THE SECRET TO MAKING MONEY
ARE YOU REALLY FIT TO TRADE IN THE FOREX MARKET?
FOREX trading is becoming more and more popular among individuals of all walks of life.In the thoughts of many,it would seem from the outside that it is an easy option to get easy money,quit your daily job,and start your path to the rich and famous gallery.However,this is not true.Although you now can start trading with a very small amount of money,you also need to possess some basic elements of personality and character that are paramount for a successful career as a FOREX trader.FOREX trading should be treated as a business.It is an investment venture.Unfortunately,most people who throw themselves in the market without any previous preparation tend to treat it as a lucky gamble and end up with an unpleasant experience. Before attempting to start trading,especially on a live account with real money,you should evaluate your motives and capabilities:
●Are you willing to apply yourself,and do you have some spare time to
learn and prepare yourself thoroughly?
●Are you just looking for easy money,thinking that you’ll get rich quick?
●Are you capable of following rules and discipline, leaving emotions
out of your decision-making processes?
●Are you clear about how much money you will allow yourself to
invest and how much you can afford to lose?
TRADING PLANS
What is a trading plan?
A trading plan is a complete set of rules that have to be defined before starting to operate in the market. It should cover every aspect of your trading in detail.
Building a trading plan, however, is not an absolute guarantee that you will succeed, but it has all the elements necessary to prevent things from going wrong or bring a solution when they do, providing you with the tools to react in the best possible way to any possible outcome. Markets can’t be controlled, but you can control yourself.With a trading plan,you are establishing control of the most important part of your trading the trader.The number one reason FOREX traders do not succeed
is the fact that they did not build a trading plan.One of the benefits of a trading plan is that it simplifies your trading because you will have a defined sequence of rules to follow one after the other before opening a trade. You will be able to control yourself and establish a discipline, which, in turn, will help you to leave emotions out of the picture, making it easier to monitor your trades and detect any mistakes
much faster. You can review your plan at any time should it bring about unexpected results, and you can check to see if you are indeed following the plan based on the rules or if any of the elements of the plan have to be redesigned.
BUILDING THE PLAN
You should adapt your trading plan to your trading style, personality, skill level, and availability of resources. It is important to be totally honest when you are defining the plan,including most especially your emotional and psychological issues.
THE COMPONENTS OF A COMPLETE SYSTEM
A complete trading system covers each of the decisions necessary for successful trading:
Markets:What do you want to buy or sell?
Position sizing:How much do you want to buy or sell?
Risk management:How much can you afford to lose if things go wrong?
Entries:When do you want to buy or sell? (This would include market hours and possible news releases.)
Stops:When do you want to get out of a losing position?
Exits:When do you want to get out of a winning position?
Strategy:How do you want to buy or sell?
Time frames:How much can you expect to win from a particular entry?
In addition to the general plan, you also should elaborate a more detailed
checklist to ensure that all these elements are being taken into account.
Here is an example of a trading checklist that you can use before entering a trade: Before entering a long or a short
position:What is the market (e.g., EUR/USD, GBP/JPY, or gold)?
Strategy:What are the main indicators and secondary indicators?
Risk areas:Are there bars or candlesticks that show risks for your position?
Breakeven price: Where would your trade be at breakeven, with no gain and no loss?
1.Identify the actual market position in relationship to previous activity
by checking higher time frames (daily chart).
a.Prices are not near a long-term resistance or support.
b.Prices are not in congestion.
c.Prices are not overextended.
d.Prices are not near the high or the low of the previous day.
e.Check the news and economic reports.
f.Check possible gaps on weekends and holidays.
2.Identify the candlestick or bar in which you will be entering the trade so that you can confirm a potential future direction of the trend.
Alternatives:
a.Long = Main trend is rising up with a downward swing on the main indicator greater than the two previous downswings. Short Main trend is falling down with an upward swing on the main indicator greater than the two previous upswings.
b.Long =The secondary trend is going down and comes back up in the same direction as the main trend.
Short =The secondary trend is going up and comes back down in the same direction as the main trend.
c.Long=The secondary trend is going down and comes back up in the same direction as the slope of the moving average.
Short =The secondary trend is going up and comes back down in
the same direction as the slope of the moving average.
