Forex Strategies

Leverage gives traders the ability to open positions with trade sizes larger than their account equity. We want to be careful when using leverage as this magnifies both our trades’ gains and losses, but how can leverage be controlled? How do we determine the amount of leverage we are using at any given time? These are the questions we will cover in today’s article.

Learn Forex: Minimum Margin Requirement (MMR)



Margin Can Be a Distraction

In the image above, we are looking at the FXCM Trading Station’s Dealing Rates window with a focus on the column labeled “MMR.” This shows us the minimum amount of money required to open a 1k microlot trade on each pair (at the time this screenshot was taken). So for example, if we were to open up a 1k trade on the USD/JPY, it would require $20 to be set aside from my account’s equity. If we wanted to open a 10k trade, that would take $200 to be set aside. A 100k trade would require $2,000 set aside, etc.

At this exact moment is where many traders begin to look at leverage the wrong way. We see the margin required, we look at our account’s equity level and then figure out how much we can open. So a trader with a $2,500 account might feel comfortable opening a 100K USDJPY position because it only requires $2,000, but that would be a terrible decision. Why? Because we would be leveraging our account 40 times!

How We Should Calculate Leverage

So where did we go wrong with our trade? We were so distracted by the margin requirement that we forgot to look at what we were actually trading, $100,000 US Dollars against the Japanese Yen. $100,000 is 40 times our $2,500 equity that we deposited into our trading account. Using this amount of leverage is very dangerous and actually decreases the chance we will be profitable traders in the long run.

To solve this problem, we need to first look at the actual trade size in relationship to how much equity we have in our account. We need to calculate what each trade’s notional value is and make sure it is not too large for our risk appetite. A good rule of thumb that I follow is never trade more than 10 times your account’s equity across all of your open trades.

For example, our $2,500 account… we would multiply $2,500 by 10 to get to $25,000. That means we could open up a maximum of 25k USD/JPY and be within the rule of 10. The best part is, as long as we always keep our trades less than 10 times our equity, we don’t need to worry about how much margin each pair requires. The formula insures our account will be well capitalized for the positions we have open.

Would you like to try out Forex trading with a professional price feed and platform for free? Register for a Forex demo trading account today!

---Written by Rob Pasche

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Talking Points:
- Trading FX does not have to be a full time job
- Learn three methods to trade in your spare time
- Try them out in a practice account

As we speak to many different traders and investors around the world, the one thing that surprises me a lot is how many traders looking to get into FX perceive FX to be a day traders market. Sure, if you have time during the day to sit in front of the screen and hammer away at several trades, the FX market offers simple access with no day trading restrictions.

Many traders new to FX would be surprised to know that the 24 hour nature of the market also makes FX attractive to part time traders. A part time trader would be somebody who has a day job and may have only a couple of hours per week to research or make trades.



Trading typically doesn’t require a lot of time. The act of actually pushing the buttons to get into or out of a trade or moving stop losses doesn’t happen often. The challenge is that traders don’t have the confidence in their plan so they choose to watch each pip roll by rather than stepping away from the computer monitor.

There are variety of tools and strategies available to assist the trader in accessing the full time market in a part time fashion.

There are 3 general ways to trade:

• Investing with currency baskets
• Trade automation
• Discretionary Trading

The strategies implemented and time required for each of the 3 styles above will vary. Let’s take a moment and review each one. There is likely a method that works for your personality and time availability.

Currency Baskets

Currency baskets can require as little as a couple hours per month with most of the time spent researching for trade ideas. The idea behind a currency basket is that you wish to take a position in a currency rather than a pair.

For assistance while researching which pair to trade, check out the Strong & Weak publication series. There are generally 2-3 article published per month which asses the strongest and weakest currencies based on the current market environment.
Additionally, check the DailyFX Plus Live Classroom for regular webinars on trading the strongest and weakest currencies.

Trade Automation

Much like the currency baskets, trade automation can be one of the simplest methods of accessing the full time 24 hour FX market in a part time fashion.

There are 2 general ways to trade with automation. First, you can set up your own network to run the strategies from your computer. Once the network is set up, turning strategies on and off are simple. This would be more complex and requires a basic knowledge of computers and networking because the strategies are run on your network. The benefit, you control it and you only need a 3rd party broker to execute the trades.

