Archive for September, 2009:
Why Trading Forex Now Beats The Stock Market
You’ve likely heard the term Forex lately — it is becoming one of the hottest trading trends in the markets today. That’s a trend we believe will continue but today, I wanted to take a few moments to point out why as well as why you should take advantage of trading foreign currencies.
Just a couple of years ago, the foreign exchange markets were dominated by the big brokers and major banks around the world. Today, the ‘little guys’ have gotten in on the action — and the growth in currency trading has increased from $1.9 trillion to nearly $3 trillion in that short space of time (that’s the average daily turnover in the markets – a 50% growth in turnover).
But why should you trade Forex?
First, the Forex markets are highly liquid (in the major pairs) and have a strong tendency to ‘trend’ regardless of what is happening in other markets (stocks, commodities, bonds).
That liquidity also creates constant volatility — and the volatility is where the ability to profit from those trends happens. The greater the volatility, the greater the profit potential.
Second, the stock markets have been beaten down, rallied, fallen, rallied — and there are strong indications that another ‘fall’ is coming. The uncertainty in these markets is keeping them from a specific direction, or trend. In the Forex markets, however, traders don’t have to worry about “bull” or “bear” markets — the currencies are always in a trend (whether up, down or sideways).
Furthermore, the financial upheaval driven by the credit crisis and the massive government responses means investing or trading in the stock markets will never be the same – but these same events helped to create even greater opportunities in the Forex markets.
Forex trading is not without risk – and frankly, most people approach the Forex markets completely wrong. The current economic and financial conditions make this one of the best times to take on Forex trading, but only if done correctly.
35+ year trading veteran and forex educator, Bill Poulos, has recently released a new video on the RIGHT way to approach trading Forex.
See, most traders go into forex trading with the idea of getting rich quick. And they come out pretty poor.
What Bill shows you is how to get into trading forex by managing risk FIRST and taking profits SECOND. It’s completely turning the forex community upside down.
Watch this free video — see if you disagree with him.
How to Manage Your Forex Trades
We were talking with some forex traders about one of the problems affecting them while their trades were ongoing and found a common issue — watching winning trades become losing trades.
As we’ve talked about before, if you aren’t managing your forex trades, from entry point to exit point, you’re going to see this happen to you – and it will likely happen often.
Here’s the root of the problem:
A trade is entered along with an initial stop loss. What most traders do is try to get ALL their profit at once, but they don’t actually have a ‘target’ –
When the trade initially gets profitable, many traders will ’screengaze’ — they get focused on how much they’ve made or are making at that moment. What they don’t do is plan for exiting the trade — they overstay in the trade and frequently watch their profits evaporate when the market turns against them (and then compound that error by staying in EVEN LONGER to ‘get back’ those lose profits). This is a losing proposition in forex trading.
In short, they let GREED cause them to lose sight of the purpose of the trade.
What is the purpose of a trade? To maximize gain and minimize risk – it IS that simple.
Maximizing gain does not mean you exit a trade at the absolute ‘Top’ – it does mean that for the duration the trade is on, you have a set of rules that determine where you’ll exit for profit – and it isn’t where YOU think it is! More on that in a bit…
Minimizing risk means more than just setting that initial stop loss — you MUST manage your stop losses throughout the duration of a trade.
When forex traders enter a trade they must protect their capital first and think profit second. When their position starts trending up, they can take the right action to protect their capital AND their profits.
In fact, most successful forex traders ASSUME they’ll lose on every trade. They perform this psychological trick to make sure their risk strategy is always top of mind! Once a trade turns in their favor (much to their surprise), the first steps they take is get themselves into a break-even trade situation; followed by aggressive stop loss management to maximize their profits on the trade.
They think risk first, profit second.
Watch this video to see how it’s done.
Forex Robots, The Great Debate: To Automate or Not Automate your Forex Trading
One of the dirty little secrets in the forex market over the last few years has been the huge growth in so-called “robot” trading — Robots are nothing more than automated programs that work off of fancy mathematics based on historical market patterns.
But there’s a real problem with Robots: They don’t work.
Oh, you’ll hear all the fancy talk about how so-and-so turned $10,000 into $ 150,476 in just seven days…
…but it isn’t true. It’s hype and it’s based on ‘hypothetical’ historical trading.
Fact: Most forex traders who use forex robots LOSE MONEY.
Truth: Robots lose money because they have disproportionate RISK MANAGEMENT rules built into them.
