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What is forex?
Quite simply, it is the transaction that allows the exchange of one currency for another. When you exchange one currency for another currency at a money changer, this action has been defined as a foreign exchange transaction.
When you exchange currencies, you will notice that there is a certain exchange rate between each currency exchange. This exchange rate is also called spread. Therefore, traders in the foreign exchange market all make profits by buying or selling currencies that will appreciate or depreciate.
The foreign exchange market is composed of many different types of participants. They will vary significantly in size, and are usually one of the following:
- Personal traders — online operation and management of their personal trading accounts (referred to as retail trader).
- Professional trader — professional trader is employed by investment banks to make profits for other banks and customers in trading.
- Central bank — The majority of developed market economies have a central bank as their main monetary authority. The role of central banks tends to be diverse and can differ from country to country, but their duty as banks for their particular government is not trading to make profits but rather facilitating government monetary policies and to help smoothen out the fluctuation of the value of their currency
As you can see, the foreign exchange market is huge compared to other well-known stock exchanges. The daily trading volume of the New York Stock Exchange is up to 22.4 billion U.S. dollars, the Tokyo Stock Exchange is up to 18.9 billion U.S. dollars, and the London Stock Exchange has a daily trading volume of 7.2 billion U.S. dollars. The daily trading volume of the foreign exchange market is as high as 5 trillion US dollars and continues to increase. Among them, the daily transaction volume of retail investors has reached as high as 300 billion to 400 billion US dollars.
There are a many of benefits and advantages for trading in the Forex markets. Below are a few reasons why many people choose to trade in forex market.
Forex trades 24 hours a day, all across the world. Each day begins in Sydney, then travels across the world to Tokyo, London, and then finally New York. You won’t hear the closing or opening market bells, and there is no central market. Traders can base their decisions upon economic, political and social events at the time they happen – day or night. Making it a perfect market for those that want to trade on a part-time basis because you have complete control over when you want to trade.
Unlike other markets, the foreign exchange has no government fees, no brokerage fees, no exchange fees and even no clearing fees. Brokers are instead compensated for their services by what is called a ”spread”.
High leverage margins
When trading in the Forex markets you often have many leverage options to choose from. These allow a trader to make a small deposit, but control a large contract value. Therefore, allowing them to make a nice profit with little upfront capital, and keep capital risk to a minimum. Many Forex brokers offer leverage options of 100, 200, or even 500 to 1 of trade margin. For example, a $100 in a 100:1 Forex account will give you the purchase power of $10,000 in the actual currency market. High leverage is not suitable for everyone, It should be cautious that the higher the leverage, the higher your profit will be, but it is also easy to cause losses.
Flexibility to trade from anywhere in the world
The explosion of the internet has allowed Forex traders to enjoy almost complete freedom. A computer with an internet connection, combined with an active Forex trading account from one of the many brokers allows you to execute trades from anywhere in the world.
High level of liquidity
The Forex market is huge, trading on average $5 trillion every single day. With its enormous size comes high liquidity. This means that with a single click on your mouse, you can instantly buy or sell a currency pair. Allowing traders to easily cash in or cash out their capital. Traders can even utilise limit order on their online trading platform to close trading positions once a desired level has been reached. For example a trader could set a trade to close once they reach take profit level, or close a trade once they lose until ”stop loss level”.
Ability to practice without risk
Most online Forex brokers offer you to use a ‘demo’ account to practice trading, build up your skills and get an understanding of how the markets work before using real account to trading. These demo accounts allow you to trade alongside real-time forex news and utilise a range of charts and tools, just like you would with a live account.
As you may already know, foreign exchange trading currency pairs are composed of two currencies. In currency pairs, the first currency is called the “base,” and the second currency is called the “quote” or “relative” currency. For example, in the euro / dollar currency pair, the euro will be the base currency and the dollar will be the quote currency. The quote currency is used as a reference to provide us with the relative value of the base currency. We will use this example again because it is the easiest way for you to understand: If the exchange rate of EUR / USD is 1.22752, this will mean that 1 unit of base currency (Euro) will cost 1.22752 units of quote Currency (USD), so for every Euro we will get 1.22752 USD. This is a simple relationship hidden behind the foreign exchange currency pair; the first currency (basic) is quoted relative to the second currency, and we will get the relative value from it. In the euro / dollar exchange rate, if the quoted price increases by 1.22752 and reaches 1.22800, it means that the dollar has lost a certain value or the euro has increased a certain value. Now we need to pay 1.22800 US dollars for 1 euro. The value of the euro is relatively high now, we can also see this data in the chart, because the chart is the form of price changes in the graph. If the euro appreciation chart will show a upward trend, if the euro depreciation chart will show a downward trend.
