Sponsor Forex Brokers Some Practical Thoughts About Money Management

We get a lot of questions about various complex money management (MM) formulas and our preferences. We don't comment on this subject very often because money management is such a personal issue that it would be impossible to give any universal advice that would be specific enough to have value. Everyone seems to have different goals and tolerances for risk, not to mention varying amounts of capital for trading.

However we do have some basic thoughts and opinions that might be helpful in picking a suitable MM strategy that will help you to become a winner.

Be careful about trying to use formulas that are designed to optimize the returns. In my experience I have found that the most successful traders, over the long run, are not seeking to maximize their returns. The best traders are always seeking to carefully control their risks and to achieve as much consistency as possible. They look for methods to achieve consistent returns with low drawdowns and they are willing to accept smaller returns in the process. My policy has always been to worry about the risk and the consistency first and then to accept whatever returns that prudent approach will allow. I'm sure I will never win any trading contests and I have never bothered to enter one. In my opinion, no one should ever trade like the winner of a trading contest. I apologize for getting off on a different subject here. Lets get back on track and talk about trading in the only contest that matters - the trading that you do every day.

In recent years the strategy of risking a small percentage of capital on each trade has become quite popular and deservedly so. This MM strategy, often referred to as fixed fractional trading, reduces our dollar amount of risk as we experience losses and increases our risk level as we earn profits. The possibility of ever going to zero with such a strategy is virtually nonexistent. However this strategy has an inherent weakness that tends to constantly work against us. If we assume an equal number of winners or losers in a sequence this popular strategy produces net losses if the winners are not larger than the losers. To keep things very simple lets just look at a series of five wins followed by five losses with the wins being equal to the amount we risk. Lets also keep the math really simple and begin with starting capital of 100 and risk 5% of our current capital on each trade. I think that most traders would assume that if they had five losers followed by five winners they would be even. Unfortunately that is not the case.

Here are the numbers: Risk is always 5% of current capital. (I'm going to round the numbers to two decimals.)

Capital $ Risk W/L Account balance
100.0 5.00 L 95.00
95.00 4.75 L 90.25
90.25 4.51 L 85.74
85.74 4.29 L 81.45
81.45 4.07 L 77.38

OK we are already tired of losing. Let's have five winners in a row and see if we can get our money back.

Capital $ Risk W/L Account balance
77.38 3.87 W 81.25
81.25 4.06 W 85.31
85.31 4.27 W 89.58
89.58 4.48 W 94.06
94.06 4.70 W 98.76

As you can see we had an equal number of winners and losers yet somehow we lost money. Perhaps it is because we had bad luck and got started in the wrong direction. Lets reverse the sequence of trades so that we start out on a winning streak instead of losing. Maybe that will help.

Capital $ Risk W/L Account balance
100.00 5.00 W 105.00
105.00 5.25 W 110.25
110.25 5.51 W 115.76
115.76 5.79 W 121.55
121.55 6.08 W 127.63

Looks good so far. Starting off with winners looks much better than starting with losses. But now we have five losers coming up.

Capital $ Risk W/L Account balance
127.63 6.38 L 121.25
121.25 6.06 L 115.19
115.19 5.76 L 109.43
109.43 5.47 L 103.96
103.96 5.20 L 98.76

Hmmm. It doesn't seem to matter if we start out with a string of winners or a string of losses. Somehow we wound up losing the same amount of money either way.

Obviously we don't have a very good system at work here but it is not a losing system. With the proper MM strategy we should break even. Our winning trades are only equal to our risk and to have a winning system the winners need to be bigger than the losers. We are winning on only half of our trades and we would be profitable if we could win on more than half. Even though our system is not a good one you would think that it would at least be a breakeven proposition (we haven't included any costs) because the winners are always equal to the amount at risk and we win 50% of the time. That sounds like a breakeven system, doesn't it? But if we employ the popular money management strategy of risking a fixed percentage of our current capital we manage to turn the system into a loser. However, if we risked a fixed dollar amount on each trade the system results would improve and we would break even.

The fixed percentage of risk approach to MM is a good one because it keeps us from going broke and it compounds our profits rapidly. Both of those are desirable characteristics but we need to be aware that they come at a price. We should realize that our recovery from drawdowns might not be as fast as we would like and that we can give back profits even faster than we made them.

One strategy that can help solve the problem of giving back the profits too rapidly is to periodically sweep some of the profits out of the account and place them in some other place where they are adding to our diversification and reducing our risk. Now and then we should take some of the profits out and spend them on something that improves our quality of life. This important step gives the dollars at stake a new meaning and boosts our morale tremendously. What is the point of winning and losing and accumulating profits only to give them back at some later date? If we make it a practice to routinely sweep some of the profits our account will continue to grow but it will be compounding at a slower rate than if we left our profits at risk. However if we stumble into a losing streak we will be glad that we took out some of the profits and reduced our bet size.

If we are good traders and we make it a practice to withdraw some of our profits on a regular basis we will eventually reach the point where we have taken out more than we started with. There are very few traders, particularly in futures, who can claim that they have truly beaten the market. Until you have taken out more than you started with the market can still beat you. Trading futures is a zero sum game and winners are few and far between. Taking out profits now and then rather than getting carried away trying to optimize the gains to infinity is contrary to what is being taught these days. Everyone is obsessed with finding formulas to optimize the returns. We need to remember that the trader who has the optimum gains today could easily be tomorrow's biggest loser. That is a game we don't need to play.