The second way is using the mirror platform. This method is geared for the beginning as you can choose from a menu of strategies to trade. The strategies are held on Mirror’s servers so you can turn off your computer and let the strategies run while you are away.

Discretionary Trading

Lastly, there are strategies that you can trade by hand without spending a lot of time in from of the computer. These are strategies that trade off of longer intraday charts or daily chart time frames.

For example, a breakout strategy is a common strategy that does not require a lot of time. This is because it utilizes entry orders. Simply log in, set the entry orders and then, wait for those strategic price points to get hit. This can be accomplished through a simple 4 steps to trading breakouts.

Also, there is a strategy that trades using a 4 hour candle chart which is called the 4 hour trader. This means every 4 hours, a new price bar will close and you can scroll through each of the charts looking for trade set up. The 4 hour trader is a good strategy for somebody with mobile access that has the ability to check the charts a couple times per day.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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Talking Points:

• Correlations are useful to find direction for a variety of markets.
• Gold and the AUDUSD have a positive correlation.
• Once direction is found, plan your trading strategy for another asset.

Understanding correlations is a great way for traders to form opinions on markets that they may previously not follow. The idea of a correlation is to take two seemingly different markets or assets and see how market price moves relative to each other. Today we will review using the AUDUSD currency pair to determine the direction of gold through the use of a correlation.
Let’s get started!

Golds Correlation

When someone mentions Gold, the AUDUSD should immediately come to mind as a correlating asset. These assets are positively correlated, meaning they can be seen generally moving in the same direction. First this correlation works because both assets are priced in US Dollars. The AUD/USD pair represents Aussie Dollars priced in US Dollars. While gold is XAU/USD or gold priced in US Dollars per oz. When the US dollar gains strength, both assets tend to depreciate in value.

Secondly, the AUD has a high correlation to gold due to Australia’s extensive gold mining operations. As gold prices fluctuate, this increases or decreases the amount of funds transferred into AUD to make purchases of the metal. These transfers essentially change demand for the currency and can directly cause changes in the AUDUSD currency pair as well.

Learn Forex – AUD/USD & Gold (XAU/USD) Correlation




Trading the Correlation

The key to trading positively correlated assets, is finding a direction from one of the underlying assets before making a trading decision. If traders are seeing the AUDUSD push to lower lows, this could easily be the catalyst for a bearish bias on Gold. Conversely if gold is trending upwards, this can also be a signal of a new uptrend on the AUDUSD.

As you can see, this information is very useful to traders that have a general fundamental view of the market. If you have an opinion on Gold or the US Dollar this can be relayed into a trade idea. Often traders that are bullish on Gold choose to trade the AUDUSD instead of the metal itself. The Aussie Dollar carries a 2.50% banking rate, meaning traders can earn additional interest while executing a buy order on a positively correlated opinion of Gold. If a trader is bearish on the AUDUSD currency pair, traders can in turn sell gold to avoid accumulating interest on their trading balance.

---Written by Walker England, Trading Instructor

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Talking Points:

• What Is The Commitment of Traders Report?
• Who Are the Players In The Report?
• How to Read CoT for Directional Bias

What Is the Commitment of Traders Report?

How would you like to know what the smartest guys and girls in the room are doing? Thanks to a requirement by the Commodity Futures Trading Commission, the largest futures traders in the world are required to report their positions which can easily be tracked due to the margin they must pay to hold their large positions which the CFTC has been publishing since 1962 and since 2000, ever Friday at 3:30ET pm. This information can be of extreme help due to the people who come into the Futures market like hedge funds to make a return above their respective index or some of the largest companies in the world with real-time data of the health of the economy that come to the futures market to hedge their exposure to price fluctuations of raw materials that they use to make their product or preform their service.

Learn Forex: CoT Report for Euro FX (EURUSD) as of 01/28/2014



It may be helpful to think of the CoT report as a sentiment indicator with a lot more depth than most indicators. The depth, of course, comes from the fact that the readings are based on the largest future traders and can help you see when large fortune-500 companies switch their outlook on something that you’re trading. In short, this report provides incredible levels of insider intelligence that you’d be hard-pressed to find in another avenue.