For novices in the world of foreign exchange trading, the face of constantly changing currency prices is quite daunting. Many novices usually do not know what factors can cause frequent changes in currency prices and the impact they can bring on the market. Simply put, the current exchange rate represents the rate of change of supply and demand factors. Generally speaking, the more buyers than sellers, the more market exchange rate growth. For a specific currency, the more sellers than buyers, the faster the market exchange rate cuts.
The most-tricky part is to understand why price changes occur in the first place, and how to predict any future price changes, so that you can make a profit by buying or selling orders before the price changes. It is necessary to have a deep understanding of economic and political factors. As a foreign exchange trader, you can fully learn these aspects of training while training your experience and skills. The following are some of the most common market movement factors and their impact.
Basic factors that lead to changes in currency prices：
Changes in interest rates: Central banks in different countries will announce changes in interest rates at different points throughout the year. Changes in interest rates will directly affect the relevant currency pairs in the foreign exchange market
Differences in growth rates: Countries with strong growth rates usually also attract more investors to buy the country’s currency, thus causing the country’s currency to appreciate. The countries with weaker growth rates are usually sold off by investors, which leads to the devaluation of the country ’s currency.
Political influence on stability: Developed countries tend to have an advantage over backward countries. The market also tends to favour countries that provide greater fiscal responsibility. This means that the government will invest funds in, for example, national defence and social projects, Stable politics also gives investors the information to invest in the country and currency.
Regional political events: wars, terrorist attacks and other similar events can greatly affect currency prices. Compared with those in turbulent countries, this will also benefit those countries that are peaceful and have relatively stable economic and political structures.
Impact of supply and demand: a large amount of funds flows into another type of funds, which often occurs when international companies do transactions or large fund managers change investment shares from one country to another. It can directly affect the exchange rate, and is usually beneficial to currencies with large demand.
How to trade forex?
Fundamental analysis is a method used to analysis and develop ideas before trading on the market. By focusing on various economic, social, and political events and statistical data, you can make a well-trained forecast of the impact that a currency will have on supply and demand. Through the study of many different factors, a trader can determine the quality of their economic prospects based on many different countries, and use these conclusions to make decisions about their foreign exchange transactions. In short, if a country has a good economic shape, it will attract more foreign companies and investors. As a basic example, due to the growth and improvement of the British economy, the value of the pound will continue to increase. The high interest rate makes any sterling financial asset more attractive to investors. However, to master these value assets, both traders and investors must buy some local currency. Because of this, the value of the pound will increase.
Most traders think that the world of foreign exchange trading is controlled by interest rates. Of course, the interest rate may be the biggest factor indicating the future value of the currency. In each country, the interest rate will be controlled by the so-called central bank that determines the interest rate of overnight loans for commercial banks nationwide. Interest rates are often used to control so-called ‘inflation’. Inflation is also the reason for the annual increase in prices of products, materials, services and other items. Generally speaking, steadily rising inflation is keeping pace with developed economies. However, excessive inflation may be harmful to the economy, so this is why the central bank needs to be vigilant about the level of inflation. Once the inflation level reaches a certain height, the country usually increases its interest rate. Therefore, encouraging consumers and businesses to reduce borrowing and save more can slow down economic growth and inflation. As a trader, the role of interest rates in the foreign exchange market is usually an indicator of the global capital flow of a particular country. Interest rates can affect an investor’s investment choices in a country, or they can bring their own funds to other countries, thereby affecting the supply and demand of a currency pair. In turn, it will affect the value of a particular currency pair. For the actual current interest rate itself, it is important to understand the future trend of interest rates. In addition, successful traders who perform fundamental analysis will understand that these interest rates often change with monetary policy.
