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INSIDE THE TRADER’S MIND
The Forex Advisor Newsletter
The Best-of-the-Best Most Popular Issues
Special E-book Edition
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Page 2 of 43
INSIDE THE TRADER’S MIND
Table of Contents
The New Year Strategy
Page 4
Forex Advisor's own personally developed strategic trade is the essence of
simplicity -- the one trade a year that has historically yielded surprisingly
excellent profits.
Pivot Points as Primary Support & Resistance
Page 7
Pivot points are one of the primary tools used at Forex-Advisor yet they are not
commonly taught in Forex courses and are not generally understood by the
average trader. In this issue we will explain what they are and why they work
consistently well.
Structural Problems Will Continue Dollar's Decline
Page 10
A look at the continuation of the EURUSD trend occurring because of the
continuation US and European fundamentals.
Forex Trading as an Alternative Career Path?
Page 14
Many traders have the combination of talent and skills to take on Forex Trading,
but what are the steps necessary to actualize one's dream of trading Forex as a
job substitute? What are the mistakes that should be avoided that can cause
financial ruin? Here are some guidelines.
The Straddle Trade Technique
Page 17
This trade (with an example taken from this week's trading results) demonstrates
how strong technical trading can be integrated with fundamental trading and is a
good example of one of the trading methods used at Forex Advisor.
The Circular Nature of Currency Prices
Page 18
What determines a currencies value, and how to make Market Opinion work for
you in terms of profitable trading.
Big Profits Trading the Less Publicized Fundamentals
Page 20
A look at some of the many subtle fundamental indicators that don't get headline
press and therefore go unnoticed by most small investors.
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Page 3 of 43
INSIDE THE TRADER’S MIND
Table of Contents
Big Profits Day Trading Fundamentals
Page 22
Most day traders erroneously assume Fundamentals are a long term indicator
and miss out on many great trade opportunities every week. Learn how to
improve your P&L by learning the fundamentals and how to use them effectively.
Currency Trading Rules
Page 25
More than two decades of trading experience has revealed (sometimes painfully)
some immutable rules for trading.
How to Read a Chart and Act Effectively
Page 27
A guide that tells you, in simple understandable language, how to choose the
right charts, read them correctly, and act effectively in the market.
Profit - Understanding Leverage and Capital at Risk
Page 33
Why wouldn't an investor use the maximum leverage available?
Understanding the U.S Dollar Activity
Page 35
Why did the dollar go down in a week when fundamentals and news reports were
good?
The Mental Game
Page 38
This issue is completely devoted to training and tips for gaining the Mental Edge
in the vitally important Psychology of Trading.
Forex Advisor
Page 43
Services and contact information.
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Page 4 of 43
A New Year View on Forex Investing
As the New Year approaches we thought you would enjoy an interesting new
perspective on forex investing -- a look at a different kind of forex-minded
strategy that broadens our newsletter beyond our usual Spot Forex scope. This
'New Year Strategy' deals with investing in foreign currencies in a way that
demonstrates how higher yielding interest rates can make a big difference in
terms of profits.
To be clear, we are not attempting to make a recommendation here, we are
simply illustrating to our readers the interactions of interest rates between
currencies and the fact that foreign exchange opportunities extend beyond the
spot market.
Following the New Year's Highest Yielding Currency for Maximum Profits
The idea behind the strategy is a simple one -- buy whichever major currency is
paying the most one-year interest at the start of each year, hold it for the coming
year, then repeat that approach at the start of the next year, either by switching
to an even higher yielding currency or simply rolling over your position for
another year. The high yielding currency will not change regardless of what your
home currency is. But what will change is the return you get.
For example, calculations show that if you started out with $10,000 in 1970 and
you bought whichever currency was the highest-yielding major world currency
each New Year's Day since you began, by this January 1, 2004, you would have
(the converted currency equivalent) of over US$355,000. Of course, a big part of
this profit comes from the eighth wonder of the world -- compound interest, and
this alone would represent a huge increase after 33 years in any interest-bearing
currency. Nonetheless our example illustrates the strategic value of being in the
right currency at the right time.
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Page 5 of 43
Today as we turn the corner into the New Year, the 'right currency' is the New
Zealand dollar. This past year the Kiwi dollar has soared 22% against the U.S.
dollar (from 51.72 cents to 63.10 cents).
If the New Zealand dollar rises more against the U.S. dollar than it does against
the euro, as it almost certainly will this year, then an American (Dollar) return
(converted and invested in Kiwi) will be higher than a German (Euro) return. So
far this year, the Kiwi has risen almost 20% against the U.S. dollar, but it has
risen less than half that amount against the euro. So all both investors can count
on is that they will each make the same interest rate in their chosen currency. But
what that currency is worth when it is converted back into their home-based
currency will differ.
During those few years when the U.S. dollar was the highest-yielding major
currency, (during the early 1980s), all the Dollar investor made was the big
interest rate. A German investor made this, as well as being in a currency, the
U.S. dollar, that was appreciating strongly against his own during that time. He
thus made bigger percentage returns than the American. But lately the shoe is on
the other foot, and it is the U.S. dollar holders who make the big returns.
First a little more about the New Zealand currency. For the first time since its
tremendous bull market began three years ago, there has been an official worry
that the Kiwi dollar may be rising too far too fast. The head of the country's
central bank, the Bank of New Zealand, just testified before a parliamentary
committee that he was considering his options in trying to curb the fast rise.
However, it is not clear what can be done. Since 1985, New Zealand has had a
strong policy of not intervening in foreign exchange markets to either support or
dampen its own currency's value. This strategy has very wisely been regarded as
a waste of money. And there is no suggestion that the Kiwi government will
change its stance.
The most that can be done is for the Kiwi dollar to be "talked down," but it is not
even clear if this will work. When much of the world is attracted to your currency
and wants to buy it both to get much better interest rates than are available at
home and for possible capital appreciation then anything done to keep them
away usually hurts your economy much more than a rising currency would.
There seems to be no evidence that a high NZD is hurting the New Zealand
economy. In fact, the day after the bank official expressed his concern, it was
announced that the country's manufacturing index was at a high for this year, and
is continuing to rise steadily.
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Page 6 of 43
The lack of intervention has brought about some very wide swings in the value of
the Kiwi dollar. It was 71 U.S. cents in early 1996 (the last time gold was at the
$400 level it is now) and it fell to 37.5 cents in the fall of 2000. It is quite likely on
its way up to the 71-cent level again. What happens after that is much less
certain.
How Does It Work?
How do you take advantage of this? Two ways, the first being to simply hold a
long position in Kiwi in the spot market. The second, less stressful way, would be
to convert enough U.S. Dollars to purchase a $10,000 NZD government bond, or
simply open a NZD deposit account. At the end of the year you receive the
government guaranteed interest rate and, when you convert back to U.S. Dollars,
the appreciation of the Kiwi against the Dollar. If Kiwi were to close the year
about where expected the total yield would be over 25%.
To be clear, we are not recommending this strategy. Rather we simply want
readers to be aware of the interactions of interest rates between currencies and
the fact that foreign exchange extends beyond the spot market.
