Forex Trading Systems- Introduction

By now, you should know that it is important to trade based on a trading system; otherwise, it will be very hard to generate consistent profits from the Forex market. Trading systems tell you where to get in and out the market.

When you devise a system, you look for certain moves and what indicators, patterns or price behavior caught that move, then you create a set of rules; when these rules are present in the future they signal a trade.

Most systems are based on price patterns or technical indicator readings (technical patterns). However, we must not forget something: patterns (whether chart or technical patterns) are never the same, they are only similar. In order for two patterns to be the same exact pattern the same traders need to be involved on both patterns, and not only this, they have to be in the same mood so they behave in the exact same way. We know this is almost impossible since there are just too many variables that need to be accounted for. Take for instance, how many traders are waiting in the sidelines? How many traders will get out of the market sooner than they have planned? How many of them will take partial profits? And so on...

This tells us that there are no certainties about the outcome of every single signal. Even though we don't know the outcome of any individual trade, the outcome of a set of trades is predictable; we also know that if we follow rigorously our system we will be ahead of the game in the long run. When our system signals one trade it only tells you that there is a higher probability that the market will go in the intended direction, probabilities will play their part.

So we know two important things:

• We don't know in advance the outcome of any signal
• If we follow our system rigorously, we will be ahead of the game

What is interesting is that we do not need to know what is going to happen next in order to make money in the Forex market, we only need to make sure we have a well-developed system and follow it rigorously.

However, before we apply this knowledge we need to develop our own system. In this lesson we will show you how to effectively develop a system the fits your personality.

The following topics are covered in this lesson:

Creating a Trading System - 

                                                     Important information about trading systems.

Types of Trading Systems - 

                                                           There are two types of trading systems; we will review their advantages and disadvantages. 

Trading Styles -  

                            Review of the trading styles you might adopt to develop your trading system. 

Trading Concepts -

                                     Not all trading concepts are for every trader, choose the one the better fits you. 

Trading System Conceptualization -

                                                                         After choosing our trading style and concept, we need to begin our system conceptualization. 

Testing and Live Trading - 

                                                       Once we created our system we need to test it and see if it really fits our personality, a few tips to do an effective testing. 

 Some Points to take in Consideration - 

                                                                          Before taking any action please take these important points into consideration.

How To Be Successful Forex Trader-Looking For Easy Money

Unfortunately, most people are attracted to the Forex market for this reason.

All because of the publicity of:

• Some brokers showing or rather trying to show how easy is to trade and make money almost instantly in the Forex market
• Signals providers offering the best signals that will make you rich instantly and reach the financial freedom every trader is looking for by showing you the secrets of the big dogs.

Is it easy to trade?

Yes, it is true, everyone can do it, putting on a trade is only one click away.

Is it easy to make money?

Yes, I will have to agree with this one again, it is easy to make money. No knowledge of even what a constitutes a currency is required to make a winning trade. What they don't tell you though, is that it is even easier to lose a trade (because of the spread).

What is important here is that you cannot earn a living trading that way. In order to make a living trading the Forex market, you need to be consistent, and believe me, this is no easy task. To be a consistent profitable trader means that over several periods of time a trader makes money. Just 5% of all traders achieve this goal. Therefore, it is possible, but in no way easy.

Is it possible that a signal provider could make a trader rich? I don't think so. There are no certainties in this business; in fact, no one (signal providers) will ever care if you lose money. The only person responsible for losing money following someone else’s advice, will be you. Because you are the one who is actually executing the trades.

There are no short cuts; no one will ever make you rich but yourself. How do we achieve this? Working hard, this is the only way you can succeed as a trader.

Besides, what would you get by following someone else's advice? Nothing, following blindly someone else's advice would not give you the knowledge, the experience and nothing else good at all. Because you do not know the reasons behind any trade, you don't even know if the signals come from a system. You might make some money if the signals are good. But let me ask you another question… Do you intend to rely on one signal provider for the rest of your life? I don't think so.

So at the end, you will lose precious knowledge and experience that you could have gained by trading on your own, and most importantly, you will have lost time.

And what about the big dogs’ secrets?

Again, there are no secrets, the only truthful secret is that there are no secrets, but please keep this between you and us J 

FACT - There is no easy way to become a consistent profitable trader. There are no shortcuts, and the only way to get there is through hard work, self-discipline, patience, understanding the market, experience, taking only calculated risks, and more characteristics that we will learn throughout the course.

Some Thought on News and Event Trading

News and event trading has become a very popular trading style in these days. The reason behind it lies in the huge profit potential made in just a few minutes - with no effort at all.