In addition to interest rates, there are many other economic indicators that can affect the price of foreign exchange currencies. Successful traders are not born with foreign exchange trading skills, they are developed with continuous practice. They know where to find the most reliable market information. Similarly, they also know when to find the best time. Generally, various trading platforms directly provide real-time market data and financial news to their customers through their own network software. And some of the tycoons in the news industry will provide live feed summaries. For example, CNN, BBC, American Finance, Fox Business, and many other companies. To become a successful trader, it is important to maintain a full understanding of market news and economic indicators of data. These are usually catalysts for high prices and volume changes. We recommend that you not only use fundamental analysis, but also technical analysis. Fundamental analysis can bring some guidance, it provides us with a clear picture of a country’s economic health, but technical analysis can help you improve your timing of market transactions. Here are a few channels where you can get the latest market information and dates, which will have a direct impact on how you use fundamental analysis to trade:
The second method used to predict the price movement of foreign exchange transactions is called technical analysis. The framework is created based on traders’ research on the price movements of foreign exchange transactions, which allows them to determine potential future price movements based on historical changes. We all must have heard that “History often repeats itself.” This sentence is actually the basic principle of technical analysis. Traders who use technical analysis usually look for similar patterns that occurred in the past, and then based on these ideas, They will start trading because they believe that the price will follow the same pattern as happened before. Some well-known commonly used technical analysis, including Fibonacci numbers, relative strength index, moving average, pivot points and Elliott waves. All these forms of technical analysis will be studied by traders using so-called charts. The use of charts is because it makes it easier to imagine historical data. Looking at the past, this can help identify specific trading patterns and the operating trends of certain industries, thereby enabling you to discover some huge trading opportunities.
If what happened in the foreign exchange market in the past may happen again 100%, then everyone will be rich! Unfortunately, this is not the case, no matter how much research you have done on one chart after another, how much hard work, sometimes it just cannot happen again. Because the future is not always the same as the past. In technical analysis, there are many unexpected variables that are not considered to be worth considering. For example, the replacement of national leaders, changes in government, natural disasters, wars, changes in bank policies, and even terrorist attacks. All of these can have a devastating effect on the supply and demand of currency, and therefore all your hard work sweat (and money) is wasted. This is not to say that the use of technical analysis is completely unprofitable. The best way is to use a combination of technical and fundamental analysis to optimize your transactions and reduce risk.
- In the foreign exchange market, traders usually choose the three most popular charts, depending on their skill level and the information they are looking for. These charts are: line chart, bar chart and K line chart.Line chartBriefly explain the next line chart; draw a line connecting the closing price to the next closing price. When you see these lines together, within a certain period of time, you will have a rough idea of the specific currency price trend. The following is an example of a EUR / USD line chart.
- Bar chartThe bar chart is slightly different from the line chart. It shows traders the opening and closing prices, but also shows the highest and lowest prices of currency pairs. The bottom of the bar shows the lowest price of the currency of the day, while the top shows the highest price. The full vertical bar shows us the overall trading range of that particular currency pair. The horizontal position to the left of the vertical line represents the opening price. The horizontal position to the right of the vertical line shows the closing price to the trader.
- The important thing to note is that the bar chart is also called the ‘OHLC’ chart because it shows the trader the opening price, the highest price, the lowest price and the closing price of that particular currency pair. It is for this reason that throughout your entire foreign exchange trading journey, you will find that they will be cited this way often. The following is an example of a EUR / USD bar chart.
- Candlestick chartA bar chart is similar to a bar chart, however, it shows us the same data in a more graphical format. In foreign exchange trading, they are the charts most commonly used by traders. The K-line chart is very suitable for beginners, easy to use and allows simple chart analysis. The following is an example of a EUR / USD chart.
- In the candlestick chart, different colors tell us whether the closing price is higher or lower than the opening price. The green candlestick indicates that the currency’s closing price is higher than the opening price. The red candlestick tells us that the closing price of the currency is lower than the opening price. The vertical line above or the vertical line below the candlestick tells us the highest or lowest point of the price during the trading process.
In general, the channel is based on the trend line and consists of a trend line and a parallel line on the other side.
In an upward trend, to draw a channel, we must first draw a trend line correctly. Remember, in an upward trend, the trend line is formed by connecting two lows. After drawing the trend line, draw another line parallel to the first one and make sure it can touch the highs formed by the price. Although the second line must touch the high point (the higher the better), you do not have to be so precise when drawing; the price can penetrate it a little more than the trend line. If you draw the channel at the beginning of the upward trend, you will only have two lows and possibly a high (peak). You actually only need to connect two low points, and then draw a second parallel line through the high points. This type of channel is called an ascending channel. The same principle also applies to the downtrend channel, which we call the downtrend channel. For the descending channel, first draw a trend line, connect the high point, and then draw a parallel line through the low point. The downward and upward channels are all diagonal, but there is another type: horizontal channels. The main difference between a diagonal channel and a horizontal channel is that the latter occurs in a market range where prices cannot form higher highs or lower lows. To draw it, you need to find the boundary of the range area and draw parallel lines here, as shown in the following figure:
Now that we know how to draw channels, we need to know how to trade them. Since the channel is a relatively simple tool, it should be fairly simple to trade on a basic level. When trading channels, its trading rules are generally that the bottom is the buying area and the top is the selling area. Here, we are worth mentioning: if you can draw a rising channel correctly, it means that the market trend is rising; and the channel to buy the bottom means that you are following the trend, therefore, you There will be a high probability to trade; selling at the top of the channel refers to counter-trend trading. We recommend that you avoid such trading at least in the early stages of the trading journey. However, when the market is in the horizontal channel range and the signal appears, it is safer to trade in both directions (for example: when the price touches the line with the lower channel, buy; or when the price touches the line with the higher channel Line, sell; see second picture). As in the case of trend lines, all types of channels will eventually be broken, and as we explained in the trend line section, you can do breakout trading.
