Tag Archives: forex articles

Best Position Sizing Practices

One of the key elements in risk management in Forex is position sizing. It’s a decision you have to make with every trade, and it’s best if it’s consistent. While many traders believe that the most important element of trading is having a good method and applying it, position sizing can be just as critical in determining your success or failure. We’ll start by looking at the simplest scenario, which is placing trades that you don’t scale up on.

There are many ways to complicate position sizing, but there’s no reason to do so. When you put together your trading plan, you need to figure out how much you’re willing to risk on each trade. When you figure this out, note that you’re considering how much money you can lose if a trade goes against you, not how much you can win if you succeed. Always base your position sizing off of worst case scenarios – losing 100% of your investments. New traders regularly make the mistake of risking way too much money on their trades. It is unwise to risk 10-20% or more on a trade, no matter how confident you are. Successful long-term professional FX traders usually risk no more than 2.5% on their trades. Consider 5% an absolute maximum. 2% isn’t a bad amount to risk, either.

Depending on the way your trading platform is structured, you may need to calculate your risk in a particular way each trade. The factors you take into account should include how much money you have in your total trading bankroll, the percentage you’ve chosen, and the distance between your entry and your stop loss. The pip value is a key element too. You can mathematically calculate your position size as follows:

Multiply the amount of money in your bankroll by your risk percentage and then divide that by the number of pips you’re risking (that’s the distance between the entry and stop loss). Then divide that number by the pip value per standard lot. Check whether your platform can do all this for you. Many trading platforms will do the math for you. With Oanda for example, you can choose your stop loss and the amount of money you want to risk, and it will put up the proper position size for you. Alternatively, you can use a free online position size calculator to help manage your positions precisely. Oanda was also used because it offers flexible lot sizes, which is an absolute must if you have a small account. You can’t do standard lot sizes if you only have $1,000 in your trading account. That’d be way too big a percentage for you to risk. Such brokers like Oanda, AGEA and MahiFX let you wager as much or little as you want, even if it’s just a handful of dollars.

Scaling Up

Scaling up, also called averaging up or pyramiding, is another topic that should be discussed. This is where you increase your position size if you’re winning on a trade. There are different practices for doing this; you should test any scaling up method thoroughly before you use it live since it can complicate your risk exposure. The benefits of scaling up are pretty clear; if your position continues to move in the right direction, you can become more profitable. The hardest part of making a good trade is often the beginning, and if you find that you’re in a trend, you may as well try to ride out the trend and get as much as you can out of it.

The drawback of scaling up is that if a position goes against you, it doesn’t need to go clear back to your entry to put you at break even anymore. If you doubled your investment and the price retraces 50%, you’re suddenly at break even, even though you’re not back to your entry. If price does go back to your entry level, you’re suddenly at a loss. If you don’t double your investment but choose some other amount, you have to carefully calculate the rate at which you’ll be losing money should the position reverse. So this is as much a trading style issue as it is an objective one. Some traders find this all too complicated and do better if they stick with a simple position sizing tactic. Others excel with scaling and go on to higher profits.

Setting a Target Profit

While we’ve focused largely on where you set your stop loss to determine your risk, it’s worth pointing out that another way you can ride out your winning trades without scaling is by moving your target profit and your stop loss after the trade is going in your favor. One thing traders will sometimes do is enjoy the benefits of a risk-free trade. A trade becomes risk-free when it goes in your favor and you move your stop loss to break even and push your target profit further out. If the trade continues to go in your favor, you can move the stop loss and target profit again. This locks in a small win, and gives you a chance at a bigger one. If you find out you’ve caught a trend, you can do this indefinitely, chasing larger and larger profits with no additional risk.

Why wouldn’t you do this? Depending on your strategy, it could result in a lot of break-even trades. It’s a more reliable and simpler method of riding out trades than scaling is for many traders though, and just one more idea to consider in regards to position sizing. Everything starts with making sure you don’t risk more than a tiny percentage of your account, but where you take your trades from there doesn’t necessarily need to be limited by your initial stop loss and target profit.

Pros and Cons of Fundamental Forex Trading

Many forex traders are technical traders, but there is a school of thought that says fundamental analysis is the best route. Fundamental analysis is the process of analyzing the market using both qualitative and quantitative factors that take into account economic and political factors.