Take for instance the first Friday of the month, when the non-farm payrolls report is released. The price of the EUR/USD can move around 150 pips in less than 10 minutes. That is US$1,500 (trade based in only one standard lot).

What traders fail to realize are all the risks involved in such practices. What if those 150 pips go against you? Even with a stop loss order, sometimes your broker won’t be able to honor it, because the price gaps (values between prices are not printed). In these cases, your broker won’t take the loss, so he will give you the closest printed price, meaning 70, 100, or 150 pips against you. That amount of pips could mean a margin call or a huge loss. In how much time again? …10 minutes.

The important thing here is that your job as a trader is to make sure you are going to be able to trade the next day, week, and years to come. Taking these kinds of risks won’t help much.

Other traders instead of using market orders to get in the market use stop and limit orders. But the same happens there, it is too risky, the market could again gap and your broker won’t be able to honor your stop. Traders that use this kind of strategy are taking uncalculated risks, risks that could cost them their trading account, and probably their trading careers.

Also, price movements are not always steady in one direction. It could go up and trigger some orders just to go back to the other extreme, then trigger the other side orders and then come back to where it all started.

The truth is, there is no possible way to forecast price movements in such circumstances. As we already know, the price moves based on traders and investors expectations. This is the combination of all traders perceptions on where price should be. To possibly know where the price is heading we need to ask every single trader and investor around the world what their intentions are during such announcements (something impossible to do). To go a little further, sometimes as the news report comes out, nothing happens, or worse, the price goes against the fundamentals.

Take for instance a day of interest rate announcement. It is rumored that there will be an interest rate cut. In this case, the currency will go short before the actual decision. Once the interest cut is announced, it is possible that the currency will be bought back, as all traders that could have shorted the currency, had already been short days or weeks ago. So there is no one else to short the currency. In this case, the price could be pushed up, against the fundamentals.

The point I want to make here is, trading itself is risky, and there are risks that you just cannot avoid, like the possibility to lose one trade. There are however some other risks that traders must avoid, as in event trading. The more you control your risks, the better results you will have. Take care of your risks; your profits will take care of themselves.

We consider trading the news announcements to be very risky.

Is there a system based solely on fundamental trading?

I am sure there is. But as with every system, it should have rules and setups that have to be present in order to get in the market, as well as money management controls etc.

Gold and Oil and it's relationship with the Forex market

Gold and Oil have an important relationship with the Forex market. Often these two commodities are used as a leading indicator in making trading decisions in the Forex market.

Gold

Ok, before going through some analysis let’s take a look at the following table:

Gold Production by Country

[Table 2]

Why would gold have a negative or inverse relationship with the USD if United States is the second larger producer of Gold (out-placed Australia in 2006)?

The answer is simple (or maybe not)...

The obvious reason behind this inverse relationship is that gold is always priced against the USD: naturally a strong dollar will buy more ounces of gold (and a weak dollar will buy less ounces of gold).

But there is also another less evident reason of this inverse relationship: decades ago, during periods of uncertainty investors tend to migrate away their capital from USD to gold as a safe-haven.

Ok, to check some numbers: The USD has fallen to historic lows against some currencies including: EUR, CHF and CAD while gold (XAUUSD) has reached all time highs.

Majors that have a positive or direct relationship with gold are the Canadian dollar and the Australian dollar.

AUD - Australia is the third largest producer of gold in the world and as a result, the correlation coefficient of the AUD and Gold prices is close to 80%. So the AUD always benefits from rising gold prices and it also decreases when gold prices decline.

CAD - Canada is the third world largest exporter of the commodity. This makes the CAD and Gold move in the same direction, although its correlation coefficient isn’t as large as the AUD and Gold.

What would be the case for the EUR or other major currencies where there is no relationship (at least not a clear one)?

Other majors will have a direct relationship with gold because both of them (majors and gold) are priced in USD.

Oil Prices

Generally speaking an increase in the price of oil results in increasing costs of transportation, utility and heating costs as well as the cost of practically every finished product (particularly in oil-dependent economies such as the US, China India and other developed countries).

Arguments in favor of an indirect relationship between oil and the USD:

• US accounts for only 5% of the world’s population but it consumes 25% of the world's fossil fuel-based energy.
• US imports about 75% of its oil, but owns only 2 percent of world reserves.

Because of this dependency on both oil and foreign suppliers, any increases in price or supply disruptions will negatively influence the US economy (hence the USD) to a greater degree than any other nation.

Canada is one of the few developed countries who are net exporters of energy (i.e. oil). Canada has the second largest oil reserves in the world (only behind Saudi Arabia). For this reason the Canadian dollar has a very tight positive relationship with oil prices.

Where is oil heading?

