Forex for a trader
How forex money moves

How forex money movesWhat Factors Move a Currency? 2.1 Level 1 Forex Intro 2.2 Level 2 Markets 2.3 Level 3 Trading. 5.1 Short Term 5.2 Medium Term 5.3 Long Term. The foreign exchange market is comprised of currencies from nations all over the world. Given the unique and complex nature of each and every economy around the globe, it is an impossible task to identify all the factors that drive currency prices. However, the factors that are listed below will give you a good starting point for gaining an understanding of the type of factors many would consider the primary drivers. First, an over simplified concept that is important to understand is that capital flows into economies that are considered safe, stable and growing. Economic releases can be thought of as real-time reports that give investors a glimpse into the underlying performance of the nation’s economy. These reports are usually published periodically by governmental agencies or private organizations. Although there are numerous policies and factors that can affect a country's performance, the factors that are directly measurable are included in economic reports.

(For a comprehensive overview of economic indicators, check out our Economic Indicators Tutorial. ) Having a strong understanding of economic events allows investors to compare one country’s performance against others around the globe. Before we jump into some examples of specific releases, it is important to know that there are many economic calendars made freely available online to track the release of economic announcements. Many even highlight announcements based on their likelihood that they will impact the exchange rate. Here are some of the most common economic releases that investors pay attention to: Gross Domestic Product (GDP) GDP is a report that outlines the monetary value of all the finished goods and services produced within a country during a specific time period. GDP is one of the most watched metrics in forex trading because it is a clear indicator as to whether an economy is growing or shrinking and how much it is changing relative to the opinion of analysts. Non-farm payroll figures refer to any job in the economy with the exception of farm work and other situations such as those employed within the military and intelligence agencies. This release holds such influence because it provides a gauge for investors in determine whether corporations are hiring. When reports suggest that non-farm payrolls are improving and strong, it can be interpreted to mean that the companies are growing and that newly-hired employees have money to spend, which will in turn fuel broad economic growth. Growing workforces and a strong economy will often lead to a strengthening currency.

(For more, see: Trading The Non-Farm Payroll Report) The retail sales is a very closely watched report that measures the total receipts, or dollar value, of all merchandise sold in retail stores in a given country. The report estimates the total merchandise sold by taking sample data from retailers across the country. Because consumers represent more than two-thirds of the economy, this report is very useful to traders to gauge the direction of the economy. Also, because the report's data is based on the previous month sales, it is a timely indicator, unlike the GDP report which is a lagging indicator. The content in the retail sales report can cause above normal volatility in the market, and information in the report can also be used to gauge inflationary pressures that affect Fed rates. (Refer to our Inflation Tutorial for a primer on inflation.) The industrial production report, released monthly by the Federal Reserve, reports on the changes in the production of factories, mines and utilities in the U. S. One of the closely watched measures included in this report is the capacity utilization ratio which estimates the level of production activity in the economy. It is preferable for a country to see increasing values of production and capacity utilization at high levels. Typically, capacity utilization in the range of 82-85% is considered "tight" and can increase the likelihood of price increases or supply shortages in the near term. Levels below 80% are usually interpreted as showing "slack" in the economy which might increase the likelihood of a recession. (Be sure to also check out our Federal Reserve Tutorial so you understand the role of one of the most important players in forex markets.) Purchasing Managers’ Index (PMI) The Purchasing Managers’ Index (PMI) is derived from reports from purchasing executives from a variety of corporations across the manufacturing sector.

The PMI figure is calculated based on five major indicators: new orders, inventory levels, production, supplier deliveries and employment. The primary purpose of this indicator is provide investors with a snapshot of the state of the manufacturing sector and whether it is expanding or contracting. For more, see: Economic Indicators: Purchasing Managers Index (PMI) Other common economic releases include. These economic releases are not the only factors to watch. There are also several meetings around these events that provide quotes and commentary, which can affect markets just as much as any report. These meetings are often called to discuss interest rates, inflation and other issues that affect currency valuations. Even changes in wording when addressing certain issues such as comments from the Chair of the Federal Reserve on interest rates, for example can cause market volatility. The stock market is often regarded as the barometer to a country’s economic performance. Strong stock markets are often indicators of strong and growing economies, which in turns leads to increased foreign investment and demand on the currency. The performance of major global financial markets is a key indicator used by forex traders.