Fundamental traders are concerned more with how the economy and political landscape shapes the world and affects trading activity. In forex, fundamental traders look at the macro and micro economic factors that affect a nation’s currency to determine the value of that currency relative to another currency. Since fundamental indicators don’t always result in instant market reactions, fundamental traders tend to have a more long-term view of the market.

While there is no shortage of trading software and tools for the technical analyst, fundamental analysts often find that they must put in more manual labor to realize a profit. Is it worth the effort?

The Benefits of Fundamental Analysis

There is a certain kind of romanticism surrounding fundamental analysis. The idea that politics and the economy drive financial decisions means that there’s more than just numbers that move the world along. This lends an artistic element to the process of analysis. Still, fundamental traders do look at numbers including:

  • the measure of overall economic growth for a country.
  • trade and current account balances.
  • interest rates and investment (i.e. bond) yields.
  • political stability.

The measure of economic growth for a nation is often measured by its GDP, but traders will often look at unemployment rates as well. Any decrease in the employment rate is seen as a weakening of the economy. When economies weaken, central banks have a history of lowering interest rates to spur growth. For traders, this means inflation. Inflation destroys the value of a currency causing traders to bet against that currency. If enough traders have the same view of a weak nation, that nation’s currency value could drop.

Trade balance can dramatically affect a nation’s currency. When a country has a trade deficit, it will generally result in a weak currency since that country will have continuous commercial selling of its money.

GDP, or Gross Domestic Product, can foretell a strong or weak nation. If GDP rises, there is an expectation of higher interest rates. These higher rates may be positive for a country. As interest rates rise, borrowers must pay more for their debt. Some businesses will default. Even so, the rising rates curb inflation by reducing the incentive to borrow. By curbing inflation, a currency grows stronger because it is not being devalued as much. Taken to the extreme, a deflationary environment would make a currency grow (sometimes rapidly) in value as fewer currency units become available in the marketplace.

An economy can still grow under high interest rate environments. This growth would be good for the economy, thus signaling a buying opportunity for forex investors.

The Disadvantages of Fundamental Analysis

Some critics of fundamental analysis point out that:

  • fundamental analysis requires a background knowledge of economics and is difficult to understand.
  • fundamental analysis is time consuming.
  • the information unearthed by fundamental analysis is already priced into the market.
  • it fails to give traders objective trading signals.

Economics is not an easy subject to master. There are two basic competing theories of economics: the Keynesian school of economics and the Austrian school. Keynesians believe that economic growth can be achieved through government stimulus. When an economy is sluggish, the central bank can “grease the grooves” by providing an infusion of capital to the market. The market then invests this money thus contributing to a recovery.

The Austrian school holds the opposite view. Instead of government stimulus helping the economy, it plants the seeds of its own destruction. The boom created by an influx of capital is really just a sign of malinvestment waiting to crash. This, according to the Austrians, is why central bank-induced boom periods are always followed by busts.

Many economists study just one theory for their entire life and still never master it enough to predict market trends. For traders, they must be able to pick the correct economic theory and know how it will impact the markets – a tough job at best.

Because of the nature of fundamental analysis, it’s time consuming. While some calculations can be done to assess the health of an economy, much of the analysis is qualitative. In other words, the trader has to know how to interpret the news and political speeches. This could take years of practice not to mention the fact that economic and political news may or may not have an immediate effect on the currency markets.

Many technical traders argue that markets are perfect and that this means that all of the fundamental indicators are already priced into the marketplace. This line of thinking is closely related to the efficient market hypothesis which states that financial markets are not over or undervalued. All relevant information is instantaneously priced into the markets. If that’s true, then fundamental analysis is a waste of time.

Technical traders also believe that fundamental analysis does not give investors the ability to make objective trading goals. Since much of the work is qualitative in nature, fundamental analysts are often perpetual “buy and hold” investors that seek gains over a long period of time. Because there’s no software that tracks historical trends, there’s no data mining. It’s this lack of historical data that accounts for this criticism of fundamental analysis.

Making a Choice

One option that you have open to you is to blend both technical and fundamental analysis into a new trading strategy. You don’t have to choose just one. In fact, an increasing number of traders use technical analysis to spot trends, then use fundamental analysis to confirm the validity of the trend before investing. A combination of the two methods might yield good results and provide flexibility in your trading strategy.

Author Bio:

Guest post contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading. Learn more about forex trading.

