Patience in Forex Trading

As the saying goes, “Patience is a virtue.” When it comes to investing, this is especially true. But although even the best traders and investors understand how important patience is, very few have mastered the skill. Patience in trading is a disciplined art and must be practiced intensively before it becomes automatic.

Whether it’s with stocks, commodities or Forex, holding back from a knee-jerk reaction to trading is difficult to do. Logic takes a back seat to our emotions and we end up making a quick, often non-judicious, decision. Reigning in our need for quick results is an acquired talent.

Here’s what usually happens: As a trader, you’ve done your due diligence, sought out the best Forex broker and opened an account. Intellectually, you choose the direction in which the currency pair will move, (based on a gut feeling?) and wait. The price starts to move in the opposite direction and you start to panic. You place an order below your planned entry point in a rush to make sure you don't miss the trade. You’ve now diminished some of your potential profit. More importantly, you have broken the rules that caused you to enter the trade in the first place.

Letting your emotions take over your decisions can be very dangerous in the long run. Emotions can be seen as the trader's worst enemies; they often lead to misjudgment and loss. Learning how to stand back, take time to analyze the situation and then move forward is always the prudent thing to do. Setting yourself rules and keeping to them is a way of holding the emotional side of trading at bay.

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Trading Opportunities

When it comes to trading, keep in mind that there are always many trading opportunities in the market; the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. Since 80% of all Forex trades end in a loss, the chances losing your money far outweigh those of coming out ahead.

Learning to use financial graphs and Forex indicators can be beneficial in training yourself in trading patience. Taking the time to read the graphs properly and interpret the indicators provides you with an emotional brake and offers a short interval between the time you make your decision to move and actually placing the trade.

Patience in trading is also needed after you have placed the trade. If the price moves in the direction anticipated, you must then choose whether to sell and take a small profit or wait till the price moves even higher. Small profit versus large profit or possible loss. If you wait too long, the price could start to move in the wrong direction and you will lose. If you act too hastily and sell, you haven’t given yourself the chance for the price to move back up.

Again, this is where your set of trading rules comes into play. If you decided beforehand that your will be satisfied with a small profit, then you will move to sell once the price moves even slightly in the anticipated direction. If you have decided to sit out the trade till it reaches the highest price, then you can stay firm in your trade and wait it out. If it keeps going up and you sell, you have profited; if it turns around, you can lose all your money.

If you follow your own goals and strategies, then you will have more patience in trading than if you set yourself up without any guidelines. Practicing patience in trading reduces your stress, removes unexpected surprises and makes Forex trading a lot more fun.

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Forex Basics On Analysis

The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. Forex prices can change at any moment in response to real-time events, such as political unrest or the rate of inflation. Currency market players typically use "Forex analysis" as a means of predicting currency price movements. Forex analysis is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The purpose of this article is to discuss the basics of fundamental and technical analysis.

A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of U.S. Government economic indicators. Some of these indicators are the Consumer Confidence Index (CCI), the Consumer Price Index (CPI), the Employment Situation Report, the Gross Domestic Product (GDP), the Composite Index of Leading Indicators, the Advance Report on Durable Goods, Housing Starts, and Initial Jobless Claims.

All of these Federal economic indicators have a marked effect on the Forex trading market. Some of these indicators are released weekly, while others are released monthly or quarterly. Their sources include the Federal Reserve, the U.S. Bureau of Labor Statistics, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.

Forex traders must take other economic indicators into consideration as well. The world's leading economies (for example, the United Kingdom, Japan, France, and Germany) also release their own economic indicators that will have an impact on the Forex market. For example, common economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.

A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones. The technical analyst typically uses charts as a tool in predicting currency price movements.

Investopedia states that "In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store."

For example, during the back-to-school buying season, the technical analyst might observe that more people are going into clothing stores than into stores selling flowers. Likewise, the technical analyst might observe that more men are going into stores selling flowers on Valentine's Day than into clothing stores.

Here is another example. Oil prices dramatically increase, thus creating inflation. Interest rates rise as a means of controlling inflation. One historical result of higher interest rates is less money to spend, thus slowing economic growth. Another historical result is increased foreign investment in the currency affected by the higher interest rates, thus strengthening it.

Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. The important point to remember here is that no one strategy or combination of strategies is 100% certain.

3 Things to Do Before Investing in the Stock Market

Investing in the stock market is often viewed as one of the best ways to grow wealth and reach long-term financial goals. Unfortunately no handbook is given out when you start to invest, which leads to mistakes, discouragement and a decision by some to give up on investing altogether.

If you find yourself in need of guidance as you start investing in the stock market, below are some tips to help get you started.

1. Review your finances.

The first thing you should do is determine how much money you have to invest. Take a look through a wide-angle lens to view your entire financial life. Ask yourself:

Am I currently carrying any consumer debt?

Do I have an emergency fund to cover my needs in the event of a job loss?

Depending on the answer to those two questions, you should be better able to determine how much you have to invest in the stock market. Do not worry about how much or how little you have to invest, as the key is to start investing. This is where the idea behind compound interest comes into play. The sooner you begin, the more time your money has to grow. With wise investments, a little can turn into a lot over a long period of time, so don't let a small starting amount scare you away from investing.

2. Educate yourself.

Education might be the most important factor in early investing success. This is especially the case if you haven't had much experience with investing prior to now. If you are like many beginning investors, you may not know where to look for quality, unbiased investing guidance. While there are many resources online, the best resources can be found through your 401(k) provider or online brokerage. In most cases, this education is free and can be a great boost to your investment knowledge.

Not only will educating yourself help you feel less overwhelmed when it comes to investing, it should also help your bottom line because you'll learn how to recognize high-fee investments, avoid them and move toward a purposeful investment strategy.

3. Invest with a plan.

It may sound obvious, but one of the first things you should do when you start investing is come up with an investment plan. This investment plan can be as simple or as detailed as you want. Think of it like using a map or GPS when traveling on vacation. You likely will get nowhere near your chosen destination without a form of navigation, and investing is no different.

The investment plan stage is where you need to determine your investing goals. For example:

1. Are you investing for retirement?
2. Are you investing for a child's college education?
3. Are you investing to provide income now that you're retired?

These are just some of the questions you can ask yourself. The key to is to make your plan personal. Tailor it to the amount of time you have to reach your goals and your risk tolerance. Your answers to questions like the ones above will help you form a framework for your investment plan that can ultimately help you reach your investing goals.

Principal Trading and Agency Trading

Have you ever wondered what happens when you buy or sell a stock through a stockbroker? Trading is as simple as clicking a mouse, but it is actually quite a complicated matter behind the scenes. When entering an equity order on your computer or through your broker, you are, on some occasions, trading with another person through an exchange, but on other occasions you are only making a trade with your broker. These are the two main types of trades that investors will encounter: principal and agent transactions. Let's look at this in more detail.

Principal Trading

Principal trading occurs when a brokerage buys securities in the secondary market, holds these securities for a period of time and then sells them. The purpose behind principal trading is for firms (also referred to as dealers) to create profits for their own portfolios through price appreciations. So when an investor buys and sells stock through a brokerage firm that acts as the principal to a trade, the firm will use its own inventory on hand to fill the order for the client. With this method brokerage firms earn extra income (over and above the commissions charged) by making money from the bid-ask spread of a particular stock.

For instance, if you were looking to buy 100 shares of ABC at $10, the principal firm would first check its own inventory to see whether or not the shares are available to sell to you. If they are available, the firm would sell the shares to you and then report the transaction to the necessary exchange. This reporting may be, for ensuring regulations and safeguarding clients, the most important action of a principal trade. The Securities and Exchange Commission and exchanges require that the brokerage firms complete the trades at prices comparable to those of the market.

Agency Trading

An agency transaction is the other popular method for executing a client's orders. More complicated than regular principal transactions, these deals involve the search for and transfer of securities between clients of different brokerages. The increasing number of participants in the securities market and the need for extremely accurate bookkeeping, clearing, settlement and reconciliation make ensuring the smooth flow of the securities markets quite a task.

