Market Volatility. Good or Bad? Forex Investment Strategy For Every Level Of Risk

If you’ve had any experience in investing you would know that there are levels of risk and reward. My second most favorite thing about finance, other than making money, is that there is an investment strategy available for every level of risk. Look at it this way, on one extreme; you have the stash under your mattress that has 0% volatility and zero risk apart from your house burning down, but no gain (and a loss if you count inflation). Then you have Treasury Bills and the common money markets for low-risk. Stocks are moderate, day-trading has more. However if you want the quickest, highest-risk “investment”, you can throw it all on the toss of a coin. 100% gain or 100% loss instantly.

It is up to each person to decide what his or her own comfort level is, and invest accordingly. I agree with the common perception that people who whinge about the daily grind and not having any money for a family getaway are generally those that whine about the system or investment strategy/portfolio that they are investing in. Perhaps it is time for a change when the markets change drastically like we are experiencing now.

The key is to find a strategy with a low risk and high reward for which the Forex Market is well known for. This current market volatility is generally great for low risk and high reward strategies.

source:globalmarkettrader

Why Trading Forex Now Beats The Stock Market

You’ve likely heard the term “Forex” lately — it is becoming the hottest market today, attracting more and more traders around the world. As the stock markets continue to meander, I believe that the strong trends in the forex market will continue, which means this is one of the best times to engage the foreign currency markets as an added investment vehicle to your portfolio.

Over the past few years, I’ve had the opportunity to teach thousands of new and experienced traders the pitfalls of trading foreign currencies and to help them discover the right way to attack these markets.

Today, however, I want to share with you the key reasons you should take advantage of the potential that exists in trading foreign currencies and going forward, I’m going to share more detailed strategies with you.

What is Forex?

Forex stands for Foreign Exchange and is the trading of one currency against another.

At its simplest, trading foreign currency involves two currencies that are traded simultaneously, called a ‘pair’. For example, the EUR/USD pair, trades the Euro against the US Dollar. In this example, a buyer of this pair would ‘buy’ the Euro and simultaneously ’sell’ the US Dollar.

Forex trading takes place through major banks, market makers, and brokerage houses around the world, who together create a marketplace for trading currencies on a near 24/7 basis.

The Forex market is almost always “open”; it is the 7-Eleven of the trading world. It is the largest financial network in the world with a daily average turnover totaling trillions of dollars.

Until recently, 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).

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 (be advised, however, the greater the risk, too).

Second, the stock markets have been beaten down, rallied, fallen, rallied again — and there are strong indications that another ‘fall’ is coming. The uncertainty in these markets is unnerving for buy and hold investors and traders alike.

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) and frequently, when one set of pairs is trending one way, another set of pairs can be trending the opposite way. In addition, there are no restrictions to selling short a pair like there are for selling short stocks.

Furthermore, the financial upheaval driven by the credit crisis and the massive government responses I believe means investing or trading in the stock markets will never be the same – but these same events are helping to create even greater opportunities in the Forex markets.

As interest rates are cut or raised, economies grow or slow, jobs are gained or lost — each of these factors impacts the future value of a currency pair; and as these and other economic factors change, they affect the swings in volatility.

Forex trading is not without risk – and frankly, most people approach the Forex markets completely wrong. I believe the current economic and financial conditions make this one of the best times to take on Forex trading, but only if done correctly.

How Most Traders Incorrectly Approach Forex Trading

While doing research on the current state of the Forex trading landscape, I discovered something surprising:

Losing Forex traders appear to be enamored with ‘winning percentages’ when selecting a forex trading method.

The irony in that statement should be obvious — if the ‘winning percentage’ of the forex method is so important, how can these traders still be net losers?

Because, I believe, winning percentage is the wrong concept to focus on. In fact, I find winning forex traders look for methods that have winning percentages closer to 50-60%. And, they also have one more ’secret’ that losing traders DON’T have.

The difference will probably surprise you – and it’s a big difference, too. The answer should have been obvious, but it isn’t for most traders.

Ask yourself this question: How is it possible that a forex trading system that wins 90% or more of the time can end up a net loser?

The answer?

