Traditional Forex Analysis
The Forex market is traditionally analysed with technical and fundamental analysis. Long-term trends tend to reflect fundamental analysis to a significant degree. Short-term forex trading is heavily influenced by technical patterns, volume, and sentiment.
Understanding fundamentals and technical Forex analysis is a great foundation, but it’s not everything. Understanding sentiment or trader positioning can make or break you.
Hunt or be Hunted
If you have been trading Forex for even a short period of time you have undoubtedly felt like hunted pray at least a few times. The news is bullish, the technicals are screaming “buy” and you jump into a long position.
As if someone is watching you trade from outside your window, the pair suddenly plunges to trigger your stop loss within minutes. Well, they may not be watching through your office window, but they are watching order flow.
Just as you made this trade so too did a great number of other retail traders. A trap was set and you took the bait. You aren’t crazy; you were hunted. Games like this are part of trading any market – stocks, commodities, forex, etc. If you want to be in the market, you must accept this fact and learn how to benefit from it rather than becoming a statistic.
Gamesmanship is critical in achieving success and in Forex analysis, but is not often discussed or written about. It’s the elephant in the room many pros, talking heads and pundits refuse to discuss. They believe speaking these truths may send retail investors running.
We are realists and strive to teach our clients how to spot traps, dodge landmines and avoid being hunted, which is otherwise learned through painful experience.
We are considered a “small speculator” just like you, not a billion dollar hedge fund. To avoid being hunted we must follow the hunters, and plan carefully.
Choosing the Right Trade
When trading the major currency pairs, we must first decide if the US Dollar represents a better buying or selling opportunity on the whole. Sometimes this is clear, while other times it is completely mixed.
Using fundamental and technical expertise, along with analysis of sentiment in our Forex analysis, we identify the weakest currencies to sell against USD, and/or the strongest currencies to buy vs USD.
The Forex trading we conduct is done in pairs, which means we can leave the dollar out and match up the strongest and weakest currencies in a cross pair. It may sound simple enough, but under the surface is a great deal of research and experience guiding our trades and your Forex trading experience.
Forex Risk Management
Ideally, you should aim to cut losses short and allow winners to run. In reality, managing losses and gains in Forex trading requires us to know what type of market conditions we are trading. When market conditions are highly volatile and/or headline-driven, we tend to use tighter stops and trail them automatically to reduce or eliminate initial risk, and to protect unrealized gains.
When the market lacks steady direction, you would look to book gains quickly and use profit targets instead of trailing stops. When the market is trending, we look to build into trades as they work in our favour and allow them to run. This is one of the hardest things for new traders to do; let winners run.
Managing Gains and Losses
While managing risk is the keep to survival in any market, we must also focus a great deal on how to manage profits.
Managing risk involves the use of stop-loss orders and calculating how much money you have at risk on each trade and the aggregate risk on all open trades. We also consider exposure to one currency. When possible, we try to cut losing trades ahead of our stop-loss if technical or fundamental analysis suggests we are on the wrong side of the market.
There are several ways to manage gains. One common way is to trail stop orders, which can be done manually or automatically on some platforms such as MT4. For swing and longer-term trades, we tend to trail stops manually behind new levels of support and resistance. In day trading, particularly in volatile conditions, we often utilize automatic trailing stops.