Double top refers to when the price reaches a certain height for the second time, but fails to break through and returns to a low. The opposite is the double bottom. as the picture shows:
Note how the price failed to create a new low (in the case of double bottoms) or a new high (in the case of double tops), and then moved in the opposite direction shortly afterwards. This is why double top / double bottom is a reversal model, not a continuation model. Although not perfect, this is one of the trader’s favorite chart patterns.
This model is more complicated than double top / double bottom, the fact is that it requires three tops or bottoms to complete, not just two. In an upward trend, it first forms a high point (left shoulder), then forms a higher high point (head) and a lower high point (right shoulder). Refer to the following picture, it will help you understand more thoroughly.
The right shoulder can be higher or lower than the left shoulder, but it cannot be higher than the head, because this will become an invalid mode. Please note that the neckline on the picture is connected to two low points in the pattern. Usually when the price breaks the neckline, the transaction will be formed, and if the point is down, then its reliability will be higher, although this is not a necessary condition. In the downtrend, and vice versa, but the model is called the “flip-top head and shoulders model.”
There are three main types of triangles that make up the chart: rising, falling and symmetrical triangles. When the price rises from a low point in an ascending triangle, it will encounter a resistance line at the upper end. As shown below:
The descending triangle is opposite to the ascending triangle. When the price gradually forms a falling high, the price will find a support line in the lower part. As shown below:
In the case of a symmetrical triangle, the price will be squeezed by the two sides of the triangle and a breakthrough will eventually occur, but it can happen in any direction. The characteristic of an equilateral triangle is that inside the triangle, the price will gradually increase from the low point and decrease from the high point. As shown below:
The biggest disadvantage of triangles is that they don’t always give us a clear indication of where the price will go. It can be higher or lower, there is no clear rule to set it, but even so, we can get a good clue from it: when the price approaches the top of the triangle, a breakthrough will occur immediately, and this is for a trader. It is crucial. You don’t always find a chart model by using books, but you can also use a slightly modified or incomplete chart model.
One of the greatest tools for trading is called the moving average (Mas), although they are lagging indicators. The lagging part comes from the fact that MAs is the arithmetic average of the closing prices for several days, so it looks back and calculates the historical price. There are many different types of moving averages, they have different calculation methods and different periods. The most commonly used types of moving averages are simple moving average (MA), exponential moving average (EMA) and smoothed moving average (SMA). In the chart, all moving averages will appear as a simple line:
All the MAs shown in the figure above have the same calculation cycle, but the calculation methods are different, which is why they look different. In the above example, we used 100 cycles to calculate; if we use short-term to calculate, then these lines will be closer to the price and also more sensitive to price fluctuations. Please refer to the figure below to see the difference in calculation using the same method (both lines are simple moving averages), but in different periods:
There are many ways to trade using moving averages, and the most common method is to use them as dynamic support and resistance levels. A dynamic S / R is defined as the fact that it changes according to recent price fluctuations. For example, the trend line, which is a static diagonal S / R level, it will never change by itself unless the trader decides to move it. On the other hand, the moving average will show its fluctuation through graphical representation (remember, the moving average comes from the price itself), so that it can adapt to the price. In other words, we can trade the S / R level-the price will rebound or break through it, and then move to the other side to trade MAs.
Another method of trading moving averages is similar to trading MACD: MA crossover. Regarding MA crossing, we need at least 2 MAs (usually the same type of MA) in the chart, but different periods. Let’s look at an example below. We used a 50-period simple moving average and a 100-period simple moving average.
What you can notice is that before the two MAs cross, the price has started to fall. This is because moving averages are lagging indicators, and they cannot predict future price movements, but once they cross, huge volatility will follow, and both MAs will be accompanied by strong resistance levels. When trading MA crosses, you must also be vigilant about what kind of development they are after the cross; in our example, they started to diverge (moving apart), which is precisely the performance of strong momentum, which increases our confidence in trading.
