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3 Easy Steps to Trade Forex (Part 3) By James Stanley It will often take traders awhile to learn a concept that may sound very simplistic, but is absolutely a point of emphasis for all traders. That concept is: Nobody knows what will happen next with price. Regardless of how strong a strategy may seem, or how sure the trader is that price will go up, or price will go down, a simple fact remains: Nobody knows exactly what will happen next on the chart. That is why the management of risk is so important to traders. If risk isn’t managed, results can be catastrophic.
Created with Marketscope/Trading Station 2.0 Let’s think of the trader that looks for ‘100 pip wins,’ on each trade that is taken without observance of potential losses. Let’s imagine that this trader has a string of successes, winning 9 trades in a row, adding 900 pips to their trading account. At this point, our trader is feeling good with 9 straight wins. And then our trader takes a trade that doesn’t do what they thought it would. And as opposed to immediately realizing the loss, our trader decides to wait and hope that the trade comes back in their favor. The next morning our trader opens their trading platform and sees that the position is now losing 1000 pips. This one trade, this single idea has just wiped away the gains of 9 winning trades, AND THEN SOME. Our trader would be looking at a net 100 pip loss, when they have won on 90% of their trades. 100 Pip Loss with 90% win ratio! While this may sound like a problem that can be easily fixed, we have to imagine the decision making process that goes through our heads when we are in a trade. We are human; we want to be right. By default, our brains associate losses with failure and many traders, new and old alike, are reticent to realize losses for fear of failure. The thing that most professional traders will realize is that losses are inevitable; because nobody knows exactly what will happen next on the chart. So the goal then becomes – not necessarily to avoid losses; but to mitigate the damage on those ‘ideas,’ that are losers, and maximize the profit potential on the ones that are winners. One of the most important steps that traders can take to address risk, trade, or money management concerns is the creation and observance of a prudent trading plan; a plan in which the trader specifies the maximum amount of risk that will be taken on, the maximum potential loss that could be seen, and perhaps most important – the amount of return a trader wants to look for given a pre-determined amount of risk (The Risk, Reward Ratio). The importance of risk management CANNOT be understated. The one thing that I, as a trader, know is that I will take losses. My goal is to make those losses hurt as little as possible while making my winners as profitable as I can. This is what we teach in the DailyFX PLUS Education Curriculum; between the On-Demand Video Course (available 24 hours a day, 7 days a week: On-Demand Video Course), and the 3-4 Live webinars that we host in the DailyFX PLUS Live Classroom (DailyFX PLUS Live Classroom). If you would like more information on Risk/Money Management: DailyFX PLUS Online Video Course Lesson 1 – Money Management Clarifying the 5% rule --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “Notification,” to Instructor@DailyFX.com. 
Created with Marketscope/Trading Station 2.0 In a market environment such as this – traders will generally want to look at BUY positions, looking for the trend to continue to the upside. Could short trades work here? Sure, there were a few areas where short trades may have been able to have been traded profitably. But the bias is discernibly to the upside, and that can be evidenced as price is continuing to go up. There are clearly more buyers than sellers over the duration of this chart, as price has continued to go up. On the other hand, markets can exhibit clearly defined movements going in the other direction. The chart below identifies a strong down-trend: 
Created with Marketscope/Trading Station 2.0 Once again, this is a situation in which there is a clear imbalance in the numbers of buyers and sellers in the market. By the very fact that price was going down, we know that there was more supply than demand; or more sellers than buyers. Many traders will look to only open SELL positions in these situations. Identifying the trend can bring many benefits to the trader. Two of the most important benefits are: Have an idea for the market sentiment exhibited for that particular asset over the time period analyzed To get a better understanding for which direction they may want to trade in that particular market Many traders will ONLY take trades on the side of the longer-term trend. This is done in an effort to ‘get the trend on your side,’ or to ‘trade in the direction of the previous bias,’ in the hope that that bias or trend continues and works in the traders favor to push price higher (or lower for SELL positions). There are many ways to identify trend, and this is something that can be customized and done in quite a few different ways so that traders can adjust their trend identification to the specific timeframe and approach they are looking to trade. In the links listed below, we cover a few of the more popular mannerisms of identifying trend. Over the next 2 articles, we will examine 2 more of the important subject areas of trading that new traders are going to want to be familiar with. If you’d like to learn more about identifying and trading with the trend, the following links will provide much more information: DailyFX PLUS Online Video Course- Trend Trading Price Action, an Introduction How to Trade with Moving Averages --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “JS Notification,” to Instructor@DailyFX.com. 