I think we all need to take a step or two back and look at the big picture. Trading is not really just a game. The money is real. Lets make sure that we are true winners and not just habitual players. Take some profits now and then and put them out of harms way. When we have done this I can assure you that the game is a lot more fun and our trading will improve. Nothing builds confidence like knowing for sure that you are indeed a winner.

Good Luck and Good Trading

by Chuck LeBeau

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Evidence Based Trading

In this past Friday's day trading session in our chat room many subscribers asked me to explain in detail my approach to short term trading. So I could think of nothing better for an end of the year column then sharing with you my evidence based approach to the markets. Before I begin let me preface by saying that I am the first to admit that this trading technique is far from bulletproof. Markets at their core are simply pools of sentiment and can therefore be wildly irrational and unpredictable. Nevertheless, over the long run trading is a game of probabilities and I try to put the odds in my favor every time I trade. As Daymon Runyan once said, "The race is not always to the swift, nor the battle to the strong, but that's the way to bet."

My philosophy of trading is relatively simple.

1. Have a bias
2. Let price confirm your bias
3. Manage the risk

For me, my evidence based approach starts with Kathy's Economic Calendar. Every week she combs through all the upcoming economic data isolating the most probable economic surprises using a host of proprietary analytic techniques to beat Wall Street at its own game. Over the course of the year she has been accurate approximately 65% of the time - an edge that I will take any time.

More importantly Kathy's calendar calls provide me with an intelligent, logical, well researched foundation for my fundamental view. Often currency markets will start moving in the direction of her call hours in advance of the economic event, bringing me to my second point. The fundamental bias is worthless if price action does not confirm the thesis. In trading your opinion does not matter. The only opinion that counts is the opinion of the majority of market participants. Ultimately our job as traders is to figure out the opinion of the majority and join the move before it runs out of steam.

There are a hundred different ways to generate a signal for technical entry using my approach, but my most favorite one is simply to let the price fall (if my bias is short) or rise (if my bias is long) through the 20 period simple moving average on the 5 minute chart. The key point for me is that I never sell on a green candle and I never buy in a red candle. Guessing tops or bottoms is a mugs game and I need evidence of strength or weakness before I put on a trade.

Of course price can lie. Sometimes breakdowns are instantly reversed and break outs fade faster than Vanilla Ice's career. That's when risk control becomes paramount. Again there are a hundred variations on proper stop and take profit placements but I prefer two basic approaches.

Approach One - trade with 2 units. Make the take profit target on half the position 1 times risk (usually 20-30 points). Once T1 is hit trail the rest by 10-15 points back.

This is generally the better risk control model because it allows you to capitalize on occasional large break out moves. Alas I have no patience and frequently opt for approach two.

Approach Two - trade with 1 unit and make your Take Profit target 75% of your risk stop (15 points TP on a 20 point stop) This is negative risk reward ratio, but it works if you have a high probability set up with 70% accuracy rate or better. When I adhere to my evidence based rules I often achieve better than 70% rate of success. When I deviate - I pay the price.

Trading is one of the few human enterprises where you can do everything right and still fail. That's why evidence based trading does not always work. But as Churchill once said about democracy -it is the worst type of government except for all others. Evidence based trading forces you to be aware of and utilize every aspect of the currency market - fundamentals, technicals and money management and I hope it provides you with the same edge that it has given me.

Boris Schlossberg

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Getting To Know The Majors U.S.

Business Cycle: The U.S. economy is now in the Trough phase of the business cycle, after it experienced a steep decline in the last quarter of 2007 and in the first quarter of 2008. The economy was helped in finding a bottom in the second quarter of 2008 by the rebate checks and the strong exports, but the outlook is not too great either. The economy is expected to crawl into the second half of 2008 and find a decent pace of growth only somewhere later in 2009. In the first months of the contraction phase the global economy seemed resilient to the U.S. slowdown. As things progressed the global slowdown started to be felt by almost every overseas economy, while the U.S. economy had already bottomed. The issues over mortgage lending criteria, introduced in 2002 to stimulate another period of weak housing, has come back in the form of bad debt, but now not just US debt problem. Global Markets bought the US Mortgage debt, not really expecting a slow-down in the US economy. That debt now needs servicing and if the sub-prime U.S. home owners decide that they cannot pay the bill there will be a lot of Inter-Bank re-alignment of those holdings.

Swap Interest Rate: 2.0% is the overnight interest rate after the Fed had cut 325 basis points over a very short period of time. Most analysts agree that the Fed will raise somewhere in 2009, before they look to cut.

Euro Area

Business Cycle: The euro-area economy contracted for the first time in its short history in the second quarter in 2008. However, the ECB officials had called this contraction “technical” citing the strong read in the first quarter, and have affirmed that Q1 and Q2, as Q3 and Q4 should be judged together. Analyst expects growth to pick up somewhere in 2009, lead by the German economy, which is seen as a powerhouse in the area. The Euro-zone has a very diversified economy, that backs the strength of the Euro-zone business cycle. The Euro-zone economy is actually seen by many as the most diverse economy in the world, and therefore is not susceptible to other individual region's economic highs and lows.

