Writing a good research grant proposal is not easy. This document is an attempt to collect together a number of suggestions about what makes a good proposal. It is inevitably a personal view on the part of the authors; we would welcome feedback and suggestions from others.
APPROACHING A PROPOSAL
The first and most obvious thing to do is to read the advice offered by your funding agency. In the case of EPSRC, the primary funding body for computing science research, there is a "Guide to EPSRC Research Grants". We make no attempt to duplicate the material in the EPSRC guide or any other; you must get yourself a copy and follow the guidance closely.
The most substantial part of any grant application is some form of "Case for Support". It is this case which will persuade, or fail to persuade, your funding body of the value of your proposal. Proposals range very widely indeed in their quality. You can improve your chances enormously simply by ruthlessly writing and rewriting. This document is entirely about improving your case for support.
There are two vital facts to bear in mind:
Your case for support will, with luck, be read by one or two experts in your field. But the programme manager, and most members of the panel that judges your proposal against others, won't be expert. You must, must, must write your proposal for their benefit too.
Remember that programme managers and panel members see tens or hundreds of cases for support, so you have one minute or less to grab your reader's attention.
Based on these facts, here are two Golden Rules:
Ask lots of people to help you improve your proposal. Give it to your colleagues, your friends, your spouse, your dog, and listen to what they say. If they misunderstand what you were trying to say, don't say "you misunderstood me"; instead rewrite it so it can't be misunderstood. If they don't immediately see the value of what you want to achieve, rewrite it until they do. And so on.
This isn't a big demand to make on someone. Ask them to read your proposal for 10 minutes, and say what they think. Remember, most committee members will give it less time than that.
Make sure that the first page acts as a stand-alone summary of the entire proposal. Assume (it's a safe assumption) that many readers will get no further than the first page. So don't fill it up with boilerplate about the technical background. Instead, present your whole case: what you want to do, why it's important, why you will succeed, how much it will cost, and so on.
CRITERIA FOR A GOOD GRANT PROPOSAL
Most funding agencies apply similar criteria to the evaluation of proposals. We discuss these below. It is important to address these criteria directly in your case for support. A proposal which fails to meet them will be rejected regardless of the quality of its source. Otherwise, there is a danger of discriminating unfairly in favour of well-known applicants.
Major criteria
Here are the major criteria against which your proposal will be judged. Read through your case for support repeatedly, and ask whether the answers to the questions below are clear, even to a non-expert.
Does the proposal address a well-formulated problem?
Is it a research problem, or is it just a routine application of known techniques?
Is it an important problem, whose solution will have useful effects?
Is special funding necessary to solve the problem, or to solve it quickly enough, or could it be solved using the normal resources of a well-found laboratory?
Do the proposers have a good idea on which to base their work? The proposal must explain the idea in sufficient detail to convince the reader that the idea has some substance, and should explain why there is reason to believe that it is indeed a good idea. It is absolutely not enough merely to identify a wish-list of desirable goals (a very common fault). There must be significant technical substance to the proposal.
Does the proposal explain clearly what work will be done? Does it explain what results are expected and how they will be evaluated? How would it be possible to judge whether the work was successful?
Is there evidence that the proposers know about the work that others have done on the problem? This evidence may take the form of a short review as well as representative references.
Do the proposers have a good track record, both of doing good research and of publishing it? A representative selection of relevant publications by the proposers should be cited. Absence of a track record is clearly not a disqualifying characteristic, especially in the case of young researchers, but a consistent failure to publish raises question marks.
Secondary criteria
Some secondary criteria may be applied to separate closely-matched proposals. It is often essentially impossible to distinguish in a truly objective manner among such proposals and it is sad that it is necessary to do so. The criteria are ambiguous and conflict with each other, so the committee simply has to use its best judgement in making its recommendations.
An applicant with little existing funding may deserve to be placed ahead of a well- funded one. On the other hand, existing funding provides evidence of a good track record.
There is merit in funding a proposal to keep a strong research team together; but it is also important to give priority to new researchers in the field.
An attempt is made to maintain a reasonable balance between different research areas, where this is possible.
Evidence of industrial interest in a proposal, and of its potential for future exploitation will usually count in its favour. The closer the research is to producing a product the more industrial involvement is required and this should usually include some industrial contribution to the project. The case for support should include some `route to market' plan, ie you should have thought about how the research will eventually become a product --- identifying an industrial partner is usually part of such a plan.
A proposal will benefit if it is seen to address recommendations of Technology Foresight. It is worth looking at the relevant Foresight Panel reports and including quotes in your case for support that relate to your proposal.
Cost-effectiveness
Finally, the programme manager tries to ensure that his or her budget is to be used in a cost-effective manner. Each proposal which has some chance of being funded is examined, and the programme manager may lop costs off an apparently over-expensive project.Such cost reduction is likely to happen if the major costs of staff and equipment are not given clear, individual justification.
COMMON SHORTCOMINGS
Here are some of the ways in which proposals often fail to meet these criteria.
It is not clear what question is being addressed by the proposal. In particular, it is not clear what the outcome of the research might be, or what would constitute success or failure. It is vital to discuss what contribution to human knowledge would be made by the research.
The question being addressed is woolly or ill-formed. The committee are looking for evidence of clear thinking both in the formulation of the problem and in the planned attack on it.
It is not clear why the question is worth addressing. The proposal must be well motivated.
The proposal is just a routine application of known techniques. Research funding agencies are interested in funding research rather than development. Industry are expected to fund development work. The LINK scheme is appropriate for proposals which combine both research and development. If the development would benefit another research field, rather than industry, then look to the funding agencies of that field.
Industry ought to be doing it instead. If the work is `near market' then it should be done by industry or industry or venture capital should be funding you to do it. If no industry is interested then the prima facie assumption is that the product has no commercial value.
There is no evidence that the proposers will succeed where others have failed. It is easy enough to write a proposal with an exciting-sounding wish-list of hoped-for achievements, but you must substantiate your goals with solid evidence of why you have a good chance of achieving them.
This evidence generally takes two main forms:
"We have an idea". In this case, you should sketch the idea, and describe preliminary work you have done which shows that it is indeed a good idea. You are unlikely to get funding without such evidence. It is not good saying "give us the money and we will start thinking about this problem".
"We have a good track record". Include a selective list of publications, and perhaps include a short paper (preferably a published one) which gives more background, as an appendix. If you make it clear that it is an appendix, you won't usually fall foul of any length limits.
A new idea is claimed but insufficient technical details of the idea are given for the committee to be able to judge whether it looks promising. Since the committee cannot be expert in all areas there is a danger of overwhelming them with technical details, but it is better to err by overwhelming them than by underwhelming them. They will usually get an expert referee to evaluate your idea.
The proposers seem unaware of related research. Related work must be mentioned, if only to be dismissed. Otherwise, the committee will think that the proposers are ignorant and, therefore, not the best group to fund. The case for support should have a list of references like any paper, and you should look at it to check it has a balanced feel - your referee will do so. Do not make the mistake of giving references only to your own work!
The proposed research has already been done - or appears to have been done. Rival solutions must be discussed and their inadequacies revealed.
The proposal is badly presented, or incomprehensible to all but an expert in the field. Remember that your proposal will be read by non-experts as well as (hopefully) experts. A good proposal is simultaneously comprehensible to non-experts, while also convincing experts that you know your subject. Keep highly-technical material in well-signposted section(s); avoid it in the introduction.
The proposers seem to be attempting too much for the funding requested and time-scale envisaged. Such lack of realism may reflect a poor understanding of the problem or poor research methodology.
The proposal is too expensive for the probable gain. If it is easy to see how to cut the request for people/equipment/travel, etc. to something more reasonable then it might be awarded in reduced form. More likely, it will be rejected.
The proposers institution should be funding it. Research agencies will usually only fund research that requires resources beyond that which might be expected in a "well-found laboratory" --- indeed, this is part of the charter of the research councils. If it looks like your proposal might be done by a PhD student on the departmental computer then that is what should happen. If the proposer's laboratory is not "well-found" then this is taken to be a vote of no-confidence in the proposer by his/her institution.
Doubtless there are other common grounds for failure that have been omitted. If you know of any please let us know!.
Often, one can tell from independent knowledge of the proposers or by reading between the lines of the proposal, that the criteria could have been met if a little bit more thought had gone into the proposal. There is a clear question being addressed by the research, but the proposers failed to clarify what it was. The proposers are aware of related research, but they failed to discuss it in the proposal. The proposers do have some clear technical ideas, but they thought it inappropriate to go into such detail in the proposal. Unfortunately, there is a limit to which a funding agencies can give such cases the benefit of the doubt. It is not fair for referees to overlook shortcomings in proposals of which they have personal knowledge if similar shortcomings are not overlooked in proposals which they have not encountered before. In any case, proposals which do meet the criteria deserve precedence.
CONCLUSION
We hope that this document will help you to write better grant proposals, and hence to be more successful in obtaining funds for your research. This article is not just about writing better grant proposals to obtain more money. The basic set-up of peer-reviewed grants of limited duration is a sensible one. It compels researchers regularly to review and re-justify the direction of their work. Behind poorly presented grant proposals often lie poorly-reasoned research plans. Perhaps if we can improve the quality of Computer Science proposals we will also improve the quality of Computer Science research.
Tuesday, December 19, 2006
Sunday, December 17, 2006
economic indicators
Economic indicators are snippets of financial and economic data published by various agencies of the government or private sector. These statistics, which are made public on a regularly scheduled basis, help market observers monitor the pulse of the economy. Therefore, they are religiously followed by almost everyone in the financial markets. With so many people poised to react to the same information, economic indicators in general have tremendous potential to generate volume and to move prices in the markets. While on the surface it might seem that an advanced degree in economics would come in handy to analyze and then trade on the glut of information contained in these economic indicators, a few simple guidelines are all that is necessary to track, organize and make trading decisions based on the data.
Know exactly when each economic indicator is due to be released. Keep a calendar on your desk or trading station that contains the date and time when each stat will be made public. You can find these calendars on the N.Y. Federal Reserve Bank Web site using this link http://www.ny.frb.org/, and then by searching for "economic indicators." The same information is also available on many other sources on the Web or from the company you use to execute your trades.
Keeping track of the calendar of economic indicators will also help you make sense out of otherwise unanticipated price action in the market. Consider this scenario: it's Monday morning and the USD has been in a tailspin for three weeks. As such, it's safe to assume that many traders are holding large short USD positions. However, on Friday the employment data for the U.S. is due to be released. It is very likely that with this key piece of economic information soon to be made public, the USD could experience a short-term rally leading up to the data on Friday as traders pare down their short positions. The point here is that economic indicators can effect prices directly (following their release to the public) or indirectly (as traders massage their positions in anticipation of the data.)
Understand what particular aspect of the economy is being revealed in the data. For example, you should know which indicators measure the growth of the economy (GDP) vs. those that measure inflation (PPI, CPI) or employment (non-farm payrolls). After you follow the data for a while, you'll become very familiar with the nuances of each economic indicator and what part of the economy they are measuring.
Not all economic indicators are created equal. Well, they might've been created with equal importance but along the way, some have acquired much greater potential to move the markets than others. Market participants will place higher regard on one stat vs. another depending on the state of the economy.
Know which indicators the markets are keying on. For example, if prices (inflation) are not a crucial issue for a particular country, inflation data will probably not be as keenly anticipated or reacted to by the markets. On the other hand, if economic growth is a vexing problem, changes in employment data or GDP will be eagerly anticipated and could precipitate tremendous volatility following their release.
The data itself is not as important as whether or not it falls within market expectations. Besides knowing when all the data will hit the wires, it is vitally important that you know what economists and other market pundits are forecasting for each indicator. For example, knowing the economic consequences of an unexpected monthly rise of 0.3% in the producer price index (PPI) is not nearly as vital to your short-term trading decisions as it is to know that this month the market was looking for PPI to fall by 0.1%. As mentioned, you should know that PPI measures prices and that an unexpected rise could be a sign of inflation. But analyzing the longer-term ramifications of this unexpected monthly rise in prices can wait until after you've taken advantage of the trading opportunities presented by the data. Once again, market expectations for all economic releases are published on various sources on the Web and you should post these expectations on your calendar along with the release date of the indicator.
Don't get caught up in the headlines. Part of getting a handle on what the market is forecasting for various economic indicators is knowing the key aspects of each indicator. While your macroeconomics professor might have drilled the significance of the unemployment rate into your head, even junior traders can tell you that the headline figure is for amateurs and that the most closely watched detail in the payroll data is the non-farm payrolls figure. Other economic indicators are similar in that the headline figure is not nearly as closely watched as the finer points of the data. PPI for example, measures changes in producer prices. But the stat most closely watched by the markets is PPI, ex-food and energy. Traders know that the food and energy component of the data is much too volatile and subject to revisions on a month-to-month basis to provide an accurate reading on the changes in producer prices.
Speaking of revisions, don't be too quick to pull that trigger should a particular economic indicator fall outside of market expectations. Contained in each new economic indicator released to the public are revisions to previously released data. For example, if durable goods should rise by 0.5% in the current month, while the market is anticipating them to fall, the unexpected rise could be the result of a downward revision to the prior month. Look at revisions to older data because in this case, the previous month's durable goods figure might've been originally reported as a rise of 0.5% but now, along with the new figures, is being revised lower to say a rise of only 0.1% Therefore, the unexpected rise in the current month is likely the result of a downward revision to the previous month's data.
Don't forget that there are two sides to a trade in the foreign exchange market. So, while you might have a great handle on the complete package of economic indicators published in the United States or Europe, most other countries also publish similar economic data. The important thing to remember here is that not all countries are as efficient as the G7 in releasing this information. Once again, if you are going to trade the currency of a particular country, you need to find out the particulars about their economic indicators. As mentioned above, not all of these indicators carry the same weight in the markets and not all of them are as accurate as others. Do your homework and you won't be caught off guard.
