Profit Yielding Strategies: Applying the 80/20 Rule

Profit Yielding Strategies: Applying the 80/20 Rule

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The implication of the 80/20 rule in the realm of forex trading is that you should focus more on high quality trades that pay off handsomely rather than trading more frequently. This is actually one of the most common errors that most novice traders make when they are starting out to trade online... Too much trading. They will go for day trading, hedging and scalping for low odds trades which result in more losses than gains.  

This mentality is due to the way we were educated and brought up to think in the sense that the harder you work, the more you will stand to gain. Unfortunately, the illusion of hard work doesn’t pay off when we are dealing with forex trading. The market is always changing and our flawed ingrained philosophy cannot cope with the dynamics of the financial markets. We need to adopt a paradigm shift in the way we think if we ever hope to profit from trading forex. This is the main reason why we get the forex veterans making most of the money in online forex trading. Research and surveys have proven such is the case.

Professional or experienced forex traders on the other hand tend to go for long term trades but pay off with high profitability. It is not uncommon to find these experienced traders making just a single trade once a week or even a month and still get a 100% return on their investment. The key toward profitability is to look for long term trades and learning how to use the forex charts properly to look for long term trends which could last for months.

Once you have identified such a long term trend pattern on your charts, stake your market position, hold on to the position and trail your stop loss to follow the long term trend. With the application of the 80/20 rule in your trading strategy, you will get to make more money, have less stress and also waste less time on unprofitable efforts.

Source: www.etoro.com

Why Investors Fail in Trading?

Why Investors Fail?

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According to research more than 92% of traders close their accounts within 9 months and never come back trading again. This essentially means one thing – trading is not a get rich quick scheme. Yet, this should not be misinterpreted to mean that it is not a profession for newbies. Even the best traders lose money in their first months in the investment industry, and they made it big because they strived to overcome the challenges and went on to learn from their mistakes. Why then do so many investors fail? Here are a number of reasons:

1.    They trade for a quick buck. While traders can easily make money in the forex market, it can easily disappear. Many traders earn quick money but very few make it big because they do not fully understand how the market works. On the other hand, there are many others who end up broke because they failed to realize that forex trading is all about an properly timed trading strategy.

2.    They don’t have a plan. In any financial market, a trading plan (or strategy) is essential. Before an investor decides to trade real money, they must set specific amounts on capital they want to invest, and how much they are prepared to lose. Unfortunately, so many new traders do not realize the importance of this or they simply couldn’t be bothered.

3.    They don’t use stop losses. Not all trades will go well, and in this case, a trader must know when they can call it quits. By setting up stop losses, traders can prevent additional risk to their account and can limit their losses to a few hundred dollars.

4.    They do not test for entry and exit points. Trading works a lot like firing a missile – you have to test it so you can minimize the casualty. Random buying and selling just wont work.

5.    They get emotional. Most traders who profit in an uptrend will tend to keep their bets on that same position hoping to get a few more dollars. Unfortunately, at a time when information can be transmitted so fast, prices can change in just a few minutes and will cause a $1,000 portfolio to drop in value without notice.

In the same way, traders who have losing positions may wish to keep trading hoping they can recover their losses, and end up losing even more. To prevent these from happening, a trader must stick to their plan – when they have reached a certain amount of profit, it is best to close the position and take home the profit. In the same way, traders will also need to stick to their stop losses.

Source: www.etoro.com

How to Read the Psychological State of the Market

How to Read the Psychological State of the Market

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Market psychology and collective market behaviour can be predicted by using technical indicators which show the level of volume in the market.

Introduction:

Unfortunately all human behaviour cannot be measured by reading graphs or tracking trends but human crowd behaviour can be measured and in some ways predicted by studying how crowd behaviour reacted to various economic and social events in the past. The market participants use various indicators to gauge the strength of the market. These volume indicators and oscillators together price charts and other technical indicators, if used properly offer strong indications of where crowd behaviour is going.

How to Read the Psychological State of the Market:

The most popular oscillators for market participants tend to be the MACD, RSI, and Stochastics. These indicators measure the psychological state of the markets by measuring and displaying the constant interaction between the strength of the buyers and sellers in the market and where the consensus of the market lies. These indicators use mathematical formulas to create buy and sell signals which correspond to the overbought or oversold measurements they have produced.