Swap Interest Rate: 4.25% is the overnight interest rate, a strong rate that justifies the Bank's objective of assuring price stability over the medium term (seen as 18 months)

U.K.

Business Cycle: Once a shinning economy, but now near the step of a deep recession is the story of the U.K. nation. The U.K. economy has to pass some tough times ahead, as the housing market declines at a very strong pace, the financial system is moving at a sluggish speed and inflation is way above the comfort area. Recently, Chancellor of the Exchequer Alistair Darling said “The U.K. is facing arguably the worst economic crisis for 60 years". The recent business cycles has shown the U.K. economy likes to follow in the footsteps of the U.S., and this is what is happening now. The Service sector and the City of London –the financial headquarters- dominates the UK Business Cycle, while Tourism is the main drivers of economic stability in the region.

Swap Interest Rate: 5.00% is the overnight interest rate; a strong rate that was needed to control inflation, was reduced by 0.25% in December 2007 and April 2008, to respond to the economic downturn.

Australia

Business Cycle: 26 years of uninterrupted growth characterizes the Australian economy. However, some suggest the economy has peaked and is heading toward the Contraction phase as the global slowdown has affected the economy. The housing market, which was renowned in the financial world, had recently slowed down the pace of growth, and consumers seem to be affected by it. The Australian economy is heavily based on commodity exports and the recent selling of the raw material markets can only have a downward effect over the real economy.

Swap Interest Rate: 7.00% is the overnight interest rate that is paid to hold AUD Long, minus the rate of the currency on the other side. The bank recently cut the interest rate by 25 basis points to assure a reasonable growth.

Japan

Business Cycle: Japan has a very interesting and unique history, full of legend and fearless worries. At the same time, the Japanese economy is unique and interesting too, however, not in an encouraging economic way. The Japanese economy has been fighting stagflation (no growth together with inflation) for almost a decade now. Nevertheless, these days the stagflation era is slowly turning into a period of recession with a high degree of inflation. Consumers that are continuously saving and a cultural environment that has no peers could easily characterize the financial landscape. The real economy is not moving anywhere, and the Bank of Japan has its hands tied because the overnight rate is at a dangerously low level.

Swap Interest Rate: 0.50% is the overnight interest rate, the lowest in the world. The central bank and the Finance Ministry have repeatedly said that rates should go up, but until the real economy shows any signs of growth this will not happen. The markets look to go Short the JPY currency Pairs to earn interest. For example: Eur/Jpy trade held Long equates to; buying the Euro Zone Interest Rate of 4.25% and selling the Japanese Rate of 0.5%, a net profit of 3.75%. Welcome to the Carry Trade.

Canada

Business Cycle: The Canadian economy had been expanding well over the course of 2007, however, the Canadian business cycle moved into the Contraction phase at the same time that the U.S. did. U.S. As Canada's biggest trading partner, having the bilateral good trades reaching the equivalent of $1.5 billion a day, the U.S. is an important gauge of potential Canadian strength. Having such a background it is normal that the Canadian economy closely follows the U.S cycles.

Swap Interest Rate: 3.00% is the Overnight Interest Rate after the 0.50% drop in February.

Switzerland

Business Cycle: Switzerland has the biggest financial sector in the world compared with the size of the economy. In fact, the economy is based on the service side, and is renowned for the strength and confidentiality behind the Swiss banks. In the last quarters, the Swiss economy has show it is resilient to the global slowdown, even if banks (one of the countries' biggest industries) suffered huge losses from the credit crunch. The Swiss economy has two unique characteristics: the economy rarely suffers from “boom and bust cycles” and Switzerland has one of the highest costs of living in the world (which is offset by the taxes).

Swap Interest Rate: 2.75% is the overnight interest rate, only higher than the dollar and the yen. The Markets can be Short the CHF currency Pairs to earn interest. For example: A Gbp/Chf trade held Long equates to; buying the U.K. Interest Rate and selling the Swiss Rate, and netting the profit. The Swissy (Usd/Chf) is a strong indicator of intra-day US$ sentiment, it tends to move faster and to be more reactive to US$ changes than any other major pair. The Swiss National Bank is listed on the Swiss Stock Exchange (SNBN symbol)

New Zealand

Business Cycle: New Zealand has just passed the Peak of the business cycle, confirmed by the latest news releases. Inflationary pressures have built to an extremely high rate as imports flood the economy, but recent developments have lead to a reversal of such trend. The economy is largely based on the export of raw materials.

Swap Interest Rate: 8.00% is the overnight interest rate, the highest in the countries with an AAA (investor grade) bond rating. The bank had recently cut the overnight rate 25 basis points, after it held at 8.25% for almost a year.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

TheLFB Risk Disclaimer can be found at http://www.thelfb-forex.com/content.aspx?id=174.

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"Follow-Through" -- It's Significance for Your Market Position

Patience is a virtue in most endeavors in life, and it's certainly a valuable asset in futures and stock trading. You will many times hear me use the important term, "follow-through," when I discuss significant market moves such as price breakouts or trend changes.

"Follow-through" trading activity is really just a confirmation of the previous trading session's bigger price move. If one day's (or one price bar's) move is really that technically significant, then prices should be able to show some follow-through in the same direction the next trading session (or next trading bar on the chart).