Who Are the Players In The Report?

Commercials – Using the futures market primarily for hedging unfavorable price swings to their daily operations. They likely have the best insight as to what the demand and future is for the market as a hole and have some of the deepest pockets. These players are also known as commercial hedgers.
Examples: Coca Cola in the Sugar Market or American Airlines in the Gasoline Market

Non-Commercials (Speculators / Funds) – Traders, whether hedge-funds are large individuals, who have no interest in taking delivery but are rather in the market for profit and meet reportable requirements of the CFTC.
Examples: Hedge Funds and large banks or large Commodity Trading Advisors (CTAs)

Nonreportable Positions – Long & Short open interest on positions that don’t meet reportable requirements, i.e. small traders.
Examples: This is the leveraged players without deep pockets and are shaken out on big moves, similar to the DailyFX SSI.

How to Read the CoT for Directional Bias?

Upon the first reading of the CoT, you may be confused how future positions in USD, JPY, GBP or EUR could be helpful for trading EURUD, USDJPY, or EURGBP. There is a lot to learn about the Commitment of Traders report but what’s often helpful is to find when there is a very strong divergence between large speculators and large commercials.

Learn Forex: Look to See What Hedge Funds Are Buying Selling




Learn Forex: Non-Commercials / Hedge Funds Sold USDJPY Longs & Charts Confirm This




The first place to start with is a clean understanding of Net Positioning which is shown clearly on the reports and the week over week differential of major market bias (circled above). It may be helpful to know that what you’re looking for isn’t as much the specific number but a clear sign in % of open interest or bias so that you see Non-Commercials / Funds flipping against the primary trend. Furthermore, when you see a key flip in sentiment of non-commercials / funds who are in it for the money and not to be hedged like commercials, and there is a confirmation on the charts that a trend is exhausting, you are likely trading in the direction of the big kids.

As you can see from the last report in January, the number of funds off-loading the JPY shorts increased dramatically from the week prior. When you see this type of shift from major funds, you can look for other signs that show the prior trend is losing steam and that maybe you should exit the trade too. The chart above of USDJPY notes that there have been 4 bearish key days on USDJPY since the start of 2014 at the same time non-commercials have unloaded their USDJPY longs / JPY shorts giving credence that this move down may have more to go.

Happy Trading!

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Talking Points:

• Correlations are useful to find direction for a variety of markets.
• Oil and the USDCAD have a negative correlation.
• Once direction is found, plan your trading strategy for another asset.

Understanding market correlations can allow traders to have an option on a commodity based off of the direction of their favorite currency pair. The idea is to take two seemingly different markets or assets and see how market price moves relative to each other. Today we will review using the USDCAD currency pair to determine the direction of USOIL (WTI) through the use of a correlation.
Let’s get started!

Oils Correlation

When someone mentions Oil, currency traders should immediately think of the USDCAD as a correlating currency pair. These assets are negatively correlated meaning they generally can be seen moving in opposing directions. This occurs because the USDCAD quotes the price of Canadian Dollars in terms of USDollars. USOil represents Oil per barrel priced in terms of US Dollars. With the USD being on opposing sides of each equation this means that the two assets will move in opposing directions when the USD strengthens or weakens.

Secondly, the CAD has a high correlation to Oil due to Canada’s extensive oil deposits. Most of this oil is purchased by the US causing a transfer of funds along the way. As oil prices fluctuate, this increases or decreases the amount of funds transferred from USD to make purchases of Canadian resourses. These transfers essentially change demand for the currency and can directly cause changes in the USDCAD currency pair as well.

Learn Forex – AUD/USD & Gold (XAU/USD) Correlation




Trading the Correlation

The key to trading negatively correlated assets is finding a direction or having a fundamental opinion from one of the underlying assets before making a trading decision. If traders are seeing the USDCAD push to higher highs, this could easily be the catalyst for a bearish bias on Oil. Conversely if Oil is trending upwards traders would have reasonable expectations of the USDCAD traveling towards lower lows.