Losing trades. BIG losing trades. Here’s what I’ve discovered many of those systems (or robots) that claim 90% winning trades aren’t telling forex traders:

When their systems ‘win’, they are making a high number of very small gains.

But when their systems ‘lose’? They wipe out all of the gains and a good percentage of the trader’s account balance, too.

Still, traders flock to these automated systems because, after all, something winning ‘almost’ 100% of the time must be good, right? Not really, no.

See, what most traders don’t get is that the reward to risk ratio in those high win percentage systems is upside down. Traders risk too much capital for too little profit potential.

That’s poor risk management and leads to one becoming a ‘losing’ trader.

Let me illustrate an example, using a ‘typical’ Robot (or automated) trading system, making 5 trades:

Trade 1 – gains 8 pips on 20 mini lots (+ $160)
Trade 2 – gains 8 pips on 20 mini lots (+ $160)
Trade 3 – gains 8 pips on 20 mini lots (+ $160)
Trade 4 – loses 80 pips on 20 mini lots (- $1,600)
Trade 5 – gains 8 pips on 20 mini lots (+ $160)

This is standard practice for automated systems out there that don’t employ risk management. They set stop losses that are far too wide given the reward ratio. Here it’s 10:1 (risking $10 to win $1 – does that make sense?)

Say you had a starting account balance of $10,000 — at the conclusion of these 5 trades, your account balance would be $9,040.

That’s a 9.6% loss even though you ‘won’ 80% of your trades!

We haven’t factored in lot or position size yet, either. I would expect it to be obvious that the trader above is taking on far too much risk. Keep in mind, too, that trading with an automated or robot method, you are unlikely to be able to stop that 80 pip loss unless you happen to be watching it unfold.

Of course, that robot is supposed to make you money ‘while you sleep’ – isn’t it? (That’s what they promise, anyway)

The bottom line is if you aren’t managing risk in every single trade, from determining the correct lot and position size to the right points for your stop losses and your exit strategies, you will NEVER join the elite 5% of successful Forex traders.

Here’s the Forex ‘Secret’

Let’s illustrate a ‘winning’ trader using a Forex trading method (not a robot), who only wins on 60% of their trades, and see if you note right away what their ’secret’ is:

Trade 1 – gains 43 pips on 10 mini lots (+ $430)
Trade 2 – loses 30 pips on 10 mini lots (- $300)
Trade 3 – gains 29 pips on 10 mini lots (+ $290)
Trade 4 – gains 19 pips on 10 mini lots (+ $190)
Trade 5 – gains zero pips on 10 mini lots (+$0)

Again with a starting account balance of $10,000 — this trader would have made a 6.1% gain ($610 net), as opposed to the first trader’s nearly 10% loss.

Yet, this trader only ‘won’ 60% of the time? What happened?

This trader ‘broke even’ on 1 of the 5 trades. No gain. No loss.

What the ‘winning’ trader does is eliminate risk as quickly as possible, thereby ensuring infinite reward (until they liquidate their position). To do this, these traders take aggressive action to move their initial stop losses up to the breakeven point from the outset of a trade, set an initial profit target and, once they are able to eliminate the risk side in the trade, they will manage the profit side of the trade by scaling out in stages at predetermined profit points.

In this way, once the trader has been able to ‘erase’ the risk side, they can focus solely on the profit side – with the worst case scenario being a ‘zero’ gain trade (or, break even).

Now you may not be able to eliminate risk in every single trade; but breaking even on just 1 in every 5 trades can have a significant and positive impact on your account balance.

So, don’t let yourself be fixated on the ‘winning’ percentage of a trading method. As you’ve just seen, that doesn’t guarantee you can be a net winner. Instead, put risk first and profit second. I think you’ll be surprised at the results.

Optimal Profit Strategy for Forex Traders

As we’ve just shown, when it comes to trading Forex, traders typically focus on when to enter the trade, but pay too little attention to protecting their initial position AND too little attention on how to manage and exit the trade.

This is a critical mistake, yet it is one of the simplest concepts in trading.