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Page 7 of 43
Pivot Points as a Primary Support and Resistance Tool
Pivot points are one of the primary tools used at Forex-Advisor and yet they are
not commonly taught in Forex courses and are not generally understood by the
average trader. In this issue of Inside the Trader's Mind we will explain what they
are and why they work consistently well.
Why Pivot Points Work
Think of pivot points as "industrial strength" resistance and support lines. Since
they tend to be used by bank and institutional traders, where a large part of
Forex volume is based, they become accurate almost by definition. Like most
traders you have probably been taught the importance of resistance and support
lines and learned how to define them. Typically this involves examination of
several time frames, use of Fibonacci ratios, analysis of candle formations, and
much work in drawing these lines on the particular time frames you will be using.
This method is also subject to our subconsciously "reading into the data" what
we what the results to be as we try to determine what the "major" lines are. Pivot
points on the other hand are based on simple mathematical formulae and are
completely objective and simple to determine.
We use pivot points by calculating them for the previous 24 hour "session" with
the resulting pivot lines being valid for the next 24 hours. You will find that pivot
lines also reflect major Fibonacci retracements, classical resistance and support
levels, and even elliot wave retracement levels. Since much of the volume in
forex depends on these techniques, pivot lines then become the focal points for
the battles between buyers and sellers. We have seen that price action tends to
speed up when close to pivot lines (either in breaking through them or bouncing
back from them) and therefore they are much safer entry points than simply
observing indicators or candlestick formations on their own. No system is perfect
and we look to give ourselves every advantage in terms of probability of success.
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Page 8 of 43
Trading with Pivot Points
After calculating pivot points you will have a pivot line and four additional lines to
the top and four to the bottom for a total of nine lines corresponding to resistance
and support. In general pivots work best in trending markets and trading in the
direction of the daily trend is highly recommended. In the direction of the trend
you will find price is much more likely to cross several pivot lines in one move.
Opposing the trend, price will more often retrace only one pivot channel.
Therefore the risk / reward is far greater in the direction of the trend.
In determining when to enter a trade you will look for the usual candlestick
formations indicating reversals (hammers, "railroad tracks", engulfing bull and
bear candles, spinning tops, and so forth). Confirmations with technical indicators
such as RSI which suggest "overbought" and "oversold" conditions are also
useful. Adding trend lines to define trading channels is very important. As you
can imagine, when price breaks a pivot line and breaks out of a channel at the
same time you would expect a quick move.
Determining Pivot Lines
We post charts for the major currencies showing the pivot lines for the upcoming
session each morning prior to the European opening. You can then plot the lines
on your own charting system for reference. We have also programmed an
"expert" which will automatically plot the pivot lines which we will share with you if
you are using the Metatrader platform for charting. If you are interested in this
powerful charting system we can provide it (and the expert) free through
InterbankFx. Pivot lines are then calculated with a single mouse click.
View the following example, and contact us if you are interested.
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Page 9 of 43
The trade was entered at the spot marked "Enter on Clear Break" on the chart.
This represented the spot where a new candlestick opened above the pivot line.
Price was about to cross a moving average line and moves on other currencies
confirmed the move on this one. As the trade moved above the next higher pivot
line at 1.2273 we moved our stop to break even to protect the trade. At this point
we could have also closed half the position to guarantee profit. The trade was
exited as price failed to defeat the pivot at 1.2325 and began to retrace. Profit on
the trade was 76 pips.
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Page 10 of 43
Structural Problems Will Continue Dollar's Decline
Back in October we published an Inside the Trader's Mind article describing the
Current Account and why concern about it was beginning to overwhelm even
truly great U.S. economic news. A point of the article was that there was no quick
solution to the problem and that the U.S. dollar would continue to weaken for
some time. Now with the EURUSD making new all time highs above 1.2400, we
are revisiting this topic, and asking how much further can the euro rally? Without
a clear catalyst to reverse the dollar's downward trend, the EURUSD appears
poised to move towards 1.2800 and perhaps as high as 1.3000 in the coming few
months.
What will cause the EURUSD trend to continue?
The continuation of the EURUSD trend will occur because of the continuation US
and European fundamentals. You have probably seen the reasons for Euro's
climb versus the Dollar in various news pieces, but let's review them briefly:
1) Large and growing current account deficit
2) Lack of foreign investment to fund the deficit
3) Low interest rates / unattractive yields
4) European economic recovery
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Page 11 of 43
A Reversal of the Current Account Deficit will Mean Further U.S. Dollar
Weakening
In the last half of 2003, we saw that the US dollar had decoupled from improving
US economic data and equity market performance. Improving economic data has
become essentially immaterial to the market as we come to realize that if 8.2%
Q3 GDP growth cannot push the dollar higher, then it is unlikely that any other
economic announcement expected in the near future will be able to do so.
Instead, the market turned its focus to the magnitude of the current account
deficit, which is currently hovering around 5% of GDP. As Kathy Lien in a recent
article pointed out, " … studies show that current account deficits greater than
5% of GDP leave an economy vulnerable to sharp currency depreciations. Based
upon a study by Caroline Freund (Fed economist) of industrialized nations
between 1980-1997, current account deficit reversals generally begin when the
current account deficit is approximately 5% of GDP. The reversal tends to take 3-
4 years and involves slowing income growth and a significant trade weighted
exchange rate depreciation. The overall average exchange rate depreciation is
on average 20%, with the decline beginning 1 year before the current account
deficit hit its trough and continuing for three years. The current account deficit for
Q3 is 4.9% of GDP, which is a rebound from the record low of 5.2% in Q1. If we
assume that we have already seen the trough this year, then over the past 12
months, the Fed's real broad trade-weighted dollar index has declined
approximately 9% - implying that we should expect another 11% depreciation
over the next 2 years."
Central Banks Are the Primary Source of Funds for the Deficit
Aside from the required continued depreciation of the dollar to reverse the deficit,
the current source of funding for the deficit also poses a significant concern. Over
a quarter of the deficit is currently being funded by foreign official institutions
such as central banks. Asian central banks are estimated to own 70% of global
currency reserves. Clearly, central banks have been funding a large part of the
deficit and not private investment. Therefore should these central banks reduce
the aggressiveness of their US fixed income asset accumulation it could result in
a combination of higher bond yields, which would hurt the recovery, and also a
weaker dollar.
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Page 12 of 43
A Falling Danger of Inflation May Keep the Fed From Hiking Rates
One of the primary factors deterring private foreign investment is the low yield
offered by the United States. As long as interest rates remain low and the Fed
maintains an accommodative monetary policy stance, the US will face fierce
competition for foreign investment with countries such as Australia, New
Zealand, and the UK. November's CPI announcement validated the Fed's
assessment of low inflation risk. Consumer prices excluding the volatile food and
energy components fell for the first time in 21 years. This clearly confirms that
inflation is still very low. Prices of airfare, clothing and lodging continue to
decline. As long as this is the case, the Fed will be under pressure to keep
interest rates low.
So What could reverse the EURUSD trend?