Agency transactions are comprised of two distinct parts. First, your brokerage needs to bring your request to the appropriate market in order to find a party wishing to assume the opposite position. So, if you wish to buy at a certain price, the broker needs to find someone wishing to sell at the same price and vice versa. Once both parties are found, the exchange records the transaction on its ticker tape, and an exchange of money and securities between the parties occurs on settlement.

The second portion of the agency transaction occurs after the trade is completed and has been properly documented on the exchange. This portion is commonly referred to as clearing. While all brokers maintain individual books recording the entire amount of buy and sell orders transacted by clients, the actual act of clearing these transactions is handled by a larger institution.

The basic act of clearing involves matching buys and sells. Once the transactions are executed on the exchange, details of the trades are sent to a subsidiary, and are subsequently recorded and matched for accuracy. After all the trades sent by member firms  are matched for buys and sells,  notifies all member firms of their associated obligations, and arranges the transfer of appropriate funds and securities. Thus, rather than having individual brokers dealing with one another after every trade on a securities exchange, it acts as middleman collecting all transactions and streamlining the transfer of stocks and cash. This reduces the amount of time required for delivery and receipt of obligations and provides flexibility for brokerages in choosing dealing partners. This entire clearing process usually takes three days to complete.

It is important to note that not only facilitates but also guarantees delivery. If one party fails to deliver the securities or cash to the other, it will step in and fulfill the obligations of the failing party.

Brokers are required to inform you as to whether a filled trade was an agency or principal transaction; you are usually notified in your trade confirmation sent in the mail (or electronically). Although you cannot specify to your broker how you want the trade to be filled, as a client you have the right to know how your transaction was completed.

The Bottom Line

Although this information might not make you any more money in the market, it is important for investors to understand the process of filling orders. These two ways of transacting orders not only help reduce the risk for investors, but also give brokerage clients a relatively liquid and efficient way of placing and executing trades.

4 Steps to Forex Position Trading

talking Points:

• Position traders usually enter and exit trades based on large, macroeconomic themes.
• A large amount of capital is not required when low leverage is used.
• AUD/NZD has rebounded from an 8-year low and higher prices can be expected.

While many traders are attracted to the Forex market’s 24-hour trading and fast moves, others choose the Forex market for its long trends and responsiveness to key support and resistance areas. Position forex traders usually hold their trades open for months, weeks and years. This type of trading is attractive to people who either have limited windows of time to trade or people who want to diversify their trading with both long and short-term trading strategies.

In addition, position trading can allow a trader to sleep at night because they do not have to “baby sit “their trade. With position trading, a Forex trader can risk 200 pips to potentially make 1000, 2000 or 3000 pips. To get started in position trading just follow these 4 steps.

Learn Forex: AUDNZD Weekly Support and Resistance

Created with Marketscope 2.0

In the chart above, you can see that AUDNZD has been trading in a large 3300 pip range for the past 10 years. Currently, AUDNZD, has rebounded from an 8 year low. This low in the 1.0450 area could be the beginning of another 3000 pip run higher. Positive MACD divergence marked the first big run higher and we can see the beginnings of positive MACD divergence some 8 years later.However, before we jump into this position trade there are some concepts we have to understand.

Many traders believe that position trading is the realm of the billionaire traders like George Soros or Warren Buffet due to the large stops and whipsawing intraday price action. However, using low leverage is the first step. Though traders have as much as 400:1 leverage available, it is not necessary to use in this type of trading. Using 10:1 or less leverage will allow a trader to stay in the position longer and withstand the day to day fluctuations. Step two goes hand in hand with step one and that is to use small position size. Risking 1% of your trading account on any one position trade.Using 250 to 400 pip stops with low leverage and low smaller position size opens the door for 1:10 and 1:20 risk to reward trades.

The third step is to use long time frames like weekly and monthly. By using these time frames, a trader gets the wider perspective and a more complete picture of where price was and where it could potentially go. It is easy to spot multi-year highs and lows that serve as reversal points at key areas of support and resistance on longer time frame charts.

The fourth step is to be patient and let the market unfold for your trade setup. This is probably the most difficult step as we live in a “microwave oven society” that thrives off of instant gratification. This is far from a “get rich quick” strategy but slow and steady gains are possible with little effort.