(For more, see: Economic Factors That Affect The Forex Market ) International Trade - Balance of Trade. The interconnectedness of the global economy means that the status of international trade is a key indicator of an economy’s competitive advantage. The balance of trade, or the difference between a country’s imports and its exports, is a common metric used in conjunction with other data points by forex traders for determining a country’s economic health. In general, investors get concerned when a country’s imports are larger than exports, known as a trade deficit, over a prolonged period of time. Persistent trade deficits are closely watched because they can put a nation at risk or future currency devaluation. At this stage, the important thing to understand is that data points about the Balance of Trade andor the state of international trade in general are commonly used in conjunction with other economic data to determine a nation’s economic health. Differences in Interest Rates. Varying interest rates among lenders in different nations is one of the primary drivers of currency prices. This concept is discussed in more detail later on, but at this point, it is good to understand that generally speaking, foreign capital tends to flock toward higher interest rates, which in turn causes exchange rates to rise. (For more, see: Why Interest Rates Matter For Forex Traders ) Forex traders try to stay as informed of polictical news and events as possible. Factors such as newly-elected leaders, changes in fiscal or monetary policy decisions, and overall openness to trade and commerce impact the performance of a nation’s economy and therefore its currency. One example that is worth noting is Brexit, which was the vote for a planned withdrawal of the United Kingdom from the European Union, which sent the British Pound (GBP) to a multi-decade low due to the uncertainty surrounding the UK’s economic prospects. While this is a drastic example of the impact of politics can have on currencies. Sometimes even comments from nation’s leaders or hints of an upcoming market can trigger large price swings.

(For more, see: How Global Events Affect The Forex Market ) Given the scale of the forex market, it is quite common for investors to use charts and the various tools of technical analysis as the basis of making buy and sell decisions. More specifically, given the liquidity of the market and broad number of fundamental factors that influence prices, it is warranted to assume that all salient data is already priced in to exchange rates. We’ll take a closer look at some specific chart patterns and indicators later on, but at this point it is important to understand that since so many rely on the charts that common signals can be enough to trigger moves in an underlying currency. (For more on this topic, see: Technical Analysis Works In Forex Markets ) Understanding the factors that move currencies is an important first step to becoming a successful forex trader. Simply following global news and events, reading analyst reports, examining reliable commentary and analyzing chart patterns can help forex fundamental analysts gain a better understanding of long-term market trends and allow short-term traders to profit from extraordinary happenings. If you choose to follow a fundamental strategy, be sure to keep a calendar that highlights important dates so you know when these reports are released. Your broker may also provide real-time access to such information. Now that you've gotten your feet wet, let's dig in a little deeper into the basics of forex. Trading With Institutional Money Moves. Spotting and following “smart money moves” provides a wonderful investmenttrading strategy for private investors. Identifying and trading along with institutional money moves works for all asset classes: stocks, commodities, currencies, and Treasuries. In this article, we focus on stocks. Who are institutional investors and what is their core focus?

Fig 1: Key Institutional Investors. Table-1 shows: “Prop Traders” also act as “Liquidity Providers”: On one hand, some institutions trade their own money and on the other hand, they are providing liquidity. Hence, if a core “Prop Trading Company” wants to accumulate or dispose stocks, they have to bypass their key competitors. Even so, they try to hide their actions, the other market forces spot what is going on and trade along with it – and you can do the same. Fig 2: GOOG – Spot Institutional Money Moves. Fig 3: Spot Institutional Money Moves. The highlighted trade situations on the chart identify that: • Price consolidation is going hand in hand with decreasing volumes. • Price expansions to the up - or downside is going hand in hand with increasing or collapsing volume. Putting it all together provides you a chart-based strategy to trade right at the highlighted instances: • With the direction of the price range breakout. • With a Strong Directional Candle. Fig 4: AAPL Trading Institutional Price Moves. Over the years, I developed multiple indicators and studies, which highlight institutional price moves by spelling out potential trade entries and exits. After we clarified when to initiate a trade, the next question is which stocks to trade? To follow institutional price moves, pick stocks which are widely held by multiple institutions.