Many times that all-important follow-through price action does not occur. What many times does occur is the market retraces much of the previous trading session's bigger gains or losses, and when all is said and done at the end of the day, prices are not that far from where they were two sessions (or two price bars) ago.

I am not a perfect trader and I, too, am continually learning (or trying to learn!) from past trading missteps. I want to provide you with a specific example of when I did not wait for a market to show me that important follow-through strength on what I thought to be an upside breakout--but instead was a false breakout.

I had the corn market on my "Radar Screen" for several weeks a while back. I was waiting for the market to break above and negate a longer-term downtrend line. On a Wednesday, corn did show a strong up-move and prices pushed just slightly above a longer-term downtrend line--but did not come close to negating it. Well, I had to be out of the office for the next two days (Thursday and Friday), and would not have any access to my broker or price data. So I called my broker that Wednesday afternoon and put in a buy-stop order for corn at a price level far enough above the downtrend line so that if the buy stop was it, I thought it would be a strong enough price move to negate the downtrend line and signify an upside breakout on the daily bar chart.

So I took off out of town that night, with a little gremlin in the back of my brain that was saying, "You are still not waiting for follow-through price strength the next trading day to confirm the upside breakout in corn!" Sure enough, corn futures opened up on Thursday morning and moved high enough to touch my stop and get me into the market on the long side--only to have that price level be the high for the month. Prices then reversed lower and I was stopped out of the corn market about a week later.

Of course, hindsight is always 20/20. However, this particular trade reconfirmed to me the importance of having the patience to wait for a market to show follow-through price action to confirm a potential trading "set-up." In waiting for follow-through strength or weakness, a trader does run the risk of missing out on some of a price move. But more times than not, it is prudent to make a market confirm a bigger price move with follow-through activity the next session--or the next price bar for intra-day charts.

By the way, a market sometimes can exhibit a small-trading-range "rest day" after a bigger price move, and then confirm that bigger move the next trading session. But usually, if follow-through strength or weakness is going to occur, it's the very next trading session after the bigger move.

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Three Simple Rules Of Winning Traders

About two weeks I went on CNBC and predicted that range will rule the currency markets for the foreseeable future. The price of EURUSD at the time of broadcast? 1.2630. The price of EURUSD at close of trade today? 1.2590. So range reigns in the currency market as every rally fails and every decline proves false breaking the hearts of both bulls and bears and that dynamic will probably last for the rest of this year. Thus with little new to say and holiday shortened week ahead of us I thought we'd change the format this week and skips the price action review concentrating instead understanding the basic building blocks of successful trading.

This past week in Kuwait I gave a presentation titled "3 M's that Drive the Currency Market". It showcased a simple analytical framework created by K and I to explain most of the price movement in currencies. The 3 M's stand for Macro - broad economic and political themes, Micro - day to day economic releases and Monetary - for monetary policy of the G-10 nations. The 3M's model, though relatively straightforward, does a very good job of encapsulating virtually all of the catalysts in the FX market.

As I was flying back to US, my thoughts drifted to the 3M idea and I realized that trading itself can also be summarized in a 3 variable model - a model I call the Three Simple Rules Of Winning Traders.

Rule 1 - Develop an opinion.

Whenever I hear traders tell me, "I don't have any opinion, I just trade price action." I always smile ruefully and think to myself that the trader is both an idiot and a liar. The fact of the matter is that every time you enter the market you are implicitly rendering an opinion on the future movement of price. The difference between those traders who do so implicitly versus those who put forth an explicit reason for their trade is that the former have no clue of what they are doing while the later at least try to figure out the story behind the trade.

It goes without saying that I have little respect for traders who mechanically follow price action like mindless robots. In trading you get paid not for what is happening now, but for what will happen in the future and if you cannot figure out what is likely to drive price towards your target you are just a lemming in the market. Right or wrong, developing an opinion is the cornerstone of a winning strategy.

Rule 2 - Let Price Confirm Your Thesis

To politely paraphrase a very crude Wall Street saying, opinions are like faces - everyone has one. Developing an opinion even one that is ultimately correct is utterly worthless if the market happens to disagree with your assessment. The history if trading is littered with brilliant analysts who were absolutely correct on their calls and yet were bankrupted by the vagaries of price action before they were ever proven right. Your opinion may be dead on, but as traders it is price movement, not opinion that we are trading. Until and unless price corroborates your opinion you have no entry signal for your trade.

Rule 3 - Manage Your Trade

More than anything else great traders are good money managers. I've always believed that you can put two great traders on the opposite side of a position and often both of them will wind up making money. On the other hand put two novices in the same spot and they will more than likely both lose. Trading above all the art of managing the unknown. Let's say you own a sandwich shop in some strip mall in Nebraska. Most likely you would know to within 10 or 20 sandwiches how many customers you will have every single day of the year. Now imagine that sandwich shop was the FX market. The day to day variance would drive most sandwich shop owners insane. Some days you may sell 500 sandwiches, other days you may have to dump all your food supplies into the garbage as no business came through your door. That's why trading at its core is always about managing risk. Every time you trade the operating principle is - Hope for the Best Prepare for the Worst.

The only way we've been able to control risk and at the same time participate in the market is by always cutting our position in half once a short profit target is met. No matter what anyone tell you, there is simply no way to know a priori if any given trade will be successful. At BKT we really believe that half a loaf is better than none. Success in trading is contingent not only on your analysis but on your ability to properly manage your position. That is why the game is hard. To be a winning trader you must be both - a good analyst and an an excellent risk manager..