Risk management:
3.Buy entry price: Buy when the prices are above the high of the signal bar plus 1 tick.
Sell entry price: Sell when the prices are below the low of the signal bar minus 1 tick.
4.Initial risk price: Long= Risk set to the swing low (minus 1 tick) of the signal bar or
of the last three or four bars depending on the time frame.
Short=Risk set to the swing high (plus 1 tick) of the signal bar or of
the last three or four bars depending on the time frame.
Long=Set stop to breakeven (entry price) after a range of four bars
above the entry price.
Short=Set stop to breakeven (entry price) after a range of four bars
below the entry price.
5.Never let a positive trade become negative!
6.Exit strategy:Take profit.
Alternatives:
a. Using one lot =(or mini- or micro lot)=Take profit at about 60 percent of the average price range.
b. Using two lots=Take full profit in one of the lots. Trail the stops using last short-term supports as a guide.
c.Using three lots=Take full profit in one of the lots. Trail the
stops using last short-term supports as a guide. Keep the
remaining positions open until a reversal signal shows up or
the end of the trading session.
How many of you really plan your trades by writing all your rules on paper with so much precision?
You have to define what(entries and exits)you are going to do,when(the signals of your strategy or system) to do it,and how(risk management rules and other details). If you don’t plan carefully and follow your own fixed rules strictly, the trades you’ll initiate will be wrong even if their outcomes are positive,and paradoxically, if you follow your rules,they will be correct even if they bring about a loss because you will have been sticking to your plan. Another important part of a trading plan is to keep a detailed record of all your trades (winners and losers):entry price,exit price,date, time, stops and targets, indicators that you used, signals taken, etc.
Why did you take the trade? What was your emotional state at that moment? What were the environmental conditions at that moment,positive or negative?
(Also include interruptions, time of the day, physical condition, etc.)In this way, you can easily determine the weak spots and correct them later on, as well as reinforce the strong elements so that they can represent a greater asset as you go further in your trading career. If you don’t do this,you will be swinging in the hands of luck, which is the same as saying that you will be just gambling blindly.Before taking a trade,evaluate your skills. Have you tested your system,and are you confident about its results? Are the signals easy to understandand follow?
Prepare yourself psychologically.
How are you feeling? Did you eat and sleep well? Are you ready to trade?
If you are not totally focused and ready to confront the daily challenge
of the market, it is better not to trade because you will be prone to make
huge mistakes.
If you feel tired or sick or are angry,worried,or distracted by other personal issues, you will be unable to focus and follow your discipline rule by rule.Define your risk level. How much money can you risk on a particular trade? You shouldn’t risk more than 1 to 3 percent of your equity on each single trade depending on the situation. Is the trade riskier than average, or does it have great potential to create greater risk? When should you stop?
What is the total daily maximum risk you can allow? How many losses will
you take before you stop trading for the day?
Define your goals. Establish a realistic ratio between risk and reward,based on your strategy and risk appetite. Clearly state which is the highest risk and smallest reward your strategy allows after evaluating your usual win loss ratio. Carefully check what the potential profit expectations are based on the time frame you will be using and the minimum stop loss required for optimal safety.The risk should be lower than the reward expected,although this will depend heavily on your particular system.
For example,a scalping strategy with a 90:10 win-loss ratio will allow up to a 3:1 risk ratio and still be very profitable(winning trades being one-third of losers),whereas a system that yields fewer winners but a potential for much longer runs would need the ratio to be inverted(usually a 1:1.5 risk ratio is the smallest that should be allowed).
Investigate the win-loss percentage that you need to break even,and base your calculations accordingly.
Set your goal in points and also in money to be made (or profit percent-ages on your equity)daily, weekly, monthly, and annually.
Evaluate the economic situation that’s going on. Check the financial news, and be alert about economic news releases.
How are the markets doing? Check also stocks and indexes that offer a good perspective on market mood. Wait for news release figures before placing a trade because they usually affect the market, causing random and contradictory moves. You should wait at least a half hour after every market open and not trade a half hour before any market close, as well as at least an hour later than a significant economic release.Prevent technical issues. Check that your Internet connection and computer are working properly. Perform routine maintenance daily, clearing
memory and temporary folders. Be sure to have in place the utmost security software (i.e., antivirus, anti spyware and anti key loggers)to protect your account data. Prepare your trading charts and indicators so that all the signals and support/resistance levels are seen clearly,and check that the sound volume is appropriate if you use sound alerts.
Make sure that you will not be interrupted or distracted during your trading activity either by other people(turn off the phone,TV,or radio if needed,and close the door of your trading space)or by other activities you could attempt to do simultaneously (no Web surfing,chatting,or even reading FOREX forums while you are trading).
Have a clear set of rules for entries and exits. Except in the case of scalping,where entering a trade also has to be very precise,exit rules are more important than entry rules.Set the appropriate fixed stops, or get out at the level you have planned
if you happen to be using mental stops. Don’t make the mistake of letting losses run in the hope that the market will come back. If a trade is wrong,take the loss, and move on.You will still be making profits if you limit losses without looking back and manage your risk conservatively, even if your winning trades are less than your losing ones. Mental stops have to be written down even if you don’t place them physically on the platform. You can set a line on the chart at that level to help you react at the proper moment.The same goes for target profits. You should know where to lock the benefits and set a written target price, either on the platform or as a first goal when using several contracts or trailing the stops thereafter. When you get there, take a partial profit on your position,move the stops to break even in the rest, and trail the stops using your preferred method (automated or manual). Know your signals and system well. Your strategy should be simple so that you can make a fast decision and not struggle with a series of conflicting signals.Too many conditions to be met will lead to trade paralysis. When conditions are me t you enter the trade without any doubt or hesitation. Since you have already tested your system and know its potential,it doesn’t matter if the trade is going to be right or wrong because you rely on the probabilities of the strategy and thus are confident about the overall outcome.
Track your performance. Record your winning and losing trades with the same detail and care. Go back over past trades, and review what made them right or wrong. Good decisions will be reinforced, bad decisions will be analyzed,and the lessons learned will prevent you from making the same mistakes again.
Try to write down all the details of your trades, along with any comments about what led you to open those specific positions,your mood,the time of day,other circumstances, and general prevailing conditions. Keep track of the draw down (not only the net draw down,which is the sum of all lost positions,but also the ongoing floating draw down while your trades are still open).
Keep a trading journal in which you reference all those details for further study.
Professional traders treat their trading activity as a business.This is paramount if you really want to trade full time and be successful at trading in the currency markets. You also need to know and accept that you can’t always win,that losing trades are a necessary part of the picture in the FOREX. It is important to let your profits run and cut your losses short,and the accuracy of your own money management is what will bring about success in the end.
RULES AND DISCIPLINE
You might think that it is only necessary to have a winning system in place to succeed in the FOREX market. But are you able to follow the rules of your system exactly, trade after trade? A good system certainly is a positive edge in ensuring your success, but
there is another,more important element that has to be present: your discipline and steadiness in executing the rules by the book without adding, changing, or omitting parts of the strategy. Tested and proven winning systems include a series of rules as well as a series of losing and winning trades that have to be brought to completion. Not everyone is prepared to assume such a discipline because it requires changing some of your ingrained habits.
ATTITUDE TOWARD LOSING
In the everyday life, losing is seen as a bad thing. In the FOREX market,losing is part of the equation that leads to a successful result. The FOREX is a zero-sum game, where no additional resources are created and where someone’s loss is another trader’s win.
GROUP MENTALITY
Don’t let others influence you. In the FOREX,you are on your own and can’t depend on the decisions of others or other people’s points of view. You need to develop your own system, which will be based on successive experiences,trial and error, until you are satisfied with the potential results. You are the one watching the charts and feeling the market.Don’t confuse this with being part of a network of like-minded investors. The James Dicks FOREX Network is just that individual investors sharing ideas, strategies, and stories on the market,individual currency pairs, etc. In the end, the trade decision is yours,but what I have found is that discussing trades that may be setting up can provide an added benefit when it ultimately comes time to place the trade.Make sure that you don’t talk yourself out of a trade. Nine of 10 times if you follow your plan and go with your gut, you will be right,even if the trade goes against you. Moreover,you don’t have to be right all the time. In fact, with good money management, you can be right just 34 percent of the time and still make money in the FOREX. This is better than a coin flip. Focus on your own opinion. Of course,you can compare different approaches to the same situation, but in the end, you are the one who will make the decision and the only one responsible for your trading.
RESPONSIBILITY
Be your own leader; make your own the rules! FOREX markets are a force made of orderly chaos,a powerful mix of human emotions, economic circumstances,and strong financial interests. The market is always right because it moves as it wants and when it wants and has no fixed rules by itself. The only stable data on which to depend are your system and you,the trader,and your ability to make the rules and to change them as many times as necessary to adapt to ever-changing market conditions.
WORKING HARD VERSUS WORKING EFFICIENTLY
The more you work will not make a difference in your results. Unlike most working situations, in the FOREX what counts is how efficient you can be,not how many hours you spend in front of your charts.
LETTING PROFITS RUN
Holding to a trend can be difficult if, based on the previously mentioned
attitude of expecting results proportional to the effort made, you think that
it is too easy and can’t accept huge profits. Most traders “hit and run” and
don’t have enough discipline to wait patiently for a trend to develop.
Instead, they cut their profits as soon as they appear in fear that they might
go away. I have seen this many times, and I too am guilty of. It is a difficult
attitude to overcome,but stay focused,and you will. Traders often find themselves in a trade that is going against them and completely forget about their trading plan. They let their emotions get the best of them, saying such things as, “It will come back,” “I have a feeling about this,” and“I will cost-average down or double my position so that I can make money when it comes back.” This is not good; it is the wrong state of mind. What ends up happening is that you have a huge loss, and then, when you place your next trade and are up a few dollars,you start saying,“I’ve got to take money off the table now,” and thus put yourself in an upside-down money
management position, willing to risk hundreds of dollars to gain only a few. There are some basic rules that never should be broken.First of all, you need to have a clear objective and know what you really want to achieve.Without a goal,it is much more difficult to obtain a result because your efforts will lack direction and focus. Stating your goals and milestones clearly will help you greatly in achieving success, one step at a time.Most traders start with the sole purpose of just “making money”as much and as soon as possible. However, the other side of the coin has to be planned as well, and risk has to be defined even more carefully because it will make or break your final results. Goals also have to be realistic.Your rules should be measurable and achievable in terms of potential returns and time and resources available.This is not to say that you can’t aim big, but don’t expect either to become a millionaire by the end of the month if your available equity is only $10,000. Aiming above your real capacities will only lead you to frustration and failure.I often ask my students, “How much return would you like to make on your investment”I then follow up by saying,“Let’s be realistic. Before there was the FOREX, what would you have been happy making on your money in the stock market” You would be surprised; 5 to 12 percent is the usual reply.That’s right, not an unrealistic goal. Think of it this way: The
rule of 72 says to take 72 and divide by the rate of return you would like to earn. Thus 72 divided by 20 percent 3.6. This is the number of years it would take to double your investment3.6 years. This is a number I like to strive for because doubling my portfolio every 3.6 years is certainly something I can live with.With that said, people make huge returns in the FOREX. I see it every day. In fact, I live it as well. But be realistic. A 20 percent return means that it takes 3.6 years to double your investment. Thus a 40 percent return means that in 1.8 years you will double your money. What happens if you make 40 percent in one year? I would suggest that you may want to be even more conservative with your trading for the rest of the year. If you end the year at 40 percent, you should be very happy. In fact, if you end the year up 20 percent, you also should be happy. Keep that in mind when you are placing trades and developing that realistic goal you are shooting for in terms of return on investment,don’t get carried away trying to make 1 percent a day or more because with risk comes reward, but so does the potential for loss. Just think smart, and stick to your plan.
NOW YOU NEED A SYSTEM
Whether you adopt an already defined trading strategy or choose to develop one yourself with the various technical tools at hand, you will have to follow its rules and make sure that all the needed steps are included when to enter,when to exit,and what targets and stops it allows.This is why having a mentor, someone who has already paved the way,a leader in the field, is important.I am confident that after reading this book,you will want to learn more,and I know I can help you by sharing with you my FOREX journey. If not me, then make sure that you get someone to help you along the way. You have to be confident in your system, know all its details perfectly,and have practiced with it enough to be certain of its probable results. The rules have to be simple and clear, and you should have the discipline to follow them to the letter.Trading impulsively and randomly,led by the flow of your emotions,and without a precise plan will only lead to negative results.
Your system should include a solution for every situation that you might encounter in your trading.In this way,the results you obtain from your testing will be accurate, thus adding to your confidence and ensuring that you will be trading with consistency in any situation that might arise.In addition,you should have answers that address all the possible scenarios that can develop and have a precise action plan prepared for each of them. If all the possible circumstances that can arise are not anticipated and planned for,an unexpected event could cause you a huge loss. Every thing should be predictable,even the situations that you couldn’t even think might happen.
Here’s a list of some of the most basic rules:Stay with the trend. Identify as soon as possible the main trend and its subsequent intermediary cycles to minimize the risk for losses. As is often said, the trend is your friend. If you are going with the
trend,any minor retracement will not affect the final result when it comes back in your direction. If you are counter-trending, be careful because the price can move against you and possibly never recover as it picks up with the long-term trend. In a bullish market, go long. In a bearish market, go short. In a sideways
market,it is better to stay on the sidelines and wait for a better
opportunity.
Buy strong,sell weak.
Identify which currencies are showing more strength and which ones are weak,and try to pair them up.
Buy low,sell high.Always try to get the best possible price both when
buying and selling. Never sell into a support level nor buy at a
resistance point.Let your profits run, and cut your losses short.
Control your fear of losing when you are in a winning trade, and learn to develop
patience so that a trade can evolve to its full potential. Conversely,as soon as a trade has proven to be wrong, don’t hesitate for a second in closing it according to the rules you have defined for your risk level. Don’t fall into the temptation of widening your stops because last time you were stopped out the trade went back in your direction. Past performance is not a guarantee of future performance. Your system might have been performing very well, and suddenly there is a change in the market behavior. Be aware of the signs of such a change, and adjust your system accordingly. Markets could have been trending for a long time, and they now are consolidating
sideways. Be sure to have several strategies ready to use in each
different market condition. Have an alternate power supply and supplementary Internet connection, as well as the phone number of your broker’s dealing desk,ready at hand in case you experience an unexpected power outage, server disconnect, or general Internet failure. There are now several options through mobile communications that allow traders to open or close positions that could be at risk in such an event. Know exactly what to do in case you are unable to trade, if you
happen to lose a certain percentage of your account, or if the markets are closed and you need to get out of your current positions. Develop your patience. Not having a position is also a position. There will be moments when the best trading approach is to stay on the sidelines and wait patiently for a setup to develop. Never jump into a non planned trade out of impatience or boredom. Wait for pullbacks to enter if you have missed the initial entry. The market moves in waves, and by waiting for the correction, you will have the odds in your favor as to the necessary stops. Reaching that rate-of-return goal does not have to be done over night. In the FOREX, it could be reached quickly, allowing you to sit on the sidelines the rest of the year if you choose to. Have patience. Let your trade breathe and develop fully to its complete potential.
Inversely, be impatient and eager to close any trade that is proving itself wrong from the beginning. Capital preservation is a must. Don’t count and cry over missed pips.
Missed money is better than lost money. There always will be a better opportunity to enter the market.Add to your winning trades; never add to your losing positions.
Averaging down is down is a very risky practice that could make you lose much more than you planned initially. Inversely, when a trend is developing successfully, consider adding to your trade after each small correction.
Never risk more than 5 to 10 percent of your equity total and not more
than 1 to 2 percent on a single trade.In this way, if you happen to hit a losing streak, you still will have more than enough capital left to take losses back to breakeven.
Avoid trading at news time and when markets open or close. To o much random volatility can kill your account very fast. Wait for the market sentiment to settle down, and go with the flow as soon as the direction is clear. Trade only when conditions are at their best. Periodically review your past performance, and redefine your plan if needed. Adjust your money management and position size according to your profits or losses on equity. Evaluate your results, and compare them with your goals. Readjust your goals if necessary. If you experience a heavy loss, take some time off to reevaluate the situation and clear your mind. Stop trading for a few days.
Absolutely do not trade for revenge! You shouldn’t allow yourself to fall into the need of getting your money back as soon as possible. Instead, examine the reasons that caused the loss,recheck all your rules and trading plan, and take some rest to be
able to come back refreshed and with a clear focus.Match your position properly to your account size. Risking more than the recommended percentage can increase your gains tremendously,and you could be tempted to do so because the high leverages and small margin requirements of some brokers allow you to exceed your capabilities. Remember that it works the other way around as well: Losses can become unmanageable very soon. Think and plan for a long-term career.Learn to read chart patterns and price action. Draw trend lines, and study and analyze the market’s past behavior and present trends.Watch carefully how price reacts on supports and resistances. Try to understand what happened at every point of the price wave. Consider scaling out of your position when it is profitable, if its size
allows.In this way, you take some profit at an appropriate moment and still remain in the market for the long run, should it happen. If the trade then goes against you, at least you took some profit at a good point.When being extremely successful, proceed with extra caution. Reinforce the discipline or, better, take a day off from the market. Overconfidence can occur insidiously and you could lose in a few hours what took you several days to build. Keep your profits, and stay alert!
HOW THE MARKET WORKS
A market is a situation where there is an imbalance in supply and demand
between its participants that results in continuous and unpredictable fluctuations in the exchange rates. What causes the market to be so unpredictable?
●Different traders interpret the same fundamental factors differently.
●The intents of various market participants are different, as well as their reasons and purposes for conducting a transaction. Reasons may include hedging, purchase of currency with the purposes of financing an international commercial project, or a bargain for a speculative profit.
●Since the market is simultaneously influenced by the various
fundamentals and contradictory forces,the final reaction can vary,
causing fluctuations in the market,and not comply with the expected
reaction to some fundamental event or process.
In addition,even powerful financial institutions can make mistakes because institutional traders are just people like you and me. This also adds to the randomness of the whole picture.
RULES FOR WORKING WITH THE MARKET
Try to have no particular bias about the market’s future behavior. Follow your own system and rules, and react to the signals the market is giving you(trade what you see, not what you think). Examine the signals given care-fully, and be aware of those that go against your point of view instead of looking for signals that confirm your point of view.Never try to predict. Listen to what the market is really telling you, here
and now. Forecasts (especially long-term ones) are useless in an unpredictable and changing situation such as the FOREX market. Be here and now, and trade what you see. The need to be right is a waste of energy and time, which you should invest instead in focusing on real-time conditions.Moreover, if your predictions turn out to be wrong, this would add unnecessary stress to your emotions.There are no guarantees of success independent of your own past performance in this or any other professional activity.Logic and common sense will not work; for example, the same results in fundamental news can bring about completely opposite reactions in different time spans because there are too many details in between that exert an influence on market sentiment. Markets will react based on their interpretations of fundamentals more than to any specific figure itself. Most FOREX transactions are done as a result of international business and commerce. The FOREX is used much less as an investment vehicle,although there is much room also left for speculation. Commercial participants at the international level only want to produce and sell their products.They are seldom interested in all the details about exchange rates. Banks
initially only provided the exchange rate between currencies. They bought the foreign currency at one rate, added a commission for their services (the spread),and sold the currency to the customers at a higher rate.
Thereafter,based on the growing volume of all those commercial
transactions,bank traders started to speculate on future currency rates.They then could give a quote at a certain rate and hold the transaction until another one came by at a better price. Given these practices, the banks were able to expand their profits. On the other hand,though,the liquidity redistribution made some transactions impossible to complete.For this reason, the market was opened to non bank and noncommercial participants. More orders started to flow into the market from less experienced participants, from which banks could make an additional profit, providing a better liquidity distribution for their international orders.
The largest proportion of transactions in the FOREX market is performed by the largest central banks from major countries through a series of communication agreements. This is also known as the Inter bank,which has no physical location. All of the central banks are independent of each other unless the need arises to execute a transaction (i.e., the exchange of each country’s currency), and then they interact.
Since it would be difficult for each other to keep track properly of all
the transactions made and resources available, the electronic broking service (EBS) was created as a central server that allows interconnection between all the computers of the banking network.Through this service,the banks can show each other the prices at which they are willing to sell or buy any other currency and their own, creating in effect the Inter bank market. In itself, the Inter bank is not a market, nor is it a market maker. Rather,it is an application that is used to see the various bid and offer prices from all the banks involved.The EBS the Inter bank is the first component of the currency markets. The next component is every bank in itself because any one of them can buy or sell currency to any individual, institution, or business that needs to exchange one currency into another.The third component is the sum of all the retail brokers (i.e., market makers) and electronic communications networks (ECNs). A market maker is usually associated with a bank from the second level, which will provide liquidity for all its transactions. Since these are retail institutions, it is not easy to know how many liquidity providers with whom they are associated.Very often, small transactions are kept in house and never reach the Inter bank market. Orders are matched and resolved internally,and if needed(depending on the number of lots required),they can be transferred to another market maker or placed directly with the liquidity provider.
This structure allows the market makers to accept negotiations with smaller amounts,such as mini and micro lots. On the Inter bank market, the smallest amount is the standard lot (minimum $100,000).A market maker is the counterpart of almost all its customers’ transactions. ECNs, on their side, are automated brokers that route your orders to the best price on the platform from multiple liquidity providers.These liquidity providers may be banks or other traders connected to the platform.The
deals are performed directly on the Inter bank without any intermediary dealing desk.
FOR EVERY BUYER, THERE MUST BE A SELLER
You would think that in a market such as the FOREX that moves around
such a large amount of money, liquidity would never be a problem. How-
ever, the truth is that there has to be a seller for every buyer and a buyer for
every seller for transactions to be executed. When orders are too large at a certain price,exceeding the opposite orders for that level, the price has to move to a point where there is enough counterpart interest to match them. Prices that are listed on the Inter bank through the EBS show how much and at which price banks agree to buy or sell a currency. They choose the price and are in no way forced to transact
if they believe that it is not in their best interest to do so. The volumes of bids and offers are shown for each price level, and of course, there are prices at which there are none. All these constitute limit orders placed in the market. Thus, at the moment a market order for a certain volume is placed at a given price, it will have an effect on spreads and will move the price accordingly. Depending on the volume and level of the opposite orders available, the price will settle at a higher or lower level, immediately, causing a widening of the spreads and sharp changes in prices, because there are no intermediary orders to absorb the current quote. Later on, another
order can enter the market at an intermediate price between the widened bid-ask spread, and thus a new change in spreads and prices will occur.
Slippage means that there is no one to take the other side of the transaction at the exact moment the order is placed in the market. You are being
given the nearest best price according to the volume of matching orders.
Changes occur very fast, especially at news time, because higher volumes enter and exit continuously. Thus you can be quoted a price that is not available any more less than a second later.This is why you get requotes or invalid prices because there is no more interest left at that particular level.
The spread is defined by the price levels where there are effectively existing bids and offers. If all the intermediary limit orders were canceled at the same time,the spread could widen because a higher offer and lower bid could exist at that moment.This only means that nobody is agreeing to effect a transaction at any price between those levels. Spreads and slippage are a natural part of the trading scene and are the result of agreements or refusal to transact between market participants and thus are impossible to avoid.
PAPER TRADING
A FOREX demo account is basically a practice account that allows traders
to use virtual credits instead of real money, but with actual real-time price
feeds and conditions, on the FOREX market. It is important for every individual who wishes to invest in the currency markets to acquire a solid grounding in basic financial concepts and to learn as much as possible about technical and fundamental analysis. Then practice as needed to apply this knowledge in a live situation to make sure that it is understood. Paper trading (or demo trading) is often overlooked because most traders are impatient to jump into the market and gain their first real-money profits. However, nobody should be trading with real money until they have at least obtained good results consistently in their demo account with real-
time conditions (not only back testing). Of course, being able to get excellent results on paper trading will not guarantee that you will have the same outcome when you are trading with real money because the emotional part of trading doesn’t show up (or at least not at the same level) until you are using real money. However, you
will be able to determine if your strategy or system works and gauge its
probabilities while you learn all the mechanical details of the platform.
This is very important because not every trading software system offers the
exact same features, and styles of trading allowed will differ a little from one broker to another. All retail brokers allow their potential customers to test their platforms,
some for a limited time and others with no limited. Precise knowledge of
the software is needed to be able to act as fast as possible and avoid making
mistakes. I have integrated a demo account into my AI software platforms
to help achieve a more realistic trading environment.
You also can experiment with various trading styles and different brokers in different time zones, test various systems simultaneously, and
define more precisely the trading style that suits you best. There also are
different styles of platforms. Some you can access directly online; others
need to be downloaded to your computer. Most of them integrate news and charting packages in addition to the price feed,as well as a history and reports of your trading activities.It is a good idea to try several of them so that you can master all the different mechanics. For example,some allow you to place contrary orders on the same currency pair,
whereas others use those contrary orders to close an existing position.Some require a single margin or even no margin on two contrary positions,whereas others require a margin guarantee on both the long and short trades. With certain platforms,you will be able to do a stop and reverse with just one click by opening a contrary position of double the value of your existing position or plan a detailed sequence of interdependent orders to be executed if the first condition is met, whereas others won’t have this feature.
With my AI software, I have had the luxury of thousands of traders over
the years providing feedback as to what features they like and don’t like,
what enhancements increase the efficiency of the platform, etc. This has
allowed me to build what I believe to be the single best, most robust and
flexible trading station on the market. If you want to learn more about it,
you can visit www.cents0.tk
The following are the basic questions you should ask before you attempt to trade live with your own real money on any platform:
1.How do I to place a market order?
2.How do I place a pending order (buy/sell limit or buy/sell stop)?
3.How do I set a stop loss?
4.Are automated trailing stops available, and if so, are they on my side
or the server’s side?
5.Can the target profit and stop loss be set at the moment of the entry,
or do they have to be set afterwards?
6.Are the spreads on the platform fixed or variable, and if so, what is
the usual range?
7.What are the swaps (overnight interest) earned or paid on open
positions that last more than 24 hours?
8.What is the lot size that can be traded (standard, mini, micro,
or nano lots)?
9.Can partial lot sizes be used (e.g., 0.45 micro lots, 1.2 lots, etc.)?
10.Does the broker offer the possibility of calling the dealing room
directly by phone if my Internet connection goes down?
11.Is live support available?
12.Are the trading history and reports clear enough to be used afterwards
for tax purposes? Although this is a responsibility of the trader, you
should be able to get manageable reports under the point of view
of accounting.
DISADVANTAGES OF DEMO TRADING
Most of the real circumstances of trading can be easily overlooked when
you are paper trading.Unless you commit yourself to treat your demo
account in the same way as you would a real-money account with the same
set of rules and discipline and a starting capital that is proportional to the
one you will be using when you switch to a real account, the following are
the most common pitfalls that you might face:
1.Careless handling of real risks. Losses that you may incur are not real losses, so you won’t be able to learn to deal with your real emotions when facing a loss.
2.No fear is involved. Whenever you start losing, and even if you get a margin call on a demo account, you simply can start a new one all over. So you won’t be able to learn how to handle the fear of losing,which is a very powerful emotion in real trading.
3.No real commitment to develop a concise money management.
Since you can chose to trade with any huge amount, you could be tempted
to take excessive risks because, in the end, it is not real money, and
you could develop a bad habit that will continue when you start on a
live account.
4.You can develop greed.Given the great amounts that can be involved in a demo account and the larger position sizes that you can trade because of this,if you start making lots of money, you could become greedy and be under its control. To avoid those pitfalls, you must trade on a demo as if it were real money. Forex ample,if you are planning to start trading live with equity of $2,000, open a demo account with that same amount of funds.Trading a higher amount would be fun and boost your ego for a while,but it wouldn’t be applicable thereafter to real life.Add to this the fact that you might lose your sense of proportion and make huge mistakes afterwards. Paper trading should be just for learning purposes. It’s also a good way to test a system or strategy to see if it really works before going live with it and losing your money. Keep in mind that if you are unable to produce acceptable gains on a demo account, chances are that you won’t on a real money account either.The good part of a demo account is that you can make all the mistakes you need to acquire experience and confidence,which you then will be able to apply under real conditions.FOREX demo accounts are also very useful for experienced traders,who employ them to bring their trading strategies to perfection, test new changes without risking funds, or practice a new system while evaluating its results in total safety.
the source by : JAMES DICKS
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