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Trading For A Living

By admin | Filed in Forex Investments

The popularity of forex trading has reached unseen heights in recent years. This may be attributed to a number of factors which all helped forex trading become a lucrative alternative to individual investors looking to place their money on newer, more profitable investment options.

Professional Trader

And so, a newer type of professional has evolved – the professional forex traders. These professional forex traders do their forex trading for a living. Some call them day traders. Although the term day traders can be attributed to the then-popular stock traders during the dot-com boom when every stock investor gained profit for almost any kind of stock that he buys into. It was the time of the sky-rocketing stock market. Anybody who invested in the stock market made money. Even the mutual funds which heavily invested in the equities market could not go wrong with their choices of stock portfolio.

But when the market crashed, everyone was brought back to earth. When the dot-com bubble burst and the stock market crashed for the first time in this information age, investors had a taste of reality check.

This would be repeated for a second time in more recent history when the real estate bubble was the one which burst. Before this second crash, the stock market was again soaring to all time highs. All equity investors, especially real estate investor were so happy that prices kept going up and up. Gains were continuing to flow in. It seemed like an endless party for everyone.

But then we all know what happened.

All throughout these times, there have already been day trader in the stock market. These day trader did nothing for a living but trade stock during the day. They were capable of gaining enough money to afford living off the profits they earned from stock trading.

The Other Type Of Investors Who Were Trading For A Living

But aside from these day traders who invested in the equities market, there was another set of individual investors which were slowly becoming popular. These were investors who also did trading for a living, but they did not invest in stocks or mutual funds. The invested in currencies and were forex trading for a living.

The bubbles which burst in the recent financial turmoils proved that investing in equities had its limitations. Actually, everyone already knew of the limitations. Everyone who invested in the stock market knew that for one to profits in stocks, prices of stocks must go up. You buy stocks, wait for its price to climb, sell the stocks at a profit. It was pretty simple, And everyone was able to do it. It was just a matter of time before the prices for most stock appreciate since the market was experiencing an extended bull run which brought the indexes to new heights.

Everyone knew this limitation but a few cared. Everyone was making money and the limitation was not being felt. Until everything changed. Stock market fell. No one could make a profit on a falling market.

The Advantage of the Forex Market

Meanwhile, the other group of investors who were forex trading for a living were not affected by these turmoils in the stock market. They traded currencies, which were not stocks of companies. Although the most important difference here is that short-selling is allowed in forex trading. Even if the price of a particular currency falls down, profit can still be made if one makes a short-sell position. That major difference, plus the fact that the forex market is more liquid than the equities market, proved advantageous to forex trader who traded for a living.

The Shift In Investing

And pretty soon, day traders who traded stock began to shift. They could not make money in a falling market, so they began shifting their funds for forex investments. They shifted their investments to forex where the markets opened on Monday mornings and closed Friday afternoons. No breaks in between days. It was continuous trading which meant continuous opportunities to make money with every trade.

Investors who traded for a living began to realize the value of having diversity in their investment portfolio. And so, trying out forex trading for a living was a logical option for them. Forex trading provided them with countless opportunities day in and day out. And even when the economy turns bad once again, the more important thing is that money can still be made. No more waiting for the markets to turn around. This was really trading for a living, regardless of how the economy was doing.

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Reduce You Risk In Trading

By admin | Filed in Forex Basics, Trading Strategies

Forex trading became popular because it was viewed as a highly lucrative investment option where even an investor with a small amount of equity can make big profits with trading currencies because forex trading allows leverage.

Forex leverage is the feature that magnifies gains or losses resulting from changes in the prices of currency pairs. Unfortunately, for many newbies on the field of forex investments, they do not realize that forex leverage is a double-edged sword. It is a tool of investment which can be both beneficial and detrimental for you as an investor.

The promise of quick riches has often been associated forex. Though this may be true, almost all forex websites have been stern with their warnings that forex, with the use of leverage, is also a very risky investment alternative. The warnings have been repeated over and over. But some investors seem to believe that the risks do not apply to them, or they simply refuse to heed the warning.

And so, most of them trade believing that the unfortunate event of losing one’s investment would not happen to them. They take unnecessary risks with their trades. They expose their accounts to financial danger whenever they overtrade. Everything seems ok as long as the wins can compensate for the losses. But once the losses get out of hand, they may now rely on false hopes. This is not too uncommon. Forex investors who hold on to losing trade simply because cutting their positions at an incredible loss would leave their equity burned badly.

You have probably read it before. You probably know of the infamous statistic that 9 out of 10 forex investors lose their money in forex trading. Somehow, most investors entering the risky business of forex investments believe that they can be that singular investor who would beat out the other 9 losers. But sadly, statistics are statistics. And unfortunate things are bound to happen, especially to those who take unnecessary risks. And before the investor realizes it, he becomes a part of that statistic, belonging to the 9 out of 10 losers in forex trading.

But this should not be the case. Forex trading is a very lucrative investment option only if investors take the risk warnings more seriously. Sure, there are people who become forex millionaires overnight with forex. But these are extremely lucky individuals who have developed systems which reduced the risks of forex trading thru their strategies. But in general, the surest way to be profitable in forex trading is to reduce your risks. It is only through reducing your risks in trading that you shall be able to stay longer in this investment business. And the longer that you stay alive in this business, the brighter chance that your account would grow.

Risk management is crucial if anyone wants to succeed in forex. Forget the get-rich-quick mentality. Opt for the stay-longer-in-the-game philosophy. If you can stay longer, the more opportunities to make money would come your way. Choose your trades wisely. Do not trade just for the sake of having a position in the market. Do not trade just because you have a personal quota of trading one position per day. Having a position, or waiting for a trading opportunity, is a position in itself. Without a position, you may not be gaining profits, but you are not also inflicting losses in your account. Anyone who has held a losing position for so long would agree to this.

Reduce your risks in trading, and you would reduce the chances of being the 9 out of 10 losers. Slowly build up your account. The longer you stay alive in this business, the more confident you would become with every trade that you make. And when you become more confident with your trading decisions, it would just be a matter of time before you can conquer this business called forex.

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Forex Holy Grail

By admin | Filed in Forex Investments

Many forex traders have been looking for the forex holy grail. And sad to say, all of them will fail simply because the forex holy grail does not exist.

There is no fool-proof forex strategy that exists to give an investor 100% accurate profitable trades. There is not even a single forex strategy out there that can assure its trader sure-profits when used in trading. A forex holy grail, or whatever forex strategy hunters call it, does not exist.

Most of these forex strategy hunters who search for the forex holy grail look at the various forex robots available in the market today. A quick look at the various forex forums would reveal that there are far too many forex strategists developing their own trading strategies, mostly with the aid of forex robots or Expert Advisors, to make trading purely mechanical, taking away the factor of human greed and other emotions. But reading through the threads, most of these forex strategies end up being “overdeveloped” by the forum posters to the point that, most of the time, the true and original essence of the strategy is lost in development and modification.

A better chance to find the forex holy grail would be on the open contests for forex robots. There are trading championships usually held annually where forex strategy developers enter their Expert Advisors (EA’s) competition. There is usually a timeframe for the contest where the most profitable EA wins. Some forex robots entered into the contests are quite impressive. Accounts are multiplied many times over during the course of a few months period. And reading through the message exchange between the developer and his followers, there are many offers to buy the EA buy wealthy forex hunters.

While these forex EA’s have indeed shown extreme profitability as proven by the contests that they have won where all forex robots are traded under normal forex conditions, forex investors should still be wary that it is not proof that the same strategy would always work in the future.

That is the precise reason why there is no such thing as a forex holy grail. Forex strategies that work extremely well under today’s market conditions are not guaranteed to work in the future. Markets change, traders develop, central banks learn from their mistakes, governments modify existing laws governing forex trading, forex brokers adapt to more competitive market conditions, and even in the field of programming, new systems are developed to improve existing ones.