Fed or ECB Intervention
Intervention by the U.S. Federal Reserve or the European Central Bank (ECB)
to sell euros and buy dollars would have a very significant impact on the value of
the EURUSD. However, we doubt that the Fed or the ECB has any intentions of
intervening in the near future. Although ECB officials will certainly become
increasingly uncomfortable with the Euro as it continues to appreciate, verbal
intervention would likely happen before actual intervention. Thus far we have yet
to hear any verbal intervention from members of the ECB. Our belief is that the
ECB will not intervene until the Euro becomes so strong that trade is badly hurt
and the European recovery is in serious jeopardy.
An Early Rate Hike
A Fed rate hike would strengthen the Dollar and a strong economy would tend to
call for such a hike to combat the inflationary pressure of an expanding economy.
We have seen a surge in profits that has increased corporate spending and
hiring. Payrolls have risen for three consecutive periods thus far. Additional gains
are expected in consumer spending during this month's holiday season.
However, although improving economic fundamentals may prompt the Federal
Reserve to move monetary policy earlier than expected, this argument is weak
given the low rate of inflation (remember the last several CPI announcements)
and the continued slack in labor and capital resources.
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Page 13 of 43
Conclusion: A Stronger Euro into 2004
Despite the risk of a reversal in the EURUSD, the arguments for continued Euro
strength outweighs any argument for a reversal. The weakness of the dollar is
structural and unless there is a significant shift in foreign sentiment regarding the
attractiveness of US assets, the weakness of the dollar will persist into 2004.
Expect a corrective retracement fairly soon but not a change of the longer term
trend upward for EURUSD.
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Page 14 of 43
DO YOU HAVE WHAT IT TAKES TO BECOME A CAREER TRADER?
Forex has been increasingly viewed as a compelling Alternative Investment
Class for individuals seeking improved total returns. Yet, almost every day, in
conversations all over the globe, people lament: I want to do Forex for a living.
How do I become a trader? Forex is becoming thought of as an Alternative
career Path throughout the world. The pool of applicants for a job as a Forex
Trader is large. For example, in the United States there are over 300,000
displaced workers who cannot return to former jobs that have been lost to the
great decades long shift of manufacturing jobs abroad. Former workers in
declining Manufacturing sectors; former software engineers; housewives or need
extra income; fit the profile of those looking to become Forex Traders. This is not
a USA only phenomenon. Residents of other nations are experiencing the same
phenomenon of limited job growth and opportunities. There is no doubt that the
lure of Forex as a gateway to extra income is great. Many of these people have
the combination of talent, and skills to take on Forex Trading. But what are the
steps necessary to actualize one's dream of trading Forex as a job substitute?
What are the mistakes that should be avoided that can cause financial ruin? Here
are some guidelines.
Start with a Business Plan. Forex Trading is a task that should be treated as a
self-directed business. Even before one sets out to trade for a living, a business
plan needs to be structured that sets forth revenue objectives and capital
requirements related to conducting your own personal Forex business. The plan
does not need to be a tome. It does need to articulate key goals and costs. Like
any business Forex Trading requires not only a personal commitment of effort
but a commitment of resources. Missing this key first step can cause
exaggerated expectations and under-capitalization.
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Page 15 of 43
Set Salary and Income Objectives. The goal of replacing your current day job
with one as a Self-directed Forex Trader cannot be successfully done in one
step. It takes time to hone your skills. A practical first step is to see if you can
replace ½ of your expected income from a Day Job. If you can do this then you
have the proven confidence in your ability to phase into a full time operation. If all
that can be achieved is ½ your Day job salary or income, then you have a long
term increase in your earning!
After delineating income targets for yourself, it's a good idea to use a Monthly
and Weekly Pip target to reach your business goals. Day targets are possible,
but having a goal for the day often can lead to undue pressure to trade to meet
that goal. Weekly targets permit greater tolerance for the variations in
opportunities and periods of rest. Avoiding overtrading is important.
Train and Train and Train. Before you quit your day job, training is critical. Do
you have what it takes to shift into a Forex Trading Career? The best way to test
your skills and stamina is first not to throw real dollars at the market. Rather,
learn a variety of technical analysis and trading strategies. A course can provide
valuable core skills you will need and it can pinpoint areas of weakness.
Determine Trading Style. What kind of trader do you want to be? Do you seek
the style that captures moments of opportunity for a quick grab of PIPS ? Can
you tolerate a position trade for days? Each style requires different skills and
levels of technical analysis that will inform your approach to this business.
Simulation. No airline pilot flies, nor any soldier goes into battle until they are
fully trained in simulation. Those who criticize simulation as a game that doesn't
reflect real trading situations miss the real value of simulation. While real money
is not involved, simulation can reflect the value of a disciplined approach. Also,
there are many ways to use emotional factors during simulation by analyzing
emotions during the trade. For example, by setting up two simulated accounts;
One for testing a strategy and the other for emotional trades; an individual can
allow emotions to enter into a trade by allowing its expression in the second
simulated account. Even after you start real dollar trading, keep a simulated
account to test ideas.
Measure Performance. Once simulation has started, measure results in a
phased approach. Take your first 20 trades and evaluate them along several
dimensions. Among the important ones are : 1) win/loss ratio; 2) Average pip
gain/average pip loss; 3) Greatest lost. Greatest gain.
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Page 16 of 43
Evaluate Your Errors. A loss in a trade is not an error. Losses are part of the
business. But the path to making Forex Trading a Job is to understand and
minimze the errors that Are due to faulty trading. Be prepared to answer these
questions: Are you making Strategic errors where your wrong on direction? This
kind of error means your analysis is weak and needs improvement. The second
common type of error is being Stopped Out. Many new traders have many of
their positions Stopped Out and then the market resumes in a direction that the
trader had correct. Reducing Stop loss errors will result in Immediate and
dramatic improvements. Finally the third error is the best. Your trade didn't work.
Everything looks good, but the market moved against you. This happens, but
hopefully not too often.
Psychological Preparation. Since cashflow is the heartbeat of any business,
write down your family cash flow needs for a period of 6 months to 1 year and
prepay a large amount of them. This will allow you to enter the start up period
without the huge pressure of performing. Becoming a trader will require a degree
of self -examination and understanding that few jobs or careers require. A key
question to answer is what is your trading personality? Are you analytical or
emotional? Do you tend to try to study the market or are you reacting to the
charts? Do you have patience to wait for conditions for entry or do you like the
quick action? Each style has its strengths and weaknesses. The challenge will be
to arrive at the mix of styles that is right for you.
Considering Forex trading as a job for your future is a worthy quest. Whatever
your profession has been, it is a challenge that tests all the qualities that make us
human. There is no single path to success. Answering that Help Wanted Ad in
your mind and taking on the job of becoming a Forex Trader need not be a race
against time. It is not a sprint, but a marathon. There will be bumps in the road.
Just make sure your car has a big gas tank and good shocks.
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Page 17 of 43
The Straddle Trade
One of this week's trades was 'news' trade that worked to textbook perfection.
One minute before the November U.S. Initial Unemployment Report came out we
put on a Straddle. With the market waiting most of the previous session for this
report there would be a high likelihood that it would move the market, but which
way no one knew. So we evaluated the chart patterns and decided to place an
Entry order to Buy on a Stop above the resistance at that time. We placed a Buy
eurusd at 1.1440 on a stop with a Limit at 1.1460. At the same time we placed an
entry order to Sell on a Stop at 1.4110 with a limit at 1.1385. The news hit and
price went down right through to our limit at 1.1385. The limit on the down side
was set at a major support level and if it hit that level we wanted to be
automatically limited out before a retracement. Sure enough, it went just past our
limit, triggering our exit from the trade, and then whipsawed almost back to the
entry point. This trade demonstrates how strong technical trading can be
integrated with fundamental trading and is a good example of one of our trading
strategies at Forex-Advisor.
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Page 18 of 43
The Circular Nature of Currency Prices
The very first thing to realize about currencies is that current price is nothing
more than a suggested value; there is no scientific way of knowing what a
currency is actually worth. Economists have put forth theories such as
purchasing power parity, however empirical evidence clearly shows that actual
currency values seldom trade near these theoretical values.
Economists babble on about GDP, Current Accounts, Trade Balances,
Employment and a slew of other comparative measurements but once again the
evidence shows that the currency values are almost always at odds with what
should be based upon fundamental analysis.
What determines a currencies current value is the collective thinking of the
market. The collective thinking of the market is influenced by price. As the value
of a currency rises the market enhances its value by anticipating further gains,
thereby pushing the currency higher still. As long as the currency continues to
rise, the market remains positive on the future performance of the currency and it
continues to perform well.
When price declines slightly the collective thinking of the market does not change
right away; however weak longs (traders with highly leveraged positions) are
forced to liquidate causing further price decline.
If the price decline persists, market opinion becomes more negative and further
price declines result; thereby causing a further shift in market opinion toward
negative, which in turn causes further selling and further price fall.
When price begins to go up again, market sentiment changes back to positive
and the cycle starts all over again.
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Page 19 of 43
This circular cause and effect pattern is always present in the market. Because
the collective market is essentially a crowd, the price over time tends to move
further and further from what economists determine to be fair value.
Since the current currency price has little to do with "real fundamental value",
traders cannot assume that the release of a particular economic number away
from market expectations or a statement by a government official will have a
quantifiable effect on the market price.
It would depend upon whether the news or statement changed the collective
thinking of the market. The most likely circumstance that would change the
markets opinion would be a change in price.
The conclusions to be drawn are as follows: 1) Market opinion causes currency
values to overshoot in both directions because it is a crowd mentality. 2) The
opinion of the crowd changes often and most often in the direction of price. 3)
Trade in the direction price is going and the crowd will not be far behind. 4)
Trying to think rationally and going against the crowd is like trying to talk sense to
a madman.
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Big Profits Day Trading the Less Publicized
Fundamental Indicators
EXAMPLE 1 The monthly U.S. retail sales number is widely accepted as an
important gage of future economic performance. When the August number came
in below expectations the U.S. dollar quickly lost 1% of its value. It's reasonable
to assume any leading indicator of the general direction of next months
(September) retail sales number should also have an impact on the value of the
U.S. dollar.
There are two such leading indicators. They are BTW-UBS Chain Store Sales
and Redbook Chain Store Sales. Every Tuesday these two indicators are
released. The BTW reports cover exclusively sales at big retailers. Redbook
reports on big retailers and also department stores. When the weekly numbers
are extremely good or extremely bad it's a good indication of what consumers are
doing right now and as such has important implications going forward, especially
when a clear pattern over two or three weeks emerges.
Smart investors are all over this new information, staying current and adjusting
their positions to reflect the more current outlook. Because the media does not
make a big splash about it, the subtle price changes in the U.S. dollar go
practically unnoticed.
While these relatively minor price changes are unlikely to change U.S. dollar
direction on the day even, getting into the next short-term price move early is the
kind of "leg up" type of trading that can cause a trader to get his or her day off to
a winning start and provide the money and confidence to parlay a small gain into
a great P&L trading day.
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As a caveat, store sales are only a small percentage of total retail sales and are
therefore far from a holy grail. However, its very current information on the
spending patterns of consumers and that's very important information which has
far reaching ramifications.
EXAMPLE 2 Without a doubt, the U.S. monthly employment report spectacularly
moves the currency markets; the change in non-farm payroll employment is what
the market focuses on. Being a leading indicator, the weekly jobless claims
number has been getting a lot of press, and therefore a currency market mover.
There are two monthly reports that don't get the press but are good indicators of
current employment situation; they are Challenger Job-Cut Report and Help
Wanted Index.
Challenger Job-Cut Report states the number of announced corporate layoffs.
While some of these announced layoffs might never come to pass, knowing the
aggregate outlook for "block" layoffs is an important indicator of employment
trends. The report also lists the layoffs by industry, alerting investors of possible
"keeping up with the Jones" layoffs to be announced by other companies in the
same industry or industries that depend on other industries.
Help Wanted Index compiles data on how many lines of help-wanted advertising
appeared in about 50 major newspapers from all over the United States. In the
current environment of a jobless recovery, knowing how much advertising is
being done is a leading indicator of the jobs created portion of the monthly non-
farm payroll employment number. Changes in this monthly indicator will cause
some immediate stock and currency position adjustment. Take advantage of it.
Summary
There are many subtle fundamental indicators that don't get headline press and
therefore go unnoticed by most small investors. To list all of them here is beyond
the scope of this article. The big boys are all over these hints of the current "big
picture" and some of them adjust their currencies immediately based when the
info is released. Learning to day trade these tier 2 indicators can be easy money.
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Page 22 of 43
Big Profits Day Trading Fundamentals
Back in the mid 1980's a Wall Street Journal reporter asked me what role the
fundamentals played in currency trading. I responded, "there are 14 floors
between here and the fundamentals". Over the years I warmed up to
fundamentals; these days the fundamentals are an important part of my overall
trading strategy. Let me give you a few examples of how I used the fundamentals
to generate significant profits this month.
1) Friday, September 5 - The best gauge of the current state and future direction
of the U.S. economy (hence the U.S. dollar) is the monthly employment report.
The currency markets respond immediately and adjust the value of the U.S.
when the actual reported number deviates significantly from the median forecast
(the median forecast is arrived at by news organizations such as Bloomberg or
Reuters polling economist).
The headline number the market focuses on is non-farm payroll employment; the
median forecast was +20,000 (range was -20,000 to +50,000). What immediately
got my attention was that the median actual reported number the past 12 months
was -100,000. What also got my attention was that the actual reported number
averaged more than 100,000 up or down, the past 4 years.
I concluded the number would be way off the mark. It would probably be much
worst than expected. Why I thought the number would be way off from the
median forecast is obvious; most months it's up or down 100,000. The reason I
thought it would be down is because it has been down 24 of last 30 months.
I also believe the economist purposely give a rosy forecast (especially if their
employer is a brokerage firm, for obvious reasons).
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Page 23 of 43
I took advantage of this fundamental by placing U.S. dollar stop loss entry sell
orders slightly above the current market. Upon the release of the employment
numbers I was "stopped into" an immediately profitable U.S. short position. By
days end the U.S. dollar had declined about 1.75% from levels prior to news.
2) Friday, September 12 - Monthly retail sales measures how much money
consumers spent in stores; consumer spending accounts for approximately two-
thirds of U.S. economy, so when consumers are spending the economy is doing
well and vise verse. A better than expected retail sales indicates the economy
(and U.S. dollar) are stronger than previously thought. The price of the U.S.
dollar therefore adjusts to reflect this new information; and vise verse.
Consensus forecast for August retail sales was 1.5%; once again the economists
were overoptimistic (one economist forecast 2%; a number not reached in this
century, up or down) - A reading equal to or greater than 1.5% had only been
achieved in 3 of the last 42 months! There was a 93% chance that the release of
August retail sales would be a disappointment causing the U.S. dollar to decline
and we entered stop loss U.S. dollar sell orders very close to market prior to data
release time. The number turned out to be a rise of 0.6%; U.S. dollar fell about
about 1% within an hour of the release.
At 10am, one and one-half hours after retail sales was the release of University
of Michigan Consumer Sentiment Index. Of course, the economists were
forecasting a rise, what was actually reported were a decline, and the U.S. dollar
promptly fell another half percent.
3) Wednesday, September 17 The Bank of England released the minutes of their
MPC meeting which took place on Sept 2nd and 3rd. On page four the
committee stated they expected the Euro weaken against the GBP, citing the
fundamental weaknesses of the Euro. Within an hour the Euro was 0.5% lower
against the GBP. By Fridays close the Euro was more than 3% lower against the
GBP.
4) The Japanese Central Bank had intervened buying USDJPY each day;
September 2nd through September 12th. On Monday the 15th Japan was closed
(holiday) and their was no intervention. Everyone expected intervention on
Tuesday; there was none. Knowing there was a G7 meeting on Saturday, Sept
20th, it was likely the Japanese decided not to intervene in the week leading up
to the G7. A short USDJPY position on Wednesday, after their intentions became
clear, would have yielded a profit of 2% in less than 48 hours.
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Most day traders erroneously assume Fundamentals are a long term indicator
and miss out on many great trade opportunities every week. Learn the
fundamentals and how to use them effectively. Your monthly P&L will improve
significantly.
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Page 25 of 43
Currency Trading Rules
More than two decades of trading experience has revealed (sometimes painfully)
some immutable rules for trading.
1. Your maximum daily loss limit should be conservative. We suggest
not more than 2% of capital. This allows you to trade without fear or
emotion; knowing that even your worst day will not hurt you.
2. Be patient with winning trades. Don't look for excuses to take profit;
use trailing stops based upon a systematic formula for locking in
profits.
3. Trade active currencies and only when significant price change is
occurring; trade in the direction the market is going.
4. The shorter the time frame, the more random currency movements
become. In the absence of news, don't look to fundamentals for
reasons to justify holding onto a losing position.
5. Traders, like the market, have up-trends and downtrends; when
your trend is up trade aggressively and when it's down tread lightly.
6. If you get into a currency position at the wrong price and time have
the discipline to get right out again. Getting in and out wrong is very
expensive.
7. Economic news releases oftentimes create a move much greater
than the news itself justifies. Get used to this! It's the norm and not
the exception. Waiting is difficult and stressful when you have an
open position and the price is fluctuating in a narrow range. Get
used to it; the market range trades 80% of the time.
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8. Never, under any condition, add to a losing trade.
9. Don't try to enter the market at the top or at the bottom, allow the
trend to gain a foothold and join the move in progress.
10. Don't spread yourself too thin. Begin by focusing on one or two
currencies and get to know them well. Each currency has its own
trading personality which must be learned from experience.
11. Trade where the market is going not where the price is. Avoid
thinking the price is too high or two low.
12. Always remain true to your trading plan. That means maintaining
the discipline to control losses.
13. Keep it simple. The more indicators the more ambiguity.
14. Follow the market wherever it wants to go; don't waste your time
predicting where it will go.
15. It's easy to take money from the currency markets; the tough part is
not giving it back.
16. When everybody agrees you have the right position, you have the
wrong position.
17. Take windfall profits whenever you can. If you put on a trade and
get a quick 50 points take it.
18. Trade with your head. Not over it.
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Page 27 of 43
How to Read a Chart and Act Effectively
Table of Contents
· Introduction
· Recommendation
· Using your charts effectively
· What to look at first
· How to use the information gathered so far
· How to trade the information gathered so far
· Other chart ideas
· Limitations of charts
· Summary
Introduction
This is a guide that tells you, in simple understandable language, how to choose
the right charts, read them correctly, and act effectively in the market from what
you see on them. It is not necessary to understand all the techniques presented
here in order to use the advisory service. Probably most of you have taken a
course or studied the use of charts in the past. This issue should add to that
knowledge.
Recommendation
There are several good charting packages available free. Netdania, FXCM, and
InterbankFx all have good packages available as free downloads. The
requirements for a charting package are lengthy but the high points are: a
reliable and accurate data feed, the right time frames and indicators, and the
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ability to store sets of charts for future use. Contact Rick if you would like some
help in picking a package.
Using charts effectively
The default number of periods on these charts is usually 300. This is a good
starting point;
• Hourly chart that’s about 12 days of data.
•15 minute chart its 3 days of data.
• 5-minute chart it’s slightly more than 24 hours of data.
You can create multiple "tabs" or "layouts" so that it’s easy to quickly switch
between charts or sets of charts.
What to look at first
1. Glance at hourly chart to see the big picture. Note significant support and
resistance levels within 2% of today’s opening rate.
2. Study the 15 minute chart in great detail noting the following:
• Prevailing trend
• Current price in relation to the 60 period simple moving average.
• High and low since GMT 00:00
• Tops and bottoms during full 3 day time period.
How to use the information gathered so far
1. Determine the big picture (for intraday trading).
Glancing at the hourly chart will give you the big picture – up or down. If it’s not
clear immediately then you’re in a trading range. Lets assume the trend is down.
2. Determine if the 15 minute chart confirms the downtrend indicated by big
picture:
Current price on 15-minute chart should be below 60 period moving average and
the moving average line should be sloping down. If this is so then you have
established the direction of the prevailing trend to be down.
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Page 29 of 43
There are always two trends – a prevailing (major) trend and a minor trend. The
minor trend is a reversal of the main trend, which lasts for a short period of time.
Minor trends are clearly spotted on 5-minute charts.
3. Determine the current trend (major or minor) from the 5 minute chart:
Current price on 5-minute chart is below 60 period moving average and the
moving average line is sloping downward – major trend.
Current price on 5-minute chart is above 60 period moving average and the
moving average line is sloping upward – minor trend.
How to trade the information gathered so far
At this point you know the following:
Direction of the prevailing trend.
Whether we are currently trading in the direction of the prevailing (major) trend or
experiencing a minor trend (reaction to major trend).
Possible trade scenarios:
1) Lets assume prevailing (major) trend is down and we are in a minor up-trend.
Strategy would be to sell when the current price on 5-minute chart falls below the
60 period moving average and the 60 period moving average line is sloping
downward. Why? Because the prevailing trend is reasserting itself and the next
move is likely to be down. Is there more we can do? Yes. Look for further
confirmation. For example, if the minor trend had stalled for awhile and the lows
of the past half hour or hour are very close to the 5 minute moving average then
selling just below the lows of the past half hour is a better place to enter the
market then just below the moving average line.
2) Lets assume prevailing (major) trend is down and 5-minute chart confirms
downtrend. Strategy would be to wait for a minor (up trend) trend to appear and
reverse before entering the market. The reason for this is that the move is too
“mature” at this point and a correction is likely. Since you trade with tight stops
you will be stopped out on a reaction. Exception: If market trades through today’s
low and/ or low of past three days (these levels will be apparent on the 15 minute
chart) further quick downward price action is likely and a short position would be
correct.
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3) A better strategy assuming prevailing trend down, 5-minute chart down, and
just above days lows is to BUY with a tight stop below the day’s low. Your risk is
limited and defined and the technical condition (overdone?) is in your favor.
Confirmation would be if today’s low was a bit higher than yesterday’s low and
the price action indicated a very short-term trading range (1 minute chart) just
above today’s low. The thinking here is that buyers are not waiting for a break of
today’s or yesterday’s low to buy cheaper; they are concerned they may not see
the level.
4) Generally speaking, the safest place to buy is after a sustained significant
decline when the bottoms are getting higher. Preferably these bottoms will be
hours apart. By the third or forth higher bottom it is clear a bottom is in place and
an up-move is coming. As in the example above your risk is limited and defined –
a low lower than the last low.
5) The reverse is true in major up-trends.
Other chart ideas
• There are always two trends to consider – a major trend and a minor trend. The
minor trend is a reversal of the major trend, which generally lasts for a short
period of time.
• Buying above old tops and selling below old bottoms can be excellent entry
levels; assuming the move is not overly mature and a nearby reaction unlikely.
• When a strong up move is occurring the market should make both higher tops
and higher bottoms. The reverse is true for down moves- lower bottoms and
lower tops.
• Reactions (minor reversals) are smaller when a strong move is occurring. As
the reactions begin to increase that is a clear warning signal that the move is
losing momentum. When the last reaction exceeds the prior reaction you can
assume the trend has changed, at least temporarily.
• Higher bottoms always indicate strength, and an up move usually starts from
the third or fourth higher bottom. Reverse this rule in a rising market; lower
tops…
• You will always make the most money by following the major trend although to
say you will never trade against the trend means that you will miss a lot of
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opportunities to make big profits. The rule is: When you are trading against the
trend wait until you have a definite indication of a selling or buying point near the
top or bottom, where you can place a close stop loss order (risk small amount of
capital). The profit target can be a short-term gain to nearby resistance or more.
• Consider the normal or average daily range, average price change from open to
high and average price change from open to low, in determining your intra-day
price targets.
• Do not overlook the fact that it requires time for a market to get ready at the
bottom before it advances and for selling pressure to work it’s way through at top
before a decline. Smaller loses and sideways trading are a sign the trend may be
waning in a downtrend. Smaller gains and sideways trading in an up trend…
• Fourth time at bottom or top is crucial; next phase of move will soon become
clear… be ready.
• Oftentimes, when an important support or resistance level is broken a quick
move occurs followed by a reaction back to or slightly above support or below
resistance. This is a great opportunity to play the break on the “rebound”. Your
stop can be super tight. For example, EURUSD important resistance 1.0840 is
broken and a quick move to 1.0860, followed by a decline to 1.0835. Buy with a
1.0820 stop. The move back down is natural and takes nothing away from the
importance of the breakout. However, EURUSD should not decline significantly
below the breakout (breakout 1.0840; EURUSD should not go below 1.0825.
• After a prolonged up move when a top has been made there is usually a trading
range, followed by a sharp decline. After that, a secondary reaction back near the
old highs often occurs. This is because the market gets ahead of itself and a
short squeeze occurs. Selling near the old top with a stop above the old top is the
safest place to sell.
• The third lower top is also a great place to sell.
• The same is true in reverse for down moves.
• Be careful not to buy near top or sell near bottom within trading ranges. Wait for
breakaway (huge profit potential) or play the range.
• Whether the market is very active or in a trading range, all indications are more
accurate and more trustworthy when the market is actively trading.
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Limitations of charts
Scheduled economic announcements that are complete surprises render nearby
short-term support and resistance levels meaningless because the basis (all
available information) has changed significantly, requiring a price adjustment to
reflect the new information. Other support and resistance levels within the normal
daily trading range remain valid. For example, on Friday the unemployment
number missed the mark by roughly 120,000 jobs. That’s a huge disparity and
rendered all nearby resistance levels in the EURUSD meaningless. However,
resistance level 200 points or more from the day’s opening were still meaningful
because they represented resistance to a big up move on a given day.
Unscheduled or unexpected statements by government officials may render all
charts points on a short-term chart meaningless, depending upon the severity of
what was said or implied. For example, when Treasury Secretary John Snow
hinted that the U.S. had abandoned its strong U.S. dollar policy.
Summary
The advisory focuses on short-term moves with tight stop losses. Accordingly,
the focus is on short-term charts, initiating trades at tops and bottoms, support
and resistance, where a “tight” stop loss can be used effectively. Watch for an
explanation of why a trade is done to be provided in the comments column. The
end goal is for subscribers to develop the necessary skills to understand the
market and trade more effectively. Please feel free to email any questions or
comments you have on this article.
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Page 33 of 43
Profit Maximization
Understanding Leverage and Capital at Risk
My first investment was a two bedroom, two bath apartment in a doorman
building on the upper east side of Manhattan. The purchase price in 1988 was
$240,000. My down payment (investment) was 25% or $60,000. Around the
same time my friend bought 5 of the exact same apartments from anxious sellers
willing to finance 95% of the $240,000 purchase price. My friend's total down
payment (investment) was also $60,000.
Both of us sold our apartments in 2001 for $480,000 each. I made $240,000. My
investment was $60,000; so my return on investment was 400%
($240,000/$60,000). My friend made $240,000 times 5 or $1,200,000. His
investment was $60,000, so his return on investment was 2,000%
($1,200,000/$60,000).
Had we invested in foreign exchange instead of real estate it would have looked
like this:
My initial deposit (investment) in 1988 was $60,000. I leveraged 4 to 1 and
bought $240,000 worth of Euros. My friend's initial deposit (investment) was
$60,000; he leveraged 20 to 1 and bought $1,200,000 worth of Euros. By 2001
the Euro doubled in price and we sold our positions. I made $240,000 on my
$60,000 investment (400%). My friend made $1,200,000 on his $60,000
investment (2000%).
So why wouldn't an investor use the maximum leverage available? The answer is
mark to mark and margin calls. The dollar value of your account is adjusted
throughout the day to reflect the current market value of any open positions.
Using the example above. Had the Euro initially declined 5% my friend would
have received a margin call requiring additional monies or his Euro position
would be closed out and his initial investment of $60,000 would be entirely lost.
On the other hand, my Euro position was safe until the Euro declined 25%.
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Clearly, a 5% decline would not have put me in any danger, while potentially
wiping out my friend.
Choosing the right amount of leverage that allows for maximum return on
investment, while adequately protecting against getting wiped out is the key to
realizing optimal returns.
When Forex-Advisor started on June 30, 2003 we determined that a client
trading 2 lots (200,000) with $20,000 in their account would maximize profits
while maintaining adequate protection from draw downs (consecutive losing
trades that reduce the account balance). Leverage would be 10 to 1.
An investor starting with a balance of $20,000 on June 30,2003 and trading all
our signals would have a current balance (August 31) of $30,979; that's a 54.9%
return in two months. How close has the account come to getting wiped out? Not
even close. There were two extended losing streaks. The aggregate loses were
$1,927 and $1,918.
The key to understanding how a trading advisor can give 11 wrong signals in a
row to a client using 10 to 1 leverage and for this not to cause more than a
wrinkle in the account has to do with the advisor properly managing daily risk to
protect the investment during down periods. The trader does this by purposely
limiting daily losses; during our worst losing streaks average daily loses were
around $200.
To be honest we weren’t aware of just how little risk we were taking (our
managed accounts have been leveraged between 1.3 to 1 and 3 to 1). We ran
the numbers it was evident we were using too little leverage given our
conservative daily loss limits.
Beginning September 1, 2003 we will strictly adhere to the following guidelines
for our advisory clients:
Daily loss limit - 30 EURUSD points (assuming 2 lot positions - $600). For all
other currencies the daily loss limit is the same. The points will vary but the USD
amount of the loss will not (assuming 2 lot position - $600).
We hope that each client determines the correct amount of leverage to use to
maximize profits while limiting risk by using the examples above as a guide.
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Page 35 of 43
Why did the Dollar go down when Fundamentals were excellent.
Two good economic reports and a leading indicator, the stock market, soared?
The best explanation I could find reading weekend press was that the FX market
was overly optimistic about second half of 2003. Here is the explanation.
Fundamentals are difficult to trade because there are always two sides to any
argument. People who write about currency movements find this very
convenient. For example, had the Dollar rallied sharply on Friday headlines
would have read "U.S. Dollar rallies on strong economic data, strong stocks".
Since reporters and writers don't have a P&L to deal they don't need to really
understand what happened Friday or it's implications.
As traders and investors we need to think carefully and draw conclusions that will
help us trade successfully this coming week.
POINT 1 - The U.S. Dollar is falling in spite of strong short-term
fundamentals, such as recent economic releases and strong stock market.
The fact that this is occurring is much more important than why it is
occurring. Bottom line is U.S. Dollar is in a long-term decline, it had a nice
intermediate term correction (7 weeks) and the long-term downtrend is again re-
emerging. If this is true, and my opinion is that it is true, then the only prudent
strategy for trading FX is to sell U.S. Dollar on any short-term strength.
It is likely that short-term strength will emerge after good economic releases,
such as what happened on Friday; or when stock market rallies - again like
Friday. Trading strategy should be look for opportunities to sell U.S. Dollar
whenever a short-term Dollar rally appears to be over and evidence of short-term
weakness becomes visible. Short-term charts and technical indicators are the
tools.
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POINT 2 - Why did the U.S. Dollar decline Friday. Fact is, nobody can say for
sure. On a micro level could be a central bank took opportunity to buy EURUSD
and adjust reserves. This caught the market by surprise and shorts scrambled to
cover. On a macro level is the catch 22 of an economic recovery in U.S.
U.S. economic strength lies within its own borders; meaning when Americans are
buying the economy is strong. When they are not the economy is weak. Despite
unemployment rising precipitously, Americans in the aggregate are still spending
and the U.S. economy is still registering growth. However, the source of the
money fueling the economy is about to run out, in my opinion.
Perhaps Bush knows that better than anyone and that is why he pushed through
tax cuts at a time when the government deficit is skyrocketing.
The source that is drying up is the large amount of spendable cash (probably
spent is more accurate in many cases) created by housing market bubble.
Looking back the government created this bubble. First by allowing most
Americans to keep profits from sale of first home. Second by lowering interest
rates to 45 year lows. Most of us have probably reacted by "trading up" and
presently have a big mortgage and a good size equity loan (got to fix up that new
house).
This all works as long as interest rates stay very low and the housing price
market stays high. Unfortunately, interest rates are rising. The reason probably
has to do with a perceived stronger economy and recognition that the
government budget deficit is spiraling out of control (my guess is currently 5.5%
of GDP and heading higher). As interest rates rise the deficit rises (interest
payment on existing debt is huge and rising with higher rates).
The housing market will respond negatively to higher interest rates. Americans
tend to buy the best house they can afford. Afford means what monthly payment
can be serviced comfortably from present cash flow (essentially paycheck).
There is little thought given to the absolute amount of debt to be repaid from
future earnings, especially during a bull housing market. Mantra is - housing only
goes up. I have nothing to worry about.
When housing prices inevitably level off and begin to come lower, the real
underlying weakness in the U.S. economy will become apparent. Other
countries, notably Great Britain and Australia, have housing bubbles but they
have plenty of room to lower interest rates if need be and prolong the inevitable.
They also don't have huge budget deficit.
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Page 37 of 43
In summary, the U.S. economy lacks the catalyst for growth - people spending
money. The "equity loan well" is drying up. Jobs outlook is weak. The tax cut will
do nothing. People only spend money when they feel good about present
situation. I think most people realize it's time to pay off the credit cards and
tighten the belt. This is hardly the environment to expect spending and growth.
U.S. Dollar negatives:
· Ballooning government deficit, trade deficit.
· High and rising unemployment.
· Rising interest rates hurt housing, increase deficit.
· U.S. soldiers dying in Iraq everyday. No end game in sight.
· Expense of remaining in IRAQ
Bottom line is USD is weak and it should be.
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Page 38 of 43
The Mental Edge: Mind Training for the Forex Trader
In the inner game of trading psychology plays such a major role in trading success,
that professional Bank FX Traders and financial institution traders routinely spend
an hour a week in mind training sessions for a year or more with their own
personal mind trainer or peak performance coach.
We have sketched in this mental visualization with examples of positive self-talk
and mental imagery intentionally used in the mental game of a successful trader.
Here we introduce you to a mental picture of success; in other words, the
visualization and inner dialog that goes on in the mind of a success-oriented trader.
These are mental skills that are easily learned by anyone.
Before the Trade
Relax. Breathe in as deeply as you can and exhale slowly. Close your eyes; see
and feel the air as it flows into your lungs and out of your lungs. See yourself
breathing in calm and confidence and breathing out anything that is not useful to
you, whether it be stress or worry or an old conditioned response or whatever.
Repeat this a few times; see and feel calm entering your body/mind/emotions like a
breath of fresh, revitalizing air, and see and feel the unuseful things exiting. A
relaxed mind and body is key to achieving an alert mind and peak trading
performance. Getting "pumped up" to trade is unproductive, you know this and so
you avoid it.
Visualize. Go over in your mind what a good trade feels like from start to finish.
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Page 39 of 43
The Trading Session
A trade signal flashes on the screen, in this case it is telling you sell EURUSD.
Feel a relaxed smile coming across your face. The game is on and the fun begins.
You know the worst thing that can happen is a small calculated loss. You know
taking small losses is inevitable and a necessary component of a successful
trading strategy that is consistently making you money. You confidently make the
stop loss entry, 'if done stop loss' and 'if done take profit' as one trade entry on
your broker platform.