Now here is this week's video to show you what I mean

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9 Forex Secret

Secret #1: The Forex market can be moved by big traders

Here is the deal—I have heard over and over again that the Forex market cannot be moved by any one trader. That is just not the truth. The argument is that because the Forex market has such a high daily volume that it is not as easily moved by big traders.The thing that they don’t tell you is that the high daily volume takes into account every tradable currency. The last time I checked you don’t trade every tradable currency at one time, so the number of $1.3 or $1.5 trillion is really irrelevant.What you need to pay close attention to are the currencies that have good liquidity. This includes every dollar pair, the EURJPY and the GBPJPY. These are the highest volume currency pairs there are.This is what the big boys look for, because they can move the market and suck the “dumb money” in. They do this through buying and selling large amounts at a time during certain news releases, dumping their positions and turning them in the direction they really want to go. This absolutely happens and you need to know how to follow their lead so that you can get your piece of the pie.

Secret #2: You can’t trade with technical analysis alone
I once fell prey to this trap. Early on in my career as a trader I though that my bad trading was a result of not having the right technical analysis approach so I was constantly changing my approach. This didn’t work. I use technical analysis in my trading strategy so I am not trying to bash it. All I am saying is that sometimes you can get analysis paralysis so to speak. Many of you are thinking that your bad trades are due to not understanding enough about technicals…99% of the time this is not the case. Many traders don’t understand market sentiment and therefore they fail miserably. Here is the best piece of advice I can give to you about using technical analysis: It only influences how much relative weight we give to the fundamentals. Once you begin to understand this you will see technical analysis from a whole different light and it will become a lot less complicated.

Secret #3: You can make thousands of dollars in a matter of minutes
OK, I think I may have lost some of you here. For most traders this is the exact opposite of their normal routine. Many times they are losing thousands of dollars in a matter of minutes.How is this done? Let me give you an example. On November 3, 2006 we had the last Non-Farm payroll announcement. If any of you pay attention to these numbers you will remember that the numbers were way off of consensus which caused the market to immediately spike up. However if you would have bought off of these initial numbers you would have lost a significant amount of money. The reason is because of the revisions that came out afterward.Knowing how these triggers work could have made you an easy 70 pips. In a situation like this it is a no-brainer to “load the boat,” in which case if you would have done this you would have made a lot of money in a matter of about 15 minutes. If you were trading a $50,000 account using the right strategies you would have made about $7,000. That’s 14% in one trade. Not too shabby for a day’s work. The beauty of it is this kind of trade happens at least once a month. If you used nothing else but this one strategy alone and never made another trade during the month, many of you could quit your 9-5.

Secret #4: You can capture 300-1000 pips in a matter of weeks

Most fundamental systems out there do not teach you the most valuable secrets of fundamental trading: LONG TERM PROFITS. The reason is very simple…most don’t have the slightest clue how it all works.By long term profits I mean that you hold a trade for 2-5 weeks. But here is the thing…once you know what to look for you can spot one of these trades nearly every month. You take your position (which is usually larger than normal) and you rest for the next 2-3 weeks because it is so secure you don’t have to worry. The key is proper money management and proper risk reward analysis. You have to know when to push the limits so to speak.Here is the beauty of this kind of trade…not only do you make a substantial amount of pips, but most of the time you make great daily income in interest. There are certain currencies that this works beautifully on. Keep reading to find out more…

Secret #5: You don’t have to have a Master’s degree in economics or have had to work for a bank for 20 years to use fundamental analysis

This is what the “Mystic Gurus” would want you to think…but it is just not the truth. Once the big picture clicks in your mind you can begin to pick out the finest trades in that big picture. This is how an understanding of fundamental analysis begins.It is like laying a foundation. Fundamental analysis is the foundation for every big trader out there. If you don’t even have the foundation laid and you are trying to build the finished product, how can you expect to be successful?The bottom line is this…I don’t have a Master’s degree in economics, and although I do have some financial background from my previous career, I haven’t worked for a bank for 20 years as a trader and yet I still have managed a way to understand how this works.
You have to get rid of the preconceived idea that this is impossible for you to understand. Let me give you a golden nugget…think you can, think you can’t, you’re right either way.What you need to do is pick one currency at first and learn how that currency is affected by the news. That is what I did. I went back in time and I found out when the biggest moves in the market happened and I found out what was going on economically, politically, and socially at that time.It’s not rocket science. If you can read you can do this.

Secret #6: You don’t have to be able to withstand big down draws in your account in order to trade like the banks

This is the most absurd lie I have heard yet. It comes from people that don’t know how to trade and don’t know how the banks trade. Banks are conservative when it comes to losing money. They just don’t like to do it. Do you?The answer is no, of course. No one likes to lose money. There is something built into our DNA that equates losing large amounts of money to the same pain as getting hit in the head with a frying pan.With that said many bank traders get fired if they have more than a 5% down draw in their account. Does this shock you? Well it is the truth. Why do you think they have so much money to trade with? Because they don’t lose. They steadily build equity and it makes them very, very rich. Listen, they have been in this game for a long time. Remember this was their playground for years before it was ever made available to the speculative trader. They use key fundamentals to signify technical breakouts and reversals.