Economic indicators and their impact on currencies

Economic indicators measure how strong an economy of a country is. They can measure specific sectors of an economy, such as the housing or retail sector, or they give measurements of an economy as a whole, such as GDP or unemployment.

Traders are interested in these measurements because they have an impact on the value of a currency.

The following will explain two of the most important economic indicators that drive the value of a currency: interest rates and inflation.

Interest rates

Interest rates are one of the most important drivers of the forex markets. The base interest rate of a country is set by its respective central bank. It is used by a central bank as a tool to manage the economy – either by raising the interest rate to curb inflation, or lowering the interest rate to promote growth.

Changes in the interest rate affect borrowers

The mechanism behind using the interest rate as a tool works in the following way:

The central bank of a country lends money to certain banks and the base interest rate is what these banks have to pay for borrowing that money. Banks also lend money to other banks and consumers in the form of loans, who also have to pay interest – the minimum interest they have to pay is the base interest rate.

If the central bank increases the base interest rate, then borrowers have to pay more for the money they borrowed. This reduces the amount of money they have for spending on other things and thus impacts the economy.

An example using mortgages

For example, if the interest rate increases, those that have a mortgage may find that their monthly payments will rise.

Increasing the interest rate therefore results in curbing economic issues such as excessive inflation, because if people have to pay back a higher mortgage amount each month, they will not have as much money to spend on other goods and services.

On the other hand, if a central bank is concerned that the economic growth of a country is too low, then lowering the interest rate will lower the payment on these mortgages. People may therefore have more money to spend each month and this stimulates the economy.

Using interest rates in this way is not specific to mortgage payments. Companies that borrow money to grow, by investing or hiring new employees, are also affected. If companies have to pay back a higher amount because of higher interest rates, then this will curb the amount of money available for such investment.

Impact of the interest rate on the currency

Firstly, higher interest rates indicate a strong economy and investors are more likely to invest into an economy that is growing. The demand for local currency is therefore likely to increase, which leads to an increase in value.

A higher interest rate also means that you get a higher rate of return for the capital you hold in bank accounts. Investors will likely invest capital into countries that have a higher interest rate, because they are likely to get a higher rate of return for holding their money there.

Higher interest rates therefore increase the demand for the currency of a country and so it appreciates in value (under normal economic circumstances).

Inflation

Inflation measures how quickly the prices of goods and services rise in a given period of time. An increase in the inflation rate means that prices are going up more quickly. If the inflation rate falls, the prices of goods and services still rise, but at a slower rate.

If the rate of inflation increases, then the disposable income people have to buy things with is reduced more quickly. This can have a negative effect on an economy and hence the currency.

However, if a country experiences deflation, i.e. prices actually fall, investors could also see this as an indicator that the economy is performing poorly. Therefore, this can also have a negative effect on the value of a currency.

Central banks tend to target a specific rate of inflation

A central bank will therefore try to target an acceptable level of inflation – for example, an inflation level between 2–3%.

If the inflation rate is reported to be within the target range, the currency value does not tend to react very much. The currency value reacts much more if the inflation rate is drastically outside this range.

To protect consumers from excessive inflation, central banks will tend to raise interest rates. This is because, as explained above, it reduces the spending power that consumers have, and so the prices for goods and services decrease under the reduced demand. Under decreased demand for something, the price falls (or stops increasing).

When inflationary data is higher than expected, traders may buy the currency of a country in anticipation of an interest rate hike from the central bank, which means that the currency could appreciate in value. However, this depends, because excessive inflation could erode the value of any capital within that economy and the currency value could decrease. This makes the inflation rate a more difficult economic indicator to use when determining the likely increase or decrease of a currency value.

Hawkish vs. dovish

The terms ‘hawkish’ and ‘dovish’ refer to the attitude of a central bank toward managing the balance between inflation and growth.

If a central bank is concerned about inflation, it is considered hawkish and is more likely to adopt a higher interest rate. If a central bank is concerned about growth, it is considered dovish and is more likely to adopt a lower interest rate.