The Ten Commandments of Forex

Apart from the trading strategy, the successful trader should follow some important rules. As important as the Ten Commandments, the ten rules of Forex which I identified during my experience will (hopefully) help you to keep your account in healthy condition. For those who are not familiar with trading on the financial markets, I recommend reading this article on what Forex is prior to diving in the deep waters.

After you read this article please share with me if you liked it and how it contributed to your trading experience?

The success

“Trade for the success, not for the money”. You should be motivated entirely by achieving success in that particular trade and leave the thoughts of “what will I do with that money after I win”. Human’s mind get easily distracted when thinking about money. That is why the computer programs don’t get distracted when traded, because they don’t know the meaning of money.

The discipline

The most important quality of a trader is the discipline. The key to successful trading is having control over your mind, body and emotions. You can make technical analysis of great use for your trading but without discipline it will be very difficult and almost impossible to make successful trades. Regardless of the fact if you lost or won today, if you are disciplined you can come back tomorrow and trade again.

Know yourself

Before you start trading Forex you should get to know yourself. How do you react under pressure? Are you willing to take the risk? Do you get mad when you think of losing money? If you cannot sleep in case of losing money, then leave the Forex market and rather purchase a shares portfolio with minimum risk. But if you can manage the risk with discipline go for the currency market. It is important to clarify whether you do it just for the game or for the investment. In the first case it is better to visit Las Vegas.

Get rid of your ego

The quickest way to wipe out your account is to allow your ego to dictate your trading decisions. That is why you should not share with your friends what you traded and how much you won or lost. Like this you might be in a position of holding your trade just because you don’t want to get embarrassed in front of your friend. Again, the computers won’t do it because they don’t know the meaning of friends. The only follow the rules of the trade.

Don’t pray

I have literally seen traders praying in front of the monitor while the price is going towards their auto close levels. Remember, the market price is determined by the buyers and seller (on some other factors sometimes). Nobody will help you because it’s a jungle and everybody is against everybody. Follow your stop and limits, stay cool and don’t rely on things such as prays and emotions.

Leave your gains and cut your losses

When the stop order level is reached leave it. Even if the marklet recovers after it don’t get mad but be proud because you have discipline. In this sense, I respect the women traders because when they start losing they run away – this is the best in Forex. Conversely the men hold the losing position until their last breath. Remember to eliminate all emotions, ego and other human qualities. There are only numbers and nothing more than that.

Know when to enter and when to wait

I would say that 80% of the trading process passes in watching the screen and waiting for the best moment to enter or exit the trade. Think of it, the more you trade the greater the chance to make the wrong move. So trade only when you are 100% certain and have checked your technical and fundamental analysis.

Love your winning and losing trades

The losing trades are your best teacher. That is why you should note both winning and losing trades. Like this you will be able to learn from your mistakes and avoid them in the future.

Take a break

After three losing trades you must definitely take a break. Go out and do some sports or just walk in the park away from any screens. You need to calm down and erase all thoughts from your mind. In my opinion, you should also do that after winning trades. People often get too excited about their wins and easily risk all their accounts in a single trade because they feel too certain.

Follow the rules

This is the most important rule of all. Don’t break your rules and you will succeed. What is the sense in having rules and not following them?

You can start today by opening a risk free demo account and test your strategy!

Like this article? Please share it with your friends!

Earn profit and do away with debt – Solid reasons to invest in the forex market

With the increasing debt burden of the Americans, an increasingly large number of them are trying to expand their horizons and branch outside to boost the level of income that they make in a month. As the unemployment level is not showing any positive move, the Americans are suffering from lack of income but spiraling debt obligations that they have to pay in a single month. In case you’re suffering from various debt problems and you’re tired of making the credit card payments, you can switch your role as a forex market investor. Investing in the forex market can assure you maximum returns and you need not take help of the professional debt help companies that may charge you fees for providing you with their services.

What happens when you opt for professional debt relief?

When your high interest credit card debts are rising beyond your control, you should get help from a professional debt relief agency but are you aware of the way in which such companies work and how they help you eliminate your debt burden? If you choose a debt consolidation company, the interest rates on your credit cards will be reduced and you can make a single monthly payment towards the program. However, if you want to make the payments on time, you have to make sure that you keep on making the monthly payments on time. When you’re already in debt, how are you supposed to gather the payments? Here comes the option of starting off with passive income that can be achieved through the forex market. Read on to know the reasons to invest in the forex market.