When you select the S&P 100 and the NASDAQ 100, you already found the core of the trading opportunities. Each of those stocks is held in most mutual funds and by multiple institutional investors. The next challenge is to find trading opportunities. We developed special scanning programs; however, you can find tradable stocks by picking those with a stronger price move than the referring index: - For the S&P 100 choose OEX. - For the NASDAQ 100 choose QQQ. Stocks to trade are those with an above or below the comparison index price-moves. To be a successful private investor, the skills and experience for being able to make money when the markets go up and down is essential. When a major price move occurs, expect to trade one direction for no more than 10 trading days and after that expect a reversal. If you want to catch a longer trend trade, trail your stop: • To the upside: Below the low of the prior candle. • To the downside: Above the high of the prior candle. Why is an institutional follower strategy successful? • Private investors have the advantage of speed: They can enter and exit entire positions, while Institutions need a longer time to get in and out of a position by sheer size and SEC (Security Exchange Commission) regulations. • By the smaller size, you have an easier way to leverage and hedge trading positions.

• With a short - rather than long-term strategy, money can be made on up - or down-moves. • Short-term trading allows for constantly generating and compounding interest, which gives you accelerating returns. • With modern technology on hand and competitive commissions, the private investor can access all markets real time, similar to institutions. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake. by David Rodriguez , Quantitative Strategist. Big data analysis, algorithmic trading, and retail trader sentiment. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to David Rodriguez. You can manage you subscriptions by following the link in the footer of each email you will receive.

An error occurred submitting your form. Please try again later. We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Here is what we believe to be the number one mistake FX traders make. W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately . Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader.

Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average ProfitLoss per Winning and Losing Trades per Currency Pair. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time.

They lose more money on their losing trades than they make on their winning trades . Let’s use EURUSD as an example. We see that EURUSD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBPUSD pair was even worse. Traders captured profits on 59% of all GBPUSD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out . Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common?

The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing. What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose? 50% chance to Win 1000.

50% chance to Win 0. Expect to win $500 over time. Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again. 50% chance to Lose 1000. 50% chance to Lose 0. Expect to lose $500 over time. In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory. Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains . It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around.

This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure. Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall. Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “ rewardrisk ratio ”. If you risk losing the same number of pips as you hope to gain, then your rewardrisk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 rewardrisk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.

What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower rewardrisk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher rewardrisk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the rewardrisk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits. Once you have a trading plan that uses a proper rewardrisk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning . This will allow you to use the proper rewardrisk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management” . Many of the most successful forex traders are right about the market’s direction less than half the time.

Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. T raders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a riskreward ratio of 1:1 or higher. Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account.

The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same rewardrisk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 312014 to 3312015. View the next articles in the Traits of Successful Series: The Traits of Successful Traders. This article is a part of our Traits of Successful Traders series. Over the past several months, The DailyFX Research team has been closely studying the trading trends of traders via a major FX broker.

We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more. Stay tuned for the next article in the Traits of Successful Traders Series. Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX. com. Sign up to David’s e-mail distribution list to receive future e-mail updates on the Traits of Successful Traders series and other reports. Contact and follow David via Twitter: twitter. comDRodriguezFX. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. How Forex Brokers Make Money. In the foreign exchange market, traders and speculators buy and sell various currencies based on whether they think the currency will appreciate or lose value.

The foreign exchange, or forex market is high risk and sees more than $5 trillion dollars traded daily. Traders have to go through an intermediary such as a forex broker to execute trades. No matter the gains or losses sustained by individual traders, forex brokers make money on commissions and fees, some of them hidden. Understanding how forex brokers make money can help you in choosing the right broker. (For related reading see : 5 Tips For Selecting a Forex Broker .) Role of the Foreign Exchange Broker. A foreign-exchange broker takes orders to buy or sell currencies and executes them. Forex brokers typically operate on the over-the-counter, or OTC, market. This is a market that is not subject to the same regulations as other financial exchanges, and the forex broker may not be subject to many of the rules that govern securities transactions.

