What is forex?

The Foreign Exchange market, also referred to as the "Forex" or "FX" market, is the largest financial market in the world, with a daily average turnover of approximately US$1.5 trillion. Foreign Exchange is the simultaneous buying of one currency and selling of another. The world’s currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.

Spread Trading

Futures spread trading is probably the most profitable, yet safest way to trade futures. Almost every professional trader uses spreads to optimize his profits. Trading spreads offers many advantages which make it the perfect trading instrument, especially for beginners and traders with small accounts (less than $10,000).

The following example of a Soybean-Spread shows the advantages of futures spread trading:

Example: Long May Soybeans (SK3) and Short November Soybeans (SX3)

Four Advantages of Futures Spread Trading

Advantage 1: Easy to trade

Do you see how nicely this spread starts trending in mid February? Whether you are a beginner or an experienced trader, whether you use chart formations or indicators, the existence of a trend is obvious. (If you are looking for a concept of how to identify a trend, we strongly recommend visiting http://www.tradingeducators.com/?source=Tradejuicetrading_philosophy.htm). Spreads tend to trend much more dramatically than outright futures contracts. They trend without the interference and noise caused by computerized trading, scalpers, and market movers.

Advantage 2: Low Margin requirements

Many spreads have reduced margin requirements, which means that you can afford to put on more positions. While the margin on an outright futures position in corn is $540, a spread trade in corn requires only $135 — 25% as much. That’s a great advantage for traders with a small account. With a $10,000 trading account risking 8% of your account, you can enter 6 corn spreads, instead of only 1-2 outright corn futures trade. How’s that for leverage?

Advantage 3: Higher return on margin

Each point in the spread carries the same value ($50) as each point in the outright futures ($50). That means that on a 3 point favorable move in corn futures or a 3 point favorable move in the spread, you would earn $150. However, the difference in return on margin is extraordinary:
Corn futures - $150/$540 = 27.8% return
Corn spread - $150/$135 = 111% return
And keep in mind that you can trade 6 times as many spread contracts as you can outright futures contracts. In our example you would achieve a 24 times higher return on you margin.

Advantage 4: Low time requirements

You don’t have to watch a spread all day long. You do not need real-time data. The most effective way to trade spreads is using end-of-day data. Therefore, spread trading is the best way to trade if you do not want to watch or cannot watch your computer all day long (i.e. because you have a daytime job). And you can save all the money you would have had to spend for real-time data systems (up to $600 per month).
So where is the catch?
If futures spread trading is so fantastic, why does it seems that hardly anybody trades spreads? Well, it is not true that hardly anybody trades spreads: the professional traders do, every day. But either by accident or design, the whole truth of spread trading has been hidden from the public over the years.
The purpose of this website is to inform you about futures spread trading. In the following we will answer the four frequently asked questions:

• What is a spread?
• Why trade spreads?
• What can you expect when trading spreads?

What Is a Spread?

A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. You can turn that around to state that a spread is the purchase of one or more futures contracts and the sale of one or more offsetting futures contracts. A spread is also created when a trader owns (is long) the physical vehicle and offsets by selling (going short) futures. Furthermore, a spread is defined as the purchase and sale of one or more offsetting futures contracts normally recognized as a spread by the fact that the two sides of the spread are actually related in some way. This explicitly excludes those exotic spreads put forth by some vendors, which are nothing more than computer generated coincidences which are not in any way related. Such exotic spreads as Long Bond futures and Short Bean Oil futures may show up as reliable computer generated spreads, but bean oil and bonds are not really related. Such spreads fall into the same category as believing the annual performance of the U.S. stock market is somehow related to the outcome of the Super Bowl sporting event. In any case, for tactical reasons in carrying out a particular strategy, you want to end up with:

• simultaneously long futures of one kind in one month, and short futures of the same kind in another month. (Intramarket Calendar Spread)
• simultaneously long futures of one kind, and short futures of another kind. (Intermarket Spread)
• long futures at one exchange, and short a related futures at another exchange. (Inter-exchange Spread)
• long an underlying physical commodity, and short a futures contract. (Hedge)
• long an underlying equity position, and short a futures contract. (Hedge)
• long financial instruments, and short financial futures. (Hedge)
• long a single stock futures and short a sector index.

The primary ways in which this can be accomplished are:

• Via an Intramarket spread.
• Via an Intermarket spread.
• Via an Inter-exchange spread.
• By ownership of the underlying and offsetting with a futures contract.

Intramarket Spreads

Officially, Intramarket spreads are created only as calendar spreads. You are long and short futures in the same market, but in different months. An example of an Intramarket spread is that you are Long July Corn and simultaneously Short December Corn.

Intermarket Spreads

An Intermarket spread can be accomplished by going long futures in one market, and short futures of the same month in another market. For example: Short May Wheat and Long May Soybeans.
Intermarket spreads can become calendar spreads by using long and short futures in different markets and in different months.

Inter-Exchange Spreads

A less commonly known method of creating spreads is via the use of contracts in similar markets, but on different exchanges. These spreads can be calendar spreads using different months, or they can be spreads in which the same month is used. Although the markets are similar, because the contracts occur on different exchanges they are able to be spread. An example of an Inter-exchange calendar spread would be simultaneously Long July Chicago Board of Trade (CBOT) Wheat, and Short an equal amount of May Kansas City Board of Trade (KCBOT) Wheat. An example of using the same month might be Long December CBOT Wheat and Short December KCBOT Wheat.

Why Spreads?

The rationale behind spread trading is one of the best-kept secrets of the insiders of the futures markets. While spreading is commonly done by the market "insiders," much effort is made to conceal this technique and all of its benefits from "outsiders," you and me. After all, why would the insiders want to give away their edge? By keeping us from knowing about spreading, they retain a distinct advantage.
Spreading is one of the most conservative forms of trading. It is much safer than the trading of outright (naked) futures contracts. Let’s take a quick look at some of the benefits of using spreads:

• Intramarket, and some Intermarket, spreads require considerably less margin, typically around 25% - 75% of the margin needed for outright futures positions.
• Intramarket, and some Intermarket, spreads offer a far greater return on investment than is possible with outright futures positions. Why? Because you are posting less margin for the same amount of possible return.
• Spreads, in general, trend more often than do outright futures.
• Spreads often trend when outright futures are flat.
• Spreads can be filtered by virtue of seasonality, backwardation, and carrying charge differentials, in addition to any other filters you might be using in your trading.
• Spreads can be used to create partial futures positions. In fact, virtually anything that can be done with options on futures can be accomplished via spread trading.
• Spreads allow you to take less risk than is available with outright futures positions. The amount of risk between two Intramarket futures positions is usually less than the risk in an outright futures position. The risk between owning the underlying and holding a futures contract involves the least risk of all. Spreads make it possible to hedge any position you might have in the market. Whether you are hedging between physical ownership and futures, or between two futures positions, the risk is lower than that of outright futures. In that sense, every spread is a hedge.
• Spread order entry enables you to enter or exit a trade using an actual spread order, or by independently entering each side of the spread (legging in/out).
• Spreads are one of the few ways to obtain decent fills by legging in/out during the market Closing.
• Live data is not needed for spread trading, saving you $$ in exchange fees.
• You will not be the victim of stop running when using Intramarket spreads.