The solid reasons to invest your dollars in the currency market

Forex offers some advantages that you may not get with the other financial assets. If you’re wondering why you should leverage the forex market when there is the stock market, the bonds and the mutual funds? Here are some reasons.

  • Fewer investment choices: If you’re an investor who is investing money to earn returns with which he can pay back high interest debt, your responsibility is more than a normal investor. When you consult a forex broker, he will give you a choice of 20 currency pairs but when you enter the stock market, you may come across thousands of choices. You may suffer from information overload when you enter any other market and this may make you take wrong decision.
  • Trade with leverage: Trading with leverage is another benefit of the forex market and this type of leverage is much greater than what you get in the other financial assets. While you may get 2:1 leverage in the stock market, you can get 500:1 leverage in the forex market. This means that you’ll be able to control a larger amount with a smaller amount of capital.
  • Trade at any time of the day: Another unique feature of the forex market is that the market is open 24 * 7 and you can trade the market at any point of the day. Even if you go abroad for a vacation, you can trade online at any point of the day and this raises your options of making returns.
  • Size and liquidity: The size of the forex market is a big advantage and this is the largest financial market in the world that trades almost $4 trillion in a day. As a large number of players are involved, the places of the trade gets filled up instantaneously.

Therefore, when you’re worried about your rising debts and you have no option to repay them on time, you may become a forex investor. Earn huge returns and use them for credit card debt repayment so that you don’t have to waste your dollars behind the professional companies.

Grab 50% Gains with This Unpopular Currency

By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist

Mr. Market is a very tricky character.

He always does what you least expect.

Take last year, for example. The consensus at the beginning of 2011 was that global economic growth would be healthy, and that it would be a good year for stocks.

We all know it didn’t turn out that way. The market had lots of ups and downs, and finished the year at breakeven.

This year started with the consensus that global growth would face a lot of challenges, so stocks and commodities would have a tough time. So the least thing anyone expected was for the market to begin the year with a big rally in stocks and other risky assets.

And of course that’s exactly what we’re getting. That’s how Mr. Market operates. And that’s why it pays to bet on unpopular assets. It’s no different in the currency market.

One of the most unpopular currencies has just started a big rally.

It’s Time to Love This Hated Currency

When looking for trading opportunities, it’s always a good idea to start asking “what is it that everyone hates right now?”

Late last year, I asked myself that question. What is the most hated emerging-market currency right now?

The Mexican peso was on the top of the list. It was one of the worst-performing currencies of 2011, losing about 18% of its value just in the second half of the year alone.

That’s a huge move in the currency market. To put it in perspective, the euro, also a contender for the most hated currency in the world, lost less than half of that during the same period.

The least thing anyone expected late last year was for the Mexican peso to start a big rally. So I jumped right into the trade.

There are two particular assets that helped me make that decision. Let me explain.

Finding Something Fishy in the Charts

When I trade the Mexican peso, I always have to check how two other assets are doing: stocks and oil. The reason is simple.

The Mexican economy still depends a lot on the U.S. economy. We buy about 80% of their exports. So if our economy is doing well, their economy tends to do well too. So far this year, economic data has been surprisingly strong in the U.S. No wonder stocks have been rallying.

The Mexican government is also very dependent on oil revenues. As a major oil producer, its economy tends to do well when the price of oil is rising.

So both the stock market and oil have been rallying. With the S&P 500 trading above 1,300 and oil above $100, the Mexican peso should be shooting through the roof, right?

But it didn’t happen. Check out the chart below.

Mexican Peso Has a Lot of Catching Up to Do

It’s clear there’s a pretty strong correlation between the Mexican peso, stocks, and oil. They moved together for the past 3 years. But while oil and stocks started a major rally in October of last year, the peso just moved sideways and was left behind.

It didn’t make any sense.

It’s Not Too Late to Profit

The Mexican peso is only now starting to move in the “right” direction. So it still has a long way to go catch up with the S&P 500 and oil.

An easy way to profit from that in the spot market is to short the pair USD/MXN. By shorting the pair, you will be betting the peso will appreciate against the dollar.

In fact, that’s exactly what I did when I saw this divergence in the chart. I recommended that my Exotic FX subscribers buy the peso.
We now have open profits of about 60%, using 20:1 leverage. And we’re shooting for tripe digit gains.

But it’s not too late to bet on the peso.