What the Robots go after are small, quick profits — 3 pips, 7 pips, 9 pips. And over the course of a series of trades, the Robot’s ‘Winning Percentage’ will be very high — 85-95% winners.
BUT the Robots have a fatal flaw: their stop losses are out of line with typical reward to risk ratios, usually on the order of 1:5 or 1:10 (that means you, the trader, are risking $10 to win $1. In gambling, this is known as “sucker betting” and you’re the sucker.).
Here’s what’s really going on with those Robots: The stop losses are set so wide that ONE TRADE can wipe out the profits from those “85%” winners. That’s because the gains you’re making on the winners are miniscule compared to the losses you take with the built-in risk – or lack therein.
Dirty little secret #2: The percentage of winning trades is inversely proportionate to the reward:risk ratio. The higher the percentage of winning trades, the lower your reward ratio; the lower the percentage of winning trades, the higher your reward ratio.
This means if a Robot claims to have 90% winning trades, your reward to risk ratio will be around 1:10.
Truth? Don’t fixate on ‘winning percentages’ — focus on managing the risk in every trade and keeping the reward to risk ratio in YOUR favor.
Watch this video proof of how this concept can radically change your forex trading.
Why are so many forex traders NOT succeeding?
I had a chance to chat with Bill Poulos today and posed that question to him. Do you know what he said?
“most experienced forex traders wait too long to move stops to protect their positions and frequently watch their profits disappear.”
And that wasn’t all — he went on to explain a simple concept, similar to Gambler’s Ruin that permeates the forex trading world.
Basically, once a trader sees profit in a trade begin evaporating they get solely focused on getting back the lost profits. They forget to see the need to protect the profits that they still have in the trade. The result? A reversal continues, the once-profitable trade becomes a losing trade and the trader’s frustration mounts.
I’ve seen this myself and it’s the easiest trap to fall into, because you convince yourself that the Euro just hit that intra-day high and it can get back up there! Except – it doesn’t and it continues to pull back until your 20 or 30 pip gain turns into a 20 or 30 pip loss.
That’s a pretty severe example – but have you had that happen to you?
What do you do?
Bill had an answer for that, too!
He said most traders don’t know what the available profit potential is for any single trading event — that is, they don’t set profit targets which allow them to take what the market gives them and then exit the trade in multiple steps. And, without a strategy that protects capital first and manages profits second, there’s no way the average forex trader can survive in the foreign currency markets.
In order to position yourself correctly, traders MUST have a multi-part strategy — one that teaches them how to identify the BEST available trades, clearly sets out a profit target, helps manage the taking of those profits and from the outset, teaches traders how to protect their precious capital!
He calls this managing risk first, taking profits second – and it’s really groundbreaking thinking.
Click here to watch the first part of his new free video series.
Learn how to trade Forex THIS way…
Our research and surveying has confirmed that too many new and inexperienced forex traders simply do not know how to manage risk in each trade — and all too often, the result is the same: they wipe out their accounts.
Here’s what we find is happening. Forex has grown in popularity so quickly that many traders who are new to forex trading have just waded into the waters, opened an account and have begun putting on trades without any real thought or planning to how to approach trading.
It should be obvious that the problem with this thinking is little to no understanding of how to approach trading foreign currencies and the significant risks to capital that it poses. All to often, new traders try to trade first and learn second.
And the result of that learning is the loss of their account balances. Hey, let’s be honest, trading on a demo account is never the same as trading with real money. You do not apply the same emotional control, the same trading principles or rules, you’ll take greater risks with the demo account and play too safe with the live account (often to your own loss).
Reverse your thinking: learn first, trade second. In fact, across the board, the need to reverse people’s mindsets about forex is what is needed. Learn the right way to trade first, and THEN take that knowledge to the market and trade with it.
As part of that learn first scenario – the NUMBER ONE element to trading forex that new, inexperienced or unsuccessful traders should learn is how to MANAGE RISK FIRST in every single trade.
Today, one of the most well-respected Forex educators, Bill Poulos, released a video that teaches traders EXACTLY how they should be trading forex. And, how traders can put more trades in their favor by erasing risk — it’s very cool thinking and it isn’t what’s being taught by most of the so-called ‘Gurus’ out there.
By learning to manage risk FIRST, traders will find their trading transformed as they are able to approach forex trading with an entirely different mindset, a plan for erasing risk and a solid set of rules by which to trade.