If there is indeed a forex holy grail and someone has found it, do you think that he will ever share it with anyone. The forex market is a constant battle between forex traders. Any forex trader who has developed a winning strategy can only hope that such strategy remains effective for a loner period of time. Coz once the secret goes out, and other forex trader learn of the strategy, it is only a matter of time when the strategy becomes ineffective.

Each forex trader has a trading personality. Depending on your personality, there is a forex trading strategy that would fit you and your investment goals. Find that forex strategy that fits you perfectly and develop your own system. That would be your forex holy grail. Each one has his own forex holy grail that fits his trading personality and investment goals. Continually develop your forex system ajd it would eventually become your forex holy grail.

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Forex Risk Management

By admin | Filed in Forex Basics

Surely, you must have read it countless times: never risk more than 2% of your equity in forex.

But what exactly does it mean? How do you compute that and translate it into number of lots, which is how traders speak the language of forex?

Let’s assume that you have USD 10,000 of equity in your mini-account. And you intend to risk only 2% of your equity as your capital management guideline.

This is how you compute it.

USD 5,000 x 2% = USD 100

So, it means that you should only be exposing USD 200 with any trade that you make with your mini-account.

And since it is a mini-account, you are trading with 10k lots, and let’s assume that your leverage is 1:200, the usual forex leverage given by forex brokers.

Using basic algebra:

1 / 200 leverage = x / 10k lot
where x is the amount you risk per lot you trade with this mini-account

200x = 10k
x = 10k/200
x = 50

You, then, apply this with the amount you are willing to risk based on the size of your account based on our earlier computation.

Total lots to be risked = Total USD amount to risk / Risk per lot

Total lots to be risked = USD 100 / 50

Total lots to be risked = 2 lots

That is how you compute for the number of lots you should open based on the amount of risk you are willing to take. But bear in mind that this is the total number of lots that should be opened based on a USD 5,000 equity. The 2 lots can be divided into 1= two 1 lots trades. Or if your account allows micro-lots, the total number of lots open for any given time should never exceed 2 lots.

Some traders make the mistake of opening 2 lots per position when trading. Thus, when they have opened 5 positions, they end up with a total of 10 lots open. This is a mistake which would put their accounts at serious risk.

Remember that proper capital management is necessary if you want to stay alive in this very risky business that is forex. And appropriate discipline should always be observed by sticking to your trading plans and capital management guidelines. In the long run, these should prove to be profitable for your forex trading account.

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Forex Drawdown

By admin | Filed in Forex Basics

Forex investors should know how to evaluate investment strategies based on the risks that their accounts are exposed to based on forex drawdown. Forex drawdown is the amount, either in absolute value or percentage terms, of decline in a forex account’s equity through the course of trading.

For any given instance that a position is opened in trading account, the value of its equity changes from time to time depending on the current floating profit or floating loss that the open trade is incurring. Even if the said trade has not yet been closed and liquidated, the equity also rises and falls as the price for the traded currency pair fluctuates.

Forex drawdown is important in determining if a forex strategy is a good strategy. Forex drawdown gives the forex investor an idea of how risky a forex strategy is. If a trading strategy has a relatively large amount of drawdown when compared as a percentage to the account’s equity, that strategy may be considered risky. It is risky because it puts excessive strain of the account’s equity for the open trades it takes before it can make a profit. And an excessive forex drawdown may also eventually lead to a forex account losing a considerable part of its value as a result of risky trading strategies.

Forex drawdown can also be used to evaluate forex trading signal providers. In the same way that strategies are assessed by the risk factor that it exposes a trading account, forex signal providers should also be evaluated with the amount of risk their signals put on an account. Forex trading signal provider should be able to give profitable trading signals to their clients without taking too much risks. The value of any amount of profit generated by trading signals should be analyzed in view of the risks that were taken during the trade to achieve that level of profitability. As an example, if a forex signal provider suffered a floating loss of 100 pips before the price of the currency pair turned around and hit a 10 pip profit, is it worth it for the investor? The forex investor risked 100 pips to be able to gain just 10 pips of profit.