Secret #7: 80% of the profits made in this market are made only 20% of the time

Why is it that so many traders think they have to trade all of the time? It is a proven fact that the above statistic is true. Ask any bank analyst out there and they will tell you this is true.The “Big Boys” love to steal the small traders’ money when the market is in the range. The fact is it is in the range 70-80% of the time. This is easy for the banks to do because they all do the same thing at the same time. Trading in the range means that the market stays within a tight price range for a given period of time without any major longer term runs.For example if the euro trades between 1.2400 and 1.2700 for 2 months it would be in the range. Contrary to popular belief among some fundamental traders, this is not when the most money is made. The money is made when due to key fundamental changes the market breaks out of this range. When it does this you will see 600-1000 pip moves in a very short period of time.This is the kind of fundamental analysis the banks and other big traders use. This is where the big money is without a doubt. Most traders never make it to this level because they got all of their money stolen from them by the banks when the market was in the range. Therefore they have no trading capital left to load the boat when a big move occurs.

Secret #8: Stand on the shoulders of giants

This is the one secret I have learned in my trading career that has made everything else pale in comparison.Simply put, you don’t need to re-invent the wheel.You don’t need to start from scratch every time you sit down at your desk to trade. If you were going to build a car, then you would study the cars of the past. You would probably look to some experts that could teach you the lessons they have learned over the years about building cars. Trading is no different. It’s been around for a long time, and lots of really smart people have spent a lot of time testing, tweaking and perfecting their trading.This is an immense resource for anyone who wants to trade profitably. If you want your trading to work, don’t try to make it happen from scratch…look at what has worked in the past.Use that as a starting point and a model for your trading…and you will be on your way to trading profitably.

Secret #9: Get a mentor

Okay, this last secret may be the toughest to actually follow through on…which is why I left it for last.Nevertheless, if you can pull this off, then you are on the path to trading success.If you can find a mentor, someone that can show you the ropes in your trading, well…that’s the ticket.As I mentioned above, you don’t want to re-invent the wheel. You want to be able to leverage all the great trading talent and skills that have come before you. The easiest way is to learn from someone else who has been there and already made the mistakes and figured out the important lessons.

That being said, it can be difficult to find someone who will show you the ropes, give you shortcuts, and help you avoid the mistakes. You want someone who has been down that road and already MADE THOSE MISTAKES FOR YOU.

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Forex strategy

1-Forex Money Management
There are many definitions of Money Management, from the use of a stop loss to how many lots you trade on each trade. My definition of Money Management is safety of funds. The most important money in trading is the money you already have. Yes, it is important and required to risk some money to make profits, yet a true Money Management plan maximizes profits with as little risk as possible.Once you have established a trading plan, practice your plan through some form of simulator or demo account. If you need a good trading plan, choose one of fifteen forex trading systems with Smart4xTrader. Log each trade and note all your orders (i.e. entry, stop loss, targets, etc.). After you have logged at least 30 trades, go back over these trades and look for the highest risk trades - those trades with the largest stop loss yet with the smallest potential return (Risk Reward Ratio). Establish rules to minimize this drawdown potential and test them over and new set of 30 trades. If these better your results then implement them into your trading plan. It is wise to evaluate your money management techniques every 100 trades to perfect your trading.

NOTE: Using Money Management techniques may actually lower your total return, but remember that Money Management is safety of funds first, profits second.

2-Forex Long-Term Hold Strategy
Is it possible to hold your cash in a bank and make a 12 percent plus annual rate of return with zero risk? It is if you know the Forex market. As mentioned earlier, the goal in cash investing is not obtaining the most money, but retaining the most valuable money. So how is it done? Place your cash reserves in the currency that is appreciating over your countries currency. You may need to find a worldwide bank, however, many international banks will allow you to save your cash in the currency of your choice. If you live in the US and you wish to save your cash in Euro's when you deposit your funds, make a request to the bank that the US Dollars be exchanged over to Euro's. When you withdraw your funds you will exchange back toUS Dollars for a profit if the Euro appreciated over the US Dollar. There are also many forex brokers that will allow you to do the same thing. AC Markets is a good example. Of course you need to have a system on when to exchange and when to not exchange your cash into the other currencies. Smart4xTrader teaches this Forex strategy in their Forex Training.To give you an example of the potential of a Long-term hold, in the Premier System provided by Smart4xTrader we were given a signal for a premier time to move over to Euro from US Dollars the week of April 15, 2006. By holding that position until May 2007, if we were going to withdraw our funds to US Dollars, we would now have 7.17 percent more US Dollars then we started with. Plus, we would also have any interest that we would have made in the savings account. If we look to the New Zealand Dollar and its run against the US Dollar our system gave a premier signal to be long the New Zealand Dollar the week of October 7, 2006. Today you would be up 13.23 percent over the US Dollar in less than 8 months. (Premier Trading Strategy offered by Smart4xTrader)
Add a little leverage and diversification in the mix and now you could have some serious profits over the long term. It pays to understand the foreign exchange market!