The world of trading is full of mistakes made by traders. Whether you are a senior trader or a novice, we will make mistakes. The difference between a veteran trader and a novice is that a veteran trader can learn from his mistakes and not make repeated mistakes. He is aware of his mistakes and admits the fact that changes must be made. On the other hand, novices don’t always know what went wrong, and they can’t find out where they went wrong. One of the good ways to avoid such mistakes is to insist on recording the transaction experience, write down the reasons for the transaction and the transaction results. After the loss or profit of the transaction, we must constantly check the transaction experience, because we tend to forget the mistakes made in the past, and focus on our success.
If you test a trading system back and forth and get satisfactory results, then do n’t let your high emotions hinder your trading in reality. After the system has fully tested a trading , as long as you trust it, don’t let a series of losing trades dominate your thoughts. When trading, you should follow your trading system rules, not your intuition, and always wait until all your system conditions are perfect and effective before trading.
Another common mistake that novice traders are susceptible to is that they will add more and more indicators to their charts because they feel they need another indicator to filter out false signals among other factors. The result is often a messy chart, because on the basis of all lines and indicators, the price is difficult to see. After a while, you will realize that there are at least two or three indicators that you do n’t use, but they take up a lot of space on your chart.
We must pay attention to news and fundamentals. Even if you do n’t know how to interpret the news that is released, at least stop trading when you see a clear direction of the transaction. Some traders see crazy price movements during news hours, and they are worried that they will miss the move after entering the market. This is a common mistake that novices tend to make. Trust us, when we tell you that the market will stay here for a long time, then you will have many opportunities to trade.
We believe that the biggest mistake is being blinded by the market. Some traders cannot have an open mind when analyzing charts, so when trading, they cannot do what they can clearly see. To explain it this way, traders who do not admit that the uptrend is also developing when market trends have changed significantly will find reasons to play short. Of course, this will eventually lead to transaction failure and setbacks. When talking about market direction, be sure to be impartial; just do what the test system instructs you to trade.
From the moment you move from a simulated trading account to a real account, and risk your time and money, your entire psychological journey will change accordingly. It is important to understand how trading psychology can influence your judgment on the foreign exchange market and how to control such emotions, and ultimately allow you to remain successful for several years. When you make your first real transaction, you feel at a loss when to cut your losses. The two most common emotions traders experience when operating a foreign exchange market are greed and fear. Greed can make a trader enter a riskier or high-volume transaction, and it can also make the trader wait for the last basis point trend, rather than telling them to stop when they make a profit. And fear may make the trader miss the opportunity, causing the trader to close the trade in advance before real gains.
The following are the most common emotions and sentiments experienced by traders when participating in foreign exchange market transactions. To be successful in this forex market, you must understand the most direct impact of the following emotions on you, and how to control them effectively.
- Fear – Worried about losing money will directly affect individuals and the entire market. Fear also controls the trader, and when the opportunity comes, it will cause the trader to cancel the trade or close the trade early.
- Greed – It may make traders overconfident in the development trend and eventually cause them to suffer heavy losses. Greed can also enable traders to open transactions that are much larger than their own funds. They usually hold the mentality of making a fortune once.
- Hope – Traders usually hope that after a loss, the market will turn around, turning this loss into a lucrative transaction. Unfortunately, hope can only cause traders to misjudge their position and weaken their horizons, in order to prevent them from trading effectively. On the contrary, they should face losses, protect their investment shares, and adhere to strict risk management plans.
- Excitement – The foreign exchange market can often be exciting, so it ’s not a bad thing for everyone to experience such excitement. However, successful traders can control their excitement so as not to disturb their attention. Excitement can lead to over-trading and carelessness. Many over-excited traders usually see their accounts with a net loss to end the day’s transactions.
- Depression – A series of bad or loss-making transactions can frustrate foreign exchange traders. Such emotions can not only cause harmful effects in a person’s investment shares, but can also damage health. If, under normal conditions, you feel that foreign exchange trading will lose your will, then it may be best to close the trade at this time.
- Anger – As a trader, when you are unable to make a profit, a common emotion at this time will be anger. A sound risk management and trading plan will be the key to handling this sentiment. If it is not necessary, you should stick to your stop loss in order to avoid trading into a huge loss. The key to combating trading psychology is to understand how to effectively control your emotions. The following traders use a rigorous trading plan to remind themselves when they can make money and when they can close. Adhering to a good risk management program can make you truly profitable in the foreign exchange market, while other unsuccessful traders are due to their failure to control their emotions.
