Three Rules For Successful Forex Trading
Introduction - There are some very simple things a forex trader can try to understand that will increase their trading accuracy from the more common 90% failure rate to as high as 90% positive trading accuracy in the matter of a few weeks with the information in this lesson.
First let’s compare online forex trading with physical currency exchange so we know exactly what happens in a typical transaction.
Just before the Euro was formed and online trading of the currency market commenced in about 2003, currency was exchanged in large suitcases with armed guards traveling over large distances to physically exchange cash for cash. These transactions were un leveraged cash transactions by companies doing international trade. This trade has evolved to electronic trading and leveraged online trading.
Currency Transaction Basics
You can still exchange physical currency on a smaller scale. If a US citizen travels to New Zealand for six months they can exchange currencies before leaving on the trip. They can exchange US dollars for New Zealand Dollars, once again this is an un leveraged transaction.
If a US citizen exchanges $10,000 US Dollars for New Zealand dollars in an unleveraged transaction, this transaction is comparable to buying one mini lot of the NZD/USD online from a brokerage platform. Except that online you would only put up $200 margin on a 50:1 leveraged transaction, this is $10,000 US Dollars exchanged for New Zealand Dollars. This online transaction is essentially the same as the cash transaction except for the leverage.
If you buy $10,000 US Dollars worth of the New Zealand Dollar there is only one way you will profit from the transaction, this is if the NZD strengthens, or the USD weakens or both, after you make the exchange. There is absolutely, positively nothing else that will influence whether or not you make a profit on the trade because you sold the USD and bought the NZD. This is true for either type of transaction, direct cash for cash exchange or the online trade because these transactions are exactly the same. The logic is exactly the same for any other pair or any other online transaction.
Rule Number 1: All traders must learn to understand currency transactions, a cash transaction versus an online transaction will tell you that they are exactly the same.
After the currency is exchanged or after the order is placed on your brokerage platform, absolutely nothing else will influence the outcome except for the individual currency strength or weakness. Yet, surprisingly, 99% of traders do not know this or don’t take this into consideration when they place a currency trade. It is actually quite astounding.
Currency Pair Construction
Traders, quite simply, don’t know what causes a currency pair to move. If you buy the EUR/USD or NZD/USD or any other pair online all you have available to guide your trade is the useless forex trading technical indicators that come with your brokerage platform. Technical indicators may be okay for scalping a few pips but you will lose as often as you make pips, and even the traders that use the indicators are never really sure. All of the other fx traders who use the same indicators use them differently. You can also lose a lot of money this way and almost all traders eventually do. Years of frustration ensue.
Rule number 2: Currency pairs only move because one currency is strong and the other is weak or both and that is the only reason, technical indicators don’t measure this. This strength and weakness is how trends form and proceed in the spot fx market. You are not trading indicators you are trading currencies.
Technical indicators do not tell you this and so traders fail continuously with no end in sight. Why? ........ because the indicators came with their brokerage platform so they presume that they work without questioning them. It’s time to question them and ask for proof, unfortunately you will not find any. After you exchange currency in a cash transaction before leaving on a long trip overseas you don’t start looking at technical indicators, you look at the exchange rate, that’s it.
Currency traders fail because they do not understand the basic construction of a currency pair either. When a new currency trader looks at the EUR/USD for the first time they view it as a single unit and immediately start to install technical indicators on the pair. They do this because the indicators are on their brokerage platform and easy to access. This is absolutely, completely dead wrong and will kill your trading on day one.
The first thing any fx trader must realize is that the EUR/USD is not one single instrument but it is actually two separate individual currencies. The Euro and the US Dollar are two separate and distinct individual currencies each with its own fundamentals, characteristics, and sentiment or direction, and they act independently of each other. These two independent currencies form the pair that is the EUR/USD. It’s like one plus one equals two, you must know what is going on with the Euro all by itself and the USD all by itself to know how to properly assess the EUR/USD. Technical analysis indicators will never tell you this and they are worthless.
As simple as it seems forex traders have always looked at a currency pair as one single unit rather than two separate currencies. They know in the back of their minds that it is always about the strongest versus weakest but they then summarily ignore this fact and everything about their trading begins to unravel and they can’t even paper or demo trade anymore because the “group thinking” of technical analysis takes over.
Rule Number 3: Not recognizing that there are two individual currencies in each pair will automatically kill off almost every forex trader before they ever place their first paper trade.
Currency pairs are constructed with the base currency on the left and the cross or counter currency on the right. On the EUR/USD the EUR is the base currency. But it is so simple and obvious that new traders never consider it, however this can be immediately fixed.
Each currency pair has two separate currencies that must be analyzed separately. You are buying one currency and selling the other when you make an fx trade. There is only one way to make a profitable trade. When you make a buy entry the base currency must rise or the counter currency must drop or both and you can make a profit, literally, on every trade and do so consistently starting in the first week you begin to do this.
Technical Indicators Don't Work
Technical analysis and expert advisors (robots) are for brokers, not traders. Technical analysis does not work and there is no proof whatsoever that it does work to make traders profitable. It is impossible for technical analysis to work on a currency pair because technical indicators don’t provide any information about the two individual currencies that make up a pair. Technical analysis does not make any individual currency measurements. Technical analysis is totally deficient and actually pretty awful if you think about it. This is a very big problem, and every forex trader seems to ignore the basic fundamentals of currency pair construction, causing a lot of damage to their trading.
Forex traders persist in their use of technical analysis and it is to their own risk, peril and eventual demise. Why? Because it’s the self fulfilling prophecy of the forex industry and the use of technical analysis is pushed on forex traders on the trading platforms they use. In this regard brokers are somewhat responsible because they give tools to traders that they know don’t work. Forex traders need to stop kidding themselves about technical analysis, it does not work and we all know it. Wanting it to work is not good enough anymore, not after 8 years of retail forex traders' failures.
There are now some simple but novel tools like The Forex Heatmap® available to help forex traders be profitable that measure currency strength and weakness, analyze the parallel and inverse forces in the forex market with real time currency correlations that are reliable. Demo trading with these simple techniques can be performed by any trader, even new forex traders and successful demo trades will occur consistently within the first week and going forward for the long term.
These systems can be mastered by almost anyone including people with no forex trading experience. No more useless forex robots or technical indicators that have been forced on forex traders by the industry. Using these simple tools along with a solid trend analysis using multiple time frame analysis of a large number of pairs and most forex traders can begin to make pips consistently and almost daily in a reasonably short period of time.