3- Forex Fundamental Trading
Most of the time we talk about Technical trading strategies and systems. The On Target Trading System and other trading systems used and taught by Smart4xTrader, use technical analysis exclusively in making trading decisions. What about Fundamental Analysis? Does it have the potential of creating consistent profits over time? Fundamental Analysis is the study of the market strengths and weaknesses. Due to the global environment of the Forex, Fundamental Analysis is more focused on news catalysis's than the strengths and weaknesses of the currencies themselves. If you used fundamental analysis to trade stocks you would spend a great deal of time focused on the make-up of the company, its CEO, earnings per share, and future product line. The same isn't as true with Forex, you spend more time focused on the changing of interest rates than anything else. It is impossible to teach Fundamental Analysis in a single paragraph, but if you desire to explore further this trading technical my suggestion is to start by taking a look at the current news events of each day and spend some time seeing how the market reacts to the price fluctuations. Be careful as price can move on a dime with one single word change in the news. One of the best free sources on the web is
www.forexfactory.com. Even though I don't trade on fundamental analysis I still from time to time like to see what the other guru's are talking about. This is a great resource to hear the buzz of the market. Check them out and happy trading.

4- Look Both Ways Before you Cross the Street – Forex Street
"Look both ways before you cross the street," is a phrase that we all heard as a child and now is a phrase that I say constantly to my own children. Why do we say this? Because we want our children to look for the potential dangers in front of them as well as those behind them. The same principle can be said with the forex market, but instead of looking for cars we are looking for support and resistance lines. Levels of support and resistance are what gives the markets shape and form. It is what keeps price from just drifting to the ends of the earth. Now to understand why these levels create shape to the markets you need to understand how they came about.First, the why. Support and resistance levels are created by at least one of two major things: volume and/or the mental phenomenon. Volume is the major cause of these levels and creates the strongest level of the two. When price is either bought or sold in a high volume amount at a certain price level, that level now becomes either support or resistance (support if price was bought up or resistance if price was sold down). Since a large body of trades entered the market at that price, lets say 1.2345, if price returns to that area, price is usually held by those initial traders through additional position taking. Traders add additional positions to hold the market from going against them. In addition, other traders that missed out on the opportunity to get in from the beginning, now jump in and follow the crowd. Hence, price is maintained beyond the initial entry level. The greater the volume at a given price, the stronger the level will be. Initial volume levels are strong, but they do tend to weaken overtime as traders close out positions for profits. These high volume levels are usually generate through news catalysts and that is why we see a lot of support and resistance lines initiated at 5:30 AM, 8:30 AM, and 9:30 PM EST as these are the times when most major news releases come out worldwide.

5- Our other explanation for levels of support and resistance is the mental phenomenon.
We are taught from an early age to recognize that the world is made of numbers from price tags to how much we weigh, everything is associated with a number. Just like in sales, where a number ending in .99 makes the product seem less expensive then the even number .00, even though it is only one cent lower, the same goes for the forex. The mental numbers in the forex market are those even-whole numbers like: 10, 50, and 100. Price is going to find some form of support or resistance at these number levels as traders tend to respect price as these numbers are approached. Of course the larger the even number the better (Ex. 1.3000 or 2.0000). Whether there was volume at these levels or not you will find that price tends to hold for a time at these levels. Learn Forex strategies like these and others at Smart4xTrader.com

6-How to Make Money with Support and Resistance – Profit Targets
The first is Profit Targets. The majority of traders trade on emotion and close their trades when, 1- They have made enough money. 2- The problem with most traders is they have never made enough money. Just like Las Vegas, they stay in the game too long and give back all their profits to the house. Using support and resistance lines as levels to take your money off the table is a consistently winning strategy. What I like to do is to look for a close level of support/resistance for my Target 1 and then look at a further away support/resistance for Target 2. Once I hit Target 1, I take half of the lots off the table realizing profits, and then I allow the other half to ride toward Target 2. To conserve capital and eliminate the risk of loss, I will bring my stop loss up to breakeven or even set-up a trailing stop. Remember when you are in Buy trade you are looking for the next level of resistance to place your targets and if you are in a Sell trade then you are looking for the next level of support.

7-Learn Forex Trading Systems at our site.The second way to make money with these Forex support and Resistance levels is through money management. This actually comprises two aspects: 1) stop loss positioning and 2) Lot Sizing. A smart Forex stop loss is one placed below/above a key level of support/resistance. If you are in a Buy trade, place your stop loss 5 - 10 pips below the next level of support that is below your entry price. If you are in a Sell trade, you are going to place your stop loss 5 - 10 pips above the next resistance line. By doing this, you actually hire other world traders to protect your position. If price approaches your stop, other larger traders will step in to maintain price as explained in our last week’s article. Lot Sizing is another form of management that can be enhanced with these support/resistance levels. It all has to do with risk. If your profit targets compared to your stop loss are not large enough then your risk vs. reward is not exactly in your favor. Instead of trading and missing the trade set-up, minimize your lots to reduce risk.

8-Vice versa, if the risk vs. reward is in your favor or Target 1 sits at a place that has a high probability of being reached, then you can take on more risk and increase your lot sizing and profits.
Make sure that you look both ways before you enter a trade in the Forex. Look behind you for potential risks that may keep price from going where you think it will go and also look for shelter for a solid stop loss. Look ahead of you to establish profit targets where price will most likely go. Support and Resistance Lines are the railings of the markets. Lean on them, trust them, and use them to better your trading. Learn additional Forex Trading Strategies at www.smart4xtrader.com.
Happy Trading!

