited into the margin account if you lose.  That account is overseen by your broker.  He monitors your account when you trade.  He usually will not allow you to risk more than what is in your margin account.  The margin account exists so, as you win on a daily basis, they have a place to deposit your money. Similarly, when you lose, they have an account to withdraw the money. 

How is money made trading currencies?

Currencies are traded on a point or pip system.  A pip is another word for a point in the currency trading arena.  Traders are trying to capture points.  Depending on the currency, each point is worth a different amount.  For example, the British Pound is worth about $10 per point that is traded per lot.  If you trade 1 lot and capture 40 points, you just made $400.  If you trade 10 lots and capture 40 points, you just made $4,000.00, etc. 

What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price.  Making this move allows the investor to benefit from a decline.  Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more.  Making these moves allows the investor to benefit from changing market prices.  Remember! Since currencies are traded in pairs, every Forex position inevitably requires the investor to go short in one currency and long in the other. 

What is the difference between Futures and FOREX?

Currencies are the money that represents the monetary system from different countries; for example; the Japanese Yen, Canadian dollar, Brazilian Real, Swiss Franc, etc.  Futures trading of currencies are done in trading pits, where you are trading those currencies today, but for future prices.  FOREX trading is trading actual currencies at today's exchange rate with banks.  All trades are done through brokers or market makers. 

Am I buying actual currencies when I trade?

No.  With your margin account, you are buying the right to trade one "lot" of a currency.  Each lot equals a different amount of currency, depending on the currency being traded verses the US dollar. 

What is Day Trading?

Day Trading is when a trader buys and sells his lots or stocks that same day.  He is in and out of the market that same day.  He does not hold his position overnight or for a week, etc. 

What is the difference between an "intraday" and "overnight position"?

Intraday positions are all positions opened anytime during the 24-hour period AFTER the close of normal trading hours at 5:00pm EST.  Overnight positions are positions that are still on at the end of normal trading hours (5:00pm EST), which are automatically rolled over.   

How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing.  It is generally held that interest rates, inflation rates and political stability are top among important factors.  At times, governments participate in the Forex market in order to influence the traded value of their currencies.  These and other market factors such as very large orders can cause extreme relative volatility in currency prices.  The sheer size of the Forex market prevents any single factor from dominating the market for any length of time. 

What percentage of people really earns money on the FOREX?

While exact percentages are difficult to know, it is fair to say that most people lose money trading Forex, while a unique few make money trading Forex. 

Why?  

Most traders who enter the market are driven by emotions such as greed and fear.  They lack a sound equity management plan and know very little about the techniques of trading.  The fact is they are lacking adequate and proper education for the task at hand. 

Why do Professional Traders earn so much money?

Most Professional Traders are part of the unique few making money. As Forex is a zero sum game, those that win take from those that lose. Giving that most people lose, it goes without saying that professional traders are handsomely rewarded   

Can I become a successful Professional Trader?

Absolutely!  Trading is a profession that almost anyone can learn.  However, it doesn't happen over night or in a few weeks.  You must go through the same processes of education and mentoring that all professionals go through.  Generally, we are becoming conditioned by numerous national ads into believing that trading is simple.  If it is that easy why do we hear the horror stories about most people losing?  

Is trading a form of gambling?

All forms of trading and investment can be construed as a form of gambling, although neither are the same as playing the lottery, roulette nor betting.  Traders seek price fluctuations and investors seek return on investment.  Both require a calculated risk that is minimized by knowledge.  You are always gambling when you don't know what you are doing, uneducated, trading emotionally or with a " hot tip".    Calculated risks are taken in all investments.  People risk huge sums of money and not every one succeeds.  Even when there is a track record of success as in many franchises there is still no guarantee.  Their investment becomes a calculated risk.   

The FOREX market is no different.  When you trade not knowing what you are doing, or off a tip, you are gambling.  When you trade after you have been educated or mentored by a successful program, or by other successful traders, you are now taking a calculated risk. 

Can I lose everything when trading FOREX?

No.  You can't lose everything you own.  The under-educated will more than likely lose their margin account.  The educated will more than likely capture the loser's margin account money. 

How can I manage risk?

The most common risk management tools in Forex trading are the stop-loss order and the limit order.  The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position.  A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange.  The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders. 

What trading strategy should I use?

Both economic fundamentals and technical factors influence the decisions of currency traders.  Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price.  Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities.  Over time, the most significant price movements occur in close association with unexpected events.  Perhaps the central bank changes rates without warning, or an election puts an unexpected candidate in power.  News from conflicts certainly impacts currency pricing.  More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures. 

How often can trades be made?

As one might expect, trading activity on any particular day is dictated by current market conditions.  Some small to medium size traders might make as many as 10 transactions in a day.  By institutions not charging commission and offering tight spreads, investors can take positions as often as is necessary without concern for excessive transaction costs.

How long should a position be maintained?

Forex traders generally hold positions until one of three criteria is met:

• A sufficient profit has been realized from the position.
• A pre-set stop-loss order is triggered.
• A better potential position emerges and the trader needs to liquidate funds to take advantage of it.

How do margin calls work?

A margin call is generated when the equity balance in an account drops below the margin requirement for that size account.  If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions. 

Why don't we hear more about the FOREX?

Reliable sources indicate that about 3 trillion dollars of currency is traded daily on the FOREX market.  The majority of the volume historically is generated by major investors, banks, financial institutions and governments.  Thanks to the Internet, more and more people like us are beginning to learn of the opportunities and are getting involved. 

How can I get started?

You need to be very careful and exercise due diligence.  There are growing numbers of international firms offering various approaches to FOREX trading.  Look before you leap.  Do your homework and check references.  Many companies prey on the greedy promising phenomenal returns that are the exception, not the rule!  Find a company that doesn't promise the moon.  If it sounds too good to be true, it usually is.  Reputable firms have credentials.   Beware of "Black Box" systems.  It is against regulations for a firm to offer any guarantee of performance of any system.  What one can guarantee and offer is that their trading methodology is sound, productive and designed to be profitable.   Trading decisions should not be made by computer only.  A professional trader is a human being, with emotions, intuition and a brain to interpret what the computer tells him/her.  A trader is not a computer.  A professional trader has been educated and is disciplined to live by his or her trading methodology of good judgment trading. 

What is good judgment trading?

Good judgment trading is the exact opposite of a Black Box System.  It's a complete understanding of the market and its constantly changing environment.  It is a clear trading methodology utilizing high probabilities.  When a trader is educated, he no longer takes a shotgun approach to the market.  He takes a very focused "rifle and target" approach.

How much money can I make?

If you get involved with the right company offering the proper education and mentoring, you can expect to create a financial performance expectation plan.  Your plan will depend on how much you start out with, how knowledgeable and how unemotional you are.    

Never enter the market without first paper trading, which is trading pretend money.  Once you achieve a track record of consistently completing successful trades and prove to yourself you can trade, then and only then, should you enter the market with your own money. 

What do emotions have to do with it?

Where money is involved so are emotions.  Many people are quite knowledgeable about trading but can't handle the emotions.   Your emotions will be your biggest obstacle to successful trading.  Not the techniques.  To be a successful trader you cannot trade emotionally.  You must trade logically.  Our egos drive us to be successful 100% of the time, but in reality no one is successful 100% of the time.  Not even the professionals.  Successful professional traders clearly understand the market is about logic, not emotions.  They trade logically, not emotionally and they are the minority who trade successfully all the time! 