From time to time in our LIVE Daily Webinars, the question of Rollover comes up. The question essentially is what is it and how does it impact my account. 
Let’s say that a trader bought the AUDJPY currency pair. Since they bought the pair, they bought the AUD and sold the JPY. Since the AUD has an interest rate at this writing of 4.75% and the JPY’s interest rate is 0.10%, the trader is long the currency in the pair with the higher interest rate and, as such, would earn interest on the position each day at 5 PM Eastern time. Had the trader sold the same pair, they would then have sold the AUD and bought the JPY and therefore would be short the currency with the higher interest rate. In that event, the trader would be paying interest and it would be subtracted from their trading account each day the position was held open after 5 PM Eastern time. A trading strategy is associated with the concept of Rollover and it is called the Carry Trade. The Carry Trade strategy is based on the concept discussed above…being long the currency with the higher interest rate thereby earning interest each day whether or not the trade moves in your intended direction. If a trader has a longer term strategy and identifies a trending pair that is trending in the direction of the Carry (the direction they will earn interest) taking a trade in that direction can be quite powerful. For this example let’s say the GBPAUD is trending to the downside. By selling that pair a trader would be earning the “carry” since they are shorting the GBP (0.05% interest) and buying the AUD (4.75% interest). So, if the trade continues trending to the downside, not only will the trader earn pips on the trade, they will also earn interest on their position each day. Depending on the size of the trade and the length of time the position is held, potentially there can be quite a positive impact on the trading account. The link below will provide additional information on the strategy... http://www.fxcm.com/carry-trade.jsp --- Written by Richard Krivo, Trading Instructor To contact Richard, e-mail rkrivo@fxcm.com. To be added to Richard's e-mail distribution list, send an e-mail with subject line "Distribution List" to rkrivo@fxcm.com. 
Created with Marketscope/Trading Station 2.0 As you can see in the above picture, when price approached or entered in the ‘Support Zone,’ price had shown a tendency to go up. By price going up, we can assume that there were more buyers than sellers in the market. Also, as price enters or approaches the Resistance Zone, traders have shown a tendency to sell in the past. Identifying Support and Resistance in this fashion can be classified as using Price Action to display these levels; as traders are using the price chart itself, devoid of any other indicators or studies to assist. Support and Resistance can be extremely important for traders to identify as taking a BUY position when price is approaching or in a resistance zone could be potentially costly. Or, perhaps, imagine taking a SELL position as price is in a Support Zone. If traders respect that support as they had in the past, and ensue with more buying than selling – driving price higher, once again that could be potentially costly. There are numerous ways of identifying Support and Resistance, or potential Support and Resistance price zones. This is where areas of study such as Fibonacci can come into play, as many traders will look at ‘Fibonacci levels,’ to point out potential prices that may become Support or Resistance in the future. The links below offer more information in specific regards to Fibonacci. 
Created with Marketscope/Trading Station 2.0 Pivot points are another study that traders will commonly look to in an effort of forecasting potential price levels that may function as support or resistance in the future. Pivot points are based on calculations of previous day’s price action. Once again, the links below contain more in-depth information into the study. If you would like more information Support/Resistance: Fibonacci Retracements: How to Trade Fibs in Forex Pivot Points: Floor Trader Pivots DailyFX PLUS Online Video Course Lesson 1- Support and Resistance How to Trade with Support and Resistance Part 1 How to Trade with Support and Resistance Part 2 Price Action Swings --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “Notification,” to Instructor@DailyFX.com. 