Indicator trading

Did you start day trading after buying a book on technical analysis, and getting a charting program - probably a free one that you found online - in order to save money? While reading your book you learned about trading indicators which could ’predict’ price movement, and what do you know, the ’best’ indicators were actually included in your free charting program - let the games begin.

Now that you have all the day trading tools that are necessary, the book for education AND the free charting program with those ’best’ day trading indicators, you now need a day trading plan so you can decide which ones of those ’magic’ day trading indicators you are supposed to use. This really is a great book, besides telling you how to day trade using indicators to ’predict’ price - it also said that you need a trading plan to day trade.

So what should this plan be? The book told you about trend following using an indicator called macd, and it also told you how it was possible to pick the top or bottoms using an indicator called stochastic; my guess is that you picked the stochastic indicator to start your day trading - this must be the ’best of the best’ since this indicator was going to ensure you of entering your trades with the ’best’ price. Amazing, simply amazing how easy this day trading stuff really is. In fact, why even bother taking the trades, each time your indicators give a signal - just call up your broker and tell him to stick $100 in your account.

My book was Technical Analysis of the Futures Markets. My charting program was TradeStation with an eSignal fm receiver; that was the one that if you hung the antennae wires just right, and you put enough foil on the tips, you might even get quotes. I had sold a business before I started trading so I did have some capital - isn’t that how everyone gets into trading, you either sell a business or you lose your job? My indicator was the macd as I had decided that I was going to be a ’trend follower’ instead of a ’top-bottom picker’. I also decided that I was going to be ’extra’ clever, if one indicator was good than two indicators must be better, so I added a 20 period moving average. My first trade was a winner, then after many months of extensive therapy, I was finally able to forget the next twelve months - ahhh the memories ƒ؛

Learning To Day Trading - The Learning Progression

Beginning to day trade, or learning to day trade, as an indicator trader is very typical. This is also logical when you consider - HOW are you supposed to initially learn how to trade? Trading indicators are available to anyone who has a charting program, and simply using line crosses, or histogram color changes, provide ’easy’ signals to understand. If you will also take the time to learn the arithmetic behind your indicators, as well as learning what each indicator is specifically intended to do, not only is this a logical way to begin, it is also a good ’step’ in your learning progression - understanding the WHAT you are doing, instead of attempting to create ’canned’ indicator only trading systems, without any regard as to WHY you are trading this way.

This does become one of the ’sticking’ points in your learning progression, as you come to find out that you are unable to profitably trade indicators as signals only - now what? Now what - you ’can’t’ develop your own indicators, so you start doing google searches for day trading indicators and start buying your ’collection’ - they don’t ’work’ either. Now what - you buy a mechanical trading system - what does hypothetical results may not be indicative of real trading or future results mean? Now what - you start subscribing to signal services OR you start joining the ’latest and greatest’ chat room - am I really the only person using the signals who isn’t profitable?

Now what - you never learn how to trade.

I began trading as an indicator trader, and I did try to learn everything that I could about the various indicators, as well as trying to combine indicators that were consistent with how I wanted to trade - I just could never develop a mechanical day trading system from what was available to me. I read a couple more books that didn’t really help me, so I then started looking for someone who could teach me. From what I now know about gurus -vs- teachers, I am very lucky that I got involved with a money manager-trader who taught me a tremendous amount, but I still couldn’t get profitable, in part because there was also ’pressure’ to learn how to trade using real money. As well, any discussions or thoughts about trading psychology and the issues involved, especially to beginning traders, was non-existent.

Now what - learning but losing - I stopped trading. Learning to trading using real money, and ’scoffing’ at trading psychology as simply individual weakness, really was something that I now regard as misinformation. I always mention this as I now feel that this cost me as much as a year of time, and was very close to costing me my trading future, as stopped trading was VERY close to quitting trading. How can’t trading psychology be real to a beginner, when you consider that you are risking losing money at a very fast pace as a day trader, and when you further consider that you are also doing this when you really don’t know what you are doing - this is NOT by definition being weak. And if trading psychology is real, how are you going to learn to make ’good’ trading habits with real money while you are fighting the implications?

Now what - not trading and not ready [quite] to quit - still studying and searching.

Probably the single most important ’thing’ that got me to a next step in learning how to trade, was the concept of a trading setup, and that a setup and a signal were not the same. This was extremely meaningful to me, as it also led to an understanding of how to better use trading indicators for the information that they can provide, but not to use them as trading signals - in essence I began learning about trading method where discretion could be consistently applied -vs- trading system that was mechanical and arithmetic rules.

Traders who are indicator only traders, are also what I refer to right side only traders, that is they are always looking at the right side of their charts for an indicator signal. BUT what about the left side of the chart, what about price and patterns, what about market conditions - WHAT about the relevant ’things’ that are ’moving’ price, instead of indicators only as an arithmetic derivative of price, and thus, one that is dependant on the time frame that you have chosen to trade from? These ’thoughts’, along with the concept of trade setup, became instrumental in the development of a trading method, and how I came to turning my trading around.

When I think about the steps in my learning progression - I would list them as follows:

2/95 - 6/96 indicators only teaching service that included signals learning to trading with real money and trading psychology issues stop trading

6/96 - 3/97 understanding of trading psychology issues learning about trading setups concept trading method -vs- trading system trade setup - trade trigger are not the same method development understand the importance of the left side of the chart and what is happening ’across’ the chart related trading setups and how/when they triggered indicators + pattern indicators + pattern + price indicators + pattern + price + market conditions

3/97 - 11/97 able to paper trade profitably able to real money trade profitably able to trade for a living

Indicator Only Day Trader - Setup Including Indicators Method Day Trader

I have attempted to discuss the way I started day trading, and the way I think many-most traders typically begin. Along with this, I have pointed various issues and problems that I had - those regarding how to learn to trade, and then progressing into a profitable trader. My experiences have been both personal, as well as those of many traders that I have worked with over the last 8-9 years through Tactical Trading - that a very large number of these problems are due to day trading only with indicators, the specific indicators used, along with trying to turn these indicators into a mechanical trading system. This is not to say that this can’t be done - I simply couldn’t do it. However, I would strongly suggest that anyone who is in the early stages of day trading, or struggling with their day trading, consider these things that have been discussed.

Trading techniques

First, a few words about Fibonacci himself…

Leonardo Pisano (nickname Fibonacci) was a mathematician, born in 1170, in Pisa (now Italy). His father was Guilielmo, of the Bonacci family. His father was a diplomat, as a result Fibonacci was educated in North Africa, where he learned "accounting" and "mathematics".