Oil experts adopted Hubbert’s Curve to forecast oil production for the following decades:

[Image 1]

According to their prediction, world oil production was to peak sometime around the second half between 2000 and 2010 (like now?). Right now the oil barrel is pretty close to US$100, but what could happen to if this prediction is true? It will probably keep going that way for a few more hundreds...

Brain Feeder 4 – Recently a few presidents from large oil producer countries have announced their concerns about the weak US dollar and have declared they would be willing to change the oil pricing in Euros instead of US dollars. What to you think could happen to the USD if they price their oil barrels in Euros instead of US dollars?

The Psychology of Forex Trading(3)

 

• How to obtain and maintain an effective trading mindset
Obtaining and maintaining an effective Forex trading mindset is the result of doing a lot of things right, and it usually takes a conscious effort on the trader’s behalf to accomplish this. It’s not necessarily difficult to achieve, but if you want to develop an effective trading mindset, you have to accept certain facts about trading and then trade the market with these facts in mind…

You need to know what your trading strategy (trading edge) is and you need to master it. 
 You have to become a “sniper” in the market instead of a “machine gunner”, this involves knowing your trading strategy inside and out and having absolutely NO questions about what the market needs to look like before you risk your hard-earned money in it.

You need to always manage your risk properly.
  If you do not control your risk on EVERY single trade, you open the door for emotional trading to take hold of your mind, and I can promise you that once you start down the slippery slope of emotional Forex trading, it CAN be very hard to stop your slide, or even recognize that you are trading emotionally in the first place. You can largely eliminate the possibility of becoming an overly-emotional trader by only risking an amount of money per trade that you are 100% OK with losing. You should EXPECT TO LOSE on any given trade, that way you are always aware of the very real possibility of it actually happening.

You need to not over-trade. 
Most traders trade way too much. You need to know what your trading edge is with 100% certainty and then ONLY trade when it’s present. Once you start trading just because you “feel like it” or because you “sort of” see your trading edge…you kick off a roller coaster of emotional trading that can be very hard to stop. Don’t start over trading and you will likely not become an emotional Forex trader.

You need to become an organized trader.
  If there is something that is the “glue” that holds all of the points I’ve discussed in this part together, it is being an organized trader. By organized, I mean having a trading plan and a trading journal and actually using both of them consistently. You need to think of Forex trading like a business instead of like a trip to the casino. Be calm and calculating in all your interactions with the market and you should have no problem keeping the emotional trading demons at bay.

The Psychology of Forex Trading(1)

The Psychology of Forex Trading

 

I have been a trader long enough to know a thing or two about how most people think while trading the market. You see, most people experience similar thinking patterns and emotions as they trade the markets, and we can learn many important things from the differences in the way losing traders think and the way winning traders think.
I would be lying to you if I said that success in the Forex markets depends entirely on the system or strategy you use, because it doesn’t, it actually depends mostly on your mindset and on how you think about and react to the markets. However, most Forex websites trying to sell some indicator or robot-based trading system won’t tell you this, because they want you to believe that you can make money in the markets simply by buying their trading product. I prefer to tell people the truth, and the truth is that having an effective and non-confusing trading strategy is very important, but it’s only one piece of the pie. The bigger portion of the pie is managing your trades correctly and managing your emotions correctly, if you do not do these two things you will never make money in the markets over the long-term.
• Why most traders lose money
You have probably heard that most people who attempt Forex trading end up losing money. There’s a good reason for this, and the reason is primarily that most people think about trading in the wrong light. Most people come into the markets with unrealistic expectations, such as thinking they are going to quit their jobs after a month of trading or thinking they are going to turn $1,000 into $100,000 in a few months. These unrealistic expectations work to foster an account-destroying trading mindset in most traders because they feel too much pressure or “need” to make money in the markets. When you begin trading with this “need” or pressure to make money, you enviably end up trading emotionally, which is the fastest way to lose your money.

What is Technical Analysis?

 