Market psychology is the overall feeling that the foreign exchange market is experiencing at any time. For example, it can feel greedy and fearful at certain times, and it can even cause traders to look forward to buying or selling. When performing fundamental or technical analysis, you should theoretically be able to predict the direction of currency prices, especially when you have all market data at hand. If this is the case, then all traders will take the same measures, but each trader has their own views. Every foreign exchange dealer is unique. They have different interpretations of why the market will take certain actions and how they conceive of their next plans. This is where market psychology can play. The market generally represents all the combined traders, and in a given period of time, they feel the market. No matter what position a trader chooses, it will help form the overall atmosphere of the market. But sometimes as an individual, no matter how strong you feel, even if you may be sure that the euro will continue to increase, the rest of the market is actually bearish. As a result, you lost money in the transaction process. On your way to becoming a successful trader, you must take everything to take this into account. An essential weapon in your strategic equipment is the ability to assess the market, whether it is a bull or a bear.
Throughout the course, we have shown you a series of important tools and trading techniques, but nothing is more important than the psychology behind trading-the mental state you must have when trading. The human mind is always complicated and strange. Once stress, anxiety or other similar factors occur, its response is different from the normal situation. When it comes to loss or profit with money and possibility, most people feel stressed, scared, greedy and anxious. The definition of foreign exchange transactions involves profit and loss, so human emotions are an important part of it. If we want to make a calm, calculated decision, we must learn to control our emotions. One of the first skills we must master (if you have not already done so) is the market principle. You must always follow your trading plan, and never make decisions based on the feeling that you are already in a transaction. Decisions made when it comes to money are most likely influenced by the emotions we discussed earlier. If we make all the decisions before entering the transaction, we will think in a neutral state of mind. Even if we are prepared for all possible outcomes before entering the transaction, most people will sweat their palms and accelerate their heartbeat for the first live transaction. To avoid this, first use the smallest position available on your platform, and do not make big trades until you start feeling good. Once entering the transaction, be sure to avoid greed and fear as much as possible. The price will fluctuate up and down to touch your stop loss or profit point, in an attempt to change your initial decision. But always keep in mind that your decision is made when the brain is not afraid of money and failure. Before entering the transaction, learn to accept any possible outcome. But once entering the transaction, let the transaction follow its course naturally. When conducting real money transactions, fear is one of our strongest enemies, which can take many forms: fear of losing money, fear of not meeting expectations, or fear of missing good deals. If we consider losses more when trading, rather than market conditions, our trading opportunities will be greatly reduced. It is common for new traders to fear entering a trade. After several consecutive failed trades, fear invades, even if the next trade will meet all the conditions of the trader’s strategy, he will also feel fear. Later, when he saw that he could have won the transaction, he felt frustrated and was afraid of missing the next transaction, so he would accept a weaker signal. The point is: face your fears and understand that this is not a game for people with poor mental tolerance. You need to accept any possibility of failure and hold your head high. Another problem we have to face is overconfidence. It happens when a series of successful trades occurs, the trader thinks there is nothing to stop him, he is the leader of market trading. The next stage will be prone to poorly performing transactions, using weak signals or increasing positions. What you need to understand is that you are not in the market to prove anything, but to make money. Pride and arrogance are not the right attitudes in successful trading. On the contrary, you should be humble and easy in trading and try to avoid overconfidence. Some things you need to avoid at all times are retaliatory transactions. This is one of the biggest mistakes in foreign exchange trading, even some experienced traders will still make this mistake. When you want to retaliate the market with trading, your judgment becomes darker because of the previous trading failure, because you only want to earn back the money you just lost, not using logical signals to trade. We are not fighting the market, we are just observers who want to analyze market activity and decide when to enter the market under strong market trends. Our goal is to continue to follow the trading plan and never take shortcuts. The trading plan we decided to use must include funds management guidelines and a thoroughly tested trading strategy. If you have tested the strategy and are confident that it will bring you profits, why should you discard it after two or three losses? Many traders become afraid after losing several times because they do not understand that there is no 100% accuracy in foreign exchange, and they need to stop looking for the “holy grail” of trading. Seeking a perfect, 100% accurate strategy forever will only bring defeat and frustration. If you find a strategy with 70% accuracy, it means that 30 out of every 100 transactions will fail and 70 will succeed, but the problem is that we don’t know the order in which success and failure will occur. This does not mean that if we lose more times than we win over a period of time, we must change our strategy. All we should do is to get through the difficulties and continue to believe in your strategy if you know it has been tested in a sufficiently long period of time. Learn to analysis whether you have done something wrong or whether the transaction is reasonable after each transaction is closed. In order to do this, be sure to keep detailed records of your transactions. If the operation is correct, but the transaction ends in a loss, don’t worry, because failure, like success, is part of the transaction. Because if the transaction reward is greater than the risk, you only need 50% of the successful transaction to be profitable.