It should go without saying that as soon as you enter the market with a new position, an initial stop order should be entered to protect the position against an adverse move in the market or an exit strategy should be employed to cover the trade if the market closes adversely. If such a move occurs, as is often the case, you want your position liquidated and to be out of the market with a minimal loss.

The consequences of failing to do this are simple: you will not be successful at trading.

In fact, every trade you put on, you should plan to lose, so that you are sure to place your stop loss order or cover the trade on an adverse close. Otherwise, what would have been a small loss turns into a big loss, turning the entire risk/reward ratio against you.

That being said, where should you place your stop loss? The short answer is, “Where you don’t expect the market to go”; or, more specifically, where the assumption in putting on the trade is no longer valid.

For example, if a long position was entered into after an uptrend or breakout market traded back down to support, an initial stop could be entered below the recent low because if the market does go there, support (as defined by that low) would have failed, and there is no longer any reason to be long the market – so get out! Don’t wait around for it to come back in your favor because the odds are against it.

If the market goes in your favor once the initial stop is in place, then you need a set of rules that will allow you to exit the market profitably. This poses a real dilemma. If you exit too soon, you may secure a small profit, but miss out on all those big moves that occur (and the big profits that go with them). On the other hand, if you wait too long to exit, the market may reverse and take away all of your open profits and even put you into a loss position.

So what do you do? Well, the first thing is to realize that there is no method that can forecast whether or not a particular move will:

* Go against you immediately
* Go up only a little before going back down
* Go up a lot in your favor

For example, after you enter a long trade in an uptrend, there’s absolutely no way to predict what will happen next (contrary to what the so-called “gurus” tell you). Because of this, you absolutely need an exit strategy, because the risk of loss is significant no matter how carefully you plan your entries and exits.

The Optimal Profit Exit Strategy

The following is the very best exit strategy that I believe possible when trading the Forex markets. I call it the Optimal Profit Exit Strategy.

It’s a strategy that scales out of a trade in two steps. This strategy is first and foremost about taking an initial profit as soon as appropriate, thereby “taking some money off the table” and reducing the risk in the trade at the same time.

So, don’t let yourself be fixated on the ‘winning’ percentage of a trading method. As you’ve just seen, that doesn’t guarantee you can be a net winner. Instead, put risk first and profit second. I think you’ll be surprised at the results.

Optimal Profit Strategy for Forex Traders

When it comes to trading Forex, traders typically focus on when to enter the trade, but pay too little attention to protecting their initial position AND too little attention on how to manage and exit the trade.

This is a critical mistake, yet it is one of the simplest concepts in trading.

It should go without saying that as soon as you enter the market with a new position, an initial stop order should be entered to protect the position against an adverse move in the market or an exit strategy should be employed to cover the trade if the market closes adversely. If such a move occurs, as is often the case, you want your position liquidated and to be out of the market with a minimal loss.

The consequences of failing to do this are simple: you will not be successful at trading.

In fact, every trade you put on, you should plan to lose, so that you are sure to place your stop loss order or cover the trade on an adverse close. Otherwise, what would have been a small loss turns into a big loss, turning the entire risk/reward ratio against you.

That being said, where should you place your stop loss? The short answer is, “Where you don’t expect the market to go”; or, more specifically, where the assumption in putting on the trade is no longer valid.

For example, if a long position was entered into after an uptrend or breakout market traded back down to support, an initial stop could be entered below the recent low because if the market does go there, support (as defined by that low) would have failed, and there is no longer any reason to be long the market – so get out! Don’t wait around for it to come back in your favor because the odds are against it.

If the market goes in your favor once the initial stop is in place, then you need a set of rules that will allow you to exit the market profitably. This poses a real dilemma. If you exit too soon, you may secure a small profit, but miss out on all those big moves that occur (and the big profits that go with them). On the other hand, if you wait too long to exit, the market may reverse and take away all of your open profits and even put you into a loss position.

So what do you do? Well, the first thing is to realize that there is no method that can forecast whether or not a particular move will:

* Go against you immediately
* Go up only a little before going back down
* Go up a lot in your favor

For example, after you enter a long trade in an uptrend, there’s absolutely no way to predict what will happen next (contrary to what the so-called “gurus” tell you). Because of this, you absolutely need an exit strategy, because the risk of loss is significant no matter how carefully you plan your entries and exits.