There is also no centralized clearing mechanism in this market which means you will have to be careful that your counterparty does not default. Make sure that you investigate the counterparty and his capitalization before you proceed. Be vigilant in choosing a reliable forex broker. (For related reading, see: Market Makers Vs. Electronic Communications Networks.) In return for executing buy or sell orders, the forex broker will charge a commission per trade or a spread. That is how forex brokers make their money. A spread is a difference between the bid price and the ask price for the trade. The bid price is the price you will receive for selling a currency, while the ask price is the price you will have to pay for buying a currency. The difference between the bid and ask price is the broker’s spread. A broker could also charge both a commission and a spread on a trade. Some brokers may claim to offer commission-free trades. Actually, these brokers probably make a commission by widening the spread on trades. The spread could also be either fixed or variable. In the case of a variable spread, the spread will vary depending on how the market moves.

A major market event, such as a change in interest rates, could cause the spread to change. This could either be favorable or unfavorable to you. If the market gets volatile, you could end up paying much more than you expected. Another aspect to note is that a forex broker could have a different spread for buying a currency and for selling the same currency. Thus you have to pay close attention to pricing. In general, the brokers who are well capitalized and work with a number of large foreign exchange dealers to get competitive quotes typically offer competitive pricing. Risks of Foreign Exchange Trading. It is possible to trade on margin by depositing a small amount as a margin requirement. This introduces a lot of risk in the foreign exchange market for both the trader and the broker. For example, in January 2015, the Swiss National Bank stopped supporting the euro peg, causing the Swiss franc to appreciate considerably versus the euro. (For related reading, see: Why Switzerland Scrapped the Euro .) Traders caught on the wrong side of this trade lost their money and were not able to make good on the margin requirements, resulting in some brokers suffering catastrophic losses and even going into bankruptcy. Inexperienced traders could also get caught up in a fat finger error, such as the one that was blamed for the 6% dip of the British pound in 2016. Those contemplating trading in the forex market will have to proceed cautiously—many foreign-exchange traders have lost money as a result of fraudulent get-rich schemes that promise great returns in this thinly regulated market. The forex market is not one in which prices are transparent and each broker has his own quoting method.

It is up to those who are transacting in this market to investigate their broker pricing to ensure that they are getting a good deal. How to Calculate Forex Price Moves. A pip is the unit of measurement to express the change in price between two currencies. Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related to a currency. The term ‘pip’ is actually an acronym for ‘percentage in point’. Professional forex traders often express their gains and losses in the number of pips their position rose or fell. For example, if the EURUSD moves from 1.27 12 to 1.27 13 , that 0.0001 rise in the exchange rate is ONE PIP . All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two. Some brokers only quote to the fourth and second decimal place (for JPY pairs) but others, including AVA Trade, quote to the fifth decimal place of the currency to provide even greater accuracy when measuring gains and losses. This fifth decimal place is what we call a pipette – one tenth of a pip. So for example if the EURUSD moves from 1.27 128 to 1.27 129 , we can say it has moved one pipette or 0.1 pips (1 tenth of a pip). So now that we know what a pip is, what does it mean to us in terms of how much money we make or lose for each movement? Well this depends on the size of the position we opened.

