1KT Certified Forex Trader
- Thread starter AncientLion
- Start date
Important Concepts in Forex Trading
Important Concepts in Forex Trading
In this post I am going to cover 2 very important concepts of forex trading
Lets say someone starts trading forex with an investment of $1000 or INR 40,000 approximately.
Rule 1: Money Management says that you should use the minimum amount to trade forex and that you should use your money wisely.
The minimum amount that can be traded is 0.1 Lots which can earn $1 per pip [1 pip is the point value difference between price changes]
Now considering that forex markets operate monday to friday which is 5 days a week, so we have 20 days in a month.
We need just 50 pips a day to earn 1000 pips in a month.
WOW !!! That is 100% profit in a month at 50 pips earned per day or $50 earned per day.
Rule 2: Consistency
I have just made 100% profits, I am good in forex, I should increase my lot size beyond 0.1 and should use higher lots.
The answer is a BIG NO
Consistent trading at 0.1 will give you 12000 pips in a year at just 0.1 Lot size which means $12000 earned from an initial investment of $1000
WOW !!! That is 1200% returns in a year.
But wait, what have we learnt from this example
If your gain is $1 per pip then your loss is also $1 per pip, which means that you have a margin of 1000 pips in your first trade on the first day, and every profit earned keeps increasing this margin.
Important Concepts in Forex Trading
In this post I am going to cover 2 very important concepts of forex trading
- Money Management
- Consistency
Lets say someone starts trading forex with an investment of $1000 or INR 40,000 approximately.
Rule 1: Money Management says that you should use the minimum amount to trade forex and that you should use your money wisely.
The minimum amount that can be traded is 0.1 Lots which can earn $1 per pip [1 pip is the point value difference between price changes]
Now considering that forex markets operate monday to friday which is 5 days a week, so we have 20 days in a month.
We need just 50 pips a day to earn 1000 pips in a month.
WOW !!! That is 100% profit in a month at 50 pips earned per day or $50 earned per day.
Rule 2: Consistency
I have just made 100% profits, I am good in forex, I should increase my lot size beyond 0.1 and should use higher lots.
The answer is a BIG NO
Consistent trading at 0.1 will give you 12000 pips in a year at just 0.1 Lot size which means $12000 earned from an initial investment of $1000
WOW !!! That is 1200% returns in a year.
But wait, what have we learnt from this example
If your gain is $1 per pip then your loss is also $1 per pip, which means that you have a margin of 1000 pips in your first trade on the first day, and every profit earned keeps increasing this margin.
LOL....do you really think that any market moves based on charts????
All markets including FOREX moves purely on Fundamentals. The Technicals just highlight another aspect.
Try and learn on what actually impacts the market and you would make a lot more money.
US is near a recession and Japan is leading US into a Recess. For Japan q2 2007 GDP was -1.8% y/y. The interest rates in Japan is 0.50% and Interest rates in US is 3.50%. Still people buy JPY and sell USD. Yes Forex is very easy.
I traded (Sold) $-Y even in 1995 when it was 80.
All markets including FOREX moves purely on Fundamentals. The Technicals just highlight another aspect.
Try and learn on what actually impacts the market and you would make a lot more money.
US is near a recession and Japan is leading US into a Recess. For Japan q2 2007 GDP was -1.8% y/y. The interest rates in Japan is 0.50% and Interest rates in US is 3.50%. Still people buy JPY and sell USD. Yes Forex is very easy.
I traded (Sold) $-Y even in 1995 when it was 80.
Well lets take this one by one.
First why technicals and why not fundamentals.
In technicals we trade on higher time frames of 4 hour and above and based on weekly data, so here small news items, even the likes of NFP does not matter.
Using 4 hour chart patterns we are able to very accurately predict the NFP news results hours in advance, as I will explain in detail when we come to chart reading aspect.
We are not only able to predict the direction but also the exztent in terms of pips the markets will move.
This is done using price action based nalysis which is absent in candlesticks/rsi/stoch/macd based systems.
Now the reason why we are able to do this is that the chart patterns do not depend on one single news items, but form based on demand/supply in the markets based on multiple factors over the period of one week or one month or one year.
During news the banks do not trade, infact during news the market volume is thin, which means that the market is entirely in the hands of speculators leading to whiplash movements and sudden movements.
Banks and large funds enter almost 10 to 15 minute after the news releasess based on careful market analysis.
This is one main reason why the senior traders like us always advise our friends and clients not to trade during news.
During news the spreads also change based on demand/supply thus leading to huge losses to some.
Technical analysis does not depend on mere MT4 charts alone, but there are more definitive factors invloved including 4 year currency demand charts involved.
So to sum up, technical analysis plays a major role in careful long term trading, fundamental news are for short term trading which can lead to losses.
First why technicals and why not fundamentals.
In technicals we trade on higher time frames of 4 hour and above and based on weekly data, so here small news items, even the likes of NFP does not matter.
Using 4 hour chart patterns we are able to very accurately predict the NFP news results hours in advance, as I will explain in detail when we come to chart reading aspect.
We are not only able to predict the direction but also the exztent in terms of pips the markets will move.
This is done using price action based nalysis which is absent in candlesticks/rsi/stoch/macd based systems.
Now the reason why we are able to do this is that the chart patterns do not depend on one single news items, but form based on demand/supply in the markets based on multiple factors over the period of one week or one month or one year.
During news the banks do not trade, infact during news the market volume is thin, which means that the market is entirely in the hands of speculators leading to whiplash movements and sudden movements.
Banks and large funds enter almost 10 to 15 minute after the news releasess based on careful market analysis.
This is one main reason why the senior traders like us always advise our friends and clients not to trade during news.
During news the spreads also change based on demand/supply thus leading to huge losses to some.
Technical analysis does not depend on mere MT4 charts alone, but there are more definitive factors invloved including 4 year currency demand charts involved.
So to sum up, technical analysis plays a major role in careful long term trading, fundamental news are for short term trading which can lead to losses.
The Indian Stock market movements are also predictable well in advance based on technical analysis of currency pairs, my friends moved out of the markets during mid december to end december 2007.
Long long before the slide.
So to wait for a news event to occur and then plan a trade is part of day trading or short term trading.
Technical trading is for longer term traders who always make profits from the market moves.
So, this aspect is left entirely onto individual choice, whether he wants to be sitting infront of a computer 24 hours to see how the next candle will form or he already knows the extent of the moves and takes safer trades even while sleeping.
On forexfactory, I got some very good suggestions on how to design th e course content for the forex education on anchorfx.com, even to the extent that a good chat based training would be better than printed stuff, so that people could learn in realtime mode.
Which, I feel is a good idea.
Long long before the slide.
So to wait for a news event to occur and then plan a trade is part of day trading or short term trading.
Technical trading is for longer term traders who always make profits from the market moves.
So, this aspect is left entirely onto individual choice, whether he wants to be sitting infront of a computer 24 hours to see how the next candle will form or he already knows the extent of the moves and takes safer trades even while sleeping.
On forexfactory, I got some very good suggestions on how to design th e course content for the forex education on anchorfx.com, even to the extent that a good chat based training would be better than printed stuff, so that people could learn in realtime mode.
Which, I feel is a good idea.