While the example above was made using pips as the basis of analysis, the more correct and more accurate way of evaluating forex drawdown and the risks involved should be by using the percentages based on the forex account’s equity. Of course, different forex investors have different appetites for risk. And depending on how much risk you are willing to take, the amount of forex drawdown varies from one investor to the next. But remember that most of the time, the amount of risk that a forex investor is willing to take, based on the relative amount of forex drawdown that he exposes his account to with his trades, usually determines if his account can survive the volatile markets of forex in the long run. The profitability of a forex account is usually correlated to the length of time the account stays alive to trade in the forex markets.

So evaluate the risk factor you are willing to take with your forex account by computing the forex drawdown you are willing to take with every trade that you open. Proper capital management should dictate that forex drawdown be maintained at a minimal amount for an account to remain profitable in the long run.

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Stick To Your Strategy

By admin | Filed in Trading Strategies

So you may have been endlessly searching for the perfect forex trading strategy that would fit your trading personality. You want a trading strategy that carries a certain amount of risk, but not too much for your own comfort. You prefer strategies that open and close trades within the same trading day because you cannot sleep well knowing that you still have some money on the line that you might actually lose should the market go against your position. And you also have certain technical indicators that have become your favorite that you trust them to give you the signals when the market starts to move. You found the strategy that fits all these characteristics. And you have already tried it for quite sometime not in a demo account. It proves to give you an acceptable level of profitability. Now, what?


Going Live With You Trading Strategy

You try the forex trading strategy now on a real, live account.

But after a few trades in a two-week span, you feel uncomfortable. The trading system that you chose, which was supposed to give you around 70% winning trades suddenly lost 3 trades in a row, bringing down its winning percentage to around 60%.


Tweaking The System

You tweak the trading strategy. You add another indicator, hoping that it would screen out all the false breakouts being given during the past losing trades. And you start cutting profits even if your original system dictated that you let it run some more, fearing that the market would reverse itself and hand you another loss in your trading once again.

Then, it becomes worse. With the tweaking that you made within the trading strategy, you continued incurring losses. And this time, the losses became bigger because you started ignoring your original rules on cutlosses. You let losses run and cut profits short. The winning percentage of your trading system goes further south, crossing the 50% level. You now have a losing forex trading strategy.

Then you start looking at the various forex forums once again for a new trading strategy. You found one that seems promising. You try it out on a demo system. It makes profitable results. You apply it to your love account, totally replacing the old system that you chose just barely a month ago.

The new trading strategy seems okay. It gives you 3 consecutive winning trades. You feel happy. You feel glad that you changed your trading system.

But things started going wrong once again. You start losing trades. One, two, three. You started feeling that uncomfortable emotions once again. You take another look at your trading strategy. You again feel the itch to tweak a few things within your forex trading strategy. Add a few technical indicators to make it better. You, again, change it to the point that the trading system becomes unrecognizable from its original form anymore.

And so the cycle just keeps on going.


System Jumpers

You may belong to a group of traders which are called System Jumpers. These traders, as the name suggests, are people who jump from one system to the next in search for the perfect system that would satisfy them.

Unfortunately, there is no such perfect system. And the problem lies not within the systems that they have tried, but the problem lies within their psychology of trading. If your have chosen a forex trading strategy based on a number of factors that fit your trading personality and trading goals, just verify if the system is indeed profitable by trying it out in a demo account. If it proves profitable, then use it. And use it consistently.

Losses are part of any trading system, even the best ones. But if you trust your system, it will give you your expected winning percentage in the long-run. That is why it is called an average winning percentage. You cannot expect it to produce the same winning percentage for every 5 trades in a row.


Trust and Stick With Your Forex System

If you continue to be a system jumper, you may never find the trading system that would suit your trading personality and fit your investment goals. You would just continue to lose equity while changing from one system to the next.

Choose a trading strategy. Test it. Trust that it would be profitable. And stick to that trading strategy.

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