The Optimal Profit Exit Strategy

The following is the very best exit strategy that I believe possible when trading the Forex markets. I call it the Optimal Profit Exit Strategy.

It’s a strategy that scales out of a trade in two steps. This strategy is first and foremost about taking an initial profit as soon as appropriate, thereby “taking some money off the table” and reducing the risk in the trade at the same time.

Here’s an example from two recent moves in the EUR/USD – in both cases, I applied my Forex Profit Accelerator method to identify the potential trade, and my Optimal Profit Exit Strategy to show how to manage the trade while its ongoing.

PT1 = Profit Target 1 (your first exit point)
PT2 = Profit Target 2 (your second exit point)

PT1 in the chart above exits ½ of your position at a pre-determined profit target. The profit target is modest, but enough to make the trade worthwhile and the specific level is also dependent on the overall method being used.

Once that initial profit target is hit, you should move the initial stop up for the remaining 1/2 of the position to the lowest low of the past 3 bars for an uptrend trade or the highest high of the past 3 bars for a downtrend trade.

As you can see, in the example above (from my Forex Profit Accelerator method), the first trade would have exited PT1 with a profit of 135 pips (or $1,350 on a standard lot trade) and the second trade would have exited PT1 with a profit of 130 pips (or $1,300 on a standard lot trade).

You’re now out of 1/2 of the trade (in each instance) with a very nice profit and at the same time you are prepared to ride the market as far as it wants to go in your favor for the remaining 1/2 of your position.

PT2 allows you to continue to ride an existing market trend with the remaining ½ of your original position, but you protect it by a trailing stop always based on the lowest low of the past 3 bars (for an uptrend trade).

As the market continues to move up, you would move the stop up with it. This locks in a significant portion of the remaining open profit but also gives the market enough room to trade down a bit without shaking you out of the trade if it moves higher.

As the example chart shows, this added profits of 243 and 191 pips, respectively to the winning trades – an additional $2,430 and $1,910.

With this strategy you should be prepared to take advantage of the market after entering a trade no matter what it does. And that’s a big deal.

To see these Forex software programs in action please visit us by clicking here

Evaluating Forex Trading Methods

One of the questions I’m often asked is what constitutes a good trading method (or how do I know if a trading method is really worth buying). In this article, I’ll show you what most methods look like (and why they are bad) and show you a simple way to evaluate a trading method.

If you take a close look at most of the so-called Forex trading methods and systems on the market, they consistently share the same shortcomings:

- They are incomplete. Too many courses teach hours of ‘in theory’ — but spend little to no time teaching a step-by-step plan to help you trade.

- They don’t include risk management. This is the number one mistake most traders make — not managing risk in their trades. If the system or method you’re considering doesn’t teach risk management consistent with their method, you would do well to walk away from it.

- They focus strictly on fundamental analysis. Methods that focus only on fundamental analysis are incredibly time consuming and subjective and require much deeper understanding of more complex economic and financial issues. If you don’t understand them, you won’t succeed with such methods.

- They require you to “day trade”. Many of the methods and systems I’ve seen require you to be in front of your computer nearly 24/7 to be able to ‘react’. Reality should tell you how impossible this is.

What constitutes a “good” Forex trade method?

Based on the methods and systems I’ve seen over the last several years, I’ve created a simple 4-part measurement that I use to determine if a trading method is good for me:

- The method must be complete and teach the setup conditions, entry rules, initial stop rules and exit strategy rules while leaving no decision to chance.

- The method must teach and include specific guidelines for risk management and money management in accordance with its method.

- The method must utilize technical analysis, but it cannot be a completely mechanical or automated system.

- The method must be practical in terms of time spent applying it: I favor methods that only require 20-40 minutes a day.

The steps above have helped immensely in weeding out the ‘pretenders’ among trading methods and focusing only on the ‘contenders’. Methods which provide thorough explanation of how to apply, protect and trade the methods are the only types you should use in your trading.

Elements of a Successful Forex Trader

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you’re taking.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a ‘hold on until it comes back’ strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.