Technical Analysis

Technical analysis is the study of the price movement on a chart of a particular Forex currency pair or other market. We can think of technical analysis or “T.A.” for short, as a sort of framework that traders use to study and make use of the price movement of a market.
The primary reason that traders use T.A. is to make predictions about future price movement based on past price movement.
Technical analysts believe that all current market variables are reflected via the price movement or price action on a price chart. So, if we believe that all market variables are reflected via price movement, it only goes to reason that we don’t really need much else to analyze and trade the markets besides price. I am a technical analyst and so are the members in my trading community, we prefer T.A. because we agree with the idea that all market variables are reflected via price action, so we see no reason to use other means to analyze or trade the market. That’s not to say that having some knowledge of fundamentals and news events is a bad thing, but we just don’t rely on them heavily (we discussed Fundamental Analysis)
Technical analysts look for patterns on the chart that tend to repeat themselves; they do this to develop their trading edge from. The underlying logic here is that since most price movement is driven by human beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in their emotion and interaction with the market.
Technical analysis also encompasses learning to analyze the market structure; find trends, support and resistance levels and generally learn to ‘read’ the ebbs and flows of a market. There is obviously discretion involved here and I will be the first person to tell you that T.A. is more of an art than a science. That said, it is something you will get more comfortable with and better at given time and practice. T.A. forms the back-bone of my core trading method of price action, which is simply a derivative or off-shoot of ‘traditional T.A.”, except with more clarity and more concise strategies that don’t involve confusing forex indicators or things like Elliot Wave Theory that are far too messy and open to interpretation for me to believe they are worth trading or teaching.
Most traders instantly think of a price chart like the one above when someone mentions the word “technical analysis”. Price charts provide us with an amazing amount of useful data that paints a complete picture of a market’s historical and current supply and demand situation, as well as the price levels that the market participants have deemed the most important. As technical analysts we need to pay special attention to these price levels as price will tend to respect them again and again, indeed, much of my price action trading course is built around learning to identify and trade price action setups from key levels in the market. Price charts are also a reflection of all market participants’ beliefs about the market and market variables, so by focusing your analysis and trading on a market’s price chart you can streamline your trading and at the same time analyze the end result of everything that contributes to the price movement of a market.

Forex trading mistakes and traps(5-Trading real money too soon or gambling it)

The urge to jump into the market and start trading real money is often too much for most traders to withstand. However, the truth is that until you have mastered an effective Forex trading strategy like price action trading, you really should not be trading real money. By “mastering” the strategy, I mean you should be consistently successful with it on a demo account for a period of 3 to 6 months or more, prior to going live. However, you don’t want to use demo account trading as a crutch…trading a real account is different due to the real emotions involved, so just be sure you switch to real-money trading after you have achieved success on demo…don’t be afraid of trading real money, because eventually you will need to make the switch to real money trading.
Also, be sure you are not just gambling your money away. Doing the things we discussed above; over-trading, over-leveraging, not having a trading plan, etc, these are all things that gambling traders do. Traders who don’t gamble in the markets are calm and calculating…they have a trading plan, a trading journal, and they know exactly what their trading edge is and when to trade it.

Forex trading mistakes and traps(3-Not applying risk reward and money management correctly)

Risk management is critical to achieving success in the markets. Risk management involves controlling your risk per trade to a level that is tolerable for you. Most traders ignore the fact that they COULD lose on ANY TRADE. If you know and accept that you could lose on any trade…why would you EVER risk more than you were comfortable with losing??? Yet traders make this mistake time and time again…the mistake of risking too much money per trade. It only takes one over-leveraged trade that goes against you to set off a chain of emotional trading errors that wipes out your trading account a lot faster than you think. Check out this cool article on Forex money management for more.

Forex trading mistakes and traps (2- Over-trading)

 

• Over-trading


Most traders do not make money in the markets over the long-run for one simple reason: they trade way too much. One curious fact of trading is that most traders do very well on demo accounts, but then when they start trading real money they do horribly. The reason for this is that in demo trading there is virtually no emotion involved since your real money is not on the line. So, this goes to show that emotion is the #1 destroyer of trading success. Traders who over-trade are operating purely on emotion.
Trading when your pre-defined trading edge is not actually present is over-trading. Trading if you have no trading plan or have not mastered a trading edge yet is over-trading. Essentially, you need to know EXACTLY what you’re looking for in the market and then ONLY trade when your edge is present. Trading too much causes you to rack up transaction costs (spreads or commissions), and it also causes you to lose money a lot faster since you are purely gambling in the market. You need to take a calm and calculated approached to the market, not a drunken-gamblers approach…which seems to be the favored approach of many traders.

Advantages of being a Forex trader

Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list of skills you will need to reach your goals in the Forex market:

Ability - to take a loss without becoming emotional

Confidence - to believe in yourself and your trading strategy, and to have no fear

Dedication – to becoming the best Forex trader you can be

Discipline - to remain calm and unemotional in a realm of constant temptation (the market)

Flexibility - to trade changing market conditions successfully

Focus – to stay concentrated on your trading plan and to not stray off course

Logic – to look at the market from an objective and straight forward perspective

Organization – to forge and reinforce positive trading habits

Patience – to wait for only the highest-probability trading strategies according to your plan

Realism – to not think you are going to get rich quick and understand the reality of the market and trading

Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times

Self-control – to not over-trade and over-leverage your trading account

As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be a loser. More on money management later in the course.