Risk management helps cut down losses. It can also help protect a trader’s account from losing all of his or her money. The risk occurs when the trader suffers a loss. After all, a trader who has generated substantial profits can lose it all in just one or two bad trades without a proper risk management strategy.
Each transaction has three main parts: entry point, stop loss point and target profit point. Although the entry point is considered to be the most important of the three, we can tell you that this is not always the case. Even if you have a good entry point, but your trading space is lacking, and the stop loss point is set too close, so before the price starts to develop in the direction you envisage, it will largely touch the stop loss point. If you set the profit point too far, the situation will be almost the same; the price can be reversed before hitting the profit target. The most common position and the commonly adopted placement specification is to set the stop loss above the previous high in short positions and set the stop loss below the previous low in long positions. The last highest point and lowest point are our last known resistance and support, so if they are broken, then our trading must stop. The following is an example of a short position transaction:
Stop loss setting
In the picture above, the last high point (point A) is the last known resistance, so our stop loss order will be placed at a distance after a few points. The stop loss order will be set immediately after entering the trade (in this case, the trading signal will be the crossing point “B” of the MA) or at the same time (set the stop loss point while entering the trade). Once the transaction moves in a direction that benefits us, the price moves to a new high. At point B, we can move the stop loss point to point B to greatly reduce the risk. The above example shows a trade triggered by a bearish MA crossover, which requires a large stop loss, which makes it difficult to achieve a good risk-reward ratio, but some trades require only a small stop loss and a potential high returns. We are talking about support and resistance trading. In this type of trading, our stop loss point is placed below the support and resistance levels of our expected rebound position, as in the following example:
In the above example, the entry signal is the determined support rebound, point A. It allows us to use a smaller stop loss because we are trading in a rebound. If the rally proves to be a breakthrough to the support level, then our reason for long position trading is invalid. If the price hits a stop loss, then the move will be considered a breakthrough, so we have no reason to trade long positions. The best way to place the stop loss is as mentioned above: find a reasonable point, a point with a trading reason as invalid, and do n’t use a certain amount of points for each transaction, because the market situation is always Will change.
Trend line trading is another type of trading with small stop loss:
Point “A” is the fourth rebound of the downward trend line, which is our entry point. Many ambitious traders will enter the trade after the third rebound, but it is best to trade in a safe situation. In this case, our stop loss is set above the previous high, and you can also see that the distance between our entry points is very short. If our stop loss is hit, we will have a higher high (if it touches our stop loss, the new high formed by the price will be higher than the peak point we used to set the stop loss position). Imagine what we are doing is short trading, because it is in a downward trend, then the higher high will fail in our downward trend, and the same, the entry point.
Just as important is the setting of profitable orders. We must find a reasonable position for our profit target, not just a predetermined series of points. The generally accepted rule is that profit should be set at strong support or resistance (slashed or horizontal). Here is an example:
This is the long position trade we have shown before, so we know the reason to enter the trade and where to set the stop loss. The final part of the transaction is the profit target. It is placed at the confirmation resistance and formed at the top of the trading range (note that we are not in a very strong trend market). We set the profit order at that position because if resistance still exists, the price is likely to rebound downwards. We can see that the price broke through the resistance and then moved up, but when our profit order was hit, we had a huge risk-reward ratio of 1: 6.16 due to our only 30-point stop loss Our profit order is 185 points higher (so our rate of return is 6.16 times higher than the risk involved: 185/30 = 6.16). Don’t worry about moving every point, because it is extremely difficult to achieve. On the contrary, you only need to consider any good R: R rate; don’t be crazy about the remaining points on the table. The risk is a fair deal with great rewards.