General information regarding major economic indicators
When focusing exclusively on the impact that economic indicators have on price action in a particular market, the foreign exchange markets are the most challenging, and therefore, have greatest potential for profits of any market. Obviously, factors other than economic indicators move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators. The challenge comes in diligently keeping track of the nuts and bolts of each country's particular economic information package. Here are a few general comments about economic indicators and some of the more closely watched data.
Most economic indicators can be divided into leading and lagging indicators.
Leading indicators are economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the economy has already begun to follow a particular pattern or trend.
Major Indicators
The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Retail Sales - The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
Know exactly when each economic indicator is due to be released. Keep a calendar on your desk or trading station that contains the date and time when each stat will be made public. You can find these calendars on the N.Y. Federal Reserve Bank Web site using this link http://www.ny.frb.org/, and then by searching for "economic indicators." The same information is also available on many other sources on the Web or from the company you use to execute your trades.
Keeping track of the calendar of economic indicators will also help you make sense out of otherwise unanticipated price action in the market. Consider this scenario: it's Monday morning and the USD has been in a tailspin for three weeks. As such, it's safe to assume that many traders are holding large short USD positions. However, on Friday the employment data for the U.S. is due to be released. It is very likely that with this key piece of economic information soon to be made public, the USD could experience a short-term rally leading up to the data on Friday as traders pare down their short positions. The point here is that economic indicators can effect prices directly (following their release to the public) or indirectly (as traders massage their positions in anticipation of the data.)
Understand what particular aspect of the economy is being revealed in the data. For example, you should know which indicators measure the growth of the economy (GDP) vs. those that measure inflation (PPI, CPI) or employment (non-farm payrolls). After you follow the data for a while, you'll become very familiar with the nuances of each economic indicator and what part of the economy they are measuring.
Not all economic indicators are created equal. Well, they might've been created with equal importance but along the way, some have acquired much greater potential to move the markets than others. Market participants will place higher regard on one stat vs. another depending on the state of the economy.
Know which indicators the markets are keying on. For example, if prices (inflation) are not a crucial issue for a particular country, inflation data will probably not be as keenly anticipated or reacted to by the markets. On the other hand, if economic growth is a vexing problem, changes in employment data or GDP will be eagerly anticipated and could precipitate tremendous volatility following their release.
The data itself is not as important as whether or not it falls within market expectations. Besides knowing when all the data will hit the wires, it is vitally important that you know what economists and other market pundits are forecasting for each indicator. For example, knowing the economic consequences of an unexpected monthly rise of 0.3% in the producer price index (PPI) is not nearly as vital to your short-term trading decisions as it is to know that this month the market was looking for PPI to fall by 0.1%. As mentioned, you should know that PPI measures prices and that an unexpected rise could be a sign of inflation. But analyzing the longer-term ramifications of this unexpected monthly rise in prices can wait until after you've taken advantage of the trading opportunities presented by the data. Once again, market expectations for all economic releases are published on various sources on the Web and you should post these expectations on your calendar along with the release date of the indicator.
Don't get caught up in the headlines. Part of getting a handle on what the market is forecasting for various economic indicators is knowing the key aspects of each indicator. While your macroeconomics professor might have drilled the significance of the unemployment rate into your head, even junior traders can tell you that the headline figure is for amateurs and that the most closely watched detail in the payroll data is the non-farm payrolls figure. Other economic indicators are similar in that the headline figure is not nearly as closely watched as the finer points of the data. PPI for example, measures changes in producer prices. But the stat most closely watched by the markets is PPI, ex-food and energy. Traders know that the food and energy component of the data is much too volatile and subject to revisions on a month-to-month basis to provide an accurate reading on the changes in producer prices.
Speaking of revisions, don't be too quick to pull that trigger should a particular economic indicator fall outside of market expectations. Contained in each new economic indicator released to the public are revisions to previously released data. For example, if durable goods should rise by 0.5% in the current month, while the market is anticipating them to fall, the unexpected rise could be the result of a downward revision to the prior month. Look at revisions to older data because in this case, the previous month's durable goods figure might've been originally reported as a rise of 0.5% but now, along with the new figures, is being revised lower to say a rise of only 0.1% Therefore, the unexpected rise in the current month is likely the result of a downward revision to the previous month's data.
Don't forget that there are two sides to a trade in the foreign exchange market. So, while you might have a great handle on the complete package of economic indicators published in the United States or Europe, most other countries also publish similar economic data. The important thing to remember here is that not all countries are as efficient as the G7 in releasing this information. Once again, if you are going to trade the currency of a particular country, you need to find out the particulars about their economic indicators. As mentioned above, not all of these indicators carry the same weight in the markets and not all of them are as accurate as others. Do your homework and you won't be caught off guard.
General information regarding major economic indicators
When focusing exclusively on the impact that economic indicators have on price action in a particular market, the foreign exchange markets are the most challenging, and therefore, have greatest potential for profits of any market. Obviously, factors other than economic indicators move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators. The challenge comes in diligently keeping track of the nuts and bolts of each country's particular economic information package. Here are a few general comments about economic indicators and some of the more closely watched data.
Most economic indicators can be divided into leading and lagging indicators.
Leading indicators are economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the economy has already begun to follow a particular pattern or trend.
Major Indicators
The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Retail Sales - The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
fundamental analysis
Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a business cycle framework. If you think of the financial markets as a big clock, the fundamentals are the gears and springs that move the hands around the face. Anyone walking down the street can look at this clock and tell you what time it is now, but the fundamentalist can tell you how it came to be this time and more importantly, what time (or more precisely, what price) it will be in the future.
There is a tendency to pigeonhole traders into two distinct schools of market analysis - fundamental and technical. Indeed, the first question posed to you after you tell someone that you are a trader is generally "Are you a technician or a fundamentalist?" The reality is that it has become increasingly difficult to be a purist of either persuasion. Fundamentalists need to keep an eye on the various signals derived from the price action on charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or the myriad of societal issues that influence prices.
Bearing in mind that the financial underpinnings of any country, trading bloc or multinational industry takes into account many factors, including social, political and economic influences, staying on top of an extremely fluid fundamental picture can be challenging. At the same time, you'll find that your knowledge and understanding of a dynamic global market will increase immeasurably as you delve further and further into the complexities and subtleties of the fundamentals of the markets.
Fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist's forecast of the upcoming GDP or employment report, you begin to get a fairly clear picture of the general health of the economy and the forces at work behind it. However, you'll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.
A trader who studies the markets using fundamental analysis will generally create models to formulate a trading strategy. These models typically utilize a host of empirical data and attempt to forecast market behavior and estimate future values or prices by using past values of core economic indicators. This information is then used to derive specific trades that best exploit this information.
Forecasting models are as numerous and varied as the traders and market buffs that create them. Two people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. Therefore is it important that before casting yourself into a particular mold regarding any aspect of market analysis, you study the fundamentals and see how they best fit your trading style and expectations.
Don't succumb to 'paralysis by analysis.' Given the multitude of factors that fall under the heading of "The Fundamentals," there is a distinct danger of information overload. Sometimes traders fall into this trap and are unable to pull the trigger on a trade. This is one of the reasons why many traders turn to technical analysis. To some, technical analysis is seen as a way to transform all of the fundamental factors that influence the markets into one simple tool, prices. However, trading a particular market without knowing a great deal about the exact nature of its underlying elements is like fishing without bait. You might get lucky and snare a few on occasion but it's not the best approach over the long haul.
For forex traders, the fundamentals are everything that makes a country tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is best to get a handle on the most influential contributors to this diverse mix than it is to formulate a comprehensive list of all "The Fundamentals."
There is a tendency to pigeonhole traders into two distinct schools of market analysis - fundamental and technical. Indeed, the first question posed to you after you tell someone that you are a trader is generally "Are you a technician or a fundamentalist?" The reality is that it has become increasingly difficult to be a purist of either persuasion. Fundamentalists need to keep an eye on the various signals derived from the price action on charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or the myriad of societal issues that influence prices.
Bearing in mind that the financial underpinnings of any country, trading bloc or multinational industry takes into account many factors, including social, political and economic influences, staying on top of an extremely fluid fundamental picture can be challenging. At the same time, you'll find that your knowledge and understanding of a dynamic global market will increase immeasurably as you delve further and further into the complexities and subtleties of the fundamentals of the markets.
Fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist's forecast of the upcoming GDP or employment report, you begin to get a fairly clear picture of the general health of the economy and the forces at work behind it. However, you'll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.
A trader who studies the markets using fundamental analysis will generally create models to formulate a trading strategy. These models typically utilize a host of empirical data and attempt to forecast market behavior and estimate future values or prices by using past values of core economic indicators. This information is then used to derive specific trades that best exploit this information.
Forecasting models are as numerous and varied as the traders and market buffs that create them. Two people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. Therefore is it important that before casting yourself into a particular mold regarding any aspect of market analysis, you study the fundamentals and see how they best fit your trading style and expectations.
Don't succumb to 'paralysis by analysis.' Given the multitude of factors that fall under the heading of "The Fundamentals," there is a distinct danger of information overload. Sometimes traders fall into this trap and are unable to pull the trigger on a trade. This is one of the reasons why many traders turn to technical analysis. To some, technical analysis is seen as a way to transform all of the fundamental factors that influence the markets into one simple tool, prices. However, trading a particular market without knowing a great deal about the exact nature of its underlying elements is like fishing without bait. You might get lucky and snare a few on occasion but it's not the best approach over the long haul.
For forex traders, the fundamentals are everything that makes a country tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is best to get a handle on the most influential contributors to this diverse mix than it is to formulate a comprehensive list of all "The Fundamentals."
price charts
Chart patterns
There are a variety of charts that show price action. The most common are bar charts. Each bar will represent one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
Candlestick patterns
Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts.
Point & figure patterns
Point and figure patterns are essentially the same patterns found in bar charts but Xs and Os are used to market changes in price direction. In addition, point and figure charts make no use of time scales to indicate the particular day associated with certain price action.
Technical Indicators
Here are a few of the more common types of indicators used in technical analysis:
Trend indicators
Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction. (Example: Moving Averages, Trend lines)
Strength indicators
Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market. (Example: Volume)
Volatility indicators
Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. (Example: Bollinger Bands)
Cycle indicators
A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns. (Example: Elliott Wave)
Support/resistance indicators
Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)
Momentum indicators
Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI)
There are a variety of charts that show price action. The most common are bar charts. Each bar will represent one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
Candlestick patterns
Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts.
Point & figure patterns
Point and figure patterns are essentially the same patterns found in bar charts but Xs and Os are used to market changes in price direction. In addition, point and figure charts make no use of time scales to indicate the particular day associated with certain price action.
Technical Indicators
Here are a few of the more common types of indicators used in technical analysis:
Trend indicators
Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction. (Example: Moving Averages, Trend lines)
Strength indicators
Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market. (Example: Volume)
Volatility indicators
Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. (Example: Bollinger Bands)
Cycle indicators
A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns. (Example: Elliott Wave)
Support/resistance indicators
Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)
Momentum indicators
Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI)
price charts
Chart patterns
There are a variety of charts that show price action. The most common are bar charts. Each bar will represent one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
Candlestick patterns
Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts.
Point & figure patterns
Point and figure patterns are essentially the same patterns found in bar charts but Xs and Os are used to market changes in price direction. In addition, point and figure charts make no use of time scales to indicate the particular day associated with certain price action.
Technical Indicators
Here are a few of the more common types of indicators used in technical analysis:
Trend indicators
Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction. (Example: Moving Averages, Trend lines)
Strength indicators
Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market. (Example: Volume)
Volatility indicators
Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. (Example: Bollinger Bands)
Cycle indicators
A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns. (Example: Elliott Wave)
Support/resistance indicators
Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)
Momentum indicators
Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI)
There are a variety of charts that show price action. The most common are bar charts. Each bar will represent one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
Candlestick patterns
Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts.
Point & figure patterns
Point and figure patterns are essentially the same patterns found in bar charts but Xs and Os are used to market changes in price direction. In addition, point and figure charts make no use of time scales to indicate the particular day associated with certain price action.
Technical Indicators
Here are a few of the more common types of indicators used in technical analysis:
Trend indicators
Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction. (Example: Moving Averages, Trend lines)
Strength indicators
Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market. (Example: Volume)
Volatility indicators
Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. (Example: Bollinger Bands)
Cycle indicators
A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns. (Example: Elliott Wave)
Support/resistance indicators
Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)
Momentum indicators
Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI)
technical analysis
Technical analysis is a method of forecasting price movements by looking at purely market-generated data. Price data from a particular market is most commonly the type of information analyzed by a technician, though most will also keep a close watch on volume and open interest in futures contracts. The bottom line when utilizing any type of analytical method, technical or otherwise, is to stick to the basics, which are methodologies with a proven track record over a long period. After finding a trading system that works for you, the more esoteric fields of study can then be incorporated into your trading toolbox.
Almost every trader uses some form of technical analysis. Even the most reverent follower of market fundamentals is likely to glance at price charts before executing a trade. At their most basic level, these charts help traders determine ideal entry and exit points for a trade. They provide a visual representation of the historical price action of whatever is being studied. As such, traders can look at a chart and know if they are buying at a fair price (based on the price history of a particular market), selling at a cyclical top or perhaps throwing their capital into a choppy, sideways market. These are just a few market conditions that charts identify for a trader. Depending on their level of sophistication, charts can also help much more advanced studies of the markets.
On the surface, it might appear that technicians ignore the fundamentals of the market while surrounding themselves with charts and data tables. However, a technical trader will tell you that all of the fundamentals are already represented in the price. They are not so much concerned that a natural disaster or an awful inflation number caused a recent spike in prices as much as how that price action fits into a pattern or trend. And much more to the point, how that pattern can be used to predict future prices.
Technical analysis assumes that:
All market fundamentals are depicted in the actual market data. So the actual market fundamentals and various factors, such as the differing opinions, hopes, fears, and moods of market participants, need not be studied.
History repeats itself and therefore markets move in fairly predictable, or at least quantifiable, patterns. These patterns, generated by price movement, are called signals. The goal in technical analysis is to uncover the signals given off in a current market by examining past market signals.
Prices move in trends. Technicians typically do not believe that price fluctuations are random and unpredictable. Prices can move in one of three directions, up, down or sideways. Once a trend in any of these directions is established, it usually will continue for some period.
The building blocks of any technical analysis system include price charts, volume charts, and a host of other mathematical representations of market patterns and behaviors. Most often called studies, these mathematical manipulations of various types of market data are used to determine the strength and sustainability of a particular trend. So, rather than simply relying on price charts to forecast future market values, technicians will also use a variety of other technical tools before entering a trade.
As in all other aspects of trading, be very disciplined when using technical analysis. Too often, a trader will fail to sell or buy into a market even after it has reached a price that his or her technical studies identified as an entry or exit point. This is because it is hard to screen out the fundamental realities that led to the price movement in the first place.
As an example, let's assume you are long USD vs. euro and have established your stop/loss 30 pips away from your entry point. However, if some unforeseen factor is responsible for pushing the USD through your stop/loss level you might be inclined to hold this position just a bit longer in the hopes that it turns back into a winner. It is very hard to make the decision to cut your losses and even harder to resist the temptation to book profits too early on a winning trade. This is called leaving money on the table. A common mistake is to ride a loser too long in the hopes it comes back and to cut a winner way too early. If you use technical analysis to establish entry and exit levels, be very disciplined in following through on your original trading plan.
Almost every trader uses some form of technical analysis. Even the most reverent follower of market fundamentals is likely to glance at price charts before executing a trade. At their most basic level, these charts help traders determine ideal entry and exit points for a trade. They provide a visual representation of the historical price action of whatever is being studied. As such, traders can look at a chart and know if they are buying at a fair price (based on the price history of a particular market), selling at a cyclical top or perhaps throwing their capital into a choppy, sideways market. These are just a few market conditions that charts identify for a trader. Depending on their level of sophistication, charts can also help much more advanced studies of the markets.
On the surface, it might appear that technicians ignore the fundamentals of the market while surrounding themselves with charts and data tables. However, a technical trader will tell you that all of the fundamentals are already represented in the price. They are not so much concerned that a natural disaster or an awful inflation number caused a recent spike in prices as much as how that price action fits into a pattern or trend. And much more to the point, how that pattern can be used to predict future prices.
Technical analysis assumes that:
All market fundamentals are depicted in the actual market data. So the actual market fundamentals and various factors, such as the differing opinions, hopes, fears, and moods of market participants, need not be studied.
History repeats itself and therefore markets move in fairly predictable, or at least quantifiable, patterns. These patterns, generated by price movement, are called signals. The goal in technical analysis is to uncover the signals given off in a current market by examining past market signals.
Prices move in trends. Technicians typically do not believe that price fluctuations are random and unpredictable. Prices can move in one of three directions, up, down or sideways. Once a trend in any of these directions is established, it usually will continue for some period.
The building blocks of any technical analysis system include price charts, volume charts, and a host of other mathematical representations of market patterns and behaviors. Most often called studies, these mathematical manipulations of various types of market data are used to determine the strength and sustainability of a particular trend. So, rather than simply relying on price charts to forecast future market values, technicians will also use a variety of other technical tools before entering a trade.
As in all other aspects of trading, be very disciplined when using technical analysis. Too often, a trader will fail to sell or buy into a market even after it has reached a price that his or her technical studies identified as an entry or exit point. This is because it is hard to screen out the fundamental realities that led to the price movement in the first place.
As an example, let's assume you are long USD vs. euro and have established your stop/loss 30 pips away from your entry point. However, if some unforeseen factor is responsible for pushing the USD through your stop/loss level you might be inclined to hold this position just a bit longer in the hopes that it turns back into a winner. It is very hard to make the decision to cut your losses and even harder to resist the temptation to book profits too early on a winning trade. This is called leaving money on the table. A common mistake is to ride a loser too long in the hopes it comes back and to cut a winner way too early. If you use technical analysis to establish entry and exit levels, be very disciplined in following through on your original trading plan.
profit and loss
For ease of use, most online trading platforms automatically calculate the P&L of a traders' open positions. However, it is useful to understand how this calculation is derived.
To illustrate a typical FX trade, consider the following example.
The current bid/ask price for USD/CHF is 1.6322/1.6327, meaning you can buy $1 US for 1.6327 Swiss Francs or sell $1 US for 1.6322.
Suppose you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF). To execute this strategy, you would buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
So you make the trade: purchasing US$100,000 and selling 163,270 Francs. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
As you expected, USD/CHF rises to 1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs.
Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You sell US$100,000 at the current USD/CHF rate of 1.6435, and receive 164,350 CHF. Since you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.6435.
Total profit = US $657.13
To illustrate a typical FX trade, consider the following example.
The current bid/ask price for USD/CHF is 1.6322/1.6327, meaning you can buy $1 US for 1.6327 Swiss Francs or sell $1 US for 1.6322.
Suppose you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF). To execute this strategy, you would buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
So you make the trade: purchasing US$100,000 and selling 163,270 Francs. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
As you expected, USD/CHF rises to 1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs.
Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You sell US$100,000 at the current USD/CHF rate of 1.6435, and receive 164,350 CHF. Since you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.6435.
Total profit = US $657.13
understanding margin
Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.
Benefits of Margin
With more buying power, you can increase your total return on investment with less cash outlay. To be sure, trading on margin magnifies your profits AND your losses.
Here's a hypothetical example that demonstrates the upside of trading on margin:
With a US$5,000 balance in your margin account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
The current bid/ask price for USD/CHF is 1.6322/1.6327 (meaning you can buy $1 US for 1.6327 Swiss Francs or sell $1 US for 1.6322)
Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 163,270 Swiss Francs.
At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your account balance is now $4000.
As you expected, USD/CHF rises to 1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You close out the position, selling one lot (selling 100,000 US dollar and receiving 164,350 CHF) Since you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.6435. Your profit on this trade is $657.13
SummaryInitial Investment: $1000
Profit: $657.13
Return on investment: 65.7%
If you had executed this trade without using leverage, your return on investment would be less than 1%.
Managing a Margin Account
Trading on margin can be a profitable investment strategy, but it's important that you take the time to understand the risks.
You should make sure you fully understand how your margin account works. Be sure to read the margin agreement between you and your clearing firm. Talk to your account representative if you have any questions.
The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.
You may not receive a margin call before your positions are liquidated.
You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.
Benefits of Margin
With more buying power, you can increase your total return on investment with less cash outlay. To be sure, trading on margin magnifies your profits AND your losses.
Here's a hypothetical example that demonstrates the upside of trading on margin:
With a US$5,000 balance in your margin account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
The current bid/ask price for USD/CHF is 1.6322/1.6327 (meaning you can buy $1 US for 1.6327 Swiss Francs or sell $1 US for 1.6322)
Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 163,270 Swiss Francs.
At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your account balance is now $4000.
As you expected, USD/CHF rises to 1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You close out the position, selling one lot (selling 100,000 US dollar and receiving 164,350 CHF) Since you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.6435. Your profit on this trade is $657.13
SummaryInitial Investment: $1000
Profit: $657.13
Return on investment: 65.7%
If you had executed this trade without using leverage, your return on investment would be less than 1%.
Managing a Margin Account
Trading on margin can be a profitable investment strategy, but it's important that you take the time to understand the risks.
You should make sure you fully understand how your margin account works. Be sure to read the margin agreement between you and your clearing firm. Talk to your account representative if you have any questions.
The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.
You may not receive a margin call before your positions are liquidated.
You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.
Friday, October 27, 2006
forex #19
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Economic Indicators 101 - How to Have Half Your
Trading Battle Plan Created For You.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We touched upon this briefly in Lesson #6 - which was a
lesson mainly covering what fundamental analysis is and how
it differs from technical analysis - but, because economic
indicators by far provide the most information of all the
fundamental factors, we wanted to save this towards the end
so you can PRINT OUT half your *trading battle plan*
Here's what we mean:
Unlike the financial, political, and crisis factors,
economic indicators occur in a steady stream, at certain
times, and more often!
Economic indicators are snippets of economic data published
by various agencies of the government or private sector.
These statistics, which are made public on a regularly
scheduled basis, help market observers monitor the pulse of
a countries economy.
Therefore, they are religiously followed by almost everyone
in the FOREX markets. With so many people poised to
react to the same information, economic indicators in
general have tremendous potential to generate volume and to
move prices in the markets.
Our RESOURCE GUIDE to Economic Indicators will help you
conquer half the battle.
And, as we mentioned in Lesson #7 (Technical Analysis), the
other half of the plan is now forecasting the proper short
to long-term trend and entering your trades, and exiting
them accordingly.
=====================
While on the surface it might seem that an advanced degree
in economics would come in handy to analyze and then trade
on the glut of information contained in these economic
indicators, a few simple guidelines are all that is
necessary to track, organize and make trading decisions
based on the data.
*** Know exactly when each economic indicator is due to be
released ***
Keep a calendar on your desk or trading station that
contains the date and time when each stat will be made
public. You can find a Fundamental Announcements calendar in
the Rapid Forex Resources Section.
=======================================================
NOTE: We have an entire course on how to profit from
economic indicators, news releases and fundamental
announcements. It's titled "Explosive Profits" and
you can learn more about this innovative trading method
here: http://rapidforex.com/explosive.shtml . As a
student and member of our Membership Resources Section,
you will also receive our Top picks for the week.
We will highlight several News Releases for the week for
you to concentrate on.
=======================================================
*** Keeping track of the calendar of economic indicators
will also help you make sense out of otherwise unanticipated
price action in the market ***
Consider this scenario: it's Monday morning and the USD has
been in a tailspin for three weeks. As such, it's safe to
assume that many traders are holding large short USD
positions. However, on Friday the employment data for the
U.S. is due to be released. It is very likely that with this
key piece of economic information soon to be made public,
the USD could experience a short-term rally leading up to
the data on Friday as traders pare down their short
positions. The point here is that economic indicators can
effect prices directly (following their release to the
public) or indirectly (as traders massage their positions in
anticipation of the data.)
*** Understand what particular aspect of the economy is
being revealed in the data ***
For example, you should know which indicators measure the
growth of the economy (GDP) vs. those that measure inflation
(PPI, CPI) or employment (non-farm payrolls, unemployment).
After you follow the data for a while, you'll become very
familiar with the nuances of each economic indicator and
what part of the economy they are measuring.
*** Not all economic indicators are created equal ***
Well, they might've been created with equal importance but
along the way, some have acquired much greater potential to
move the markets than others. Market participants will place
higher regard on one stat vs. another depending on the state
of the economy.
*** Know which indicators the markets are keying on ***
For example, if prices (inflation) are not a crucial issue
for a particular country, inflation data will probably not
be as keenly anticipated or reacted to by the markets. On
the other hand, if economic growth is a vexing problem,
changes in employment data or GDP will be eagerly
anticipated and could precipitate tremendous volatility
following their release.
*** The data itself is not as important as whether or not it
falls within market expectations ***
Besides knowing when all the data will hit the wires, it is
vitally important that you know what economists and other
market pundits are forecasting for each indicator. For
example, knowing the economic consequences of an unexpected
monthly rise of 0.3% in the producer price index (PPI) is
not nearly as vital to your short-term trading decisions as
it is to know that this month the market was looking for PPI
to fall by 0.1%. As mentioned, you should know that PPI
measures prices and that an unexpected rise could be a sign
of inflation. But analyzing the longer-term ramifications of
this unexpected monthly rise in prices can wait until after
you've taken advantage of the trading opportunities
presented by the data. Once again, market expectations for
all economic releases are published on various sources on
the Web and you should post these expectations on your
calendar along with the release date of the indicator.
*** Don't get caught up in the headlines ***
Part of getting a handle on what the market is forecasting
for various economic indicators is knowing the key aspects
of each indicator. While your macroeconomics professor might
have drilled the significance of the unemployment rate into
your head, even junior traders can tell you that the
headline figure is for amateurs and that the most closely
watched detail in the payroll data is the non-farm payrolls
figure. Other economic indicators are similar in that the
headline figure is not nearly as closely watched as the
finer points of the data. PPI for example, measures changes
in producer prices. But the stat most closely watched by the
markets is PPI, ex-food and energy. Traders know that the
food and energy component of the data is much too volatile
and subject to revisions on a month-to-month basis to
provide an accurate reading on the changes in producer
prices.
*** Speaking of revisions, don't be too quick to pull that
trigger should a particular economic indicator fall outside
of market expectations ***
Contained in each new economic indicator released to the
public are revisions to previously released data. For
example, if durable goods should rise by 0.5% in the current
month, while the market is anticipating them to fall, the
unexpected rise could be the result of a downward revision
to the prior month. Look at revisions to older data because
in this case, the previous month's durable goods figure
might've been originally reported as a rise of 0.5% but now,
along with the new figures, is being revised lower to say a
rise of only 0.1% therefore, the unexpected rise in the
current month is likely the result of a downward revision to
the previous month's data.
*** Don't forget that there are two sides to a trade in the
foreign exchange market ***
So, while you might have a great handle on the complete
package of economic indicators published in the United
States or Europe, most other countries also publish similar
economic data. The important thing to remember here is that
not all countries are as efficient as the G7 in releasing
this information. Once again, if you are going to trade the
currency of a particular country, you need to find out the
particulars about their economic indicators. As mentioned
above, not all of these indicators carry the same weight in
the markets and not all of them are as accurate as others.
Do your homework and you won't be caught off guard.
==============================
General information regarding
major economic indicators
==============================
When focusing exclusively on the impact that economic
indicators have on price action in a particular market, the
foreign exchange markets are the most challenging, and
therefore, have greatest potential for profits of any
market. Obviously, factors other than economic indicators
move prices and as such make other markets more or less
potentially profitable. But since a currency is a proxy for
the country it represents, the economic health of that
country is priced into the currency. One very important way
to measure the health of an economy is through economic
indicators. The challenge comes in diligently keeping track
of the nuts and bolts of each country's particular economic
information package. Here are a few general comments about
economic indicators and some of the more closely watched
data.