Fibonacci also contributed to the science of numbers, and introduced the "Fibonacci sequence"

The Fibonacci sequence is the sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, introduced in his work "Liber abaci" in a problem involving the growth of a population of rabbits.

Aside from this sequence of number where every next number is the sum of the proceeding two, 0, 1 (0+1), 2 (1+1), 3 (2+1), 5 (3+2), 8 (5+3), 13 (8+5), etc.

There are the "Fibonacci ratios".. By comparing the relationship between each number, and each alternate number, and even each number to the one four places to the right, we arrive at some fairly consistent ratios.. The important ones are .236, 50, .382, .618, .764, 1.382, 1.618, 2.618, 4.236, and for good measure we include 1.00 ..

It turns out that the ratios are mathematical principles prevalent in nature around us, and is also in man-made objects. There are many interesting, entertaining, and poetic observations about Fibonacci numbers and ratios in the universe (see the reference section below). Fibonacci numbers appear in ancient buildings, in plants, planets, molecules, the dimensions of human bodies, and of course snails… But of what use is all that to the lowly trader?

What really interests you, the application of Fibonacci techniques in the trading environment..

Traders usually study charts! Fibonacci ratios may be applied to the Price scale, and also to the time scale of charts. I study the price scale. My focus here will be on the price scale for now, perhaps in the future I’ll add some time-scale studies.

Prices never move in a straight line. Look at any chart, you will see many wiggles, as price advances and retraces.. Stocks, Futures, Forex, all instruments which are liquid, will often retrace in Fibonacci proportions, and advance in Fibonacci proportions. Not always, and not precisely to the penny. But very often, and reasonably close! This happens often enough that profitable trades can result. I will show you some examples below.

I used Fibonacci ratios with a few simple indicators to help determine probable price turning points, optimum entry, exit and stop-loss levels. My complete techniques are available in on-line video seminars, in-person seminars, and via my real-time on-line chat facility. For more details, see the this web page

The application of Fibonacci to trading can be very complex, and take much time and experience to perfect. Many traders enjoy making the process as difficult and as complex as they can tolerate.. I do the opposite, I try to simplify, try to bring clarity.

Fibonacci example - Microsoft Weekly chart.
This lesson demonstrates a very basic way to use Fibonacci levels. You just read about Fibonacci ratios. We will use just one of those ratios for now, the .382 Fibonacci ratio. In this chart MSFT made a high of (approximately) $59.97 in December of 1999. After that, it moved down to make a low of $30.19 in May of 2000.

The down move was $29.78 (59.97-30.19), quite a substantial amount.

Projecting from that low in May, and using a Fibonacci ratio, we can calculate 29.78*.382=$11.37 . So 38.2% of 29.78 is 11.37 . If MSFT were to rally 38.2% of the down-move it would reach $41.57 (11.37+30.20). I’m using rounded numbers in my calculations, the chart above calculates it to be $41.564, we don’t need that degree of accuracy!

Several weeks later, MSFT rallied and resisted right near that .382 Fibonacci level !!

So we were able to predict a future probable turning point (after the low of May 2000), using the Fibonacci ratio of .382!! If only it were always so easy.

The steps involved are:

1. Calculate the total value of a significant price-move (high to low, or vice-versa).
2. Calculate a Fibonacci retracement (in this case .382) of the prior move.
3. Look for price to confirm, by resisting (or support in an up-move) near that predicted retracement area.

Fibonacci example - Microsoft Daily chart.
This chart shows how a different Fibonacci level (61.8%) predicted resistance and a market turn.

Notice how the market behaved at the .382 level (30.80 area). Initially the market spiked through, then fell back to that level (late October). We cannot expect a chart to retrace at every Fib level. We can expect some support/resistance as buyers/sellers enter the market at these levels, but we can’t always predict whether the market will actually turn at any particular level. Fibonacci techniques are used to alert you to a possible trade, if that price level does cause support or resistance. These techniques are not used as a trigger for entry. Other indicators are used in conjunction with Fibonacci studies to provide higher-probability entries..

The first up-move that I have identified topped out at $26.90, and then retraced 61.8% before supporting at that Fib level. There was a pause at the .382 level, but it was not sufficient to hold the market. Now look at the rally from the support level near .618, it rallied but did not exceed the prior high of 26.90 … As a general rule, a retracement to .618 or below indicates that the preceding up-move is losing steam. A shallow retracement which supports at .382 is more likely to rally beyond the prior high than one which has a deep retracement beyond .50 all the way to .618 ..

The impressive thrust from 22.55 up to 26.90 was negated by a quick move back to .618 at about 24.20, so a trader should not be too optimistic about a continuation of the initial up-thrust.

Similarly, the move up in June, from 23.50 to almost 26.50 would also not inspire much optimism for a huge rally above the high of 26.50 … In general a shallow support at .382 would indicate a probable rally beyond the prior high. However, if the up-move preceding the retracement was sluggish rather than thrusting, you also should temper your enthusiasm.

If the second rally which only retraced to .382 had the thrust of the first rally, it would be a more attractive trade!

These are not firm rules, instead they are used as a guide, to help you filter for better trades. Every Fib level is not equal, some are more attractive than others.

Important notes from this lesson:

1. Not all Fib levels are alike.
2. No technical study is perfect, you must develop the skills to filter out bad trades, and improve the odds of finding better trades.
3. Price action just before a Fib retracement can tell you something about the future.
4. Which Fib level causes the end of a retracement also can give a hint to future price action.
5. No technical study is perfect, you must develop the skills to filter out bad trades, and improve the odds of finding better trades.

Good Trading

Best Regards
Neal Hughes
http://www.fibmarkets.com/

Discretionary Traders

In browsing around the web I often encounter discussions of the merits of a particular trade and opinions about the direction of a market. I know that the traders who voice these opinions have good intentions and much of the discussions could be helpful to the person receiving the information. (Some of these discussions are on our Forum.) However the provider of the opinion must be very careful that he doesn’t start believing too strongly in his position because he has made the mistake of going public with it.

This is an important psychological issue that I seldom see discussed. Taking losses is always difficult and the reluctance to promptly acknowledge that we are on the wrong side of the market is probably the single most costly error a trader can make. Even under the best of conditions we hate to take losses. Publicly advocating a particular trade or the direction of a market just makes being wrong all the more painful and harder to accept. If we make it a policy to go around advocating the merits of our trades it will only make it harder to recognize when we are wrong.