Larger positions mean each pip movement in the pair will have greater monetary consequence to our balance. To calculate this it is quite simple. We simply multiply our position size by 0.0001 (i. e. ONE PIP): Let’s take an example and stick with our EURUSD pair. We can forget what price it is trading at for now and we’ll concentrate on how much money a pip move will be for various position sizes. So say we wanted to open a position size of 10,000 units. Our calculation to establish what a one pip movement means to us is as follows: 10,000 (units) * 0.0001 (one pip) = $ 1 per pip. So a position of 10,000 (BUY or SELL) means that every time the pair moves 0.0001 (i. e. ONE PIP) then we will make a profit or loss of $1.00 depending on which way it moved. Therefore, for a position of this size – 10,000 units – we will gain or lose $1 for every pip movement in either direction. So if the EURUSD moves 100 pips (i. e. 1 cent) in our direction we will make $100 profit. We can do this for any trade size. The calculation is simply the trade size times 0.0001 (1 pip). 5,000 (units) * 0.0001 (one pip) = $ 0.50 per pip. 60,000 (units) * 0.0001 (one pip) = $ 6 per pip. 123,000 (units) * 0.0001 (one pip) = $ 12.30 per pip. Our pip value WILL ALWAYS BE MEASURED IN THE CURRENCY OF THE QUOTE CURRENCY OF THE FX PAIR i. e. the currency on the right-hand size of the pair. So in the example of the EURUSD we see our pip value is always in US Dollars. If we were trading the EURGBP pair, the pip value will be in Pound Sterling. 10,000 units * 0.0001 = ? 1.00 per pip. Therefore the final calculation we must consider is if we have a trading account in a different currency denomination, as brokers offer accounts in US Dollar, Euro, Pound and Yen. So let’s say we have a Euro platform taking our EURGBP example above and the current EURGBP exchange rate is 1.5000.

Then each pip movement of 1.00 would be automatically converted by our broker to – we simply divide 1$ by the current EURUSD rate which is 1.26500 which equals 0.79c. If we are using a GBP platform one pip will equal 1$1.59500 (the GBPUSD rate) or 0.63 pence. These calculations will be done automatically on our trading platform but it is important to know how they are worked out. At this point you may be asking ‘how can I trade such large positions such as 10,000 units of a currency pair? That sounds like a very large investment!’ The answer to that question is leverage which we will discuss in another article. Making money in forex is easy if you know how the bankers trade! How to make money in forex? I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.

It all comes down to understanding how the traders at the banks execute and make trading decisions. Why? Bank traders only make up 5% of the total number of forex traders with speculators accounting for the other 95%, but more importantly that 5% of bank traders account for 92% of all forex volumes. So if you don’t know how they trade, then you’re simply guessing. First let me bust the first myth about forex traders in institutions. They don’t sit there all day banging away making proprietary trading decisions. Most of the time they are simply transacting on behalf of the banks customers. It’s commonly referred to as ‘clearing the flow”. They may perform a few thousand trades a day but none of these are for their proprietary book. How do banks trade forex? They actually only perform 2-3 trades a week for their own trading account.

These trades are the ones they are judged on at the end of the year to see whether they deserve an additional bonus or not. So as you can see traders at the banks don’t sit there all day trading randomly ‘scalping’ trying to make their budgets. They are extremely methodical in their approach and make trading decisions when everything lines up, technically and fundamentally. That’s what you need to know! As far as technical analysis goes it is extremely simple. I am often dumbfounded by our client’s charts when they first come to us. They are often littered with mathematical indicators which not only have significant 3-4 hour time lags but also often contradict each other. Trading with these indicators and this approach is the quickest way to rip through your trading capital. Bank trader’s charts look nothing like this. In fact they are completely the opposite. All they want to know is where the key critical levels. Don’t forget these indicators were developed to try and predict where the market is going. The bank traders are the market . If you understand how they trade then you don’t need any indicators. They make split second decisions based on key technical and fundamental changes. Understanding their technical analysis is the first step to becoming a successful trader. You’ll be trading with the market not against it. What it all comes down to is simple support and resistance.

No clutter, nothing to alter their trading decisions. Simple, effective and highlighting the key levels. I’m not going to go into the ins and outs of where they actually enter the market, but let me say this: it’s not where you think. The trendlines are simply there to indicate key support and resistance. Entering the market is another discussion all together. How to make money in forex? The key aspect to their trading decisions is derived from the economic fundamentals. The fundamental backdrop of the market consists of three major areas and that’s why it’s hard to pin point currency direction sometimes. When you have the political situation countering the central bank announcements currency direction is somewhat disjointed.