Measuring volume of either the number of shares which are traded at any given moment or the number of ticks traded at any given moment is an exceptional way to measure the markets psychology.  In essence volume is an indication of the emotional state of mind of the forex trader. Whereas low volume indicates indifference on the part of the market, high volume demonstrates a high emotional state whether the market has many winners or has many losers. 

  

Trends are a good indication of the psychological state of the market. A long term trend signifies a low emotional state amongst the market players. Small short term trend changes have moderate emotional significance because even small changes that repeat themselves and form a new trend do not change the psychological sentiment even if many traders suffer losses because of these changes. However, a series of small losses can soon lull an unsuspecting trader into not realizing that over time these small losses have aggregated into a big loss. Small changes and long term trends are driven by small volumes, however if there is a significant sharp change in market direction the emotional state of the participants will drive the volume up and extenuate the burst of strength of the particular change. 

Volume can also act as a predictor of changing market psychology.  If during a mature trend in a bull market there is a significant reduction in volume this could indicate that the bulls are running out of steam and preparing to take their profits because they feel that the market is overbought. Seeing this could push the bears into action and suddenly the psychology of the market turns against the bulls, volumes pick up as the bears become aggressive and then volumes dramatically increase as the bulls take their profits. The bull trend then becomes a bear trend.

This is also true on the other side of the coin. A bear trend can suddenly see declining volumes as the bears start to think about taking profits and believe that the market is oversold. Sensing this, the bulls enter the market and volumes are driven up. The bears take their profits and the bulls have the momentum. This type of collective psychology is very common in all the asset markets. The key is to use the available indicators so that you are sailing with the prevailing collective wind.

Source: www.etoro.com

10 Golden Rules of Forex Trading

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The truth about Forex is that it can be an intense and stressful undertaking that requires a strong control of your emotions. Forex is not a "get rich quickly" scheme. Learning to trade Forex takes patience – it will take you time before you master the basics. Those who lack discipline or make decisions that are not carefully thought through will quickly find themselves in a negative investment position. 

Those who do not adhere to sound investment principles or who allow emotion to govern their thinking will quickly find themselves losing a grip on their investments. However, those who follow sound investment principles will reap the benefits of one of the world's most liquid and influential markets.

A 100% return on investment within a couple of days wouldn't surprise anyone, and in fact 1000% wouldn't surprise an experienced trader. Because of this, Forex has become one of the most sought after and talked about investment opportunities. 

As in any industry, Forex has its own nature and golden rules. Learn Forex, understand the keys to success, and make your investment decisions wisely. This short book will introduce you to the 10 golden rules of Forex trading that every person entering this exciting market should follow in order to become successful.

1. The market is always changing and it may be hard to understand and keep up with these changes unless you invest in a good Forex trading education.

2. There are many beginners who make trades in any direction. While there is a possibility to make profits both on the upside and downside of a trade, trading in the direction of the trend will give you the best chances for success.

3. Make a demo account, and use it to learn and understand Forex trading. While using a demo account you will be able to test your trading strategies and mentally prepare yourself for real trading. However, keep in mind that you should be realistic and treat your demo funds as real money; otherwise, there is no way you can learn from demo trades.

4. While there are a lot of companies who make money by selling software which aims at predicting future trends, the reality is that if this software really worked, these companies would not be giving the secret away.

5. Trading is stressful work, and there will be a lot of setbacks on your way to the peak. Emotional trading may force you to open a trade too early and eventually lead to a loss due to a wrong entry point. Control your emotions by staying cool and calm, and focus on your long-term goals.

6. Just because the Forex market is online twenty-four hours a day does not mean that you have to trade all that time. If you are doubtful, do not trade at all. Instead, analyze the market and use the knowledge you get to make more profitable trades in the future.

7. Because trading is always full of emotions, you must have a trading strategy which includes a set of rules you stick to. This will help protect you from yourself.

8. Avoid trading strategies which are too complex to understand and which use a lot of different techniques. They can distort your judgment and you will miss a lot of good trading opportunities.