Many years ago when I was a young futures broker at E. F. Hutton and Company, the firm decided that it would be a good idea to send our commodity research analysts on the road whenever they came up with a well researched idea that appeared to have great potential. Let’s assume for a minute that our sugar analyst has decided that sugar is going to make a big move to the upside over the next six months. After publishing his research he would be sent from city to city where he would speak at meetings for brokers and clients suggesting why everyone should be buying sugar. At first the analyst road shows seemed like a great idea. The clients received the benefit of hearing about a well-researched idea straight from the analyst himself and also had the opportunity to ask questions and engage the analyst in a discussion of the details of the sugar market. The clients enjoyed the meetings and a lot of new commodity business was generated as a result Discretionary Traders

However, it turns out that the objectivity of the analysts was completely lost after the story had been told and the bullish scenario presented a dozen times or more. The analyst felt obligated to the firm and to the clients. The firm had spent a lot of money to send the analyst on the road and to host these meeting all over the country. As a result of the meetings the clients now knew the analysts by name and his personal and professional reputation was clearly on the line. This analyst was now committed and he was going to be bullish on sugar regardless of what happened in the market or what new information came to light. From the point of the tours onward the analyst would only look for information to support his opinion. To ever admit that he was wrong would be such public humiliation that the analyst would tend to ignore any contrary information and would stick to his original position through thick and thin. We eventually learned that the talented Hutton research analysts did a much better job when they were free to change their minds as new facts were revealed without the pressure and responsibility generated by their repeated espousing of a particular position on a specific trade.

Discretionary traders should learn from this example Discretionary Traders and avoid discussing their open positions or their opinion about the direction of a market. It will only distort their objectivity and make it harder to take a loss promptly when that is the best course of action. Losses that only we know about are tough enough but losses that everyone knows about become much harder to stomach and we tend to postpone our exits in hope that the market will eventually turn around and prove us right. Remember that the best discretionary traders are usually very neutral about their positions and tend to take their guidance from the price action and the flow of new information. Its OK to listen to others talk about their positions but don’t make it a habit of discussing your open trades. It will only cost you money, especially if you repeat your opinions often enough that you might actually start believing what you are saying.

Fortunately, systematic traders seldom get married to a position. They enjoy the luxury of being able to blame the system if a trade doesn’t work out. Since there is little personal attachment to any trade, the psychological problems of systematic trader are much different than those of discretionary traders. But even systematic traders have their share of psychological problems. Perhaps we can discuss some of these problems in a future Bulletin.

Forex trading System

A trading system on the Forex market is a type of strategy that allows traders to trade with a set of rules. There are many free trading systems and strategies printed in trading articles, journals, books and on trading-related websites. I would have to say that if you are not inclined to learn how to develop your own trading methodology, then perhaps you should consider giving your money for someone else to invest. Give it to someone who is trading a system that he developed and tested himself because he is more likely to have the confidence and courage to follow his own trading system.

Why you need a forex trading system?


1. It’s easy to trade with a system.
2. A good system provides consistent result.

What makes a good trading system?

* It’s simple. Forget complicated systems with lots of rules - it’s a proven fact that simple systems work better - and are less likely to fail, in the brutal world of trading.
* A trading system with profitable expectation.
* It provides good ratio of reward/risk.
* A system of comprehensive risk management including market exposure weightings, stop-loss provisions and capital commitment guidelines that preserve capital during trend-less or volatile periods.


Once you learn how to develop trading systems and strategies, you can then be better equipped to test them as well. By this point you might even find that the system created by yourself is the best one for you, because it becomes the system more suited to your profit objectives while operating within your risk tolerance levels. It is likely that once you develops this level of competence, you will simply acquire other trading systems only to dissect them, grab the parts you likes and add them to your own system. To me, the irony is that for a trader to know which system to purchase, you must first learn how to create a system. And after knowing how to create a system, he will no longer have the need to buy one.

What is the law of chart?

The Law of Charts was discovered by Master Trader Joe Ross. As he likes to say, "It was there all along. It just happened to fall on my head much as the law of gravity was discovered when an apple fell on Isaac Newton’s head."

The Law of Charts defines four basic formations known as 1-2-3 lows and highs, Ross hooks, trading ranges, and ledges. These occur in all time frames because the depict human action and reaction vis-à-vis price movement.

What makes these formations unique is that they can be specifically defined. The ability to formulate a more precise definition sets these formations apart from such vague generalities as "head and shoulders," "coils," "flags," "pennants," "megaphones," and other such supposed price patterns that are frequently attached as labels to the action of prices.

A 1-2-3 high or low comes at the end of a trend or swing. It forms as the result of a change in the direction of prices. The 1-2-3 low forms as the result of buying pressure overcoming that of selling pressure. The 1-2-3 high forms as the result of selling pressure overcoming buying pressure.

A Ross hook™ always forms as the result of profit taking in an trend or swing.

A ledge forms as a result of profit taking, uncertainty about future price direction, or both. You might consider it as a pause in the overall movement of prices in a single direction.

A ledge is the smallest of a number of consolidation formations: it never consists of more than 10 or less than 4 price bars. It is denoted by containing two matching or nearly matching highs and two matching or nearly matching lows.

A consolidation consisting of eleven to 20 price bars is called a congestion, and a consolidation consisting of 21 or more price bars.

As simple as these definitions are, the have been found to constitute a "law." Any data that contains both a high and a low, will form these patterns; even data that has nothing to do with markets and trading.

Learn more about The Law of Charts, it is a free resource on our website. Study it as much as you want. And while you are visiting take a look at the Traders Trick™ entry What is the law of chart?.

History of forex trading

Currency trading can trace its history back to the middle ages when international merchant banker devised the system of using bills of exchange. It is however changes which have occurred during the twentieth century which have really shaped trading in the global currency market we see today.

In the 1930s the British pound was considered to be the world's principle trading currency and was the currency held by many countries as their main 'reserve' currency. London was also seen as the world's leading foreign exchange center.

Following the Second World War however the British economy was all but destroyed and so the United States dollar took over as the world's major trading and reserve currency - a position which it still holds today. This said however there are now a number of other currencies, including the Japanese Yen and the Euro, which are also beginning to be seen as major reserve currencies.

It was also following the Second World War that a number of events took place which have been instrumental in shaping today's Forex market.

The first of these was the conclusion of the Bretton Woods Accord in 1944 in which the United States, Britain and France agreed that they would stabilize world currency markets by pegging the major world trading currencies to the US dollar (which was itself pegged to the price of gold). This accord held that when the price of a currency fluctuated by more than one percent against the US dollar then the central bank of the country in question had to step in and buy or sell the currency to bring it back into its one percent bracket.

The Accord also spawned the establishment of the International Monetary Fund (IMF) which was designed to produce a stable system for the sale and purchase of currencies and to ensure that international currency transactions were conducted smoothly and in a timely fashion.

The IMF also created a consultative forum aimed at both promoting international co-operation and facilitating the growth of world trade. At the same time it also broke down many of the exchange restrictions which were hindering international trade.

The IMF was also tasked with making financial resources available to member states on a temporary basis where this was felt to be necessary in furtherance of the aims of the IMF. Loans were normally only made only on condition that the government of the country to which a loan was made undertook to make substantial changes to rectify the situation which had given rise to the need for the loan.