This is not a trading system, but a fund management system. We will show you how a small system can take the same risks, but help you get higher returns. For example, we usually trade 1 lot, 30 stop loss points, and 30 profit points, which is a 1: 1 risk-reward ratio. A point movement means $ 10, so if our stop loss is hit, we lose $ 300, and if the profit point is hit, we make $ 300. Now make a modification: we use 0.50 lot instead of 1 lot. Suppose we create a long position at 1.2000 with a profit point of 1.2030 and a stop loss point of 1.1970. If our trade is close to profit, we will win 150 dollars. We reduced the risk and the return at the same time, but the ratio remained the same, that is 1: 1. If the trade is not good for us with 10 points, we create another long position trade with 0.50 lot (stop loss will be the first trade The same as the stop loss, ie 1.1970). Now if the transaction is good for development and hits profit, we will win $ 150 on the first transaction, and $ 200 on the second transaction, totaling $ 350 (the second transaction needs to move 40 points to reach the profit level, because we opened the position at 1.1990). Our risk has become smaller (the first trade’s stop loss is 30 points, and the second trade’s stop loss is 20 points), but the return is great! If the trade with another 10 points is not conducive to our development and reaches 1.1980, then we create another long trade with 0.50 (we will now have three long trades). Now if the trade is beneficial to our development and the profit is hit, we make a profit of 150 USD in the first transaction, 200 USD in the second, 250 USD in the third, and a total of 600 USD, which is our stop loss at 30 points The 30-point profit is twice that of the first-hand exchange. The beauty is that if the transaction closes at the stop loss, we only lose $ 300: the first transaction loses $ 150: it opened a position at 1.2000 and closed the position at 1.1970 (30 points * 0.50lot * 10 = $ 150) Second A transaction loses $ 100: it opens a position at 1.1990 and closes at 1.1970 (20 pips * 0.50lot * 10 = $ 100) The third transaction loses $ 50: it opens a position at 1.1980 and closes at 1.1970 (10 pips * 0.50lot * 10 / point = US $ 50) We can see from the above calculation that while maintaining the same risk, our return is doubled!
Let ’s take an example and you will understand why position size is important. Assuming that our account balance is $ 1,000, our risk per transaction is $ 500. If we fail two consecutive transactions, the account balance will be 0. In this way, two wrong transactions can lead to the termination of the entire account. Losses are part of the transaction, so no perfect system can provide you with 100% transaction accuracy, which is why we have to leave ourselves room for mistakes. If we use a small position size and a 20% risk per transaction, we will terminate the account after five failed transactions. The lower the risk of each transaction, the more consecutive failures required to clear the account. Of course, if we use a small position, the profit from a successful transaction will not be that much, but it is very important to explore the balance between risk and reward. When it comes to the risks involved in trading, traders also need to find another comfortable risk quota area. Some people are more aggressive than others. They prefer to trade with large positions, but they are conducted within the boundaries of maintaining the correct money management strategy.
Position size is important because, as we mentioned at the beginning of the course, if you do not pay attention to transaction risk, your entire account only needs to pay for one or two transaction losses. Another very important point of successful trading in the market is market principles. Never take more risks than originally expected. Of course, the amount of risk for a single transaction is up to you. Some traders completely ignore the general guidelines for fund management, which is a practice we do not recommend. At least before you have experience, you must adhere to the classic money management guidelines before making a transaction. In a single transaction, a generally accepted principle is not to use more than 2% -5% of the total amount of your account as a risk amount. In fact, for the first month of trading, we recommend that you use 1% of your account as a risk. Until everything is on track, you can freely use your own trading strategy. In the entire trading field, everyone’s views on the exchange are various. For some traders, if your risk per transaction is only 2% of your account, then you cannot make enough money. After all, we are all in the market for profit. We do not fully agree with this statement. Next, we will show you that we can also make money when the risk is still only 2% of the account. Suppose we are trading a 10,000 USD account, the risk of each transaction is 2%, and the stop loss is 25 points. Then the risk of a USD 10,000 account will be USD 200: USD 10,000 * 2% = USD 200 USD 200/25 points (stop loss) = 8 (8 mini orders or 0.8 standard orders) If we keep making profits, the account balance Will increase, and 2% will of course exceed $ 200: when the account is $ 15,000, 2% is $ 300, then we can trade larger positions: $ 15,000 * 2% = $ 300 $ 300/25 points (Stop Loss) = 12 (12 mini orders or 1.2 standard orders) Now that we can trade a larger position, our potential profit will increase, but our risk is still the same: 2%. To use this type of risk management, you need to invest all your profits so that 2% is consistent with account growth. If you withdraw funds to keep your account balance always the same, then 2% is always $ 200, making it harder to make big money. When you become a senior trader, you can increase the risk percentage, provided you do it for good reasons, not because of greed and dreams of getting rich overnight. Only by treating your account with caution can it make you a lot of money.