9-A Losing Month in the Forex
After a losing month in the Forex it is wise to step back and analyze your trading. Understand that to participate in the Forex market long term you are going to have losing months. The goal is to not let the losing month detour you from trading your system and plan into the future. The Fear and Greed Factor will destroy your trading if you let it. Yes, you lost, but if you used proper money management you should still be in the game. I have traders all the time tell me that they are "sitting out for awhile." This I highly suggest against! Why? Well, does Tiger Woods sit out a few golf Tournaments when he doesn't finish in the top five in one tournament? Absolutely not! He is back on the green working out the kinks in his system of golf and so must you as a Forex trader - get back in the game and work out your kinks of trading. Now, don't take out your frustrations on the market, but rather resort to our learning philosophy, "Learn, Simulate, Trade, Profit." Go back, analyze your strategy and trading rules, review them in your mind. Simulate a few months of trading data, including the losing month to see if there was anything that you could have done better - learn from it. Then get back in the game to Trade and Profit. Endurance is more important than returns. If you have a good trading system, like the On Target and Premier Trading Systems, then you simply need to trade your plan and get back in the game. If you do, you will look back and that losing month will be dwarfed by consistent trading profits.

10-Forex Diversification
Diversification is the key to any successful portfolio over the long term. The investor's greed is shown when he/she only wants to invest in the highest yielding investment without analyzing why one is higher and why one is lower. By diversifying in two great forex trading strategies that each have different goals and objectives, you reduce the risk of loss during unpredictable markets. When the market is good, all accounts are making money. The key to diversification is to maintain capital growth even during bumpy markets. Don't put all your eggs in one basket. Diversify between currency pairs and also trading strategies for long-term capital wealth.

11-Trader's Tip - Long-term Perspective
Maintain a Long-Term Perspective. Trading the Forex is a marathon made up of small sprints here and there. In recent months we have seen some crazy markets that really haven't taken us anywhere. Yet, over the long-term we will be able to look back and see our progress. If you maintain a long-term perspective you will stay in the game over the long term. Brief example: You may have had a few bumpy months in the Forex. I had several students want to throw in the towel over two losing weeks. Unfortunately, some did. What did they miss? May was a good month and June was a spectacular month. I personally made 42% in the month of June - three of the four currencies I trade didn't even have a losing trade in June. Keep to your game plan, use proper leverage, and stick for the long haul and you should have the account value that you are looking for in the end.

12 –The Forex, an Amazing Opportunity
Do you realize what you have discovered? The Forex is the largest market in the world. Each and every day there are over 3 trillion dollars traded. Prime stocks and quality bonds come and go, but as long as there is money in the world the Forex will always be there. It is amazing the opportunity and potential of this market. So what is the trader's tip? Be thankful for the opportunity you have to trade the Forex. Educate yourself each and everyday on how to become a better trader and when you succeed, share your success with others. Learn, earn, and return!

Happy Trading!

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Range Foreign Exhange Every News

Why Some Releases Do Not Make the List

There are many indicators that do not make the list even though traders think that they should. Industrial Production and the University of Michigan Consumer Confidence surveys are good examples. These indicators are usually released on days with many competing economic releases. Over the past 12 months, at least one indicator was released at the same time as industrial production every single month. As a result, the actual release holds less significance.
Decreasing Market Volatility
One final reason for the changes in rankings is the comparatively smaller daily trading range for the EUR/USD between June 2005 and 2006. In 2004, the average daily range for the EUR/USD was 111 pips. This has dropped to 104 pips over the past 12 months. Though the decline may seem small, it is more prominently reflected on those days when releases are due. When non-farm payrolls were at the head of the list in 2004, the average daily move of the EUR/USD on the back of the release was 193 pips. This compares to the 130 pip daily range for the ISM index, which tops this year's list. Contracting interest rate differentials around the world has also contracted market volatility.
Top Indicators As Of 2006 (Daily)

As Of (Daily) Avg. Range (pips)
1 ISM Manufacturing 130
2 Non-Farm Payrolls 115
3 Trade Balance 114
4 Personal Consumption 112
5 Inflation (CPI) 109
6 Empire Index 109
7 GDP 108
8 Philadelphia Fed Index 107
9 TICS 106
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Forex with Smart Management

Shifting Importance of Fundamental Data over Time
With the US dollar representing the other side of 90 percent of all currency transactions, US economic data is hands down the most important releases to watch. In our study, we attempt to further narrow this down to the select few that can cause the biggest movements by looking at various time frames to gage both the knee-jerk and slightly more settled reaction. Starting with the knee-jerk reaction in the first 20 minutes of trading, unemployment and the Federal Reserve's interest rate decision still win out. However, going down the rankings, we see that the trade balance, inflation and retail sales have become much more important while the report on foreign purchases of US Treasuries has slipped from the third most market moving to the sixth. The Federal Reserve's persistent interest rate hikes along with the rapid increases in oil and gold prices has pushed concerns about funding for the US' current account and trade balances to the back burner. Between June 2005 and June 2006 alone, oil prices have increased to a high of 50 percent while the price of gold was up 73 percent at its highest point during the 12 months. Therefore it is no wonder that inflation has shot up in significance. As overnight lending rates reach higher and higher, market participants are more prone to use price growth (the Fed's primary issue when determining monetary policy) to analyze how long the steady diet of 25 basis points can last.
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