Are there books I can buy to educate myself?

Hundreds of books are available and we encourage you to read.  However, no one has written a "how to - step by step" book on how to become a millionaire over night or even in a month.  Why? Because successful trading is a process, it does not happen over night.   The market is vast and complex.  Hundreds of authors have written books about most of the characteristics of the markets.  There is a lot to know.   Success in trading comes by focusing on one or two markets and specializing in those markets.  One must decide what they want to trade, educate themselves and then focus in on that area of the market. 

What can your Institute do for me?

You will begin a personal involvement with a reputable firm and successful professional traders.  We will teach you all the processes for becoming successful.  We will provide you with personal continuing support, research and education as well as offer advanced trading courses as you progress.

 CFD,s:

What are Contracts for Difference CFD’s?

A CFD is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract. 

CFD’s are traded in a similar way to ordinary shares.  The prices quoted by many CFD providers is the same as the underlying market price and you can trade in any quantity just as you would with an ordinary share, you will usually be charged a commission on the trade and the total value of the transaction is simply the number of CFD’s bought or sold multiplied by the market price.  However, there are some distinct differences from trading ordinary shares that have made them increasingly popular as an alternative instrument to speculate on the movements of shares or indices. 

Advantages of Contracts For Difference (CFD’s)

• Contracts For Difference (CFD’s) are traded on margin so you can maximize your trading capital
• NO Stamp duty is payable (saving 0.5% compared to a traditional share purchase). 
• You can profit from falling or rising markets by trading long or short
• A single account can give you access to far greater range of financial markets. 
• You can limit & manage your risk using Stop Losses and Limit orders

Risks of Contracts For Difference (CFD’s)

• The geared nature of margin trading markets means that both profits and losses can be magnified and unless you place a stop loss you could incur very large losses if your position moves against you.
• It is less suited to the long term investor, if you hold a CFD open over a long period of time the costs associated increase and it may be more beneficial to have bought the underlying asset.
• You have no rights as an investor, including no voting rights.

Key Features of Contracts for Difference (CFD’s)

Traded on margin

Rather than pay the full value of a transaction you only need to pay a percentage when opening the position called Initial Margin.  The key point is that margin allows leverage, so that you can access a larger amount of shares than you would be able to if buying or selling the shares themselves. 

The margin on all open positions must be maintained at the required level over and above any market profits or losses in order to keep the position open.  If a position moves against you and reduces your cash balance so that you are below the required margin level on a particular trade, you will be subject to a “Margin Call” and will have to pay additional money into your account to keep the position open or you may be forced to close your position. 

Trade in rising or falling markets

CFD’s allow you to trade LONG or SHORT.  A Long Trade is where you BUY an asset with the expectation that it will rise, just as you would when buying a normal share.  A Short Trade is where you SELL an asset that you do not own in the expectation that the price will fall and you can buy the asset back at a cheaper price.  Shorting in the ordinary share market is almost impossible.  With CFD’s, however, you can go short as easily as you go long.  Giving you the ability to profit even if a share price falls if you trade the right way. 

No Stamp Duty

Because with CFD’s, you don’t actually physically buy the underlying shares, you don’t have to pay stamp duty.  Saving 0.5% when compared to a traditional share deal. 

Commission

Commission is charged on CFD’s just like on an ordinary share trade, the commission is calculated on the total position value not the margin paid. 

Overnight Financing

Because CFD’s are traded on margin if you hold a position open overnight it will be subject to a finance charge.  Long CFD positions are charged interest if they are held overnight, Short CFD positions will be paid interest. 

The rate of interest charged or paid will vary between different brokers and is usually set at a % above or below the current LIBOR (London Inter Bank Offered Rate). 

The interest on position is calculated daily, by applying the applicable interest rate to the daily closing value of the position.  The daily closing value is the number of shares multiplied by the closing price.  Each day's interest calculation will be different unless there is no change at all in the share price. 

Trade Shares and Indices

CFD’s allow you to take a view on shares and indices and some CFD providers also allow trading on currencies and sectors. 

Risk Management Facilities

Because of the higher risk nature of trading on margin, many CFD providers offer comprehensive Stop Loss and Limit Order Facilities so that Investors can manage their risk in fast moving markets. 

How do Contract For Difference (CFD) work

The best way to demonstrate how a CFD works is to look at some key examples:

Share CFD Example: Long Trade  

A long trade is a position that is opened with a buy in the expectation that the share price will rise.

Vodafone is currently trading 140 – 140.5 

Investor A believes that Vodafone is going to rise and places a trade to buy 10000 shares as a CFD at 140.5p.  The total value of the contract would be £14050 but they would only need to make an initial 10% deposit (initial margin) £1405. 

The commission on the trade is £28.10 (£14050 x .20%) and because they are buying a CFD there is no stamp duty to pay. 

A week later Investor A’s prediction was correct and Vodafone rise to 145 – 145.5 and they decide to close their position.  By selling 10,000 Vodafone CFD’s at 145p.  The commission on the trade is £29 (£14500  .20%). 

The profit on the trade is calculated as follows:

·        Overall Profit

To take calculate the overall profit you must take into account the commission and financing charges on the deal.

Share CFD Example: Short Trade 

A short trade is a position that is opened with a sell transaction in the expectation that the share price will fall. 

Barclays is currently trading at 555 – 556. 

Investor B believes that Barclays is over valued and is going to fall and places a trade to SELL 2000 shares as a CFD at 555p.  The total value of the contract would be £11,100.  Even though they are selling short, they would only need to make an initial 10% deposit (initial margin) £1,110.  The commission on the trade would be £22.20 (£11,100 x .20%). 

A week later Investor B’s prediction was correct and Barclays falls to 545 – 546 and they decide to close their position.  By Buying 2000 Barclays CFD’s at 546p, the commission would be £21.84. 

The profit on the trade is calculated as follows:

 ·        Overall Profit

To calculate the overall profit you must take into account the commission and financing charges on the deal, remember with a “Short” sell the financing charge is credited to the holder. 

Index CFD Trade Example  

Although indices are not quoted like ordinary shares with a BID and ASK price, CFD providers will quote a BID and ASK price for index CFD’s and allow you to trade indices as a CFD. 

The FTSE 100 is currently trading at 4890 and XYZ CFD.com is quoting a spread of 4887 – 4893 on the FTSE. 

The price of 1 CFD is £4890., because of the size of an Index Trade and the reduced volatility when compared to an individual share the margin requirements are usually lower, we have used a margin level of 5% in this example. 

Investor A believes that the FTSE is going to rise and buys 3 Index CFD’s at £4890.  A total value of £14670, the margin required is just %5, £733.50. 

A week later the FTSE has risen and the daily FTSE spread is now 4990 – 4996. 

The profit on the trade is calculated as follows:

·        Overall Profit

To calculate the overall profit you must take into account the commission and financing charges on the deal, however not all CFD providers charge commission on Index CFD’s. 

Stop and Limit Orders

Because of the geared nature of trading on margin it is essential to have access to facilities that let you open or close positions if certain levels are reached. 

·        Limit Order

A Limit order is one that is executed at a better price than the prevailing market price, i.e. for a Long CFD Trade when the stock drops to a certain level or for a Short CFD Trade when the stock rises to a certain level. 

Example: Vodafone is currently trading at 140 – 140.5.

Investor A wishes to buy 10000 Vodafone as a CFD with a limit of 135, therefore they do not wish the order to be opened unless Vodafone reaches 135. 

This order is held by the CFD Provider until the limit level is reached. 

The next day the Vodafone is 134.5 – 135 and an opening trade of 10000 Vodafone is opened at the limit level of 135. 

·        Stop orders

A stop order is one that is executed at a worse price than the prevailing market price one of the most common uses of this is a stop loss order.  It is possible to make substantial profits when trading CFD’s as well as substantial losses, which is why many CFD providers allow you to place a stop loss when you open a trade: 

·        Stop Loss

A stop loss is a price level set by the client on a particular trade that if reached automatically closes out the particular position at the desired price.

            NOTE: Once a stop is triggered, it becomes an At Best market order, and there is no  
                           guarantee it will be filled at any particular given price. Therefore, stop orders may
                           incur slippage depending on market conditions. 

Example: Lloyds TSB is trading at 467 – 468.

             Investor A and Investor B both believe that Barclays will rise and both buy
          2000 Lloyds TSB at 468 as a CFD. "However, Investor B also places a
          stop loss at 457 when he opens the trade."

 The following day Lloyds drops steeply during the day trading down from 467 to 430.

Investor A has not been watching the price of Lloyds all day and therefore when he checks the price at the end of the day it is now 430 – 431 and he is running a £760 loss.  Investor B has not been watching the market either however his position has been automatically closed out at his stop loss level of 457 limiting his loss to just £360. 

A stop order can also be used to open a trade for instance if you wished to open Long CFD position you may wait until a stock was moving in the right direction and set a level higher than the prevailing market price. 

            NOTE:       Once a stop is triggered, it becomes an At Best market order, and there is no  
                            guarantee it will be filled at any particular given price. Therefore, stop orders may
                            incur slippage depending on market conditions. 

Trading Strategies

Short Term Trading

The ability to gear up your trading capital by trading on a margin combined with no stamp duty makes the CFD an ideal instrument for short-term trading. 

Hedging

You can also use a CFD to protect your long-term holdings against variable market conditions.  It may be cheaper to open a short CFD position in the shares rather than sell the physical shares in order to buy them back later. 

Pairs Trading

If you believe that one company is undervalued compared to another company (e.g. Barclays against Lloyds) you can use CFD’s to go long on the cheaper stock whilst going short the more expensive stock. 

Tax Efficient Trading

If you have a holding of physical shares you can sell CFD’s against this without crystallising a potentially taxable capital gain.  This enables you to control the time at which you realize capital gains or losses and may reduce your tax liability.

Origins of the Bull & Bear terminology

Two of the first words the new trader learns are the market terms; bull & bear markets and how they are characterized.  Very few actually stop to think how and why these terms are used and where they originate.  Although there are several explanations, there are some that tend to pop up more frequently than others.  Here they are: 

One of the earliest documentations of the terms being used is from the book: Every Man His Own Trader written by Thomas Mortimer.  During the 1800’s London’s equivalent to Wall Street was called The Alley.  According to the writings in this book a bull wasn’t someone that merely thought that the market was going up but was the same as an investor who uses margin.  These “bulls” hoped to buy stock with no money and to sell them before the payment became due.  The two quotes below might give more insight in to the description of bulls and bears in the 1750’s: 

“a man who in March buys in the Alley 40 000 pounds in May, and at the same time is not worth ten pounds in the world … is a Bull, till such time as he can discharge himself of his heavy burden by selling it to another person, and so adjusting his account, which, if the whole house be Bulls, he will be obliged to do at a considerable loss; and in the interim (while he is betwixt hope and fear, and is watching every opportunity to ease himself of his load on advantageous terms, and when the fatal day is approaching that he must sell, let the price be what it will) he goes lowering up and down the Stock Exchange, and from office to office; and if he is asked a civil question, he answers with a surly look, and by his dejected, gloomy aspect and moroseness, he not badly represents the animal he is named after.” 

A bear was seen as: 

A person who has agreed to sell any quantity of the public funds more than he is possessed of, and often without being possessed of any at all, which, nevertheless, he is obliged to deliver against a certain time: before this time arrives, he is continually going up and down seeking whom, or.whose property he can devour; you will find him in a continual hurry; always with alarm, surprise, and eagerness painted on his countenance; greedily swallowing the last report of bad news; rejoicing in mischief, or any misfortune that may bring about the wished – for chance of falling stocks, that he may buy in low, and so settle his accounts to advantage. 

The second probable explanation comes from further back than the 1750’s.  This refers to a time where people exchanged and sold fur skins.  Usually the middleman who sold the bearskins would sell the skins although he has not yet received them.  This by definition will in fact make him a “short seller”.  The sellers would promise their customers to deliver these already paid for bearskins while hoping that the future purchase price will decrease from the current market price.  If and when the purchase price decreased by the time the middleman bought the actual skins from the trapper/hunter the middleman will actually make a profit on the “spread” between the purchase and sell price.  The men were known as “bears” or “bearskin jobbers” which described a person who expects for a decrease in the market’s value. 

The most probable story dates from the early years in Spain and Mexico.  During these times one of the favorite pastimes was to put a bull and bear against each other in an arena to fight to the death.  Usually the caught bear’s hind leg was tied to a raging bull’s front leg while the spectators place their bets.  One such account is shown below as described by the nephew of ranchero Mariano Guadalupe Vallejo: 

“The bull began the fight by charging the grizzly with his horns.  A blow from the grizzly’s paw did not stop the onset.  In a moment they were rolling over each other in the dust.

But the bear finally, though badly gored, got his teeth fastened into the bull’s neck, and bull was pulled to his knees.  The bull’s tongue hung out.  This was what the bear wanted.  He got his claw into the bull’s mouth, pulled the tongue out still further, and then bit it off.  With this the bull gave up the contest, and soon after both animals were dispatched.”

Reading this it becomes quite clear why the typical market movements are described using this terminology as the bull would storm his enemy thrusting upwards with it’s horns.

The bear on the other hand will rise to his hind legs and swat downward on to its enemy usually falling on top of it before they sank their teeth to seal the prey’s fate. 

The role of Market Makers and Brokers

Market Makers will typically “make a market” by quoting their won prices, a tow-way price – i.e. a “buy” price and a “sell” price.  This price will be valid until they make a new price.  The gap between the buy and the sell price represent their profit after providing for costs, and can be seen as the “fee” payable per roundtrip transaction. 

Forex Brokers find good prices for their clients to deal at, thus acting as conduit putting the best bid and offer together to provide the most competitive quotation. 

They will also provide some value added service to the clients in the form of research, news etc. 

Transaction Example: 

When a client requests to buy a certain amount of lots of a currency at a certain quoted price, the dealer will typically have to offset this position: 

What it means: “To offset an initial purchase, a sale is made, and to offset an initial sale, a purchase is made”  Example: If you want to offset a long position, a sale of equal size will be made; thus – there will no longer be a participation in any gains or losses to the position.  It is for the above reason that one can experience slippage in fast moving markets (where the price you get, differs from the price quoted).  When requesting a certain lot size in a very fast moving market, the dealer needs to offset that same size with its dealing partners, and this could be a difficult task when the market is moving 100 points in a matter of seconds, and the outcome – Slippage 

Conclusion: 

It sounds pretty devastating that one can be slipped in certain market conditions, but understanding the role of Market Makers and Brokers, and how transactions takes place clears up a lot of questions investors raise daily.  

The importance of a trading checklist

A “Trading Checklist” of prioritized criteria not only will help you decide when to execute a trade, but will also help you identify potential winning trades.  You’d be surprised how a visual checklist can resolve uncertainty in your mind. 

What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader.  Each trader should have his or her own set of criteria that helps determine a market to trade and the direction to trade it – including when to get in. 

In trading terms, the more you know about chart patterns, technical indicators, fundamental factors, etc., the more tools you will have in your “trading checklist” and at your disposal when trading the markets. 

Every trader should have at least a few trading “tools” that help determine a trading opportunity. 

Listing those tools on paper, in order of importance, and then examining that list when deciding each trade, should make easier the sometimes –difficult task of “pulling the trigger”. 

Trader’s Psychology

Mental rehearsal: Coping with stressful trading.

Every trader knows that a trading day can be hectic, which emphasizes the importance of making split second decisions.  This however, is easier said than done.  Let’s look at a practical example: 

Trader A has trouble understanding the most important part of his trading.  On the surface he is doing everything according to the book.  He does a market assessment, defines where his system could give him possible entry points and outlines his trading plan and risk assessment.  He is calm and collected during the planning stages but chokes as soon as he needs to pull the trigger.  Sound familiar?

This is a common ailment even along not so novice players as all the careful planning that has gone into this is to no avail when the traders fails to enter the trade at that moment.  The truth is that anxiety and uneasiness does not need to have an influence on your trading.  One way of doing this is by applying a technique of mental rehearsal to help you cope with the emotions that handicap your trading performance. 

During hectic market movements the trader might easily be caught off guard, which in most cases seriously hampers his / her ability to stay calm and rational.  Neutralizing this feeling by means of mental rehearsal can be done in the following manner.  Mental rehearsal consists of pretending a set of conditions is occurring while in a safe and quite place.  This can be described as making a videotape of a set of market events and to replay it in your mind over and over again.  For example, you can imagine having to make a trade in a split second and enter and exit under stressful conditions.  IF you are the kind of person who would find making a trade under these conditions difficult, you can try practicing making the trade effortlessly through your imagination. 

By rehearsing these conditions under ones own terms and conditions you can learn to control these conditions.  AS soon as you feel anxious during these situations, you can start using relaxation techniques.  These include deep breaths or tensing the muscles and then relaxing them gradually. 

With practice you will be able to replay the movie without any sense of anxiety or uneasiness. 

Over time you will be able to face actual stressful events during the trading day, with ease.  Do not trade against yourself by giving heed to your emotions, rather neutralize them and soon you will be navigating your trading to profitability effortlessly. 

Overconfidence, the pro’s and cons. 

As soon as a trader is overconfident he/ she falsely believe that they can trade beyond their skill set.  The problem with over confidence is that it gives an exaggerated view of the person’s abilities, which is fatal for trading.  It is of utmost importance that one has to have an accurate and realistic perception in the trading world.  When people feel inadequate, they often tell themselves that they are superior so as to bolster their feelings of incompetence.  Every person feels inadequate at a certain stage, and the “I’m doing great” mental view soothes the feelings of incompetence.  Telling yourself that you are a smart and brilliant trader has its time and place.  It’s fun occasionally, but if you do it too often, you may never look at your trading skills objectively, and take the necessary steps to build the skills you need to become a successful trader.  It is best to restrict such self –enhancing strategies to off hours rather than during the trading day. 

Being overly optimistic is not a very useful tool during the trading day, but can prove to be very useful in the off hours.  During off hours, it can be used as an effective motivator, especially when you encounter a transitory set of losing trades and feel unrealistically disappointed about your current circumstances.  During these times, you may want to convince yourself that if you take specific action and trade a detailed trading plan, you can get yourself out of a minor rut, and should you make a few more trades, things will turn around. 

Overconfidence is a big problem, however, when you overtrade and do so impulsively.  The overconfident trader may put on trades that just won’t pan out.  Over time, a great deal of money is lost, and it is hard to get out of the hole.  You must gain an accurate assessment of your skills, identify your weaknesses, and build skills to compensate. 

Focus on performance rather than potential rewards to your ego and social status.  Doing so will help you develop an accurate view of your skills and a realistic level of confidence.  And if you have an accurate level of self-confidence, you will trade more profitably. 

In search of the Holy Grail 

Traders become very cynical, and believe that intra-day trading is nothing more than gambling with randomness and noise in general.  That does not mean that money cannot be made, but frenetic punting to end up a few dollars ahead at the end of the day does not represent a good return for the stress involved? At least not for some of us! Breakouts and trend following with positions lasting a few days to a week or two is better for the temperament! 

Mark Douglas once said that there is no such thing as a Holy Grail, an edge is all you can ever really get but it’s all you really ever need. 

Add some money management skill and the ability to recognize trend, warning signs and higher degree support and resistance levels and the trader stands within an arms grasp of the “holy grail”. 

That may be as close as he ever gets but that is frequently close enough! Unfortunately, however, it is the emotional aspects of trading and an inability to think in probabilities that most stumble over in their quest for consistent results.  When you are able to design a study that measures the trader’s emotions and issues a “stop trading” alert, you will have indeed found the “holy grail”! 

Standing on the shoulders of giants 

What separates the world’s best Traders from the average investor? Can the average investor learn from these traders? We would like to think so.  Here are few traders deemed as being the best in their fields:

Nicolas Darvas turned a $ 36 000 account into $ 2 000 000.00 in 18 months.

Ed Seykota, Turtle Trader, turned $ 5 000 into $ 15 000 000.00 in 12 years. 

Jesse Livermore made several multi-million dollar fortunes in the early 1900’s.

Richard Dennis, another Turtle Trader, made between $ 100 and $ 200 million.

George Soros is believed to be one of the greatest Traders of all time

Impressed? The question one needs to ask at this stage is; how were they able to achieve such enormous success? 

There are common factors, which can be observed through most of the successful traders’ strategies and methods: 

• They have a system which they strictly follow.
• Most of them have a trend following trading style.
• Most of them have a mid- to long –term approach.
• They have no fear and greed mentality.
• They have absolute discipline and stick 100% to their system.
• Their trades are fully planed; they are prepared for all scenarios in advance.
• They know that a system goes through bad times and good times.  Cut losses early and let profits run.
• Their systems fit to their personality.

Although these factors have been hammered into our heads, the truth is that the average investor does not behave in this manner.  Traders wiped themselves out completely before the achieved success.  Let’s look at a few behavior patterns that could cause this: 

• Losses are not cut early enough.
• Investment with a short-term horizon becomes a long – term horizon in hope of raising prices.
• People listen to the advice of their investment Brokers and Analysts.
• People have no plan for their investments.
• Money Management is not considered at all.
• People use trading styles that do not fit their personalities.
• Greed and fear is omnipresent.

Taking this into consideration one can derive at the next few points to help the average trader to learn from these giants, and thus better their own trading: 

Each trader has his / her own personality.  Some of the traders have a very aggressive trading style and are trading very frequently.  Others only spend a minimum of effort.  Any trader needs to reflect on his / her own personality profile and choose a trading approach, which fits his / her personality. 

A trade needs to be completely planned in advance.  People plan a lot of their activities, but do they have a plan when they enter the market? A trader needs to have a system that helps him to be prepared for all scenarios of a trade.  One needs to know in advance when to buy, how much to buy, and when to exit. 

The most important component of a trading system is Money Management.  Surprised? 

Lots of traders spend most of their time developing very sophisticated trade entry system. 

The most important question of a Trading System is how much to invest and how many positions to trade at the same time.  A “can do” attitude is required to trade successfully.  Most people probably have this dream of being financially free, but only a few reach it.  Why? 

Because of phrases like ”~it would be great, but I can’t” or “one day perhaps I will win in the lottery, but until then I must work hard~? They have already lost.  A positive mindset is lacking. 

Fundamentals in the Forex Market 

Insight 

Changes in a countries economic state will directly affect the price and volume of that country’s currency.  It is very important to realize that these economic indicators are not the only things that influence a currency’s price.  One has to keep in mind that there are technical factors, third party reports, and other things that can also drastically affect a currency’s valuation. 

When conducting Fundamental Analysis keep these tips in mind: 

·        Always keep an economic calendar on hand, listing the indicators and the RIGHT times they are due for release.  Keep an eye on future events as markets often moves in anticipation of a certain indicator or report due for release at a later stage.

·        Be informed of the indicators attracting the most market attention at any given time.  These are normally the ones causing large price and volume movements.

·        Know market expectations for data, and pay attention to whether or not these expectations are met.  If there is a drastic difference between expectations and the actual result, be aware of the possible justifications for this difference.

·        Do not react too quickly to any news.  Often the numbers are released and then revised, changing things very quickly.  Pay attention to these revisions, as they may be useful in seeing trends.  It is important to look at all these economic indicators, private reports and more important, to understand these numbers, what they mean, and how they influence a nation’s economy. 

Leading and Lagging Indicators 

“Leading Indicators” 

These types of indicators generally signal future events, in other words anticipating future direction of an economy. 

Here are some examples of Leading Indicators:  

• Weekly Manufacturing Hours: The average hours worked per week by production workers.  They lead the business cycle as the hours will normally be adjusted before the changes are made in a workforce.
• Building permits, and housing: Number of residential permits issued gives a pretty good idea on construction activity = economic production.
• Consumer Expectation: Reflects the consumer’s attitude towards economic conditions.  Data is collected monthly and classified as positive, negative or unchanged.
• New order – Manufacturing, consumer goods and materials: Goods used by the consumer.
• Money Supply: If money supply does not keep up with inflation, bank lending may fall = difficult economic expansion.

“Lagging Indicators”

An indicator showing change after a down or upturn in the economy has begun, and helps economists predict the duration of the economic turn. 

Examples of Lagging Indicators Include: 

• Duration of Unemployment: Measures the number of weeks that individuals counted as unemployed have been out of work.  Decreases occur after expansion gains strength, and increases after a recession has begun.
• Average Prime rate charged by banks: Prime rate is considered to be a benchmark in establishing interest rates, but changes tend to lag behind movements of general economic activities.
• Commercial and industrial loans Outstanding: Measures the volume of business loans held by banks and commercial paper issued by non- financial companies.
• Change in Consumer Price Index for service: Measures rate of change in service component of the CPI.

It is very important for the Investor to have a pretty good idea on the Economic Indicators influencing the market place.  These sections on “Leading and Lagging Indicators” gives the investor examples of some of these indicators, thus making the investor aware that looking out for these indicators forms an important part of market Analysis. 

Employment Report and the Economy 

The number of jobs created can give quite a bit of information on the economy:

• Is it improving
• Overheating
• Or is it wanting

The report itself is often revised long after the initial release and it therefore very difficult to predict as confirmation of economic conditions.  Numbers can swing quite unexpectedly from month to month being way off from expectations for months in a row. 

Example:

A post recession Scenario: 

New jobs may come in far below expectation 

There might finally be a month where 3 times as many as expected might show up. 

Thus: The Federal Reserve raises interest rates and takes turns to overheating. 

The next month might be a situation where a horrible figure comes out and information from the business and household surveys could be increasingly divergent. 

The Employment report does however provide worthwhile information, and expected results often indicate that something unusual is going on with the economy and employment. 

Spring 2004

Large divergence between household and establishment surveys and was perhaps caused by a rapid shift in the nature of employment: Reduced willingness in employers to hire permanent fulltime workers caused by the following possible factors: 

An economy that has been struggling for several years. 

New technology making it possible for employees to work remotely. 

Increases in hiring efficiency making it easier to find skilled employees. 

The trend moved to employing people of all skill levels on a contract basis, recognized by the household survey, but not the establishment survey creating an illusion of a jobless economic recovery. 

A 1995 study by the Federal Reserve Bank of New York showed that the market most driven by the Employment Report is the Currency Market, which noted several ways in which the report impacted this market. 

An unanticipated rise in the Employment Report signals a rise in the dollar for example, and reactions to surprises are related to the implications on short-term interest rates.  The Currency market has become very sensitive to the data and pays attention to the establishment survey. 

The Bond market is concerned with the report in relation to inflation and interest rates: A strong report indicates an economy that is heating up too quickly creating fears of inflationary pressure.  It can also create concerns on tighter monetary policy and forthcoming interest rate increases. 

Surveys 

Household survey – Interviews 60 000 households.  This survey includes just about every kind of employed person, including those that are self-employed, agricultural workers and those working at home raising a family. 

Establishment survey- Takes data from 160 000 businesses + government agencies covering 400 000 work sites or one third of all non – farm payroll workers.  Only includes employees of companies that provide payroll counts, so it misses a significant demographic and can misrepresent the rate of employment when the number of self-employed people hits the roof. 

The Employment Report is released monthly but the actual Surveys only covers a single week that includes the 12th of the month.  

Business Cycle Survey 

The business cycle can create a situation where the number of self- employed persons fluctuates greatly: 

Due to recession, layoffs and a tight labor market, a number of people could go into business for themselves, and many skilled laborers become consultants.  These people are often unaccounted for in the establishment survey, and a move in that direction tends to exaggerate the unemployment rate. 

In an accelerating economy companies will start hiring again, and self – employed individuals may decide to go back on the payrolls for security reasons.  This causes the divergence between the households and establishment surveys to reverse. 

The rate of employee turnover is also a factor influencing the payroll survey, where people changing jobs within the reporting period could be counted twice, once by each employer, and this is ongoing influencing the longer period turnover rates throughout the business cycle. 

The Bureau for Labor Statistics responds to criticism by issuing new data such as:

• Job openings and Labor Turnover Survey – states the number of hires, separations and job openings and is released mid month.
• Quarterly Services Survey – Provides statistics about the service industry, responsible for about 55% of a nation’s economic activity.  Initially providing data for the following service sectors:

·        Information sector services

·        Professional, scientific and technical services

·        Administrative and support, waste management remediation services.

·         Contingent and Alternative Employment Arrangements – measures the number of self- employed persons, but only released every two years.  

Treasury International Capital –TIC 

The Treasury International Capital Report is very important to the Forex Market:

The TIC report tracks the flows of financial instruments into and out of the United States, and includes:

• Treasury Securities
• Agency Securities
• Corporate Bonds
• Corporate Equities

The data has been issued for the past 30 years, but due to a rise in foreign participation in our markets, grabbed the attention of the international financial markets only recently.  TIC offers a measure of foreign demand for debt and assets, and bonds and the dollar is most sensitive to the data; therefore Bond and Forex Markets are more likely to react to the report. 

A demand for US Securities is necessary to keep downward pressure on interest rates, and also underpin the value of the dollar since foreigners must purchase dollars in order to buy securities. 

A strong dollar maintains stability in US financial markets, and since foreign ownership of US equities is comparatively small, the equity market is less concerned about this report. 

The BOE Announcement 

Let’s talk about an event that causes quite a bit of stir in the market, and answer the following questions: 

• What is it?
• What does it mean?
• Why do investors watch it carefully?

The Bank of England Monetary Policy Committee generally meets the first week of every month, to determine the near term direction of monetary Policy.  Any changes would be announced immediately after the meetings.

Interest Rates are determined at these meetings, and that creates a lot of attention from investors all around the globe. 

The Bank of England has an established fixed inflation target of 2.5%, and the Bank’s measure of inflation is the Retail Price Index less Mortgage interest Payments. 

Market participants tend to speculate about the possibility of an interest change, and if the outcome is different than expected, the result in the market can be dramatic and far reaching.  High interest rates tend to slow economic activity, and lower interest rates tend to stimulate economic activity. 

Typically in the consumer section, few homes or cars will be purchased when interest rates rise.  Interest rate costs are also a crucial factor in the business world e.g. companies with high debt loans, and this has a direct impact on corporate profits. 

It is believed that higher interest rates usually have a bearish effect on the markets, whereas lower interest rates stimulate Bullish behavior. 

The Gross National Product (GNP) 

Regarded as one of the most significant Economic Indicators, the GNP “measures the economic performance of the whole economy” 

The indicator consists of the sum of: 

• Consumption spending – The spending by consumers, and is made possible by personal and discretionary income.
• Investment Spending – Consists of fixed investments and inventories.  (I)
• Government Spending – Very influential in terms of size and impact on other economic indicators.  (G)
• Net Trade – Flow of product and flow of cost (T)
• Thus: GNP = C+ I + G + T

The Gross domestic Product (GDP) 

GDP refers to the sum of all goods and services produced in the U.S. by domestic or foreign companies.  The GDP figures are considered to be more popular outside of the United States. 

The United States releases the Gross Domestic Product, to make it easier to compare the performances of different economies. 

Exchange Rates 

One can certainly say that exchange rates are one of the most important determinants of a country’s level of economic health, and play a vital role in the level of trade.  The latter is the reason why it is so closely watched, analyzed and governmentally manipulated. 

Let’s look at forces behind exchange rates: 

• Determinants of Exchange Rates:

All of the factors are related to the trading relationship between two countries, and the following are some principle determinants of the exchange rate. 

• Inflation Differentials: The country with the lower inflation rate exhibits a rising currency value due to an increased purchasing power.

• Interest Rate Differentials: Central Banks manipulating interest rates exert an influence over both inflation and the exchange rates, and a change in interest rate would impact inflation and the currency values.

• Higher Interest Rates – offer lenders a higher return to other countries = influx of foreign Capital causing the Exchange to rise.  Note: Other factors might drive the currency down.

• Opposite is true with Lower Interest rates.

Current Account Deficits: Balance of trade between a country and its trading partners, reflecting payments between countries for goods, services, interest and dividends.  An increased deficit indicates that a country is spending more on foreign trade than it is earning, and borrowing capital from foreign sources to make up the deficit.  This will lower the country’s exchange rate until domestic goods and services are cheap enough for foreigners. 

Terms of Trade: A ratio comparing export and import prices, related to the current accounts and balance of payments. 

Exports rises by a greater rate than imports = terms of trade favorable shows a greater demand for the country’s exports, which results in rising revenues from exports creating an increased demand for the currency. 

Political Stability and economic Performance: An Investor will always search for a stable country with strong economic performance in which to invest capital, and such a country will draw investment funds away from other countries.  Political turmoil can cause such an outflow of capital and move to the currency of a more stable country. 

Retail sales 

Retail Sales measure the total receipts at stores that sell durable and non- durable goods, which will in turn have an influence on the consumers spending.

The reason why the Retail Sales is of interest is because Consumer spending accounts for two thirds of the economy, which means that if one had some insight into where the consumer is going it is safe to say that one might have a pretty good idea as to where the economy is heading.  This might be the just the heads up that an investor might need to take his/her position. 

The pattern is consumer spending is often the foremost influence on stock and bond markets.  For stocks, strong economic growth translates to healthy corporate profits and higher stock prices.  For bonds, the focus is whether economic growth goes overboard and leads to inflation.  Ideally, the economy walks that fine line between strong growth and inflationary growth.  This correlation has been achieved through a large chunk of the nineties.  It is thus no wonder that stock and bond investors enjoyed huge gains during the bullish nineties.  Retail sales growth did slow down in correlation with the equity market in 2000 and 2001. 

Retail sales not only give one a better glimpse of the bigger picture, but also trends among different types of retailers. 

Technical Analysis – Useful Aspects 

Consolidation 

Looking at the marketplace, one often find times the market moves in a static motion where indecision rules. 

We all know that this indecision is called a consolidation period or a static trend, but looking more closely at it one can actually divide this indecision into categories. 

First up we look at market indecision where one would typically find candles/bars in a static motion with no significant high or lows.  In other words the candles/bars would be in line next to each other. 

The example below shows this type of indecision:

The second type of consolidation is that of a typical static trend where one can see significant highs and lows in a static motion.  One can draw in a support and resistance level connecting at least two highs/lows, to identify this period of indecision or consolidation. 

The example below shows this type of indecision:

The arrows indicate the significant highs/lows within the static trend.  Take note that a violation of this trend would signal the start of a new trend, which would not necessarily mean the market thrusts out of this consolidation.  The above example shows a violation of the support and then a lower high, showing the start of a possible new Bearish trend in this case. 

It is very easy to get confused with indecisions in the markets, but following simple rules and seeing the logic behind it, would make it much easier to analyze such a period in the market. 

MACD / Stochastic combination 

The MACD is built on exponential Moving Averages, developed by Gerald Appel, plotted on an open scale against the zero line. 

The Stochastic on the other hand was developed by George Lane and consists of two lines: %K and % D, its moving average.

In practice each of these have their own function, but together make a very good team: 

The Stochastic indicates possible turning points within a specific trend and Overbought/Oversold areas. 

The MACD would show you the general direction of that specific trend.  A cross in the MACD and the two lines moving apart would suggest a new trend/move.

The attached chart represents a 5 min timeframe with a MACD and a stochastic indicator. 

Note the first two arrows showing the turning points within the Trend and a Stochastic reflecting that with a cross of the tow lines. 

The MACD shows a steady movement upwards never crossing except where the trend actually changes, as indicated with the last arrow. 

The general direction stays bullish i.e. MACD stays bullish. 

Turning points within the Trend i.e. stochastic crossing. 

Evaluating the Fast and slow Stochastic 

Let’s discuss two indicators that are fairly similar but also totally different.  George C Lane developed the original Stochastic Oscillator in the 1950’s as a momentum indicator that shows the location of a close, relative to the high /low range over a set number of periods.  The indicator values range between 0 and 100, with readings below 20 generally considered oversold and readings above 80 considered overbought. 

Fast Stochastic 

The fast stochastic consists of % K and a % D.  To clarify this we will refer to the % K as the fast line and % D as the slow line.  In the example shown the fast Stochastic is shown in the middle of the chart.  The black line represents the fast line (%K) while the purple line indicates the slow line (%D).  The slow line is known as the trigger line and is a smoothed version of the fast line. 

To smooth %K (fast) and create %D (Fast), a 3 period simple moving average was applied to %(fast).  Notice how reactive the % K line is as it pierces the slow line on a number of times. 

This type of behavior might give some false breaks, which gave way for the development of the Slow Stochastic.

Slow Stochastic 

The slow Stochastic is displayed at the bottom of the chart with the % K as the red line and the % D as the purple line.  To obtain the slower % K a 3 period SMA was used with the fast % K to obtain the smoothed version.  If one examines the example closely one can clearly see that the % K on the slow version is exactly the same as the % D on the fast version.  The % D (trigger line) is then formed by applying a 3 period MVA to the slower % K.  One can also note that the false breaks are significantly less. 

Implementing the Stochastic 

In general a reading below 20 is considered as oversold and readings above 80 as over bought.

George C Lane did not believe that these readings did not necessarily indicate bearish or bullish readings as a security can continue to rise beyond the 80 level and continue to fall beyond the 20 level.  Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20. 

One of the most reliable signals is to wait for a divergence to develop from overbought or over sold levels.  Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. 

Fibonacci basics for the novice 

·        Fibonacci ratios in everyday life 

Scientists and mathematicians have proven that a special ratio exists that can be used to describe proportions of anything we can find in nature from atoms to large celestial bodies.  This ratio is used by nature to provide balance.  This ratio was first discovered by Leonardo Fibonacci who discovered a sequence by simply adding a number to the number preceding it.  (1,1,2,3,5,8,13,etc.) 

Although the sequence is very significant on its own, it is the quotient of the adjacent term that gives a proportion that has been described as the golden ratio, golden mean and divine proportion. 

This proportion is roughly 1.618 with its inverse 0.618.  This ratio has been proven to be a fundamental function in the building blocks of every aspect of nature.  Let’s look at some examples: 

If you should take honeybees and divide the female bees by the male bees in any given hive, you will get 1.618. 

Sunflowers, which have opposing spirals of seeds, have a 1.618 ratio between the diameters of each rotation. 

Need a more practical application? Try measuring from you shoulders to your fingertips, and then divide this number by the length from your elbow to your fingertips.  Or try measuring from you head to your feet, and divide that by the length from your belly button to your feet.  The result will be somewhere in the area of 1.618.  Stranger still is the rotation effect of this ratio in financial markets.  This ratio is normally used in three percentages: 38.2%, 50% and 61.8% although other multiples are also used.  Let’s look at 4 tools that are widely used to apply these ratios to the markets.

·        Fibonacci Retracements:       

This tool draws horizontal lines that indicate possible support or resistance levels or where they might manifest.  When this tool is drawn on an up or down move it is normally interesting to note that support or resistance manifest near these levels.

·        Fibonacci Arcs: 

The key to composing the Fibonacci arcs is finding the high and low of a chart.  This tool then draws level representing the areas discussed earlier in a compass like motion.  These areas that anticipate the areas of support and resistance or where areas may manifest where the market could be range bound.

·        Fibonacci Fans:  

The fans are composed of diagonal lines forming from a line drawn from the low of the chart to the high of the chart.  Once again these areas indicate future areas for support or resistance.

In general the Fibonacci studies are not intended as primary indication of timing to enter a position but mainly as a very useful tool of estimating support or resistance areas.  A range of analysts and traders use combinations of these tools to obtain a more forecasts- future movement.  Some research on these tools might prove to be very useful as these tools can be very efficient in your trading arsenal. 

The basics of Wave Analysis 

Objective: 

Correctly follow and interpret the development of patterns in the markets.  The

Wave principles form a basis for interpreting the market, as well as trading signals. 

Elliot stated that a market typically unfolds in a pattern of five waves in the direction of a trend, on a larger scale, and three waves against the trend. 

A rising market = 5 Waves upwards and 3 waves downwards, completing a Bull market/Bear market Cycle.

5 Wave upward movement = impulse wave

3 Wave countertrend = corrective wave

One can even go further and say that each of these waves can be subdivided into smaller waves.

The above chart represents a DAILY timeframe, so let us look at the market in detail: 

The Chart shows a Down Trend, followed by a Correction on that Downtrend.

In other words the Downtrend, consisting of 5 waves will be known as the impulse Wave, and the upwards market movement, consisting of 3 waves (labeled A, B and C) will be known as the Corrective Wave. 

Remember the following:

• The second wave may not retrace more than 100% of the first one.
• The fourth Wave may not significantly move into the price range of the first wave.

ache in High Probability Trading 

Using Basic Fibonacci Analysis together with Basic Analysis we can accurately pin point high probability environments in the market, and if used in conjunction with other tools can add to the individual Trader’s edge in the market place.

Above we see a Daily chart with the following: 

The dashed lines indicate the basic Trend Channel – Bearish 

Using Basic Wave Analysis we identify the 5 waves of the move forming the basis for the Bearish Trend.

Using the first two waves of the Analysis, we have a lower high identifying the start of the Trend. 

As previously discussed a larger wave movement consists of smaller impulse and corrective waves.  Thus: Using a Basic Fib Tool we can anticipate where the corrective wave might find resistance (Bear Trend), in preparation for a new Bearish move.  This is clearly seen looking at the chart, where the Fib Tool is drawn on wave 2. 

Using basic analysis tools we identified a high probability area for further Bearish activity, and this is yet again where the Trader can create a high probability approach in the market place. 

Designing a Trading System 

Designing a trading system could be a very complex initiative.  We will be looking at some principals to consider before attempting to develop a successful system. 

Complexity 

Most freshman traders think that trading is a very complex business, and this is also the way they want to develop their system.  By adding too many rules to the system, makes it too complex and also too difficult to trade.  You need to be able to mentally understand and remember the rules.  If you cannot remember all the rules, and don’t immediately recognize the reason for the signal, then the system is too complex.  Follow the KISS approach “Keep it simple stupid” 

Individualism 

Ever heard of a bunch of people who agree on the same thing all the time??? This in fact does not happen and developing a system is no different.  A simple reason being that some traders have longer –term outlook whilst others focus on the shorter –term and both with different risk management.  The purpose of designing a system is to develop something that works for YOU. 

Mathematics 

Once emotional decisions are made, you are on the wrong path.  Mechanical systems do not have emotion or intuition, which can be both an advantage and a penalty.  The mental tug-of-war between fear and greed can be debilitating.  You find yourself willing to concede, “pulling the trigger” to make the trade.  So the first and most fundamental principal in designing a trading system, is that every rule of reason for entering and exiting a trade must be defined by mathematics. 

What is a Trading System? 

A simple trading system is a set of rules that defines conditions required to initiate and exit a trade.  More complex systems, defines conditions for risk and money management, potential profit and /or potential loss calculation, risk evaluation etc. 

A theoretically right and practically useful system, should meet the following requirements: 

Complete Technical Theory & Mathematical Translation 

A trading system should be based on a complete technical theory, which can be translated into one or several mathematical formulas.  Without a theoretical mathematical reasoning and Logic, justifying and explaining the results, a trading system can become dangerous and cause serious losses. 

Timeframe definition 

Is it a system for long term, medium term or short-term decision making and trading? 

In addition, what is the definition the system gives to long-medium-short term periods? 

Clarifications should be, definitely, provided to the above. 

Risk Evaluation 

Every signal provided, whether it is “Go Long”, “Go Short” or “Take Profit” should be accompanied by calculation about the underlying risk.  Without risk calculation and characterization the signals are almost useless and can turn to be extremely dangerous. 

Strategy 

Specific strategy should be provided, covering both the high and low risk trading scenarios. 

Signal generation 

The system should provide clear signals, at the timeframe chosen.  Every signal should be accompanied by the potential profit and loss calculation.

Every period should be followed by the equivalent signal, including the potential profit/loss calculation.  Buy and sell, go long or short, are not the only signals that should be given.  The system should generate “hold” and “stay aside” signals, providing simultaneously potential profit-loss calculations to the “hold on the current position” signal. 

Every day is a trading day and even the “stay aside” recommendation is a trading position. 

Most of the trading systems that are sold nowadays, fail to meet these requirements.

StoTake Profit strategy 

Although Stop Loss & Take Profit are signals and could be included in the above “Signal Generation Category”, the Federation distinguishes them to emphasize their importance.  A trading system should follow a specific Stop Loss- Take profit strategy. 

System feasibility 

The trading system must be feasible and easy to use.  Even if it is based on the most complex calculations and mathematics, the system should offer a user-friendly interface and should provide its recommendations in plain understandable language. 

About Forex Worldwide's 10 Module Professional Training Program for Forex and CFD Traders 

Our Training Courses are specifically designed for persons who would like to commence Trading the Forex and CFD Markets knowing they have sufficient tools for an ONGOING trading career providing for both basic and advanced needs. 

When approaching a career in Trading it is important to understand the different components of Trading and the necessary steps to take in becoming a successful trader.  The components are typically as follows: 

1.  Learn ALL the basics of the specific Market you are trading and what you are actually trading (Forex and CFD’s).

2.  Learn how to analyze a currency or instrument sufficiently placing you in either a tradeable or a non-tradeable scenario.  In other words learn how to find context for your actual trading.

3.  Learn how trading systems work in terms of Risk Management and how to apply a successful trading system in the RIGHT context.

4.  Have the means to practice all of the above with the assistance of a DEMO SYSTEM until you are confident that you are able to trade successfully with real money.

5.  Make sure of assistance in opening a live account and continued assistance while you are trading your own money. 

The above components provide the building blocks for successful trading, and that is exactly how our training modules are set out: 

We have a 6-Modular Novice course set out as follows: 

• Module 1 – 2: Teaches the first Building Block which is all the basics of the market as well as the discipline that is involved and how to approach trading as a business.
• Module 3:                   Teaches the second Building Block which is analyzing the different markets and how to identify a trade-able or non-tradeable scenario at that specific time and for the rest of the day.
• Module 4 – 5: Teaches part of Building Block 3 and certainly one of the most important aspects in trading: Risk Management and how it works within a Trading System.
• Module 6:                   Completes the teaching on Building Block 3 where we explain actual successful trading systems and how they are applied within the right scenario.

We will provide you with a full DEMO TRADING SYSTEM to practice on while learning with the assistance of the on-line Trader Support Forum. 

Ongoing support is of utmost importance and brings all the theory together in a special "practical package" where our traders show you how analysis is done on a daily basis and how the systems you have been taught are applied in the real time market.  In other words you are always in a position to view the practical aspects as well communicate with the traders on the Support Forum on any trading related issues. 

In addition to our Novice package we also include an Advanced section consisting of 4 more Modules aimed at the trader already trading in the markets.

This package is packed with additional features to maximize your profits, such as fundamental trading and Fibonacci techniques.  Remember: Ongoing support is provided throughout to enhance your learning experience.  Read more about support below. 

The Forex Worldwide Support Structure 

Fact: Support is one of the most important factors in a trader’s life and should be effective enough to get Novice traders to point where he/she feels confident to trade with a real account as well as helping existing traders improve on their techniques and strategies. 

The Forex Worldwide Trader Support Forum is a state of the art platform specifically designed by traders for traders.  We know what it feels like to come fresh off the learning phase facing a real time market where price action is abundant and millions of players are already making their decisions.  The support forum puts Novice traders in a position where they can ask questions on ANY topic in trading, big or small and have professionals available that know exactly how to approach these questions as they are, without adding complex phrases and content. 

Our Support Structure will show traders how analysis (done in the training) is done on the major currency pairs and CFD’s every day, making it easier to follow and see how training is applied in the real time market. 

The question always is: How do I see the steps in trading applied in the real time market, without wondering where to start? This is exactly what we offer on our Support Forum which includes the following amazing topics: 

• Daily Market analysis in the Forex Market
• Fundamental announcements for the day.
• Market sentiment report
• System Application – This is critical as we show traders when and where systems taught in the Training are applied in the real time market.
• Trader’s Psychology
• Analysis in the CFD Market
• All the aspects on how to develop a winning trading strategy – This is critical in the life of a trader.
• A whole Tuition section that includes Video Tutorials of the actual trading material.
• A whole section on Trading Software including video training
• General Discussions and detail on the Company.
• Daily Trading Signals

Important information to look out for 

Once you have opened an account through us, we commit to the following: 

• Access to our 10 module online training from Novice to advance Free of charge
• Access to our support Forum to communicate with the tutor and other traders.
• The consistent support of your demo account to ensure you are able to use this tool effectively. 
• Webinars

Your logins will be sent in the following format along with the latest link to download the software. 

The Forum can only be accessed by your unique username and password. 

As a live trader you have been issued with login details to the forum: 

Demo account: 

The Demo account remains one of a traders most valuable tools to test different trading systems. 

The demo account must ideally be set up to reflect your live trading account is all aspects. 

Example:  Your lot size, margin, indicators and equity. 

If trading with a mini account your demo account should be set up in the exact same way. 

Your demo account can be extended and funded as and when needed.  The margin settings, lot size and indicators can be set according to your requirements.  Simply send a mail to: query@forexworldwide.com.  Include your specific requirements.

 If you cannot log in, contact us. 

Refresher training:  

It is of great necessity that traders refer back to the fundamentals from time to time.

With this in mind we provide our traders with their 10 module training free of charge to ensure you have all the necessary access to helpful information at your fingertips. 

You can access your training from the following link, using your unique username and password: 

Important Contact Numbers

International Tel :    +27217853452

International Fax :  +27865576673

Mail: query@forexworldwide.com

 us at "forex.worldwide.live". 

RISK DISCLAIMER:

 Margined currency and CFD trading are some of the riskiest forms of investments available in the financial markets and are only suitable for sophisticated individuals understanding financial markets and financial institutions. Trading through Forex Worldwide Training and Support permits you to trade foreign currencies and CFDs on a highly leveraged basis - up to 100 times your account equity - an initial deposit of USD $ 1000 for example will enable the account holder to trade with USD $ 100 000 in the market place. With this type of leverage and the swing of a specific currency against other currency (or the swing in the components of a CFD instrument) changes by one half percent or more, could result in you losing your entire investment. Theoretically an account could even lose more than the equity it contains if the account is trading at the maximum leverage and positions held in the account swing more than one percent in value, therefore, you could lose more than your entire investment and be held liable for the resulting deficit.

This is a STI Inc Website © Copyright Forex Worldwide Training and Support. 2003