According to my analysis, the pair USD/MXN will move down to 12.90, at least. That’s a potential profit of 50% from current levels, using 20:1 leverage. And if stocks continue to move higher, the pair will drop much lower than that. It is now oversold, but I would short USD/MXN on any pullbacks.

This year we will see lots of ups and downs in the S&P 500. Trading the Mexican peso will be one of the easiest ways to play that volatility in the stock market.

Stocks have started the year on the right foot. And so has the peso. Until very recently, everyone hated the Mexican currency. But now it’s starting to get some love.

Under this positive investment sentiment, the peso remains a very good bet.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist

Does the ECB Have a Plan to Rescue the Euro? None That I See!

by Jack Crooks
Saturday, January 21, 2012 at 7:30am

Jack Crooks

We’re constantly talking about how much help the euro zone needs to escape the economic mess they’ve created. So will the European Central Bank (ECB) monetize debt? Will the European Financial Stability Facility (EFSF) be sufficiently funded as a bailout mechanism? Will Germany agree to back-stopping periphery nations?

Earlier this week the International Monetary Fund (IMF) put forth a new, albeit unoriginal, proposal to garner funds from its non-European members that will serve as a backstop should there be a major shock to the European financial system. The IMF wants to raise another $500 billion. But, laughably, they’re hoping the G-20 can come to an agreement and make this happen.

With all that said …

Why Didn’t the ECB Cut
Interest Rates Last Week?

Perhaps they’ve evaluated the impact on investor/consumer sentiment after recent rate cuts. And perhaps they thought it would be more beneficial to portray a modicum of confidence in an economy that’s pretty much doomed, regardless of who you ask.

By not cutting rates, the ECB suggests the economy doesn’t precisely need rate cuts to achieve stability. And it implies the current dealings between governments and international policymakers are headed in the right direction.

I’m inclined to say the latter is impossible. But that attitude wouldn’t get us anywhere.

Instead, I’ll ask: Why is it that other central banks seem more concerned than the ECB, which sits at ground zero of the number one crisis facing the global economy?

For example …

  • Brazil’s central bank is still cutting interest rates to avoid the financial fallout from the euro zone. They just cut their benchmark rate to 10.5 percent from 11 percent and hinted of more cuts ahead.
  • South Africa’s central bank is holding tight with interest rates at 30-year lows because they fear a global economic revival may not pan out to a sufficient degree.
  • China is on the verge of easing up on last year’s stretch of tightening since it is realizing significant slowdown in key areas of its economy. Lending is expected to exceed last year’s total even though there is a case to be made against the effectiveness of additional lending in an economy that shows major signs of overinvestment.
  • Even Australia, the yardstick economy to which most developed nations can’t measure up, saw its central bank cut interest rates at the last monetary policy meeting. If you wonder why, maybe the news this week that employment unexpectedly fell offers a clue.

What Could Those Folks at
the ECB Be Thinking?

Have Mario Draghi and the ECB done enough to get the euro-zone's finances  under control?
Have Mario Draghi and the ECB done enough to get the euro-zone’s finances under control?

If the answer to that question eludes you, and not knowing bugs you, you’re not alone …

The ECB confounds most investors by not cutting interest rates while the Federal Reserve and other central banks around the world prepare to go easy with interest rates should the euro-zone problems encroach on their economies.

So let me give you my take on it that might help you set expectations for ECB policy going forward:

Rate cuts and monetization aside, the ECB’s ability to help support banks is determined by collateral. If a bank can put up collateral of sufficient quality, then it can receive needed funds from the ECB. If banks can’t put forth quality collateral, and the ECB wants to do something about it, they can lower the standards of what they accept … assuming they have that flexibility.

And this from Leto Market Insight:

In order to keep euro-zone banks liquid in the months ahead, the ECB may need to lower its standards for qualified collateral. But this brings us to the next problem: The ECB is not sufficiently capitalized to accept the additional risk of poorer quality collateral. The ECB’s paid-in capital was €6.36 billion against €2,733 billion assets at the end of 2011, representing a leverage ratio of assets/capital of 430! For comparison, the Federal Reserve has a paid-in capital of $26.9 billion against $2,928 billion assets, a leverage ratio of 109.

It’s impossible to determine if further ECB interest rate cuts or reduced lending standards would rescue the euro-zone’s economy and its currency. But it sure seems like what they’re doing isn’t working.

Best wishes,


Source: http://www.moneyandmarkets.com

Five Fatal Flaws of Trading

By Elliott Wave International

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit — and more importantly, do it consistently. How do they do that?

