Discuss About The Currency Trading For Dummies John Wiley.
Forex market is the market where currencies are traded with each other. Trading involves the buying and selling of currencies. Currencies are traded in pairs e.g. EUR/USD
When you predict that the EUR currency will rise against the USD, the next step is to buy the EUR. If the EUR actually gains value, you end up making some profit. On the contrary, if the EUR loses value and you had bought the currency pair, you end up at a loss. Similarly, if with the same currency pair EUR/USD you predict that the value of the USD is going to rise, the next step is to sell the currency pair. If the USD actually gains value, you end up making some gains, but if it losses value, you end up in losses. This two situations explains the concept of making a profit whether a currency is gaining or losing value. I was faced by both situations and I confirmed it to be true. This makes the forex market to be considered the most profitable market in the whole world; with proper trading strategy, there is high potential of making huge profits.
FXB Trading (2017)noted that there are over 3 trillion USD traded daily on the forex market, and that one has to deal with risks to make some profit; no trader can make profit on all the trades entered, sometimes losses will be part of the trading. As I enter in forex trading, am quite aware that forex trading is associated with great risks. The first thing I will do is to familiarize myself with various risk management techniques that will help me in maximizing my gains while minimizing my losses. For the entrance, I will start by trading small lots where I will be risking small amounts of my virtual capital. I understand that the demo account operates in a similar way to the live account, thus I will take it seriously not to exhaust my virtual capital.
One of the most important drivers for market movement according to many analysts is that of economic news. The news have been argued by make the market move very fast within some seconds. A single movement during the news period can result in making huge gains or huge losses as well. For a start, I will first avoid trading currency pairs when the market news are set to be announced on a sooner time (say like, I avoid taking long positions for a currency pair with news expected to be announced either on the same day or the following day). In case I’ll have such a long term trade, I will always close it some hours before whether it will be at a gain or a loss. Later, as I familiarize myself with the easyMarkets platform and how it operates, I shall consider trading huge lots and risk huge proportions of my virtual capital. As soon I find a proper strategy for trading the news, I will start doing so.
One of the strategy was position sizing where I decided to trade lower lots for the trades that seemed more risky. On the other hand, I traded bigger lots for the trades that had a higher probability of success (Forextraders.com, 2016). Limiting losses was another strategy, I used stop loss to limit my losses. However, I lacked discipline in this in that I used stop loss that were risking huge amounts of my capital. Russell (2017) referred to this as a mental stop loss. The most important risk management strategy I was supposing to use but it’s like it’s not supported by the easyMarkets platform is that of buy stop and sell stop orders. This could greatly reduce my risks during news announcement periods. During the news period I could have set both the buy stop and sell stop to the same currency pair such that either of the two will be triggered depending on the direction taken by the market as directed by Brooks (2015). Another important risk management I discovered from research is that of using a trailing stop which acts as a stop loss. The difference is that in this you set a percentage by which the trade closes automatically if the trade moves in the opposite direction; also if a trade is at a gain, when a reversal occurs, the trade still closes at the same set percentage locking in some gains (England, 2012). I lacked this feature in the platform. Before I opened a position, I always checked the position the market is on the chat. I.e. whether it’s on a support or resistance area. Maliti (2014) noted that this is important determinant of the entry point.
I used the deal cancellation feature of the easyMarkets’ platform. This feature is good especially during the news period. The fee charged are too small considering the amount that could have been lost if the trade hit the stop loss. I used it to cancel a losing trade and made a smaller loss than could have been the case if I had not cancelled the losing trade. In some other cases, I never cancelled the trades because I trusted that in the long term my trade could take the predicted movement; while some reverted, others ended up hitting the stop loss.
On 24th April I missed the news on the Australian Dollar (AUD) Consumer Price Index (CPI) (YoY) (1Q). This specific news has a behavior that could have led to loss making. At first when the news were released, the AUD lost value by 15 pips on average for most of the currency pairs it’s attached to. However, this did not last for long, the AUD again gained value by more than 25 pips on average for all currency related pairs. During news periods, I would have considered employing a strategy of setting my sell stop and buy stop below and above by 10 pips, then my stop loss at 10 pips above for a sell stop and below for a buy stop. However, the easyMarkets’ Mt4 doesn’t give the option of a buy or sell stop for pending orders. This explains why even though I had a better strategy to trade the market news, I opted to avoid the news all in all. If I decided to use the limits for pending orders, I was never sure at which point during the news the market would stop and take a reversal movement. I considered this to be a risky strategy during the news periods. Even if I decided to use the sell or buy limit pending orders, I could have fixed my sell limits far above or buy limits far below the current market price such that there was a very small probability of being triggered.
On my first day of trade, I initiated a trade that hit the stop loss at a greater loss. This made me to become loss conscious because my intended goal was to make as much profit as possible. From this period onwards, I constantly watched my long term trades so as to close it as soon as I identified a significant profit level. In some cases, when a my trade moved in the opposite direction at a very huge loss, and then again the trade moves on my favor, I couldn’t wait but close the trade at the lowest loss possible or at the least gain with a fear that the trade might move back to the losing position. Considering the transactions I made, the gains are smaller but many but the losses are fewer but huge. This is a weakness clearly highlighted by Stanley (2012); most traders are winning less but losing more. This is because I couldn’t allow the gains to continue flowing to avoid the risk of losing what I had already gained; on the other hand, losses continued to flow with a hope that the trade will reverse the movement to the intended direction.