Without any doubt however the most significant events as far as the Forex market is concerned was seen when the IMF proposed that currencies should become 'free-floating' in 1978. This allowed currencies to be traded at a price which was determined solely by the law of supply and demand and that there was no longer any requirement for currencies to be pegged to the dollar or for central banks to intervene in currency trading. Central banks could of course continue to intervene if they wished to do so, but any intervention would be entirely a matter of choice and would no longer be a requirement as it had been under the Bretton Woods Accord.

The next significant event in the history of Forex trading was the birth of the European Monetary System which effectively came into being in 1979. The European Monetary System got off to something of a shaky start when Britain did not join the system, although she did later participate to a degree by joining the European Monetary System's exchange mechanism in 1990.

The final major event to affect the Forex market was the establishment of the Euro as the European Union's single currency in 1998 with eleven member states replacing their national currency with the Euro.

Above all else however it was the free-floating of currencies in 1978 which accelerated the growth of the foreign currency market. Back in 1978 Forex trading displayed a daily turnover of around 5 billion US dollars but, by the turn of this century, that figure had risen to 1.5 trillion US dollars.

Good Trading using 4 elements

The foreign exchange market (forex market or fx market) is the world's largest market and consists largely of the forex spot market (spot foreign exchange market) and the currency futures market. Today however the majority of smaller traders tend to confine themselves to trading spot forex.

There are four elements which must be present in any good financial market, whether you are trading in the stock, bond, futures, currency market or any other market. These four elements are liquidity, transparency, low trading costs and market trends.


Liquidity

There are always two sides to a trade, a purchase and a sale, and in its simplest form liquidity refers to the ease with which traders can buy and sell. To be truly liquid traders must also be able to trade in substantial volume without this having any marked effect on prices.

If a market lacks liquidity then traders will often encounter delays in meeting orders to buy, frequently leading to a significant variation between the price when an order is placed and when it is executed. In addition, it may be hard to sell in a market that is not sufficiently liquid.

Fortunately the currency exchange market (especially when trading in major world currencies such as the USD and GBP) is extremely liquid and a huge number of trades are conducted each day on the Forex money market with a trading volume that far exceeds that of other markets.

Transparency

A market is said to possess transparency when traders can access accurate information at all stages of the trading process.

Information is the key to many things in life and the world's various markets are no exception. There are many examples, especially in the world stock markets, of companies and individuals which have run into difficulty because the parties to a trade did not have access to accurate information.

The foreign currency exchange market is without doubt the world's most transparent market and this is especially true when it comes to pricing.

Low Trading Costs

Markets carry trading costs which inevitably lower a trader's profits or increase his losses. However, when a market can keep its trading costs low it becomes attractive to traders and encourages both an increased number of trades and an greater trading volume.

The absence of commission and other usual trading costs, together with the tight spread of prices, in currency trading mean that trading costs in the Forex market are kept very low.

Market Trends

In many markets it can be difficult to know just when to enter the market and when to exit it (when to 'buy' and when to 'sell'). As a result, it is important to have some way of assessing the present state of a market and to predict its future direction.

In the foreign currency exchange market this is achieved by employing various forms of technical analysis which examine the past performance of the market and identify trends which can then be used to predict its future.
Most markets display trends of one form or another, but in some markets these are far more clearly defined than in others, making it far easier for traders to enter and exit the market. The foreign currency market displays a particularly strong trending characteristic Good Trading using 4 elements

5 Reasons For Currency Trader

The foreign currency exchange market offers today's investor many advantages and here are just reasons why you might want to become a world currency trader.

A Market Which Never Closes

Many of the trading markets around the world are situated in fixed locations and operate within strict trading hours, often limited to just five or six hours a day between Monday and Friday. The Forex market however is open 24 hours a day.

This means that traders can not only take advantage of international events and react literally as they happen, but they also have the ability set their own trading hours. If you prefer to work in the mornings then that's fine but, if this doesn't suit you, then you can choose to trade during the afternoon, late evening or even in the middle of the night if you want to.


Low Trading Costs

In many markets, like the equity market, traders not only have to pay a spread (the difference in price between buying and selling a stock) but also have to pay a commission to the broker. On small trades this commission can typically be about $20 and this can rise rapidly to over $100 for larger trades.

Because the foreign currency exchange market is a wholly electronic market many of the traditional trading costs are eliminated and you are in affect reduced to paying nothing more than the spread. In addition, the extremely liquid nature of the global currency exchange market means that spreads are normally much tighter than those seen in other markets.

The Ability To Trade On High Leverage

In most markets where a trader has an opportunity to trade on leverage the leverage offered is often quite low. In the case of equity markets, for example, professional equity day traders will normally operate on a leverage of about ten times their capital. In the Forex market by contrast it is quite common to find that traders are permitted to trade at one hundred to two hundred times their capital.

A downside of high leverage is that it can of course lead to high losses as well as high gains. However, within the foreign currency market, risk management is extremely tightly controlled.

Limited Slippage

In currency trading trades are executed immediately using real-time prices at which firms will buy or sell the currencies quoted. In almost all cases this means that the price you see and the price you pay are the same.

This is not often the case in other markets where there can be often considerable delays between placing an order and that order being executed during which time the price will often move against you.

The Chance To Profit In Both Rising And Falling Markets.

Equity markets follow rising and falling trends (cycling between Bull and Bear markets), but the Forex market does not suffer this cycling which comes from structural bias in the market.

World currency trading always involves two currencies so that if you are down on one currency then you are up on the other. There is therefore always the potential for making a profit whether the market is rising or falling.

foreign currency conversions

For the Forex currency trading beginner a trade can be a little confusing until you break it down and come to grips with some of the trading terminology.

The purpose of any Forex trade is to swap one currency for another in the belief that the market will move and prices change such that the currency that you buy rises in value in relation to the currency which you sell.

The first important point is that each trade involves two currencies - the currency which you buy and the currency you sell. This gives us our first two important trading terms - the long position and the short position.

You take a long position when you buy a currency in the belief that it will rise in value and that you will able to sell at a profit.

If you sell a currency in the belief that it will fall in value you take a short position and hope to make a profit by buying it back again once the price has fallen.

The next important concept is that of the open and closed position. When you take a long position and buy a currency in the expectation that it will rise in value you open a position. When you later sell that currency to take you profit you close the position. The same is true when you take a short position and open that position by selling a currency in the expectation that it will fall in price and later close the position when you buy the currency back at the lower price.

Note: How does day trading work? You will often hear the term 'day trading' used and this confuses a lot of newcomers to the world of investing. When applied to forex trading, day trading simply means short-term trading effected by opening and closing trading positions within the same trading day, rather than running a trade over an extended period of time.

In Forex trading currencies are referred to by codes (developed by the International Organization for Standardization and known as ISO codes) such as USD for the US Dollar and GBP for the UK Pound. Prices for these currencies are quoted as either USD/GBP or GBP/USD with the first currency appearing in the quote being the base currency and the second currency being the counter or quote currency.