That’s an age-old question. While there is no magic formula, EWI Senior Instructor Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading. We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection, Volume 4. Learn how to get 14 more actionable trading lessons — FREE — below.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, “How do you stop the Hand?” Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 — Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 — Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 — Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader — 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them — and achieve them — you will fend off the Hand.

Fatal Flaw No. 4 — Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month…I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: “Aim small, miss small.” I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.

Fatal Flaw No. 5 — Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% – 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50 – $150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the “aim small, miss small” movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip
Trading successfully is not easy. It’s hard work…damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

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This article was syndicated by Elliott Wave International and was originally published under the headline Five Fatal Flaws of Trading. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The Euro Could Fall all the Way to 90 Cents

european union stars

By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist

Europe’s woes will not be banished – and this week, just when you thought it was safe, things got even worse.

Spain announced its 2011 deficit will be much deeper than anyone thought – and that means it will almost certainly need a bailout, sooner or later.

Borrowing costs for countries like Italy and Spain are still skyrocketing, which makes it harder for them to roll over their debt.

Meanwhile, trading in UniCredit, Italy’s largest bank, was suspended after shares tumbled in response to a heavily-discounted share offering. This indicates the bank is having trouble raising capital, making it a strong candidate for another European bank failure.

How Low Can it Go?

There’s no question that all this is bad for the euro.

But how low can it go?

We don’t have a crystal ball, but we have the next best thing – chart patterns.

One of the most reliable chart patterns, known as Head & Shoulders, is now saying the euro could drop all the way to $0.90.

If you’re not familiar with this pattern, you can read this article I wrote last year explaining how it works.

In that article, I also showed how this pattern could have saved your portfolio from the 2008 stock market crash.

It’s basically a pattern that indicates that an asset will move lower, much lower.

Let’s take a look at the big picture for the euro. Below is a monthly chart that goes back to 2001, when the euro started a major bull market. Notice there’s a massive potential Head & Shoulders forming right now.

I say “potential” because this pattern is only complete if the price closes below the black line, known as neckline.

Right now, that line is at 1.24, so the euro is still trading above it – but not by much. It’s trading around 1.27 today.

One of the great things about this pattern is that once it’s complete the price usually falls by the same distance that separates the top of the head and the neckline. So you can use that distance to project a minimum target.

The target in this case would be around $0.90, which is much lower than anyone expects the euro to go.

But can the euro really close below 1.24?

Well, another Head & Shoulders pattern, this time on the weekly chart going back to 2010, shows it will certainly happen.

Notice that the price has already closed below the neckline. Using the distance between the top of the head and the neckline, you get a minimum price target of 1.22.

The Fed Will Keep the Dollar Weak

My observation about the Head & Shoulders is not a prediction. It’s just, well, an observation.

I rarely disagree with the pattern because it’s very reliable. But I find it hard to believe the euro will move all the way to $0.90. Why? Because of the Fed.

If the euro drops that much, it will mean the dollar will be much stronger – and the Fed won’t allow that to happen.

It wants a weak dollar to boost the U.S. economy through exports.

Besides, if the euro drops much lower, Europe will very likely be in a very deep recession.

The euro zone accounts for about 16% of the world economy. If we get a deep recession over there, it’s unlikely the U.S. will be immune.

If a recession spreads from Europe to the U.S., the Fed will have a good excuse to start printing money again, driving the dollar lower.

Nonetheless, the Head & Shoulders pattern indicates the major trend of the euro remains down, and it could move all the way to 1.22 in the weeks ahead.

Profiting from the Smaller Currencies

And if it closes below 1.24 on the monthly chart, we will have strong evidence the euro zone is falling apart, and the euro will move much lower.

It also shows that, if the euro fails to close below 1.24 on a monthly chart, it could have a big rally, much like it did in 2009 and 2010.

There will be a lot of demand for the euro around 1.22-1.24. So my instinct is that will be a great level to buy the euro for a short-term trade.

But for now, any euro rally is a shorting opportunity. I will be betting against the euro by shorting smaller European currencies, such as the Czech koruna and the Polish Zloty.

Very few people believe the euro will move all the way to parity. I don’t know anyone who believes the euro will move below it.

But the Head & Shoulders says the euro’s downside risk is much larger than anyone thinks, and it could still move all the way to $0.90.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist