Wednesday, June 23, 2010

Trade Forex Like a Professional

You have probably been advised many times to trade Forex in a professional manner. What exactly does this mean? Basically, you need to develop patience and focus on the risk elements of your trades rather than profits. You should aim to build a trading strategy that possesses a positive expectancy value. This important parameter predicts how much profit that you can expect to earn for every one dollar risked over the long haul.
Why is patience so important, you may ask? The best way to answer this question is to compare the different ways novices and experts approach their trading. For instance, novices have a tendency to seek immediate results by placing a large number of trades in a short period of time.
However, this impatient approach is folly and can lead to serious losses. They tend to favor day trading and try to identify new trading opportunities by using trading charts with short time frames, i.e. one hour or lower.
This is their first mistake because the statistics associated with these short time-periods is of very poor quality and can produce misleading information. In addition, as important pivot points, resistance and support levels are also weak in nature; new positions can be entered prematurely. You will also find that any technical indicator deployed on these charts is not very effective because their important features, such as crossovers, are unreliable.
For example, recently the Euro has been under extensive pressure as a direct result of economic problems experienced by a number of the member countries of the Eurozone. Consequently, the EUR/USD has fallen dramatically over the past months. You can clearly identify a strong bear channel if you study trading charts using the daily time frame plus. If you also deploy a technical indicator, you will find no significant signs that this weakness is stalling.
In contrast, if you use an hourly chart, then you could consider opening new long trades because temporary price retractions could well be flagging such opportunities. However, these would be high risk endeavors because you would then be trading against the long-term trend.
Novices consume sufficient amounts of energy chasing trading that produces for them low expectancy values. For example, over a month and if they are lucky, they could generate one hundred trades comprising 60 wins with an average win of $10 and average loss of $10. This produces an expectancy value of $2 meaning that they can expect to earn $2 for every $1 risked over the long haul. This is a poor return for so much work and the chances of experiencing significant losses are very high.
In general, experts base their trading decisions on the better quality statistics associated with the longer time frames from the daily upwards. Consequently, they tend to make much fewer trades, but are of superior quality. For instance, over a month they could open 10 trades resulting in 8 wins with an average win of $100 and an average loss of $50. Their expectancy value would then be $70.

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