(Created using FXCM’s Marketscope 2.0 charts) The benefit of breakout trades is that they do not require any indicators on your chart. Take a clean chart and identify levels of support. I have included the 200 day Simple Moving Average (blue line) as that is often used by large institutions as a level of support. Horizontal support rests at the low of Friday’s candle (1.4055). Additionally, the 200 SMA is nearby at 1.3940. This congestion zone of 1.3940 to 1.4055 will likely provide at a minimum temporary support for prices should they fall further. The Entry and Stop Loss Place an entry order to sell 1 pip below the support level or at 1.3940. When identifying our stop placement, scale down to a smaller time frame chart (between 1hr and 4hr time frame). Place the stop loss just above the swing high in this case because we are creating a sell entry order. Now, take twice the distance of your stop loss and project that from your entry point for a take profit level. One of the important rules of trade management we discuss inside the DailyFX EDU webinars is risking less than 5% of your account on all open trades. ( Here is a short video on Money Management of trades. ) The benefit of a breakout type of strategy is that we can be wrong on the trading idea, meaning the price of the EURUSD can move straight higher from here, yet we miss out on a losing trade. As a trader, not only do I want to enter into winning trades, but I also want to be kept out of losing trades. A breakout style of trading can help navigate volatile waters and keep you out of some losing trades. Additional Educational Resources How to Trade with Support and Resistance Part 1 How to Trade Trend Line Support and Resistance – Part 2 How to Trade Moving Averages Also, join me tomorrow at 13:00 GMT (9am ET) at the DailyFX Trading Room for a live webinar on trading the USDollar. This is an opportunity to discuss the current market events and ways to trade it on the USDollar. Ask your questions in real time. I look forward to seeing you there! Jeremy Wagner contributes to the Instructor Trading Tips articles. http://www.dailyfx.com/how_to_trade_forex/course_trading_tips To receive more timely notifications on his reports, email jwagner@fxcm.com to be added to his distribution list. 
(Created using FXCM’s Marketscope 2.0 charts) As noted above, yesterday, the US30 (a cfd for the Dow Jones Industrial Average) collapsed through the 200 SMA. 
(Created using FXCM’s Marketscope 2.0 charts) The SPX500 (a cfd on the S&P500) has been flirting and finally crashed through the 200 SMA as well. This indicates weakness in the market and perhaps a shorter term trend to the downside. Look for the 200 SMA to provide resistance into the future. So we can then plot the average of the previous 200 days on a chart to smooth out the market movement and get a better feel for the mood of the market. The use of Moving Averages can be of great help in determining the direction of the trend or for showing possible support and resistance levels. Here is a daily chart of the EUR/USD with a 200-day Simple Moving Average plotted on it. 
(Created using FXCM’s Marketscope 2.0 charts) We can see two things with the chart. The first is how the market has a tendency to find support or resistance on a move to the Moving Average. Those two points are noted by the green highlights on the chart. So if we are buying pullbacks in an uptrend or selling rallies in a downtrend, the use of a Simple Moving Average can help us better time our entry. We can also see the price activity that I have highlighted in the rectangle as a good example of how Moving Averages can be of great help in noting strong trending moves. Three items are working together in boxed off area. -The EUR/USD was moving up. -The price of the EURUSD was above the 200-day Simple Moving Average. -The Moving Average was also moving up. When you have all three points working at the same time like the activity in the rectangle, you have a strong trending move. We would want to buy in an uptrend and sell in a downtrend. This simple technical indicator has a lot of value it today’s trading environment, but we just have to be sure we understand its strengths and weaknesses to better judge its effectiveness. Additional educational resources How to Trade with Support and Resistance Part 1 Trading Support and Resistance in Forex Part 2 Jeremy Wagner contributes to the Instructor Trading Tips articles. http://www.dailyfx.com/how_to_trade_forex/course_trading_tips To receive more timely notifications on his reports, email jwagner@dailyfx.com to be added to his distribution list. 
(Created using FXCM’s Marketscope 2.0 charts) The chart above is the 5 minute EURUSD chart during July 2011 NFP release. After the three 5 minute candles close, the trader then determines to place a sell entry order as the prices are near the top of the range. The entry order is set near 1.4250. The stop loss is set at 1.4330. Take profit level is 1.4090. A trader may want to move their stop to break even if the prices moves half way to the take profit level. Additional educational resources The Non-Farm Payroll news release is arguably the largest market moving event for the US Dollar for the month. Additionally, with the recent debt crisis, there is likely going to be increased volatility. Day traders who may be interested in another strategy to trade AFTER the release are invited to Join Walker England at 9:15a ET for his live webinar on the LonNY Day Trading Strategy. The webinar is being conducted inside DailyFX Plus Live Classroom where you can interact and ask your questions live. Login HERE with the temporary password noted below: Username: dfxedu Password: dfxedu (Good thru Sunday Aug 7) Jeremy Wagner contributes to the Instructor Trading Tips articles. http://www.dailyfx.com/how_to_trade_forex/course_trading_tips To receive more timely notifications on his reports, email jwagner@dailyfx.com to be added to his distribution list.