Most economic indicators can be divided into leading and
lagging indicators.
Leading indicators are economic factors that change before
the economy starts to follow a particular pattern or trend.
Leading indicators are used to predict changes in the
economy. Lagging Indicators are economic factors that change
after the economy has already begun to follow a particular
pattern or trend.
MAJOR Indicators:
The Gross Domestic Product (GDP) - The sum of all goods and
services produced either by domestic or foreign companies.
GDP indicates the pace at which a country's economy is
growing (or shrinking) and is considered the broadest
indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of
the change in the production of the nation's factories,
mines and utilities as well as a measure of their industrial
capacity and of how many available resources among
factories, utilities and mines are being used (commonly
known as capacity utilization). The manufacturing sector
accounts for one-quarter of the economy. The capacity
utilization rate provides an estimate of how much factory
capacity is in use.
Purchasing Managers Index (PMI) - The National Association
of Purchasing Managers (NAPM), now called the Institute for
Supply Management, releases a monthly composite index of
national manufacturing conditions, constructed from data on
new orders, production, supplier delivery times, backlogs,
inventories, prices, employment, export orders, and import
orders. It is divided into manufacturing and non-
manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI)
is a measure of price changes in the manufacturing sector.
It measures average changes in selling prices received by
domestic producers in the manufacturing, mining,
agriculture, and electric utility industries for their
output. The PPIs most often used for economic analysis are
those for finished goods, intermediate goods, and crude
goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI)
is a measure of the average price level paid by urban
consumers (80% of population) for a fixed basket of goods
and services. It reports price changes in over 200
categories. The CPI also includes various user fees and
taxes directly associated with the prices of specific goods
and services.
Durable Goods - Durable Goods Orders measures new orders
placed with domestic manufacturers for immediate and future
delivery of factory hard goods. A durable good is defined as
a good that lasts an extended period of time (over three
years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a
measure of the number of jobs in more than 500 industries in
all states and 255 metropolitan areas. The employment
estimates are based on a survey of larger businesses and
counts the number of paid employees working part-time or
full-time in the nation's business and government
establishments.
Retail Sales - The retail sales report is a measure of the
total receipts of retail stores from samples representing
all sizes and kinds of business in retail trade throughout
the nation. It is the timeliest indicator of broad consumer
spending patterns and is adjusted for normal seasonal
variation, holidays, and trading-day differences. Retail
sales include durable and nondurable merchandise sold, and
services and excise taxes incidental to the sale of
merchandise. Excluded are sales taxes collected directly
from the customer.
Housing Starts - The Housing Starts report measures the
number of residential units on which construction is begun
each month. A start in construction is defined as the
beginning of excavation of the foundation for the building
and is comprised primarily of residential housing. Housing
is very interest rate sensitive and is one of the first
sectors to react to changes in interest rates. Significant
reaction of start/permits to changing interest rates signals
interest rates are nearing trough or peak. To analyze, focus
on the percentage change in levels from the previous month.
Report is released around the middle of the following month.
Economic Indicators 101 - How to Have Half Your
Trading Battle Plan Created For You.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We touched upon this briefly in Lesson #6 - which was a
lesson mainly covering what fundamental analysis is and how
it differs from technical analysis - but, because economic
indicators by far provide the most information of all the
fundamental factors, we wanted to save this towards the end
so you can PRINT OUT half your *trading battle plan*
Here's what we mean:
Unlike the financial, political, and crisis factors,
economic indicators occur in a steady stream, at certain
times, and more often!
Economic indicators are snippets of economic data published
by various agencies of the government or private sector.
These statistics, which are made public on a regularly
scheduled basis, help market observers monitor the pulse of
a countries economy.
Therefore, they are religiously followed by almost everyone
in the FOREX markets. With so many people poised to
react to the same information, economic indicators in
general have tremendous potential to generate volume and to
move prices in the markets.
Our RESOURCE GUIDE to Economic Indicators will help you
conquer half the battle.
And, as we mentioned in Lesson #7 (Technical Analysis), the
other half of the plan is now forecasting the proper short
to long-term trend and entering your trades, and exiting
them accordingly.
=====================
While on the surface it might seem that an advanced degree
in economics would come in handy to analyze and then trade
on the glut of information contained in these economic
indicators, a few simple guidelines are all that is
necessary to track, organize and make trading decisions
based on the data.
*** Know exactly when each economic indicator is due to be
released ***
Keep a calendar on your desk or trading station that
contains the date and time when each stat will be made
public. You can find a Fundamental Announcements calendar in
the Rapid Forex Resources Section.
=======================================================
NOTE: We have an entire course on how to profit from
economic indicators, news releases and fundamental
announcements. It's titled "Explosive Profits" and
you can learn more about this innovative trading method
here: http://rapidforex.com/explosive.shtml . As a
student and member of our Membership Resources Section,
you will also receive our Top picks for the week.
We will highlight several News Releases for the week for
you to concentrate on.
=======================================================
*** Keeping track of the calendar of economic indicators
will also help you make sense out of otherwise unanticipated
price action in the market ***
Consider this scenario: it's Monday morning and the USD has
been in a tailspin for three weeks. As such, it's safe to
assume that many traders are holding large short USD
positions. However, on Friday the employment data for the
U.S. is due to be released. It is very likely that with this
key piece of economic information soon to be made public,
the USD could experience a short-term rally leading up to
the data on Friday as traders pare down their short
positions. The point here is that economic indicators can
effect prices directly (following their release to the
public) or indirectly (as traders massage their positions in
anticipation of the data.)
*** Understand what particular aspect of the economy is
being revealed in the data ***
For example, you should know which indicators measure the
growth of the economy (GDP) vs. those that measure inflation
(PPI, CPI) or employment (non-farm payrolls, unemployment).
After you follow the data for a while, you'll become very
familiar with the nuances of each economic indicator and
what part of the economy they are measuring.
*** Not all economic indicators are created equal ***
Well, they might've been created with equal importance but
along the way, some have acquired much greater potential to
move the markets than others. Market participants will place
higher regard on one stat vs. another depending on the state
of the economy.
*** Know which indicators the markets are keying on ***
For example, if prices (inflation) are not a crucial issue
for a particular country, inflation data will probably not
be as keenly anticipated or reacted to by the markets. On
the other hand, if economic growth is a vexing problem,
changes in employment data or GDP will be eagerly
anticipated and could precipitate tremendous volatility
following their release.
*** The data itself is not as important as whether or not it
falls within market expectations ***
Besides knowing when all the data will hit the wires, it is
vitally important that you know what economists and other
market pundits are forecasting for each indicator. For
example, knowing the economic consequences of an unexpected
monthly rise of 0.3% in the producer price index (PPI) is
not nearly as vital to your short-term trading decisions as
it is to know that this month the market was looking for PPI
to fall by 0.1%. As mentioned, you should know that PPI
measures prices and that an unexpected rise could be a sign
of inflation. But analyzing the longer-term ramifications of
this unexpected monthly rise in prices can wait until after
you've taken advantage of the trading opportunities
presented by the data. Once again, market expectations for
all economic releases are published on various sources on
the Web and you should post these expectations on your
calendar along with the release date of the indicator.
*** Don't get caught up in the headlines ***
Part of getting a handle on what the market is forecasting
for various economic indicators is knowing the key aspects
of each indicator. While your macroeconomics professor might
have drilled the significance of the unemployment rate into
your head, even junior traders can tell you that the
headline figure is for amateurs and that the most closely
watched detail in the payroll data is the non-farm payrolls
figure. Other economic indicators are similar in that the
headline figure is not nearly as closely watched as the
finer points of the data. PPI for example, measures changes
in producer prices. But the stat most closely watched by the
markets is PPI, ex-food and energy. Traders know that the
food and energy component of the data is much too volatile
and subject to revisions on a month-to-month basis to
provide an accurate reading on the changes in producer
prices.
*** Speaking of revisions, don't be too quick to pull that
trigger should a particular economic indicator fall outside
of market expectations ***
Contained in each new economic indicator released to the
public are revisions to previously released data. For
example, if durable goods should rise by 0.5% in the current
month, while the market is anticipating them to fall, the
unexpected rise could be the result of a downward revision
to the prior month. Look at revisions to older data because
in this case, the previous month's durable goods figure
might've been originally reported as a rise of 0.5% but now,
along with the new figures, is being revised lower to say a
rise of only 0.1% therefore, the unexpected rise in the
current month is likely the result of a downward revision to
the previous month's data.
*** Don't forget that there are two sides to a trade in the
foreign exchange market ***
So, while you might have a great handle on the complete
package of economic indicators published in the United
States or Europe, most other countries also publish similar
economic data. The important thing to remember here is that
not all countries are as efficient as the G7 in releasing
this information. Once again, if you are going to trade the
currency of a particular country, you need to find out the
particulars about their economic indicators. As mentioned
above, not all of these indicators carry the same weight in
the markets and not all of them are as accurate as others.
Do your homework and you won't be caught off guard.
==============================
General information regarding
major economic indicators
==============================
When focusing exclusively on the impact that economic
indicators have on price action in a particular market, the
foreign exchange markets are the most challenging, and
therefore, have greatest potential for profits of any
market. Obviously, factors other than economic indicators
move prices and as such make other markets more or less
potentially profitable. But since a currency is a proxy for
the country it represents, the economic health of that
country is priced into the currency. One very important way
to measure the health of an economy is through economic
indicators. The challenge comes in diligently keeping track
of the nuts and bolts of each country's particular economic
information package. Here are a few general comments about
economic indicators and some of the more closely watched
data.
Most economic indicators can be divided into leading and
lagging indicators.
Leading indicators are economic factors that change before
the economy starts to follow a particular pattern or trend.
Leading indicators are used to predict changes in the
economy. Lagging Indicators are economic factors that change
after the economy has already begun to follow a particular
pattern or trend.
MAJOR Indicators:
The Gross Domestic Product (GDP) - The sum of all goods and
services produced either by domestic or foreign companies.
GDP indicates the pace at which a country's economy is
growing (or shrinking) and is considered the broadest
indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of
the change in the production of the nation's factories,
mines and utilities as well as a measure of their industrial
capacity and of how many available resources among
factories, utilities and mines are being used (commonly
known as capacity utilization). The manufacturing sector
accounts for one-quarter of the economy. The capacity
utilization rate provides an estimate of how much factory
capacity is in use.
Purchasing Managers Index (PMI) - The National Association
of Purchasing Managers (NAPM), now called the Institute for
Supply Management, releases a monthly composite index of
national manufacturing conditions, constructed from data on
new orders, production, supplier delivery times, backlogs,
inventories, prices, employment, export orders, and import
orders. It is divided into manufacturing and non-
manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI)
is a measure of price changes in the manufacturing sector.
It measures average changes in selling prices received by
domestic producers in the manufacturing, mining,
agriculture, and electric utility industries for their
output. The PPIs most often used for economic analysis are
those for finished goods, intermediate goods, and crude
goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI)
is a measure of the average price level paid by urban
consumers (80% of population) for a fixed basket of goods
and services. It reports price changes in over 200
categories. The CPI also includes various user fees and
taxes directly associated with the prices of specific goods
and services.
Durable Goods - Durable Goods Orders measures new orders
placed with domestic manufacturers for immediate and future
delivery of factory hard goods. A durable good is defined as
a good that lasts an extended period of time (over three
years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a
measure of the number of jobs in more than 500 industries in
all states and 255 metropolitan areas. The employment
estimates are based on a survey of larger businesses and
counts the number of paid employees working part-time or
full-time in the nation's business and government
establishments.
Retail Sales - The retail sales report is a measure of the
total receipts of retail stores from samples representing
all sizes and kinds of business in retail trade throughout
the nation. It is the timeliest indicator of broad consumer
spending patterns and is adjusted for normal seasonal
variation, holidays, and trading-day differences. Retail
sales include durable and nondurable merchandise sold, and
services and excise taxes incidental to the sale of
merchandise. Excluded are sales taxes collected directly
from the customer.
Housing Starts - The Housing Starts report measures the
number of residential units on which construction is begun
each month. A start in construction is defined as the
beginning of excavation of the foundation for the building
and is comprised primarily of residential housing. Housing
is very interest rate sensitive and is one of the first
sectors to react to changes in interest rates. Significant
reaction of start/permits to changing interest rates signals
interest rates are nearing trough or peak. To analyze, focus
on the percentage change in levels from the previous month.
Report is released around the middle of the following month.
Sunday, September 10, 2006
forex #18
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Why You Should Get Your Eager Little Hands on
the Biggest Self-taught FOREX Trading Course
Packages in Existence:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Here's the TOP 10 reasons why our self-taught courses, at
http://www.RapidForex.com, consistently rank #1 as "the
absolute best low-cost, premium-quality FOREX education
courses in existence."
Reason #1 -- We meet all 5 guidelines, as discussed in
yesterdays lesson, for choosing an investment course.
Reason #2 -- Our course packages are modular. From our
smallest package to our largest package, we have a trading
method, technique, or combination of technical-trading
methodologies, that can meet anybody's budget, fit their
personality style, and sync-up with their tastes for either
trading with a pure indicator-based method or a more
subjective "chart patterns" method.
Reason #3 -- While they're stand-alone trading methods in
their own right, they compliment each other. We combine
indicators in the various RAPID FOREX investment strategies
in dynamic ways that are not used anywhere else online. For
example, the "Advanced Option Strategies" information allows
you to extract price movements predicted by option prices.
"Explosive Profits" allows you to trade based on news
announcements. "Forex Sailing" teaches some other indicators
as well, and all strategies used are mutually-inclusive of
each other.
Reason #4 -- Our courses work for all TIME FRAMES. You can
sit at a computer and daytrade with them or you can look at
the charts once a day and place trades that can last several
months. These methods are standalone trading systems, which
require no prior trading knowledge. If you already have a
trading method, these techniques can be combined with your
existing expertise for a powerful investment toolkit.
Reason #5 -- With the purchase of each manual / e-book you
will receive a system that gives you the EXACT PRICE to
enter and exit a trade! We have not seen many methods out
there that do that, and we have seen almost every system in
existence.