Here's an example quote to make things a bit easier to understand:

USD/GBP = 0.5260

In this case the US Dollar is the base currency and the UK Pound is the counter or quote currency. The base currency is always read as a single unit and so this quote means that it will cost 0.5260 UK Pounds to buy 1 US Dollar. Here's another quote:

GBP/USD = 1.9150

In this case it will cost 1.9150 US Dollars to buy 1 UK Pound.

In real world trading it's a bit more complicated as the market maker needs to add in his profit for selling you a currency or for buying currency from you. In reality therefore a quote might look more like this:

GBP/USD = 1.9238 1.9243

In this case the first figure is the 'sell' or 'ask' figure and the second is the 'buy' or 'bid' figure. The first figure is price at which a trader will sell the currency pair and the second is the price at which he will buy the pair. The difference between the two prices is known as the spread.

Prices are normally quoted to four decimal places and the fourth decimal place, which represents the smallest amount by which one currency can move against the other, is known as a 'pip'. In this case therefore the spread is 5 pips.

In our example therefore, if you wish to sell UK Pounds, the market maker will buy them from you at 1.9243 US Dollars per UK Pound and, if you wish to buy UK Pounds, 1 UK Pound will cost you 1.9238 US Dollars.

If you are just starting to learn Forex currency trading then this probably seems a little bit complicated but it represents the basis on which the Forex market operates and will quickly become second nature.

Calculating the pip value of forex

Perhaps the first question we need to ask is what does pip mean in forex trading? A pip is the smallest movement that is possible in the price of one currency against another and it is vital to be able to calculate pip values quickly and easily as it is the movement in prices which results in your profit or loss when trading.

A pip is normally, but not always, 0.0001 or 0.01%. In other words, if a currency moves from a price of 1.7650 to 1.7655 it is said to move 5 pips.

The easiest way to understand how to calculate pip values is to start by considering currency pairs which involve the US Dollar and we start by considering the situation when the US Dollar is the quote currency as in the case of JPY/USD, GBP/USD or CHF/USD.


Here calculating a pip value is very easy as a pip will always have a value of $10. So, if while trading JPY/USD the market moves in your favor by 10 pips you will make a profit of $100. Let's see how this works.

Consider a quote of GBP/USD is 1.9730. This means that 1 UK Pound is worth 1.9730 US Dollars. A standard InterBank lot size is 100,000 and which means that 100,000 UK Pounds are worth 197,300 US Dollars. If the market moves 1 pip so that GBP/USD is 1.9731 then 100,000 UK Pounds will now be worth 197,310 US Dollars - a rise of $10.

Now let's turn our attention to what happens when the US Dollar is the base currency and consider a quote of USD/GBP = 0.6439. Here 1 US Dollar is worth 0.6439 UK Pounds and 100,000 US Dollars are worth 64,390 UK Pounds.

If the price moves up 1 pip then USD/GBP = 0.6440 and 1 US Dollar is worth 0.6440 UK Pounds and 100,000 US Dollars is worth 64,400 UK Pounds.

In this case a movement of 1 pip represents a value of 10 UK Pounds which, in US Dollars, gives a pip value of 15.53 US Dollars (10 ÷ 0.6440).

For a standard trading lot with the US Dollar as the quote or counter currency a pip has a value of $10 but, when the US Dollar is the base currency, the pip value will vary with the market price.

Principle of profiting in excgange rates

The easiest way to demonstrate the ability to profit from Forex trading as the exchange rate rises and falls is to look at some examples. Let's start by looking at how you might profit when exchange rates rise.

Let's assume that you believe that the UK Pound is going to rise against the US Dollar and that you can buy GBP/USD at 1.8730. We'll also assume that you are trading a standard InterBank lot of 100,000 so that 100,000 UK Pounds will cost 187,300 US Dollars.

To open a trade you start by borrowing 187,300 US Dollars, which you will have to repay when you close out your position.

[Note: We will not discuss the idea of borrowing to fund your Forex trading at this point but will simply note that the majority of trading is done using borrowed funds making use of leverage.]

Assuming that you are correct and that the UK Pound rises against the US Dollar and that the price moves 100 pips to a rate of 1.8830, the 100,000 UK Pounds which you purchased are now worth 188,300 US Dollars and you can close out your position and repay the original borrowing, leaving you with a profit of 1,000 US Dollars.

In real life of course it is not quite as simple as this because there will be transaction costs to pay. However, this does demonstrate the principle of profiting when exchange rate rise.

Now let's turn our attention to profiting when the exchange rate falls.

Assume this time that you believe that the UK Pound will fall against the US Dollar from its present rate of GBP/USD = 1.8730. In simple terms, you believe that the UK Pound is going to buy fewer US Dollars.

This time you will need to place a sell order for 100,000 UK Pounds at a cost of 187,300 US Dollars. In other words, you borrow 100,000 UK Pounds and sell them for 187,300 US Dollars.

Assuming once more that you are right and that the rate falls by 100 pips to GBP/USD = 1.8630, you can now close your position by buying back and repaying the 100,000 UK Pounds which you originally sold. In this case this will now cost you 186,300 US Dollars and you will once more make a profit of 1,000 US Dollars.

Again we have ignored any transaction costs to simply demonstrate the principle of profiting from a fall in exchange rates.

How to calculate interest rate on forex

One of the great things about Forex trading is your ability to trade using leverage, effectively borrowing sometimes as much as 1,000 times your capital to make a trade. But borrowing money for currency trading is exactly the same as borrowing money for any other purpose and you will have to pay interest on your loan.

Currency transactions involve both buying and selling currencies however and this means that interest payments due on money which you borrow to fund a sale can be offset by interest earned on the currency you buy. If this seems a bit confusing we will take a look at an example in a minute but, first, let's take a moment to look at the subject of interest rates in general to see the wider picture as it affects the foreign exchange market.

Central banks set interest rates to meet a country's monetary policy and interest rates raise or lower the cost of a currency. High interest rates will make it expensive to buy a currency and low interest rates will make a currency more affordable.

As an example of how interest rates are used imagine the government of a country with high inflation. With the price of goods and services rising rapidly, the government might decide to raise interest rates. This would increase the cost of the country's currency making borrowing more expensive and both demand and consumption fall. As demand begins to fall, so the rate at which prices rise will also begin to fall and inflation will come down.

In a similar fashion, a country experiencing recession might decide to lower interest rates in an effort to stimulate the economy into growth. As the cost of the currency falls, so too will the cost of borrowing and investors, companies and individuals will be enticed to borrow and thus spend more, increasing demand and stimulating supply to meet that increased demand.

The interest rates which are set by central banks also determine the rate at which the commercial banks can borrow from the government and the rate at which they lend to their customers, which of course includes foreign currency traders.

So how do interest rates impact Forex trades?

Imagine a trader who buys GBP/USD. In this case he needs to borrow US Dollars to buy UK Pounds and will both pay interest on the US Dollars he borrows and earn interest on the UK Pounds he buys.

As long as the Bank of England interest rate is higher for the UK Pound than the interest rate set for the US Dollar by the Federal Reserve, the trader has the opportunity to earn more in interest on his holding of UK Pounds that he is paying on the US Dollars he had borrowed.

In general however, unless the difference between the two interest rates is significant, any net gain or loss will usually be quite small. It also has to be remembered that interest rates are set at an annual rate and that most trading position are held open for only a short, or very short, period of time. This acts to lower any interest gained or paid significantly.

How To Analyze Forex Market

Like many other markets the Forex market is driven by supply and demand. When there is a demand for a currency its price rises and when there is an excessive supply of a currency its price falls. This may seem simple enough but unfortunately predicting movements in currency prices can be extremely difficult.

Today there are two main methods used to predict movements in the Forex market:

Fundamental Analysis

Fundamental analysis was the dominant predictive tool in the Forex market until the mid 1980s, although it has since declined in popularity. Fundamental analysis focuses its attention on the political, social and economic factors which drive supply and demand and is based upon such things as interest rates, inflation, unemployment and economic growth rates. All of these different indicators are used to assess a currency's present performance and then to predict its future movement.

The problem with fundamental analysis is that the trader has to keep up with events and to analyze a huge amount of data. Additionally, there is a great deal of debate about just what data needs to be included in any fundamental analysis and how much weight should be put upon each of the different indicators.

On thing about which there is general agreement is that a country's balance of payments is key to fundamental analysis as it shows the flow of money in and out of the country. In theory, a balance of payments of zero will produce a stable price while a balance of payments deficit or surplus will cause the currency to fall or rise.

Technical Analysis

Technical analysis is based simply upon movements in currency prices and uses historical price data to predict future prices.

The main principle behind technical analysis is that history repeats itself and that price movements today merely follow well established patterns. The second principle is that it is not necessary to study current market information to predict movements in the market as this is already reflected in currency prices. It is simply the movement in prices themselves that needs to be studied in order to predict the direction in which prices are moving.

Technical analysis uses charts to provide a graphical representation of the market over time and allows the trader to identify trends in the pattern of price movements. There are various different charting techniques used today including such things as moving averages, oscillators, candlestick charts, Fibonacci retracement levels, Bollinger bands and others.

How to analysis forex

Like many other markets the Forex market is driven by supply and demand. When there is a demand for a currency its price rises and when there is an excessive supply of a currency its price falls. This may seem simple enough but unfortunately predicting movements in currency prices can be extremely difficult.

Today there are two main methods used to predict movements in the Forex market:

Fundamental Analysis

Fundamental analysis was the dominant predictive tool in the Forex market until the mid 1980s, although it has since declined in popularity. Fundamental analysis focuses its attention on the political, social and economic factors which drive supply and demand and is based upon such things as interest rates, inflation, unemployment and economic growth rates. All of these different indicators are used to assess a currency's present performance and then to predict its future movement.

The problem with fundamental analysis is that the trader has to keep up with events and to analyze a huge amount of data. Additionally, there is a great deal of debate about just what data needs to be included in any fundamental analysis and how much weight should be put upon each of the different indicators.

On thing about which there is general agreement is that a country's balance of payments is key to fundamental analysis as it shows the flow of money in and out of the country. In theory, a balance of payments of zero will produce a stable price while a balance of payments deficit or surplus will cause the currency to fall or rise.

Technical Analysis

Technical analysis is based simply upon movements in currency prices and uses historical price data to predict future prices.

The main principle behind technical analysis is that history repeats itself and that price movements today merely follow well established patterns. The second principle is that it is not necessary to study current market information to predict movements in the market as this is already reflected in currency prices. It is simply the movement in prices themselves that needs to be studied in order to predict the direction in which prices are moving.

Technical analysis uses charts to provide a graphical representation of the market over time and allows the trader to identify trends in the pattern of price movements. There are various different charting techniques used today including such things as moving averages, oscillators, candlestick charts, Fibonacci retracement levels, Bollinger bands and others.

Forex / Foreign Exchange Market

Foreign Exchange Market

There are various different ways in which traders can place orders to buy and sell currencies and this gives foreign exchange traders considerable flexibility in planning their trading strategies and allows them to both maximize their profits and minimize their losses.

Market Order

The simplest form of order is the market order in which the trader simply buys or sells a currency pair at the current market price. Because of the enormous size of the market and its high liquidity there is little if any delay or slippage in the market and market orders are in essence guaranteed.

Limit Order

A limit order allows the trader to set the price at which he wants to take his profit and close out his position. For example, where a trader has bought GBP/USD at 1.9450 he might place a limit order at 1.9465 so that, if the price rises to this level, his position would automatically be closed and he will take his profit.

Stop Loss Order

A stop loss order is another form of limit order but in this case it indicates the maximum loss which a trader is prepared to take. In our example above the trader could place a stop loss order at 1.9430 so that he would limit his losses to 20 pips if the market turned against him.

Entry Order

An entry orders is an order which is only filled when the market meets certain conditions which are specified in the order. An entry order can take the form of either a limit entry order or a stop entry order.

Limit Entry Order

Let's start by assuming that the market price for the GBP/USD is 1.9740-45. This means that a trader can enter the market to sell at 1.9740 or buy at 1.9745. A trader could place a limit entry order to sell above the current market price at a level of say 1.9750 and this order would then only be executed if the market price reached this point. Similarly, he could place an order to buy at a price below the current market price - in this case below the buying price of 1.9745. So, were the trader to place a limit entry order to buy at 1.9730 this order would only come into effect if the price dropped to this point.

A limit entry order is commonly used where a trader believes that a currency is trading within an upper and lower range and is expecting a reversal in the currency's price movement.

Stop Entry Order

A stop entry order is frequently used when a trader believes that a currency which has been trading within an upper and lower range is about to break out of that range and he wants to either buy at a price above the present market price or to sell at a price below the current market price.

Our GBP/USD trader above, who can enter the market to buy at 1.9740 or to sell at 1.9745, might place an order to sell at say 1.9735. In this case the trader believes that the currency will reach this level and then continue to fall. Alternatively, he might place an order to buy at say 1.9750 again believing that the market will reach this level and continue to move in the same direction.

A stop entry order is commonly brought into play when a trader foresees large movements in the market.

Dangers Of Forex Trading

Anyone who has seen the film Wall Street will undoubtedly remember Michael Douglas telling Martin Sheen not to get emotional about a stock. This is good advice for people trading in the stock market, but it is absolutely vital for people involved in Forex trading.

It is very easy to find yourself caught up in a trade. You open a position because you feel good about it and then you hang in there even if the market starts to move against you because you just know that the market is going to turn back in your favor. From time to time of course it does but, as a general rule, it doesn't.