9. Leverage - Forex trading has large potential rewards, but also involves large potential risks. As a novice, don’t risk more than 1–2% of your margin account on any given trade. Over the long run, this will give you a chance to make a profit while reducing the probability of taking a loss.

10. Develop a habit of reviewing and analyzing your good and bad trades. Then you will have a much better sense of what will work best in your future trades.

Source:  http://www.admiralmarkets.com 

Trailing Stop Loss Tips

Trailing Stop Loss Tips

A trailing stop loss is calculated in a manner like the way we calculated our initial stop loss. The only difference being that while we calculated our stop loss from the entry price, we're calculating our trailing stop loss from the highest price since entry. The key to the trailing stop loss is that you need to make continual adjustments to make sure that the stop is moved in your favour.

The method that you use to set your trailing stop loss can vary dramatically. However, if we use the ATR method that we used to calculate our initial stop to set our trailing stop loss, we'll have the ability to lock in the profit as the share price increases.

For example, if you bought a share at one dollar, and your initial stop was set at 90 cents, your trailing stop would also have a value of 90 cents. If, after the first day, the share price moves in your favour and moves to $1.10, you would recalculate your trailing stop loss by subtracting two times the value of the ATR from the new high price of $1.10. For simplicity, let's assume that your stop size hasn't changed, and is still ten cents wide. When you calculate your new trailing stop loss, by subtracting the 10 cents from $1.10, it would be set at one dollar.

At this point, your initial stop was at 90 cents, and your trailing stop loss is now at a dollar, with the share price is at $1.10. Since your trailing stop loss is higher than your initial stop, the initial stop becomes obsolete, and our trailing stop loss becomes your active exit.

Now, my question is, How much profit have you made on this trade? The share price is at $1.10 and we entered at one dollar. If you thought, No, I haven't made any money, then you'd be right on track. Remember, our stop loss strategy gives the share price a little bit of room to move.

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You're not going to exit this position until the share price reverts to one dollar. I'ts important to note that when you are valuing any open position, you should always value it based on its stop loss value, since if you were to exit this share, you would wait until that price point was breached.

Let's go back to the example. Now, what happens if the share price begins to fall? Let's say that the share price falls from $1.10 down to $1.05. What does your trailing stop loss do? Would it move down also? Here's another important point. A stop loss will never, ever move down. A trailing stop loss can only move up. This ensures you lock in profit and that you'll also get out of the shares once they start to turn. A trailing stop loss is always calculated from the highest price since entry, so the highest price is still $1.10.

It's not until the share price makes a new high since entry that the trailing stop loss would begin to move in your favor again. However, if you're using the ATR method, there's another way for our trailing stop to move up. This would occur when the volatility of a stock begins to decrease. If a share price were to begin to move sideways, the ATR value would start to drop off. This would cause the trailing stop to move up as the share price became less volatile.

The best way to understand these concepts is to print out a chart with the ATR values along the bottom. Then on the chart, identify the point where you would have received an entry signal, and mark your initial stop loss and your trailing stop loss.

As the trend progresses make sure that you recalculate the value of your stop so you can begin to get a feel for the way this method of using a stop loss works Seeing how the changes in stock price affect you trailing stop loss will give you the confidence to make them a key part of your trading system.

About The Author David Jenyns is recognized as the leading expert when it comes to designing profitable trading systems. His most recent course Trading Secrets Revealed is a step-by-step trading road map to having excellent money management. Learn how *you* can become one of his students. Click Here ==> http://www.trading-secrets-revealed.com

Six steps to improve your currency trading: Sixth Step

step 6: Beware of Psychological Pitfalls

Many traders take shopping more seriously than trading. Few people would spend $500 without carefully researching and examining a product. But many traders take positions that cost them well over $500 based on little more than a hunch.

This cannot be stressed enough. Most traders fail because they lack discipline. Be sure that you have a plan in place before you start to trade. Your analysis should include the potential downside as well as the expected upside. So for every position you take, you should place both a Limit Order and a Stop/Loss Order.

Set Smart Trade Limits

For each trade, choose a profit target that will let you make good money on the position without being unachievable. Choose a loss limit that is large enough to accommodate normal market fluctuations, but smaller than your profit target. Lock these in using Limit Orders and Stop/Loss Orders.