Reason #6 -- We have the best Satisfaction Guarantee on the
market. You also get the opportunity to trade in a demo
account, and you can get 200% of your money_back if you
can't turn a profit in your account (see details here:
http://www.rapidforex.com/guarantee.shtml)
Reason #7 -- our Power-packed Members-only FOREX Traders
Resource Site: suck up ALL our amazing resources to help YOU
make more profitable FOREX trades in a week than most people
make in a lifetime!
Reason #8 -- the same content & quality of information
others are offering for thousands of dollars. Our goal is to
provide you with EVERYTHING that you could learn if you
spent $20,000 taking courses from all the major FOREX
schools around. Our personal mission is to provide everyone
with the opportunity to participate in FOREX trading – most
people simply can't afford the $5,000+ courses other people
are offering, and thus they miss out (which is too bad
considering how FOREX could completely change their lives
for the better). Read about our "mission" at:
www.RapidForex.com/mission.shtml
Reason #9 -- No expensive software required. Many Forex
programs require that you spend thousands on expensive
software. We believe you should possess the knowledge
about how to trade, rather than depending on some
black-box system.
Reason #10 -- RapidForex is always on the cutting edge. Our
courses are constantly being added to, improved, tested, and
tweaked. We constantly offer new strategies so you can
benefit from everything the wonderful world of Forex trading
has to offer.
Why You Should Get Your Eager Little Hands on
the Biggest Self-taught FOREX Trading Course
Packages in Existence:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Here's the TOP 10 reasons why our self-taught courses, at
http://www.RapidForex.com, consistently rank #1 as "the
absolute best low-cost, premium-quality FOREX education
courses in existence."
Reason #1 -- We meet all 5 guidelines, as discussed in
yesterdays lesson, for choosing an investment course.
Reason #2 -- Our course packages are modular. From our
smallest package to our largest package, we have a trading
method, technique, or combination of technical-trading
methodologies, that can meet anybody's budget, fit their
personality style, and sync-up with their tastes for either
trading with a pure indicator-based method or a more
subjective "chart patterns" method.
Reason #3 -- While they're stand-alone trading methods in
their own right, they compliment each other. We combine
indicators in the various RAPID FOREX investment strategies
in dynamic ways that are not used anywhere else online. For
example, the "Advanced Option Strategies" information allows
you to extract price movements predicted by option prices.
"Explosive Profits" allows you to trade based on news
announcements. "Forex Sailing" teaches some other indicators
as well, and all strategies used are mutually-inclusive of
each other.
Reason #4 -- Our courses work for all TIME FRAMES. You can
sit at a computer and daytrade with them or you can look at
the charts once a day and place trades that can last several
months. These methods are standalone trading systems, which
require no prior trading knowledge. If you already have a
trading method, these techniques can be combined with your
existing expertise for a powerful investment toolkit.
Reason #5 -- With the purchase of each manual / e-book you
will receive a system that gives you the EXACT PRICE to
enter and exit a trade! We have not seen many methods out
there that do that, and we have seen almost every system in
existence.
Reason #6 -- We have the best Satisfaction Guarantee on the
market. You also get the opportunity to trade in a demo
account, and you can get 200% of your money_back if you
can't turn a profit in your account (see details here:
http://www.rapidforex.com/guarantee.shtml)
Reason #7 -- our Power-packed Members-only FOREX Traders
Resource Site: suck up ALL our amazing resources to help YOU
make more profitable FOREX trades in a week than most people
make in a lifetime!
Reason #8 -- the same content & quality of information
others are offering for thousands of dollars. Our goal is to
provide you with EVERYTHING that you could learn if you
spent $20,000 taking courses from all the major FOREX
schools around. Our personal mission is to provide everyone
with the opportunity to participate in FOREX trading – most
people simply can't afford the $5,000+ courses other people
are offering, and thus they miss out (which is too bad
considering how FOREX could completely change their lives
for the better). Read about our "mission" at:
www.RapidForex.com/mission.shtml
Reason #9 -- No expensive software required. Many Forex
programs require that you spend thousands on expensive
software. We believe you should possess the knowledge
about how to trade, rather than depending on some
black-box system.
Reason #10 -- RapidForex is always on the cutting edge. Our
courses are constantly being added to, improved, tested, and
tweaked. We constantly offer new strategies so you can
benefit from everything the wonderful world of Forex trading
has to offer.
Monday, September 04, 2006
forex #17
How To Get a Harvard FOREX Education on a
Community College Budget.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We're going to share something with you that is not a
popular topic in the FOREX trading education world. We have
gotten some nasty comments by other FOREX trading course
authors by implementing this philosophy.
This nasty little secret is the lifeblood of the FOREX
trading education industry. We legally cannot mention any
company names here, so we're just going to tell you what
this nasty little secret is (not the people/vendors who look
that other way and don't *come clean* and admit it). We
will also give you guidelines to avoid falling into any
traps.
Here it is: All the information you need to trade the FOREX
is available in free (like this e-course) or low cost
resources (like our low-cost e-book packages).
If you search for FOREX trading systems you will see an
unbelievable trend. You will notice that many FOREX
courses are charging thousands of dollars for trading
courses. Perhaps the information is good, perhaps it is
not. But, would you believe, this is not even the most
profitable part of the industry.
Other trading courses REQUIRE you to subscribe to a paid
service that forces you to depend on that service. These
paid services can be email notifications, software leasing,
& other types of services. Without these paid for
services you simply CAN'T trade using their methods!
So what is the problem with a paid service? These services
do not explain how the systems work. You are blindly paying
for someone else's recommendations. [note: The person
selling the recommendations could be using free resources
to make those recommendations].
Ok, let's suppose the paid service predicts FOREX movements
with the greatest accuracy. You begin to make hundreds of
thousands of dollars by using the service. But something
happens and the service becomes unavailable. What would you
do then? You have just allowed someone to retire your
trading career early and at will.
Maybe the paid service works really well at first, but then
the person running the service turns it over to someone
else. You could lose a lot of money before you realize that
someone new isn't running the system properly.
It is never a good idea to put your fate in someone else's
hands. If you could learn how to predict the FOREX for
yourself, you would be in total control. You would have
knowledge that nobody can take from you.
We have been cheated by expensive courses that didn't
deliver. For instance, Brian spent $3,000 on an investment
course that gave great information. But the information
they taught him was useless unless he subscribed to an $80
per month software package. It took him 3 months to lose
the $2,000 he had in his trading account. But he also lost
the $3,000 on the course, plus $240 for the software
subscription.
This really happened to him. The worst part was that he had
paper traded using his own methods and had paper profits!
If he would have stuck to his own "homemade" trading system
he probably would have turned that $5,240 into $6,000-$7,000
in the same 3 months!
This experience, along with a few others by me (Robert),
caused Brian and I to partner up and provide you with the
best-quality and most complete self-taught FOREX courses
available.
We charge an extremely low price for our FOREX trading
methods and investment strategies because we did not like
having to spend $3,240 to lose $2,000. One man who sells a
fairly expensive trading course bought one of our trading
strategies. He then emailed us telling us how much he
loved our trading philosophy. He then told us we should
charge far more for this course (that one eBook alone. We
thanked him for his input, but we told him that we wanted
our clients to have the greatest value at the lowest price.
He became very angry because he wanted to overcharge for his
course (By the way, his course is useless unless you
subscribe to his paid email service).
We told you this story because there are a lot of people out
there overcharging for good information. Anyone who puts
time into developing a system has a right to charge a fair
price for their efforts. But just because they charge a
high price does not mean that the information is premium
information.
=============================================
We Teach -- but, We Also DO.
Yes, not only do we write the easy-to-learn
"fast track to trading" self-taught courses
at RapidForex.com, we are also very active,
focused FOREX traders.
One of the even "nastier" secrets, or sad
realities, of the trading industry and FOREX
trading in particular is that there are far
more people making money selling systems and
"ways to make money trading" than there are
people actually making money by trading.
There are many "famous traders" who don't
make money as traders. They make money selling
new trading systems, seminars, home study
courses, etc. Many, if not all, of these so
called "experts" can't trade and don't trade
the systems that they sell.
==============================================
We have now ruled out paid subscription services - so you
are one step away from low-cost FOREX trading capabilities.
When you think about getting involved in FOREX trading you
have 3 options.
Option #1 - Pay a lot of money for a course & software
you can't afford and hope you can recover the cost of the
course with the little amount of money you have left for
trading.
Option #2 - Figure out how much money you have to start
trading the FOREX. Then find some low cost information to
save you time and get you trading faster, while still
allowing you to have most of your money available to trade.
Option #3 - Spend several years learning everything there is
to know about the FOREX, and testing trading methods until
you discover the secret on your own.
Out of the 3 options above, the only one we think is
ridiculous is option #1. Option #'s 2 & 3 are the sensible
options. Option #2 is the category most people fall into.
Most people do not want to spend more money than they have
to start trading, but they do not want to wait the length of
time that option #3 demands.
At this point you have to decide which category you are in.
Please think to yourself and say "I, akin, am in
category number ________" Did you put yourself in a
category?
Ok, we'll give you another chance to do it now.
Now you should have done it. What category are you in?
We have to assume that you consider yourself in option #2 or
#3. This e-course is actually perfect for any of the
options listed above. The focus of this mini-series fits in
somewhere between options 2 & 3. The information in
this 20-part e-course is designed to give you the
information over time so you can get closer and closer to
knowing everything about the FOREX. Actually knowing
everything is impossible.
So if you fell into option #'s 2 or 3 you have to decide
right now when you want to start placing trades in the
FOREX.
If you want to start placing real trades in the FOREX market
within 3 months, you will probably need to purchase a FOREX
trading course. The only way that you will be able to learn
enough details about trading the FOREX will be to learn from
someone who has already researched and tested FOREX trading
methods.
There is nothing wrong with purchasing a FOREX trading
course in order to learn. The person who prepared the
course first had to learn how to trade the FOREX. They then
had to spend time writing their techniques into an
understandable format. They also had to pay for advertising
to get the message about their course out there.
Once you purchase a course, you will need to test it for
yourself. You should always verify that the trading system
works for you by testing it out on paper before putting real
money at risk.
Guidelines to purchasing a FOREX course.
Step 1: Figure out how much money you have to invest. This
should be money that you can afford to lose. Most people
cannot afford to lose any money. Make sure that losing
this money won't devestate you financially.
Step 2: Make sure the course costs less than 50% of the
money you have to invest. The cost of the course will not
be invested directly in the market. You want to put most of
the money you want to trade with into your trading account.
Step 3: Make sure that the course does not have any hidden
costs. You do not want to be locked into having to pay for
a signal subscription without which the trading techniques
are useless. You should also find out if the company that
sells the course has any subscription type services. If
they have these type of services, chances are that their
system will eventually require that you use them. We at
Rapid Forex do have an OPTIONAL subscription service to our
Resources Section, which is to provide you with additional
tools & resources that are helpful but not "required" to
make use of what you learn from our training materials.
Step 4: Make sure you can practice trading in a demo account
and still get a refund. There are courses out there that
require you to place trades with real money before you get a
refund. In this case, you would only need a refund if you
lost all of your m.oney! We at Rapid Forex are SOOOO
confident about what we teach that we offer a 200%
guarantee.
Step 5: Make sure the information in the course teaches you
how to trade independently. You need to be able to take the
information you learn with you if you discover a better
trading platform in the future.
You should follow the above 5 steps any time you look for an
investment course. If the courses do not meet the
guidelines listed above, you should move on to the next
course.
Now let's suppose that you want to take your time learning
about the FOREX. You are not in a hurry. You want to learn
as much as you can before investing any money in the FOREX.
You may want to purchase a course in the future (or maybe
not). You need to be ready when that time comes. You would
like to learn a lot about the FOREX without risking any
money. You even want to experiment with some trading on
paper before you spend any money on FOREX courses.
If the above paragraph desribes you akin, then you
are in luck. We have just desribed the person we created
this e-course, and ongoing ezine, for. The main benefit
that we get from publishing this fr.ee e-course and ongoing
industry/trade updates is that we stay connected to the hot
topics of the currency market. Teaching other people always
helps you to learn better. It is easy to get into our own
little "comfort-zoned" world and stop expanding our
knowledge base.
Community College Budget.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We're going to share something with you that is not a
popular topic in the FOREX trading education world. We have
gotten some nasty comments by other FOREX trading course
authors by implementing this philosophy.
This nasty little secret is the lifeblood of the FOREX
trading education industry. We legally cannot mention any
company names here, so we're just going to tell you what
this nasty little secret is (not the people/vendors who look
that other way and don't *come clean* and admit it). We
will also give you guidelines to avoid falling into any
traps.
Here it is: All the information you need to trade the FOREX
is available in free (like this e-course) or low cost
resources (like our low-cost e-book packages).
If you search for FOREX trading systems you will see an
unbelievable trend. You will notice that many FOREX
courses are charging thousands of dollars for trading
courses. Perhaps the information is good, perhaps it is
not. But, would you believe, this is not even the most
profitable part of the industry.
Other trading courses REQUIRE you to subscribe to a paid
service that forces you to depend on that service. These
paid services can be email notifications, software leasing,
& other types of services. Without these paid for
services you simply CAN'T trade using their methods!
So what is the problem with a paid service? These services
do not explain how the systems work. You are blindly paying
for someone else's recommendations. [note: The person
selling the recommendations could be using free resources
to make those recommendations].
Ok, let's suppose the paid service predicts FOREX movements
with the greatest accuracy. You begin to make hundreds of
thousands of dollars by using the service. But something
happens and the service becomes unavailable. What would you
do then? You have just allowed someone to retire your
trading career early and at will.
Maybe the paid service works really well at first, but then
the person running the service turns it over to someone
else. You could lose a lot of money before you realize that
someone new isn't running the system properly.
It is never a good idea to put your fate in someone else's
hands. If you could learn how to predict the FOREX for
yourself, you would be in total control. You would have
knowledge that nobody can take from you.
We have been cheated by expensive courses that didn't
deliver. For instance, Brian spent $3,000 on an investment
course that gave great information. But the information
they taught him was useless unless he subscribed to an $80
per month software package. It took him 3 months to lose
the $2,000 he had in his trading account. But he also lost
the $3,000 on the course, plus $240 for the software
subscription.
This really happened to him. The worst part was that he had
paper traded using his own methods and had paper profits!
If he would have stuck to his own "homemade" trading system
he probably would have turned that $5,240 into $6,000-$7,000
in the same 3 months!
This experience, along with a few others by me (Robert),
caused Brian and I to partner up and provide you with the
best-quality and most complete self-taught FOREX courses
available.
We charge an extremely low price for our FOREX trading
methods and investment strategies because we did not like
having to spend $3,240 to lose $2,000. One man who sells a
fairly expensive trading course bought one of our trading
strategies. He then emailed us telling us how much he
loved our trading philosophy. He then told us we should
charge far more for this course (that one eBook alone. We
thanked him for his input, but we told him that we wanted
our clients to have the greatest value at the lowest price.
He became very angry because he wanted to overcharge for his
course (By the way, his course is useless unless you
subscribe to his paid email service).
We told you this story because there are a lot of people out
there overcharging for good information. Anyone who puts
time into developing a system has a right to charge a fair
price for their efforts. But just because they charge a
high price does not mean that the information is premium
information.
=============================================
We Teach -- but, We Also DO.
Yes, not only do we write the easy-to-learn
"fast track to trading" self-taught courses
at RapidForex.com, we are also very active,
focused FOREX traders.
One of the even "nastier" secrets, or sad
realities, of the trading industry and FOREX
trading in particular is that there are far
more people making money selling systems and
"ways to make money trading" than there are
people actually making money by trading.
There are many "famous traders" who don't
make money as traders. They make money selling
new trading systems, seminars, home study
courses, etc. Many, if not all, of these so
called "experts" can't trade and don't trade
the systems that they sell.
==============================================
We have now ruled out paid subscription services - so you
are one step away from low-cost FOREX trading capabilities.
When you think about getting involved in FOREX trading you
have 3 options.
Option #1 - Pay a lot of money for a course & software
you can't afford and hope you can recover the cost of the
course with the little amount of money you have left for
trading.
Option #2 - Figure out how much money you have to start
trading the FOREX. Then find some low cost information to
save you time and get you trading faster, while still
allowing you to have most of your money available to trade.
Option #3 - Spend several years learning everything there is
to know about the FOREX, and testing trading methods until
you discover the secret on your own.
Out of the 3 options above, the only one we think is
ridiculous is option #1. Option #'s 2 & 3 are the sensible
options. Option #2 is the category most people fall into.
Most people do not want to spend more money than they have
to start trading, but they do not want to wait the length of
time that option #3 demands.
At this point you have to decide which category you are in.
Please think to yourself and say "I, akin, am in
category number ________" Did you put yourself in a
category?
Ok, we'll give you another chance to do it now.
Now you should have done it. What category are you in?
We have to assume that you consider yourself in option #2 or
#3. This e-course is actually perfect for any of the
options listed above. The focus of this mini-series fits in
somewhere between options 2 & 3. The information in
this 20-part e-course is designed to give you the
information over time so you can get closer and closer to
knowing everything about the FOREX. Actually knowing
everything is impossible.
So if you fell into option #'s 2 or 3 you have to decide
right now when you want to start placing trades in the
FOREX.
If you want to start placing real trades in the FOREX market
within 3 months, you will probably need to purchase a FOREX
trading course. The only way that you will be able to learn
enough details about trading the FOREX will be to learn from
someone who has already researched and tested FOREX trading
methods.
There is nothing wrong with purchasing a FOREX trading
course in order to learn. The person who prepared the
course first had to learn how to trade the FOREX. They then
had to spend time writing their techniques into an
understandable format. They also had to pay for advertising
to get the message about their course out there.
Once you purchase a course, you will need to test it for
yourself. You should always verify that the trading system
works for you by testing it out on paper before putting real
money at risk.
Guidelines to purchasing a FOREX course.
Step 1: Figure out how much money you have to invest. This
should be money that you can afford to lose. Most people
cannot afford to lose any money. Make sure that losing
this money won't devestate you financially.
Step 2: Make sure the course costs less than 50% of the
money you have to invest. The cost of the course will not
be invested directly in the market. You want to put most of
the money you want to trade with into your trading account.
Step 3: Make sure that the course does not have any hidden
costs. You do not want to be locked into having to pay for
a signal subscription without which the trading techniques
are useless. You should also find out if the company that
sells the course has any subscription type services. If
they have these type of services, chances are that their
system will eventually require that you use them. We at
Rapid Forex do have an OPTIONAL subscription service to our
Resources Section, which is to provide you with additional
tools & resources that are helpful but not "required" to
make use of what you learn from our training materials.
Step 4: Make sure you can practice trading in a demo account
and still get a refund. There are courses out there that
require you to place trades with real money before you get a
refund. In this case, you would only need a refund if you
lost all of your m.oney! We at Rapid Forex are SOOOO
confident about what we teach that we offer a 200%
guarantee.
Step 5: Make sure the information in the course teaches you
how to trade independently. You need to be able to take the
information you learn with you if you discover a better
trading platform in the future.
You should follow the above 5 steps any time you look for an
investment course. If the courses do not meet the
guidelines listed above, you should move on to the next
course.
Now let's suppose that you want to take your time learning
about the FOREX. You are not in a hurry. You want to learn
as much as you can before investing any money in the FOREX.
You may want to purchase a course in the future (or maybe
not). You need to be ready when that time comes. You would
like to learn a lot about the FOREX without risking any
money. You even want to experiment with some trading on
paper before you spend any money on FOREX courses.
If the above paragraph desribes you akin, then you
are in luck. We have just desribed the person we created
this e-course, and ongoing ezine, for. The main benefit
that we get from publishing this fr.ee e-course and ongoing
industry/trade updates is that we stay connected to the hot
topics of the currency market. Teaching other people always
helps you to learn better. It is easy to get into our own
little "comfort-zoned" world and stop expanding our
knowledge base.
forex #16
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Risk-to-Reward Ratios: How to Trade Like an
Insurance Company
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Trading in the FOREX market is a challenging opportunity
where above average returns are available to educated and
experienced investors who are willing to take above average
risk. However, before deciding to participate in FOREX
trading, you should carefully consider your investment
objectives, level of experience and risk appetite. Most
importantly, do not invest money you cannot afford to lose.
In Lesson #13, we spoke extensively about Equity Management
and Margin Control. In today's lesson, we want to cover some
basics about how you can you effectively put the odds (of
continuing to keep your account equity in the positive and
make nice returns) in your favor even if you're "right" only
50% of the time.
Why do insurance companies consistently win? Insurance
companies are consistently profitable because they use the
laws of mathematics, probability and "special circumstances"
to their advantage. They can pick and choose whom they want
to insure and the price they want to charge for insurance.
Therefore, they "own" the game by being able to call the
shots and rates that we must pay to enter into their playing
field.
Research shows that older smokers tend to have high
mortality rates. Therefore, the insurance companies charge
excessive premiums for these types of people; while young
healthy people tend to be the best risks, so lower rates are
charged as the probability of paying a premium to this
person's family is relatively small. This is not a level
playing field, as the insurance company makes the rules and
requires the charges to be paid.
Do the same with your trading. Here's how:
First, look at the following table. It shows possible risk-
to-reward ratios and the win ratios (the percentage of time
you need to be "right") required to BREAK EVEN with a
trading system, method or strategy.
Risk-to-Reward Ratio Win Ratio
(in pips) Required to Break Even
------------------------------------------------------
40/20 (2:1) 67%
40/40 (1:1) 50%
40/60 (1:1.5) 40%
40/80 (1:2) 33.5%
60/20 (3:1) 75%
60/60 (1:1) 50%
20/30 (1:1.5) 40%
20/40 (1:2) 33.5%
------------------------------------------------------
If you were to toss a coin (heads you go long, tails you go
short) you'd have a 50/50 chance of winning or losing (your
trade can only be profitable or unprofitable. The market can
only go with you or against you). If you were to trade with
a 1:1 risk-to-reward ratio, then after a hundred trades you
should theoretically have around the same amount of money
left in your account (break even as shown above).
To manage risk effectively, it is necessary to find high-
probability trades that have a 1:1.5 or greater risk-to-
reward ratio. But this depends largely on the timeframe you
are looking to trade.
For instance, in our book "Rapid Forex Surfing", one of our
trading techniques teaches you how to go after 20 to 40 pip
trades and use a 1:2 risk-to-reward ratio. So, for instance,
you would set your reward for 40 pips and your stop-loss
order for 20 pips (20 pips below the entry order). While
statistically the odds start working against you for winning
this trade, you can shift the odds in your favor by using
"high probability" strategies. Let's say you try out the 1:2
ratio on all your trades for a while. And lets say you're
only right 50% of the time (though you should be able to do
better than that). Meaning half of the trades you win and
half you loose (they hit your 20 pip stop). So, if you made
4 trades, and assuming 2 of them won and 2 of them lost,
then look at what happened. You made 80 pips (2 x 40 pips)
and lost 40 pips (2 x 20) for a net of 40 pips.
In Lessons #7 & #8, we talked about the need to identify
potential trades based on chart patterns. The idea is that
you collect a set of candidate charts, charts that have
positive prospects for immediate trading. It is with these
candidate charts that one can dig deeper into the possible
trading of a particular currency pair. The identification of
a probable trade centers around the proper identification of
realistic entry and exit positions based primarily on
support and resistance. Once you have properly identified
the support and resistance points you can take those
numbers, plug them into a simple spreadsheet and calculate
the risk / reward. The simplest form of calculation involves
nothing more than the following:
- Entry Price
- Stop Loss Target
- Stop Profit Target
- The resulting Risk-to-Reward Ratio
Here's an example of a trade that we were looking at
recently. For clarity, let's follow the logic of the
simplest risk/reward calculation one can make:
Currency Pair: EUR/USD
Type: Buy
# of Lots: 5
Entry Price: 1.3320
Stop: 1.3300
Target: 1.3360
Loss Risk: $1,000
Profit Potential: $2,000
To see if the potential play is worth wagering money on, one
must determine what the potential losses are if your
analysis is wrong and what the potential gains are if the
analysis is correct. You should usually shoot for a 2:1
ratio - that is your potential profit should be roughly 2
times your potential loss. This is a rule of thumb that many
traders use ... especially the good ones. In the example
above, if one enters a trade at the price of $1.3320 with a
defined stop loss exit of $1.3300 and a potential target
exit for profits at 1.3360, then the ratio is roughly 2:1 (a
bit less in this case, when you take into consideration the
small broker pip spread). That's it. It's really that
simple.
Recognize that once one has entered such a formula into a
spreadsheet and begins using it, one can easily play with
the numbers to make them work. For example, let's say that
EUR/USD looks like a great BUY right now, but that the exit
is really $1.3370 not $1.3360. Now, one could stretch the
target to $1.3390, even though the resistance lies at
1.3380, in order to justify the trade, but the trader inside
you knows this is not the case. When setting support and
resistance points, one has to realize that if the numbers
are fudged, the person fudging the numbers is the one hurt.
It's their money that's on the line.
An easy way around the temptation of making the numbers
work, is to always look at the support and resistance points
first and allow as much slack in the numbers as makes sense.
Now, plug in the entry price. Does the risk/reward make
sense? If it doesn't, change the entry price, not the stop
or target prices. Jiggle the entry price to the point where
it makes sense and then simply wait until you get that entry
point or pass the trade up. There are always more fish in
the pond.
Ending Thoughts on this Lesson:
Always calculate your risk to reward ratio prior to making a
trade. Refuse potential trades unless the risk-to-reward
ratio is at least 1:1.5 or greater (preferably 1:2): that is
for every dollar risk, there is a potential for 1.5 dollars
in return. By calculating your risk to reward for every
trade you will ignore marginal trades and you will identify
your exit points before taking a trade. Recognize that you
want to understand your exit criteria ... at the beginning
of the trade, not sometime later. Once you are comfortable
with simple risk to reward measurements and are identifying
support and resistance zones reasonably accurately (see our
book "Rapid Forex Surfing"), you can consider increasing the
complexity of your formula to consider other variables such
as time and confidence.
Risk-to-Reward Ratios: How to Trade Like an
Insurance Company
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Trading in the FOREX market is a challenging opportunity
where above average returns are available to educated and
experienced investors who are willing to take above average
risk. However, before deciding to participate in FOREX
trading, you should carefully consider your investment
objectives, level of experience and risk appetite. Most
importantly, do not invest money you cannot afford to lose.
In Lesson #13, we spoke extensively about Equity Management
and Margin Control. In today's lesson, we want to cover some
basics about how you can you effectively put the odds (of
continuing to keep your account equity in the positive and
make nice returns) in your favor even if you're "right" only
50% of the time.
Why do insurance companies consistently win? Insurance
companies are consistently profitable because they use the
laws of mathematics, probability and "special circumstances"
to their advantage. They can pick and choose whom they want
to insure and the price they want to charge for insurance.
Therefore, they "own" the game by being able to call the
shots and rates that we must pay to enter into their playing
field.
Research shows that older smokers tend to have high
mortality rates. Therefore, the insurance companies charge
excessive premiums for these types of people; while young
healthy people tend to be the best risks, so lower rates are
charged as the probability of paying a premium to this
person's family is relatively small. This is not a level
playing field, as the insurance company makes the rules and
requires the charges to be paid.
Do the same with your trading. Here's how:
First, look at the following table. It shows possible risk-
to-reward ratios and the win ratios (the percentage of time
you need to be "right") required to BREAK EVEN with a
trading system, method or strategy.
Risk-to-Reward Ratio Win Ratio
(in pips) Required to Break Even
------------------------------------------------------
40/20 (2:1) 67%
40/40 (1:1) 50%
40/60 (1:1.5) 40%
40/80 (1:2) 33.5%
60/20 (3:1) 75%
60/60 (1:1) 50%
20/30 (1:1.5) 40%
20/40 (1:2) 33.5%
------------------------------------------------------
If you were to toss a coin (heads you go long, tails you go
short) you'd have a 50/50 chance of winning or losing (your
trade can only be profitable or unprofitable. The market can
only go with you or against you). If you were to trade with
a 1:1 risk-to-reward ratio, then after a hundred trades you
should theoretically have around the same amount of money
left in your account (break even as shown above).
To manage risk effectively, it is necessary to find high-
probability trades that have a 1:1.5 or greater risk-to-
reward ratio. But this depends largely on the timeframe you
are looking to trade.
For instance, in our book "Rapid Forex Surfing", one of our
trading techniques teaches you how to go after 20 to 40 pip
trades and use a 1:2 risk-to-reward ratio. So, for instance,
you would set your reward for 40 pips and your stop-loss
order for 20 pips (20 pips below the entry order). While
statistically the odds start working against you for winning
this trade, you can shift the odds in your favor by using
"high probability" strategies. Let's say you try out the 1:2
ratio on all your trades for a while. And lets say you're
only right 50% of the time (though you should be able to do
better than that). Meaning half of the trades you win and
half you loose (they hit your 20 pip stop). So, if you made
4 trades, and assuming 2 of them won and 2 of them lost,
then look at what happened. You made 80 pips (2 x 40 pips)
and lost 40 pips (2 x 20) for a net of 40 pips.
In Lessons #7 & #8, we talked about the need to identify
potential trades based on chart patterns. The idea is that
you collect a set of candidate charts, charts that have
positive prospects for immediate trading. It is with these
candidate charts that one can dig deeper into the possible
trading of a particular currency pair. The identification of
a probable trade centers around the proper identification of
realistic entry and exit positions based primarily on
support and resistance. Once you have properly identified
the support and resistance points you can take those
numbers, plug them into a simple spreadsheet and calculate
the risk / reward. The simplest form of calculation involves
nothing more than the following:
- Entry Price
- Stop Loss Target
- Stop Profit Target
- The resulting Risk-to-Reward Ratio
Here's an example of a trade that we were looking at
recently. For clarity, let's follow the logic of the
simplest risk/reward calculation one can make:
Currency Pair: EUR/USD
Type: Buy
# of Lots: 5
Entry Price: 1.3320
Stop: 1.3300
Target: 1.3360
Loss Risk: $1,000
Profit Potential: $2,000
To see if the potential play is worth wagering money on, one
must determine what the potential losses are if your
analysis is wrong and what the potential gains are if the
analysis is correct. You should usually shoot for a 2:1
ratio - that is your potential profit should be roughly 2
times your potential loss. This is a rule of thumb that many
traders use ... especially the good ones. In the example
above, if one enters a trade at the price of $1.3320 with a
defined stop loss exit of $1.3300 and a potential target
exit for profits at 1.3360, then the ratio is roughly 2:1 (a
bit less in this case, when you take into consideration the
small broker pip spread). That's it. It's really that
simple.
Recognize that once one has entered such a formula into a
spreadsheet and begins using it, one can easily play with
the numbers to make them work. For example, let's say that
EUR/USD looks like a great BUY right now, but that the exit
is really $1.3370 not $1.3360. Now, one could stretch the
target to $1.3390, even though the resistance lies at
1.3380, in order to justify the trade, but the trader inside
you knows this is not the case. When setting support and
resistance points, one has to realize that if the numbers
are fudged, the person fudging the numbers is the one hurt.
It's their money that's on the line.
An easy way around the temptation of making the numbers
work, is to always look at the support and resistance points
first and allow as much slack in the numbers as makes sense.
Now, plug in the entry price. Does the risk/reward make
sense? If it doesn't, change the entry price, not the stop
or target prices. Jiggle the entry price to the point where
it makes sense and then simply wait until you get that entry
point or pass the trade up. There are always more fish in
the pond.
Ending Thoughts on this Lesson:
Always calculate your risk to reward ratio prior to making a
trade. Refuse potential trades unless the risk-to-reward
ratio is at least 1:1.5 or greater (preferably 1:2): that is
for every dollar risk, there is a potential for 1.5 dollars
in return. By calculating your risk to reward for every
trade you will ignore marginal trades and you will identify
your exit points before taking a trade. Recognize that you
want to understand your exit criteria ... at the beginning
of the trade, not sometime later. Once you are comfortable
with simple risk to reward measurements and are identifying
support and resistance zones reasonably accurately (see our
book "Rapid Forex Surfing"), you can consider increasing the
complexity of your formula to consider other variables such
as time and confidence.
forex #14
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
20 pips to 200 pips: Small Trades to Big Trades
and Somewhere in Between.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
There are FOUR different classifications of FOREX traders in
the market. Each one employing one of three different pip-
trading (profit-taking) styles.
=======================================
Sidenote: remember what a "pip" is?
We talked about this in Lesson #3,
but for a refresher: A pip is the last
number to the right in a currency
quote For example: If the EUR/USD
traded at 1.3335 this morning. The
"5" is the pip. If it moves to
1.3435, that would be a 100-pip move.
========================================
There are the novice traders – the rookies, the ones who
don't learn from the "donkey" (see yesterday's lesson;
Lesson #13).
In addition to the novice traders, there are three other
levels of participation in the FOREX market: the dealers,
the institutional traders, and the advanced traders.
The DEALERS are the most powerful and they make the market,
setting prices and putting together deals.
The INSTITUTIONAL traders work in banks, wire firms, or
government agencies. They trade huge amounts of money at a
time, and the size of their trades gives them enormous
power.
Next, there are the ADVANCED traders. This group is
comprised of people from all across the world, sitting in
smaller investment firms, offices, or even their homes. You
can be a part of this group. In some cases, the ADVANCED
traders are the smartest group – trade for trade – than any
other group. Because they don't move a lot of money on each
trade, they don't have as much power as the institutional
players. Because their trades are brokered by the dealers,
they'll never have absolute trading power. But, because
there are so many novice traders – the advanced traders have
plenty of people that they can outrun. Your goal as a FOREX
investor is to aggressively take money out of the pockets of
the novice traders (those that don't educate themselves with
cutting-edge knowledge -- like the self-taught ebooks you
can instantly download at http://www.RapidForex.com
==========================
Each of these different traders have different philosophies
about how many pips to go after.
(1) Some traders go after large pip targets -- from 50 to
500 (or more). They are often position traders, leaving
trades overnight - often for days. Usually they trade one
or two lots and use stops of around 50 to 100 pips.
(2) You have other traders that focus on daytrading (getting
in and out of a trade within one day, usually though within
hours) to get 10 to 20 pips trading one to a few lots.
(3) You also have another breed of trader that will trade
multiple lots to catch just 5 to 10 pips, usually within
minutes. For instance, trading 10 lots for 10 pips is an
equal profit to someone trading 1 lot for 100 pips. Both
would equal $1,000 profit, depending on which currency pair
was traded and assuming they were on a standard 100K account
(i.e., using 100:1 margin or putting up $1,000 to trade
$100,000 worth of currency). Traders who attempt to trim off
profits, within minutes, are usually called "Scalpers."
There is nothing wrong with trading with any of these
objectives in mind. In fact, it is good to be versatile in
your trading. They each have their pros and cons but, if
somebody gets consistent profits (more winners than losers)
with one or the other, then that one strategy should be
considered GOOD.
As you progress from ROOKIE to ADVANCED trader you will
figure out your personal preference and tolerance for risk.
Most of the courses we have for sale at RapidForex.com
(especially the "Forex Surfing" and the "Forex Scalping"
courses) teach you to shoot for 10 to 20 pips PER TRADE.
It's as simple as this: We don't try to make a ton of money
on each trade (excessive GREED), and we never try to get
revenge (a lot of traders get creamed in the market and then
want to strike back. So they double their last order and go
for broke).
======================================
Yes, You can Replace Your Full-time
Income and Make Over 5-figures a
Month On Just 10 to 20 pips Per Trade
======================================
Generally, the larger the pip target you are shooting for
the greater will be the chance that the market will turn
around on you before it reaches your target. Conversely, the
smaller the pip target you are shooting for the greater will
be the chance of the market reaching your target.
All things considered equal, there is a greater chance that
you'll successfully pull 10-20 pips out of the market than
50 pips, or even 30 pips. The further out you go the more
likely it becomes that the market will change its mind.
In our "Forex Surfing" course we give you many ideas and
trading techniques to consistently capture 10 to 20 pips per
trade, per day. And, once you get good at doing that, then
the sky's the limit. We teach you how to compound your
gains, scale in and out of trades and a lot of other ways to
trade like the Traders who shoot for 40 pips per trade, but
without all the risk.
20 pips to 200 pips: Small Trades to Big Trades
and Somewhere in Between.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
There are FOUR different classifications of FOREX traders in
the market. Each one employing one of three different pip-
trading (profit-taking) styles.
=======================================
Sidenote: remember what a "pip" is?
We talked about this in Lesson #3,
but for a refresher: A pip is the last
number to the right in a currency
quote For example: If the EUR/USD
traded at 1.3335 this morning. The
"5" is the pip. If it moves to
1.3435, that would be a 100-pip move.
========================================
There are the novice traders – the rookies, the ones who
don't learn from the "donkey" (see yesterday's lesson;
Lesson #13).
In addition to the novice traders, there are three other
levels of participation in the FOREX market: the dealers,
the institutional traders, and the advanced traders.
The DEALERS are the most powerful and they make the market,
setting prices and putting together deals.
The INSTITUTIONAL traders work in banks, wire firms, or
government agencies. They trade huge amounts of money at a
time, and the size of their trades gives them enormous
power.
Next, there are the ADVANCED traders. This group is
comprised of people from all across the world, sitting in
smaller investment firms, offices, or even their homes. You
can be a part of this group. In some cases, the ADVANCED
traders are the smartest group – trade for trade – than any
other group. Because they don't move a lot of money on each
trade, they don't have as much power as the institutional
players. Because their trades are brokered by the dealers,
they'll never have absolute trading power. But, because
there are so many novice traders – the advanced traders have
plenty of people that they can outrun. Your goal as a FOREX
investor is to aggressively take money out of the pockets of
the novice traders (those that don't educate themselves with
cutting-edge knowledge -- like the self-taught ebooks you
can instantly download at http://www.RapidForex.com
==========================
Each of these different traders have different philosophies
about how many pips to go after.
(1) Some traders go after large pip targets -- from 50 to
500 (or more). They are often position traders, leaving
trades overnight - often for days. Usually they trade one
or two lots and use stops of around 50 to 100 pips.
(2) You have other traders that focus on daytrading (getting
in and out of a trade within one day, usually though within
hours) to get 10 to 20 pips trading one to a few lots.
(3) You also have another breed of trader that will trade
multiple lots to catch just 5 to 10 pips, usually within
minutes. For instance, trading 10 lots for 10 pips is an
equal profit to someone trading 1 lot for 100 pips. Both
would equal $1,000 profit, depending on which currency pair
was traded and assuming they were on a standard 100K account
(i.e., using 100:1 margin or putting up $1,000 to trade
$100,000 worth of currency). Traders who attempt to trim off
profits, within minutes, are usually called "Scalpers."
There is nothing wrong with trading with any of these
objectives in mind. In fact, it is good to be versatile in
your trading. They each have their pros and cons but, if
somebody gets consistent profits (more winners than losers)
with one or the other, then that one strategy should be
considered GOOD.
As you progress from ROOKIE to ADVANCED trader you will
figure out your personal preference and tolerance for risk.
Most of the courses we have for sale at RapidForex.com
(especially the "Forex Surfing" and the "Forex Scalping"
courses) teach you to shoot for 10 to 20 pips PER TRADE.
It's as simple as this: We don't try to make a ton of money
on each trade (excessive GREED), and we never try to get
revenge (a lot of traders get creamed in the market and then
want to strike back. So they double their last order and go
for broke).
======================================
Yes, You can Replace Your Full-time
Income and Make Over 5-figures a
Month On Just 10 to 20 pips Per Trade
======================================
Generally, the larger the pip target you are shooting for
the greater will be the chance that the market will turn
around on you before it reaches your target. Conversely, the
smaller the pip target you are shooting for the greater will
be the chance of the market reaching your target.
All things considered equal, there is a greater chance that
you'll successfully pull 10-20 pips out of the market than
50 pips, or even 30 pips. The further out you go the more
likely it becomes that the market will change its mind.
In our "Forex Surfing" course we give you many ideas and
trading techniques to consistently capture 10 to 20 pips per
trade, per day. And, once you get good at doing that, then
the sky's the limit. We teach you how to compound your
gains, scale in and out of trades and a lot of other ways to
trade like the Traders who shoot for 40 pips per trade, but
without all the risk.
forex #13
Because we're readily admitting that YOU will pre-judge this
Lesson, based off its title above, as boring and quickly
dismiss it as "something I've heard before" (hey, didn't we
tell you we KNOW human nature), we're going to go ahead and
make a....
A VERY BLUNT IN-YOUR-FACE KINDA STATEMENT (not to offend
you, just to keep you paying attention) and then TELL YOU A
GRUESOME STORY. First the straightforward comment:
>>> 95% of the successful (full-time, well-paid) FOREX
Traders we know feel that money-management is more important
than the trading. And, it's so, so important to us that we
believe if you don't grasp, and follow, the basic rules
below, YOU WILL FAIL! (Hey, don't take this personally. It
is what it is).
Okay, on to the story.
===================================
Bloody Tale of Vicious, Senseless
Animal Slayings Guides FOREX
Traders to True Wisdom.
==================================
A donkey, a lion, and a fox decide to go out hunting for
rabbits. After a pretty good day of hunting, they had
collected a large pile of rabbits. The lion says to Mr.
Donkey, "I'd like for you to divide the rabbits fairly among
the three of us."
So, the donkey took the rabbits and made them into three
equal piles and said, "How's that?" The lion immediately
pounced on the donkey and killed him.
Then the lion threw all the rabbits on top of the donkey and
made one big pile. The lion turned to Mr. Fox and said, "I'd
like for you to divide the rabbits evenly between the two of
us." The fox walked over to the pile of rabbits and took one
little scrawny rabbit for himself and put it in his pile. He
left the rest of the rabbits in the large pile and said,
"That pile of rabbits if for you, Mr. Lion."
The lion said, "Mr. Fox, where did you learn to divide so
evenly?"
And the fox replied, "The donkey taught me."
===========================
The Moral of the Story ?
Well .... it seems quite clear it is this: if you can
learn from your own mistakes, you are smart. However, if you
can learn from others' mistakes, then you are wise.
Yup, we agree with this. And, by reading the listed rules we
have below to share with you, you will accelerate your
profit-making potential in your own FOREX trading business.
You're about to read the combined wisdom of various traders
who have "been there, done that." Traders who have
experienced setbacks, challenges, and turned those temporary
failures into successes. We've paraphrased these timeless
rules (do's and don'ts) into our own words.
WELCOME ABOARD akin .... you're about to
experience the thrill of hunting rabbits with a FOREX Lion.
However, in this case, you won't get killed :-)
======================================
Equity management and properly handling leveraged margin
accounts is the most significant part of any trading system.
Again, most traders just don't understand how important this
aspect of running a FOREX business is. The ones who DO know
understand that it is the critical point that separates the
winners from the losers.
It was proven that if 100 traders start trading using a
system with 60% winning odds, only 5 traders would be in
profit at the end of the year. In spite of the 60% winning
odds 95% of traders will lose because of their poor
management of account equity.
But, the good news is, you don't have to be a mathematician
or understand portfolio theory to manage risk. This can be
as easy as following these rules.
>>> RapidForex.com RULE #1: Thou shalt not risk more money
than thou can afford to lose (Also known as "if you can't
afford to lose, you can't afford to win.")
Let's face it - this isn't bean ball. You will lose money.
ALL traders loose money. Stop right here, delete this email,
forget about trading currencies, do something else with the
rest of your life if losing a portion of whatever money you
might trade with would take food off your table, keep your
kids from going to college or change your lifestyle. Repeat:
there is no system or approach available that doesn't
sustain losses sometimes. The trick is containing those
losses.
>>> RapidForex.com RULE #2: Thou shalt never risk more than
2% of your margin account on any SINGLE trade (if you have a
Mini Account, you may bend this to 5%).
For example, if you have $300 in your account, 2% is $6,
equal to a 6 pip move. 5% is $15 or a 15 pip move. With a
Mini-account, realistically your risk-per-trade has to be a
bit higher than those who trade a 100K (regular) account.
Once you get your account equity to $1000 or more then
definitely limit your risk to only 2% of your margin account
on any SINGLE trade.
>>> RapidForex.com RULE #3: Thou shalt always, Always,
Always Use a STOP-loss order.
When you place a STOP order, right along with your ENTRY
order, via your online trade station, you've just
automatically prevented a potential loss from "running" too
far.
Before initiating any trade, if you haven't already figured
out at what point you would be wrong and would want to cut
your loses or, at the very least, reevaluate your position
from the sidelines, then you shouldn't be putting on the
trade in the first place.
Show us a FOREX trader who doesn't use stop loss orders and
we'll show you someone who loses a lot of m.oney.
>>> RapidForex.com RULE #4: Thou shalt predetermine your
exit point BEFORE you get into a trade.
To use a football analogy, if you don't know where the End
Zone is what's the point in walking up to the scrimmage line
to make a play? In other words, when you place a LIMIT
order (or, at least mentally place it), you're telling
yourself, and the rest of the market, that you understand
the game plan, the big picture, the reason for being on the
trade (the football field) in the first place. It is prudent
to let profits run and follow a market with stop orders in
a trending market. It's the wisest of traders who put
such a limit on their trading (profit-taking). Because of
Greed, it is always more difficult to make a decision to
take profits than to enter a trade. We don't want you to be
the one who says, "If only I had sold when...." Know your
exit strategy / game plan and this won't be you.
>>> RapidForex.com RULE #5: Thou shalt paper-trade first.
First open a DEMO account and get to learn how to place
orders with it (we cover this in detail in Lesson #11). You
shouldn't invest real money until you have shown a profit in
a DEMO account. Many people have losing DEMO accounts and
still believe that it will be different with real money.
Wrong! As mentioned in Lesson #11, the only thing different
between a DEMO account and a LIVE account is, with a DEMO
account, you'll tend to be less conservative and
lackadaisical with the rules. If you lose paper trading,
what makes you think you'll win with real money?
>>> RapidForex.com RULE #6: Thou shalt take a Breather when
your Core Equity is significantly down.
First of all, you should understand the following term "Core
equity." Core equity = Starting balance - Amount in open
positions. If you have a balance of $10,000 and you enter a
trade with $1,000 then your core equity is $9,000. If you
enter another $1,000 trade, your core equity will be $8,000.
Assuming you lost money on each trade, your core equity
certainly won't be where you started it with. If you lose a
certain predetermined amount of your starting capital (e.g.,
10 percent to 20 percent), take a breather, analyze what
went wrong, and wait until you feel confident you have a
high probability trading idea/method/system before entering
the market again. Remember, the goal is to MAKE money, not
lose it.
>>> RapidForex.com RULE #7: Thou shalt not let thy emotions
rule.
This is probably the hardest rule to keep. Yet, we have
never seen a successful trader over the long haul that
didn't follow it. Most people want to be winners. Most
people want to make the big score and have the accompanying
bragging rights. We all tend to get greedy, traders usually
more so. But trading is a business. It's hard work. You must
be cool, calm and always ready for the next opportunity.
You can't have emotionally high highs or emotionally low
lows because you'll make too many mistakes, and mistakes
mean losses. If you start winning and get "too high," the
tendency is to over-trade. By that, I mean starting to make
marginal trades or "seat-of-the-pants" trades just for the
sake of making trades, instead of waiting patiently for the
right opportunity. If you get too low (this is usually after
some losses), you are liable to skip the trades you should
be making, or you might try to "cherry-pick" a system or an
advisor's recommendations for fear of more losses,
inevitably making the wrong choices. To win this game you
must remain patient and clear-headed.
=========================
Finally, to finish this lesson up, we have TWO basic rules
about winning in the FOREX as well as in life: (1) If you
don't bet (trade), you can't win. (2) If you lose all your
chips, you can't bet (trade).
Think about it. Hard once. Then softly twice if you have
too.
Lesson, based off its title above, as boring and quickly
dismiss it as "something I've heard before" (hey, didn't we
tell you we KNOW human nature), we're going to go ahead and
make a....
A VERY BLUNT IN-YOUR-FACE KINDA STATEMENT (not to offend
you, just to keep you paying attention) and then TELL YOU A
GRUESOME STORY. First the straightforward comment:
>>> 95% of the successful (full-time, well-paid) FOREX
Traders we know feel that money-management is more important
than the trading. And, it's so, so important to us that we
believe if you don't grasp, and follow, the basic rules
below, YOU WILL FAIL! (Hey, don't take this personally. It
is what it is).
Okay, on to the story.
===================================
Bloody Tale of Vicious, Senseless
Animal Slayings Guides FOREX
Traders to True Wisdom.
==================================
A donkey, a lion, and a fox decide to go out hunting for
rabbits. After a pretty good day of hunting, they had
collected a large pile of rabbits. The lion says to Mr.
Donkey, "I'd like for you to divide the rabbits fairly among
the three of us."
So, the donkey took the rabbits and made them into three
equal piles and said, "How's that?" The lion immediately
pounced on the donkey and killed him.
Then the lion threw all the rabbits on top of the donkey and
made one big pile. The lion turned to Mr. Fox and said, "I'd
like for you to divide the rabbits evenly between the two of
us." The fox walked over to the pile of rabbits and took one
little scrawny rabbit for himself and put it in his pile. He
left the rest of the rabbits in the large pile and said,
"That pile of rabbits if for you, Mr. Lion."
The lion said, "Mr. Fox, where did you learn to divide so
evenly?"
And the fox replied, "The donkey taught me."
===========================
The Moral of the Story ?
Well .... it seems quite clear it is this: if you can
learn from your own mistakes, you are smart. However, if you
can learn from others' mistakes, then you are wise.
Yup, we agree with this. And, by reading the listed rules we
have below to share with you, you will accelerate your
profit-making potential in your own FOREX trading business.
You're about to read the combined wisdom of various traders
who have "been there, done that." Traders who have
experienced setbacks, challenges, and turned those temporary
failures into successes. We've paraphrased these timeless
rules (do's and don'ts) into our own words.
WELCOME ABOARD akin .... you're about to
experience the thrill of hunting rabbits with a FOREX Lion.
However, in this case, you won't get killed :-)
======================================
Equity management and properly handling leveraged margin
accounts is the most significant part of any trading system.
Again, most traders just don't understand how important this
aspect of running a FOREX business is. The ones who DO know
understand that it is the critical point that separates the
winners from the losers.
It was proven that if 100 traders start trading using a
system with 60% winning odds, only 5 traders would be in
profit at the end of the year. In spite of the 60% winning
odds 95% of traders will lose because of their poor
management of account equity.
But, the good news is, you don't have to be a mathematician
or understand portfolio theory to manage risk. This can be
as easy as following these rules.
>>> RapidForex.com RULE #1: Thou shalt not risk more money
than thou can afford to lose (Also known as "if you can't
afford to lose, you can't afford to win.")
Let's face it - this isn't bean ball. You will lose money.
ALL traders loose money. Stop right here, delete this email,
forget about trading currencies, do something else with the
rest of your life if losing a portion of whatever money you
might trade with would take food off your table, keep your
kids from going to college or change your lifestyle. Repeat:
there is no system or approach available that doesn't
sustain losses sometimes. The trick is containing those
losses.
>>> RapidForex.com RULE #2: Thou shalt never risk more than
2% of your margin account on any SINGLE trade (if you have a
Mini Account, you may bend this to 5%).
For example, if you have $300 in your account, 2% is $6,
equal to a 6 pip move. 5% is $15 or a 15 pip move. With a
Mini-account, realistically your risk-per-trade has to be a
bit higher than those who trade a 100K (regular) account.
Once you get your account equity to $1000 or more then
definitely limit your risk to only 2% of your margin account
on any SINGLE trade.
>>> RapidForex.com RULE #3: Thou shalt always, Always,
Always Use a STOP-loss order.
When you place a STOP order, right along with your ENTRY
order, via your online trade station, you've just
automatically prevented a potential loss from "running" too
far.
Before initiating any trade, if you haven't already figured
out at what point you would be wrong and would want to cut
your loses or, at the very least, reevaluate your position
from the sidelines, then you shouldn't be putting on the
trade in the first place.
Show us a FOREX trader who doesn't use stop loss orders and
we'll show you someone who loses a lot of m.oney.
>>> RapidForex.com RULE #4: Thou shalt predetermine your
exit point BEFORE you get into a trade.
To use a football analogy, if you don't know where the End
Zone is what's the point in walking up to the scrimmage line
to make a play? In other words, when you place a LIMIT
order (or, at least mentally place it), you're telling
yourself, and the rest of the market, that you understand
the game plan, the big picture, the reason for being on the
trade (the football field) in the first place. It is prudent
to let profits run and follow a market with stop orders in
a trending market. It's the wisest of traders who put
such a limit on their trading (profit-taking). Because of
Greed, it is always more difficult to make a decision to
take profits than to enter a trade. We don't want you to be
the one who says, "If only I had sold when...." Know your
exit strategy / game plan and this won't be you.
>>> RapidForex.com RULE #5: Thou shalt paper-trade first.
First open a DEMO account and get to learn how to place
orders with it (we cover this in detail in Lesson #11). You
shouldn't invest real money until you have shown a profit in
a DEMO account. Many people have losing DEMO accounts and
still believe that it will be different with real money.
Wrong! As mentioned in Lesson #11, the only thing different
between a DEMO account and a LIVE account is, with a DEMO
account, you'll tend to be less conservative and
lackadaisical with the rules. If you lose paper trading,
what makes you think you'll win with real money?
>>> RapidForex.com RULE #6: Thou shalt take a Breather when
your Core Equity is significantly down.
First of all, you should understand the following term "Core
equity." Core equity = Starting balance - Amount in open
positions. If you have a balance of $10,000 and you enter a
trade with $1,000 then your core equity is $9,000. If you
enter another $1,000 trade, your core equity will be $8,000.
Assuming you lost money on each trade, your core equity
certainly won't be where you started it with. If you lose a
certain predetermined amount of your starting capital (e.g.,
10 percent to 20 percent), take a breather, analyze what
went wrong, and wait until you feel confident you have a
high probability trading idea/method/system before entering
the market again. Remember, the goal is to MAKE money, not
lose it.
>>> RapidForex.com RULE #7: Thou shalt not let thy emotions
rule.
This is probably the hardest rule to keep. Yet, we have
never seen a successful trader over the long haul that
didn't follow it. Most people want to be winners. Most
people want to make the big score and have the accompanying
bragging rights. We all tend to get greedy, traders usually
more so. But trading is a business. It's hard work. You must
be cool, calm and always ready for the next opportunity.
You can't have emotionally high highs or emotionally low
lows because you'll make too many mistakes, and mistakes
mean losses. If you start winning and get "too high," the
tendency is to over-trade. By that, I mean starting to make
marginal trades or "seat-of-the-pants" trades just for the
sake of making trades, instead of waiting patiently for the
right opportunity. If you get too low (this is usually after
some losses), you are liable to skip the trades you should
be making, or you might try to "cherry-pick" a system or an
advisor's recommendations for fear of more losses,
inevitably making the wrong choices. To win this game you
must remain patient and clear-headed.
=========================
Finally, to finish this lesson up, we have TWO basic rules
about winning in the FOREX as well as in life: (1) If you
don't bet (trade), you can't win. (2) If you lose all your
chips, you can't bet (trade).
Think about it. Hard once. Then softly twice if you have
too.