The problem here is that you allow yourself to become attached to a trade and your decision to stay with it is very much an emotional decision. Also, because you are emotionally attached to a trade you view closing your position as an admission that you were wrong to have opened it in the first place.

Trading within the Forex market has to be driven by the market indicators and your trading decisions must be based on what these indictors are telling you and not on how you are feeling. If you are going to be a successful trader then you have to be ruled by your head and not by your heart.

There will be times when you find that you have an emotional attachment to a specific currency and that the majority of your trading tends to be in that currency. There's nothing wrong with this. You may even feel sometimes that the time is right to buy a particular currency. That's okay too. The mistake is not to follow a feeling about a particular currency but to open a position purely on the basis of this feeling.

If you have a feeling about a currency then begin by checking it out and take a look at the market numbers. If the numbers tell you that the time is right to open a position then do so but, if they tell you that it's not a favorable market then, no matter how you feel about it, you should not get into the market.

Similarly, if you have opened a position and the indicators tell you that the market is moving against you and that it is time to close your position then do so. Your heart may well tell you to 'hang in there' but it is the market and not your heart which pays your bills

In Forex trading you will win on some trades and will lose on others and that's nothing more than the way the market works. It is not a question of whether you are right or you are wrong. The market will frequently move unexpectedly and catch out even the most experienced of traders.

The secret lies in following the market indicators, recognizing that you are going to lose in a trade and getting out as quickly as you can to minimize your loss. You can then move on to your next, hopefully profitable, trade.

Forex / Trading best market

Trading best market

The Forex market never stands still and even though it may move quite slowly at times it is nevertheless always on the move. It is of curse this movement which provides the opportunity to make money buying and selling global currencies, but it can also make it difficult to decide when to open a trade, close a trade or simply stay out of the market altogether.

Probably the greatest problem with the fast moving foreign currency market however is that it plays on our natural sense of greed and this can present traders with a very real danger.

We all like to make a profit, but what level of profit is acceptable? If you are in a trade which is showing a profit of $2,000 should you close your position and take your profit or hang on in there for $2,500? You are trading to make money and so, when the market is moving in your favor, it is only natural to want to ride the wave all the way to the beach. The difficulty however often lies in knowing when you have hit the beach and in not waiting for the undertow to start dragging you back out to sea again. Once the undertow catches you it can drag you back out to sea again very quickly.

Most Forex traders enter foreign currency trading with a clear picture in their mind's eye of just what they intend to do with all the money they are going to make and that is no bad thing. It is extremely important for you to have a goal, as well as a plan of action to allow you to reach that goal, and it certainly helps if you create a visual image in your mind of something concrete you are aiming for.

The problem however is that you could well find that you are tempted to try to reach your goal sooner than you had planned or that you create a bigger and better goal as you go along, allowing your natural tendency towards greed creep in and to start taking control of your trading.

Another commonly seen problem is that of failing to understand that it is not money which drives the market.

Think about this for a minute. It doesn't matter if you have $10,000 or $100,000 in your trading account because whatever sum you're looking at it is not going to make the slightest difference to the way in which the market moves. By the same token, it doesn't matter if you are looking at a $750 profit or a $750 loss in an open trading position because this again will not make any difference at all as far as the market rising or falling is concerned.

The fact that you are doing well in a trade and have made a profit of $750 does not mean that this profit will turn into $900 or $1,000 if you wait a bit longer. It is of course human nature to find yourself caught up in your 'winning streak' and to convince yourself that there is more profit to come.

It is also human nature to find that, having already lost $750 in an open trade, you will try to convince yourself that things will turn around if you keep your nerve and just hold on a little longer.

It is essential that you set a goal and have a plan to reach that goal but your trading decisions must be based on what is happening in the market and not on your goal.

Money should have no influence on whether or not you enter or exit a trade, or stay out of the market altogether, and these decisions should be based solely on what your analysis of the market tell you.

Successfull forex traders

Would you like to enjoy the lifestyle of successful forex traders? If you were to split foreign exchange traders into two groups – the successful and the less than successful – could you identify those characteristics which separate the two groups?

It does not really matter what we do in life, which includes foreign exchange trading, but, whatever we do, one thing that will have more affect on our success than anything else we do will be setting goals.

It is a simple fact that the human mind works best when it is given a roadmap to follow and, by setting a goal, you start building your roadmap by clearly defining the end point of your journey. However fixing a destination is not sufficient and you will also need to define the route which you are going to follow to get to your destination. Here is an example.

Suppose you decide you want to build a fortune as a foreign exchange trader, and who doesn't after all! This in itself is not however much help as any goal which you set needs to be measurable, otherwise you have no way of knowing whether you have reached it. So, at this point, you need to be clear about exactly what you mean by a 'fortune'.

Let us assume therefore you set a goal of making $1,000,000 in the next twelve months. Now you have a clearly defined destination. The next problem however is that, since you are almost certainly new to the world of foreign exchange trading, are still learning the ropes and possibly have limited capital to invest at this point, making $1,000,000 in the next twelve months is possibly an unrealistic goal.

As well as being measurable, goals also have to be realistic. It does not matter what goal you set for yourself in foreign exchange trading, but it must be within your reach. There is no point in deciding that you are going to win Wimbledon if you have never even picked up a tennis racket.

So, instead of aiming for $1,000,000 let us set a far more realistic target of say $120,000. Having done this, we then need to split this figure up into marker posts which we can put onto our roadmap and we can do this by looking at our target on a monthly instead of a yearly basis. This gives us a dozen $10,000 markers. However, if we continue along these lines we can then break our goal down further into weekly markers of $2,500.

At this point we have got something which we are able to examine against our current and recent experience and it is a fairly simple matter to see whether or not this figure is possible. Is it possible, against the background of your current experience, to make $2,500 trading foreign currencies in the coming week?

Your goals must be measurable and realistic, but they must also be attainable. It is one thing to set a realistic goal, but you also need to have the right tools, in the right place at the right time if you are going to reach that goal. If you are currently making $750 a week then you probably won't convert this into $2,500 overnight so, in this instance, your goal is unattainable and you will need to go back to the beginning and start all over again.

But, if $2,500 is feasible, then there is one additional step that needs to be taken before you are ready to head off on your journey. This final step is to paint a picture in your mind's eye of your destination.

Although you have set a goal of making $120,000 in the next twelve months, the money itself is of course not really what you are aiming for, but it is what you can do with the money which is important. So, having got your $120,000 what do you intend to do with it? If you want to buy yourself a new sports car then paint a picture in your mind's eye of driving into the sunset with the roof down and then you really have got a goal.

If you want to achieve success in foreign exchange trading then you have to set yourself a goal which is measurable, realistic and attainable and than paint a picture of your goal in your mind's eye. If you do this you will be amazed at how easy a matter it is to get to your destination.