This simple concept is one of the most difficult to follow. Many traders abandon their predetermined plans on a whim, closing winning positions before their profit targets are reached because they grow nervous that the market will turn against them. But those same traders will hang on to losing positions well past their loss limits, hoping to somehow recover their losses.

Sometimes traders see their loss limits hit a few times, only to see the market go back in their favor once they are out. This can lead to mistaken belief that this will always keep happening, and that loss limits are counterproductive. Nothing could be further from the truth! Stop/Loss Orders are there to limit your losses.

No trader makes money on every trade. If you can get 5 trades out of 10 to be profitable, then you are doing well. How then do you make money with only half of your positions being winners? By setting smart trade limits. When you lose less on your losers than you make on your winners, you are profitable.

Don't Marry Your Trades

People are emotional. It is easy to do objective analysis before taking a position. It is much harder when you've got money invested. Traders holding positions tend to analyze the market differently in the hope that it will move in a favorable direction, ignoring changing factors that may have turned against their original analysis. This is especially true when losses are being taken on a position. Traders tend to 'marry' a losing position, disregarding signs that point towards continued losses.

Don't Bet the Farm

Do not over trade. A common mistake made by new traders is over-leveraging an account. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it were, everyone would be a millionaire!).

Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Source: http://www.xe.com/currencytrading/improve.php

What should you know about Forex Signals ?

How safe is Forex Trading?

How safe is  Forex Trading?

The names used for the Forex market include Foreign exchange market or FX market and it’s basically a market which is over the counter and worldwide, functioning for 6 days per week. Thanks to a number of intermediaries and brokers, there is a huge network which is world wide, so anyone can trade Forex if they wish to. If you’re curious how safe is it to trade Forex, the answer is that it depends on how you do it. If you don’t know what you’re doing and you just start trading, chances are that it’s going to be a nasty experience for you. Being careless and not doing the research will also be dangerous for your finances in the long run. As long as you’re careful and you do everything right, you can make money from Forex trading and it can prove to be a very profitable way to make a living. The person who makes it either safe or dangerous is you. Knowledge means a lot when it comes to trading Forex, so learn as much as possible about the way it works and you should do just fine. Below is a bit of information which should help you trade on the Forex market a bit more safely.

How does it work

The thing to remember is that despite the claims you see from all kinds of brokers and online gurus, Forex trading is not a get rich quick scheme. You can’t just relax and sit back while you’re making money. You have to invest a lot of time into research and there is quite a bit of work to do before you start making a constant profit which will eventually make you rich if you’re good at it. In order to make sure that your money is safe, you should do as much analysis as possible, studying trends and keeping in touch with the latest news. You always have to know how your investments are doing and what can influence them.

The base currency when it comes to forex trading is usually a currency which is well known and easy to use. The USD is one such currency which is often used as the base currency in currency exchanges. One example of how Forex works would be an investment of $10 into Euros. Say you get 7 Euro for that $10. You want the European Union economy to do as well as possible so that its currency will grow in value. If it grows in value, you can buy more dollars with it, so for the same 7 Euro you might get $11 or $12 in return. That extra dollar or two would be the profit in this scenario, though the currency fluctuations aren’t usually as big as in this example. When you’re a Forex trader, you need to understand how this process works and when you can invest and when you have to trade your currency.

To begin trading Forex, you can look for a broker which can trade in the Forex market. Before you get started, you should look at his authorization, to make sure he has the authority to trade on the market. Besides his authorization, make sure you know exactly what you’re signing and what he’s promising you. Getting a very good broker is the best way to keep your investments safe.

When you’re looking to do some safe Forex trading, you need to find some strategies which work for you.

Something that works well is pairing up economies. One example is pairing up the Euro with the USD, or the Yen with the USD, or any other combination. Look at the economies of the two countries which issue that currency and analyze their supply and demand. You should also make sure you know how the exchange rate varies between the two countries and their economies. Graphics might just give you a better idea of how that rate evolves and when might be the best time to buy and sell currency. Ideally, you want to buy when the price is low and to sell when it’s high. The basics are the same as with every other type of business, buy low and sell high.

Source: http://www.tradingforex.net/how-safe-is-forex-trading

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