You don't enter the stop loss entry first and then enter the if-done orders since that
will cause you stress and take you out of your game. You know that staying
relaxed, focused and confident means avoiding uncertainty. By entering all three
components as one trade limit your risk immediately and therefore you can remain
cool and calm. You have been practicing entering orders and you let yourself feel
the confidence that your practice has served you well, as you do complete the
entries efficiently, quickly and correctly. You do not concern yourself with thinking
about winning or losing on the trade, nor do you spend an ounce of mental energy
thinking about what could happen if you enter the trade wrong. You are calmly
focused on your objective -- entering the complete order accurately and
expeditiously. You are focused on your task with a calm, confident manner.
Once you have entered the complete trade and double-checked it, you focus your
mind on anticipating the next likely message to be flashed on the screen, and you
consider what action this will require of you. The trade has gone 20 points your
way and you know it's coming - take half profit. You're relaxed. You're smiling.
You're smart. You knew it was coming. You confidently enter a market order to
reduce your position by half. You are unconcerned about the rate. It's like playing
horseshoes, close does count, gets the job done.
You reduced your position by half. You have anticipated and met your first risk
management objective and made some profit in the process. You acknowledge
this success to yourself as you check your remaining existing order to make sure it
now reflects the trade you did correctly. It does. You're order is now for half of what
it was before you closed half. All good. You affirm mentally to yourself some
positive observation about that excellent achievement, as you take a mental
reading of your mental/emotional state you gauge your levels of relaxation and
awareness.. If there is anywhere in your body or your mind you feel tension or
unhelpful mental or emotional responses you automatically imagine yourself
‘resetting’ your calm-yet-alert button. You immediately feel that sense of calm,
confident mastery flowing through you again.
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Page 40 of 43
You anticipate that the rest of the trade is coming, if it's not there already. Now,
there it is on your screen. Move stop on remaining half to breakeven. This feels
good. You know you don't need to rush or get stressed adjusting your stop to your
original entry level; market is about 20 points below that anyway. You glance at the
current rate and see it's still about 20 points below your entry level. Calmly you
adjust your stop. No worries, no rush. You double check to make sure you
adjusted the stop correctly. You did. You assert to yourself, “Very alert. Good On
top of your game”.
You're calmly anticipating your next action. If the market starts going back up you
are going to "close position". You're ready. You know the fill will be whatever it will
be. Doesn't matter. Doesn't concern you. You got 20 points on half the position and
the worst case on the remaining half is breakeven. You got your stop in at
breakeven. You are stress free. Confident and calm. Relaxed yet alert.
Market starts to drop and it's 35 points from your entry level. You're watching the
screen. You know that just as you anticipated you are going to take profit and close
the position or move the stop to protect profits. There it is, you move stop to 85.
That's still 20 points above the current market. You effortlessly adjust the stop with
two mouse clicks. The market is still falling, now 50 points profit. You click on
market order and close your position. You look up at the screen and there it is. You
feel good about your ever-increasing trading skills. You provided for risk safety
first. You locked in prudent profit. And you completed the trade movement by
anticipating the action necessary to take profit before the fact. Worst case was you
locked in 50 points profit. You're in the zone. The more relaxed your mind feels the
more you have freed your mental energy to perform alertly. You double check to
see you have no position and your profit looks correct. It is. Mission accomplished.
You think about making a cup of herbal tea, or some other healthful 'atta boy' as a
reward for your fine performance.
Market continues to drop. The idea you could have made another 20 points never
crosses your mind. You have better things to do with you're time than thinking
about what could have been. You are already refocused on the present moment.
Calmly and alertly you stay present. You are waiting until the market stabilizes,
goes up somewhat and generates a fresh sell signal. You look at 1 minute, 5
minute, and 30 minute charts in a mentally detached yet crystal clear way to
pinpoint entry levels, and wait for the next clear trading signal, confident that you
will identify it and act on it in exactly the right way.
In fact, whatever comes during the trading session, you have a strong sense that
your mind is so clear and undistracted by unnecessary concerns, that you will be
able to instantly determine exactly the right trading decision at the right time. You
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Page 41 of 43
feel confident. You are a well trained trader with excellent trading tools, what’s
more a well trained gold-medalist mind set. You have everything you need to
succeed. It feels great to be trading.
Trade Session Debriefing
Later when your trading session has ended, you go back to the charts and see
what they looked like when you set your stop loss entry order. You want to debrief
and deprogram any unhelpful behavior that you noticed during your trading. Or you
want to solidify the learning experience. You want to record it into your brain
archive for future reference. You know you will be able to retrieve it with complete
recall, effortlessly and naturally anytime in the future that you choose.
You calmly look at 1 minute, 5 minute, and 30 minute charts in retrospect. You are
mentally reliving your successful trading entry process. What was the trigger level?
Why there? New low for the day. That's cool, made sense. But what else? Where
was Swiss at the time? Oh, you say to yourself, I see, Swiss was already a lot
higher. And Sterling was already above short-term trend line. Look at USDCAD it
had already spiked higher. How about USDJPY? No, that currency is totally out of
whack due to intervention. How about EURJPY? Hmmm. Breaking trend line to
downside. Cool. Will help EURUSD go lower and that suits our short EURUSD
trade. How about EURGBP? Also breaking lower. Also supports a lower EURUSD
trade. EURCHF is a lot higher that's not good. Or is it? Could be the reason it's
higher is because traders are buying USD and reaching to higher levels to buy
USDCHF.
That would suit our short EUR long USD short position. All the ducks you’re lined
up in favor of EURO lower and USD higher. That's why I sold EURUSD when it too
made a new low, confirming it was ready to join the others and gain ground against
the USD.
Your mental skills have once again expanding your level of mastery. You affirm to
yourself that you are getting better at trading every day in every way.
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Page 42 of 43
Recommended Trading Psychology Books
Beyond Greed and Fear - Hersh Shefrin
Exceptional Trading - Ruth Roosevelt
Fooled by Randomness - Nassim Taleb
How to Control Stress to Become a More Successful Investor - Van K.
Tharp
Investment Madness - John Nofsinger
The Disciplined Online Investor - Steven Hendlin
The Disciplined Trader - Mark Douglas
The Mentally Tough Online Trader - Robert Koppel
The Mind of the Market - F. J. Chu
The Psychology of Risk - Ari Kiev
The Tao of Trading - Robert Koppel
The 21 Irrefutable Truths of Trading - John Hayden
The Way of the Warrior Trader - Richard McCall
Trading in the Zone - Mark Douglas
Trading in the Zone: Maximize Performance with Focus Discipline - Ari Kiev
Trading, Sex, and Dying - Juel Anderson, David Caplan
Trading to Win - Ari Kiev
12 Habitudes of Highly Successful Traders - Ruth Barrons Roosevelt
Winning the Mental Way - Karlene Sugarman
Zen in the Markets - Edward Allan Toppel
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Page 43 of 43
About Forex Advisor
Forex Advisor is an industry leader in equipping and enabling the private forex self-
trader, and the self-managed forex investor in this time of burgeoning online forex
trading. Through our one-on-one coaching, seminars and personal ‘Trade with the
Trader’ mentoring we are dedicated to helping traders master consistently
successful profitable trading in the forex market which is already today by far the
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Success Trade, the Forex Subscription Service part of Forex Advisor, offers
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