But when there are no political issues and formulated central bank policy acting in accordance with the economic data, that’s when we get pure currency direction and the big trends emerge. This is what bank traders wait for. The fundamental aspect of the market is extremely complex and it can take years to master them. This is a major area we concentrate on during our two day workshop to ensure traders have a complete understanding of each area. If you understand them you are set up for long term success as this is where currency direction comes from. There is a lot of money to be made from trading the economic data releases . The key to trading the releases is twofold. First, having an excellent understanding of the fundamentals and how the various releases impact the market. Secondly, knowing how to execute the trades with precision and without hesitation. If you can get a control of this aspect of trading and have the confidence to trade the events then you’re truly set up to make huge capital advances. After all it is these economic releases which really direct the currencies. These are the same economic releases that central banks formulate policy around. So by following the releases and trading them you not only know what’s going on with regards central bank policy but you’ll also be building your capital at the same time. Now to be truly successful you need an extremely comprehensive capital management system that not only protects you during periods of uncertainty but also pushes you forward to experience capital expansion.

This is your entire business plan so it’s important you get this down pat first. Our stringent capital management system perfectly encompasses your risk to rewards ratios, capital controls as well as our trade plan – entry and exits. This way when you’re trading, all your concerned about is finding entry levels. Having such a system in place will also alleviate the stresses of trading and allow you to go about your day without spending endless hours monitoring the market. I can tell you most traders at banks spend most of the day wandering around the dealing room chatting to other traders or going to lunches with brokers. Rarely are they in front of the computer for more than a few hours. You should be taking the same approach. If you understand the technical and fundamental aspects of the market and have a comprehensive professional capital management system then you can. From here it just takes a simple understanding of the key strategies to apply and where to apply them and away you go. Trust me you will experience more capital growth then you ever have before if you know how the bank traders trade. Many traders have tried to replicate their methods and I’ve seen numerous books on “how to beat the bankers”.

But the point is you don’t want to be beating them but joining them. That way you will be trading with the market not against it. So to conclude let me say this: There are no miraculous secrets to trading forex. There are no special indicators or robots that can mimic the dynamic forex market. You simply need to understand how the major players (bankers) trade and analyse the market. If you get these aspects right then your well on the way to success. Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature.

Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake. by David Rodriguez , Quantitative Strategist. Big data analysis, algorithmic trading, and retail trader sentiment. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to David Rodriguez.

You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Here is what we believe to be the number one mistake FX traders make. W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately . Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain.

Percent of All Trades Closed Out at a Gain and Loss per Currency Pair. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average ProfitLoss per Winning and Losing Trades per Currency Pair. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades .

Let’s use EURUSD as an example. We see that EURUSD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBPUSD pair was even worse. Traders captured profits on 59% of all GBPUSD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time.

They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out . Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing. What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose? 50% chance to Win 1000.

50% chance to Win 0. Expect to win $500 over time. Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again. 50% chance to Lose 1000. 50% chance to Lose 0. Expect to lose $500 over time. In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory. Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards.

The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains . It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure. Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall. Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “ rewardrisk ratio ”.

If you risk losing the same number of pips as you hope to gain, then your rewardrisk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 rewardrisk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower rewardrisk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher rewardrisk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the rewardrisk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits.

Once you have a trading plan that uses a proper rewardrisk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning . This will allow you to use the proper rewardrisk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management” . Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. T raders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015.

Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a riskreward ratio of 1:1 or higher. Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same rewardrisk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 312014 to 3312015. View the next articles in the Traits of Successful Series: The Traits of Successful Traders. This article is a part of our Traits of Successful Traders series. Over the past several months, The DailyFX Research team has been closely studying the trading trends of traders via a major FX broker. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more.

Stay tuned for the next article in the Traits of Successful Traders Series. Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX. com. Sign up to David’s e-mail distribution list to receive future e-mail updates on the Traits of Successful Traders series and other reports. Contact and follow David via Twitter: twitter. comDRodriguezFX. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.



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