I learnt that because the platform notes that most of the traders are buying or selling a currency pair, this does not always give a good reason to enter the trade. I bought a currency pair that was said to be bought by more than 80% of the traders and still I ended up in a losing position. It is therefore better to rely on technical analyses of your own rather than depending on the market information. The most important thing in forex trading is thus to know the appropriate point to enter the market, fixing the stop loss, take profits, and knowing when to exit.
An important lesson I learnt is that, the level of my risk management was low, this is because for instance I relied on the stop loss directly generated by the platform rather than adjusting my stop loss to a level that I could only make lower losses. Even though I used to set the take profits, I never considered the stop loss to be utmost important. The major reason for this is that most of the trades I took were meant to be long term and I never expected that the trades would move to the opposite direction to a larger extent such that they would hit the stop loss. The mental stop loss strategy is not effective as it always tempts one to push the stop loss outwards as soon as the market draws near it. This is a mistake I did when trading the EUR/USD pair as I had high hope that there would be a reversal, but the market kept moving to the opposite direction.
I also learnt a lesson on not keeping so close to the platform watching when the trades makes some profit. What one is interested in during this trading is the profit. Thus, one will always be tempted to close the trade as soon as significant profit is realized. The best idea here is to set your stop loss and take profit and leave the market to move without watching it. You will eventually make huge gains when the trade hits the take profit. I sometimes kept constant watch which I have later realized it was a huge mistake. Sometimes I could watch a trade make huge gains, but as soon as I see the market start moving on the opposite direction, and my gains start declining, I rushed to close the trade. There is a time I closed a trade for the same reason, but after a small reversion, the market started moving again on the intended direction and went past the take profit I had set earlier before I closed the trade prematurely.
Conclusion
The movement of the market is not always smooth, if the market is going up, it doesn’t go up smoothly, and it has to take some reversions at different levels. There are resistance levels where the market takes time before it bypass that level, in some cases, the market is unable to push above the resistant level and thus reverses its movement. On the contrary, there are support levels, the market sometimes fall until to the support level and then takes a reversal. As per the experience I gained during the trading, there is no guarantee that the market will always take a reversal at the support or the resistance levels. Thus, it is good to take risk management into factor before entering a trade. It is essential to know when to enter and when to exit the market, simple observations are deceptive. Being successful in many trades does not guarantee that the trader won’t be losing his investment capital. One needs to have a proper risk management system in order to success in this market. Trading discipline also need to be observed. Due to the losses I made, I conclude that this market is very risky and caution is necessary since there is potential of losing an entire investment value.
References
Brooks, K. (2015). Currency trading for dummies. John Wiley & Sons Inc.
England, W. (2012). Learn Forex: How to Effectively Use a Trailing Stop. [Online] Dailyfx.com. Available at: https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/11/07/LEARN_FOREX_How_to_Effectively_Use_a_Trailing_Stop.html [Accessed 27 Apr. 2018].
Forextraders.com. (2016). Key Risk Management Principles for Forex Trading. [Online] Available at: https://www.forextraders.com/forex-education/forex-money-management/key-risk-management-principles-for-forex-trading/ [Accessed 25 Apr. 2018].
FXB Trading. (2017). Best forex risk management strategies – FXB Trading. [Online] Available at: https://www.fxbtrading.com/articles/best-forex-risk-management-strategies?utm_source=google&utm_medium=cpc&utm_campaign=SearchBrandingEN&_aid=7254&_cid=124&utm_term=&utm_adgroup=FXB&utm_matchtype=b&utm_placement=&utm_device=c&gclid=CjwKCAjwlIvXBRBjEiwATWAQIlrLtbxKxpe_1vzgjYFNeLgLIsN6Ws6fk-2jGr7n2iU5pWDVKmmZwhoCDpAQAvD_BwE [Accessed 27 Apr. 2018].
Maliti, B. (2014). Forex Trading Strategies: How to be a Super Successful Forex Trader. Maliti Publishing.
Market Traders Institute. (2018). Forex Risk Management Strategy. [Online] Available at: https://www.markettraders.com/blog/forex-risk-management-strategy/ [Accessed 25 Apr. 2018].
Rodriguez, D. and Shea, T. (2011). What is the Number One Mistake Forex Traders Make? [Online] Dailyfx.com. Available at: https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2011/12/08/What_is_the_Number_One_Mistake_Forex_Traders_Make.html [Accessed 25 Apr. 2018].
Russell, J. (2017). Risk Management Tips for Forex Traders. [Online] The Balance. Available at: https://www.thebalance.com/introduction-to-forex-risk-management-1345194 [Accessed 25 Apr. 2018].
Stanley, J. (2012). How to Build a Strategy, Part 5: Risk Management. [Online] Dailyfx.com. Available at: https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/06/22/How_to_Build_a_Strat_part_5.html [Accessed 25 Apr. 2018].
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