As you can see, this information is very useful to traders that already have an opinion on either Oil or the USDCAD currency pair. Often traders that are bullish on Oil choose to trade the USDCAD instead of the metal itself. The Canadian Dollar carries a 1.00% banking rate, meaning traders can earn additional interest while trading a bullish bias on Oil. If a trader is bullish on the USDCAD currency pair, traders can in turn sell Oil to avoid accumulating interest on their trading balance.

---Written by Walker England, Trading Instructor

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Talking Points:

• Traders lose because they let their losing trades outpace their winning trades
• Seek out positive risk-to-reward ratio trades
• When automating, seek strategies where the average winning trade is larger than the average losing trade

The statistics show that most traders lose money in the markets. We know from our Traits of Successful Traders Research, that there are common mistakes made by the losing traders. We also know through the research what traits tend to lead to more consistent results.

Today, we will highlight the first trait of a successful trader which is to risk a little to make a lot.
Before we get started, we need to remind you that by following these methods, they won’t guarantee you will find winning trades or that you will be profitable. These are general trends found when researching traits of successful traders. (To read the complete research, download the guide here after leaving your name, email, and phone number.)



With each trading opportunity, we will find opposition. That means each trading opportunity has risk associated with it and the possibility of loss. When we find those opportunities where the reward is significantly larger than the risk, those are good risk to reward ratio trades.

The first trait of a successful trader is to seek out positive risk to reward ratio trades such that if wrong, little is at risk. However, if we are right, it is a large winner. Traders, who consistently seek out positive risk to reward ratio trades, where their average winner is greater than their average loser, tend to see more consistent results.

Traits of Successful Traders Who Automate

In the context of an automated strategy, the computer is out searching for buy and sell signals. The strategy already has programmed into its code when to enter and when to exit. Therefore, the easiest way to determine the strategy’s risk to reward ratio is by analyzing the average winning trade and comparing it to the average losing trade.

As we can see below, we have 2 different strategies looking back for a six month period. In the first image, all 10 of the currency pairs shown have a higher average winner (APT = Average Profitable Trade) versus their average losing trade (ALT = Average Losing Trade).



The second strategy consistently has a larger average losing trade relative to the size of the average winning trade.



Average Winner Versus Average Loser, Really?

By itself, the average winning trade size relative to the average losing trade size does NOT indicate anything about profitability of the strategy. However, it does indicate how much we win when we are right versus when we are wrong. That essentially provides us with a behavior of the strategy that we can use when deciding what strategy to trade.

For example, let’s assume that you are a trend follower. You identify the strongest trends occurring in the market, then filter trades in the direction of the trend. Upon analysis of your average winning trade versus your average losing trade, you realize that your winners were smaller than your losers.

If your analysis says a certain pair is in a strong trend, why cut your winners short? One benefit of trend trading is that there are more pips available in the direction of the trend rather than counter trend. Therefore, give the winning trades more breathing room to advance while limiting your losses.

The same concept applies if you are mirroring a strategy.
For example, both strategies noted in the images above trade the CHF/JPY currency pair. The first strategy has an average winner versus average loser ratio of 138 / 51 = 2.7.

The second strategy has an average winner versus average loser ratio of 119 / 127 = 0.9.
If the CHF/JPY has been in a strong trend, why take on more risk with the losers relative to the winners? That means if the first strategy is a trend loving strategy, the first strategy would be preferred over the second strategy because when it is right, it wins 2.7 times the size of its losers.

Bottom Line

Analyze the size of your strategy’s winning trades relative to the losing trades. Seek out opportunities such that the sizes of your winners are larger than the size of your losing trades.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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Talking Points –

• The future is unpredictable, but analysis can help traders get probabilities in their favor.
• Matching the appropriate strategy with the correct market condition can assist in this analysis.
• Below, we explain the three primary conditions and how traders can approach each.

As a large portion of the United States gets pummeled with record-breaking onslaughts of snow, it’s hard to remember that spring is right around-the-corner. Blankets of snow and sheets of ice get replaced by green shoots of grass and singing birds; welcoming a new and better time.

To those of you living in a comfortable year-round climate, wondering why someone might want to put up with such misery; well it’s because the cold of winter only makes the warmth of spring and summer that much better. ‘It’s just the seasons,’ as they say. It’s just a cycle; a pattern that nature has been working on for as long as people have roamed this earth.

Most living things have cycles. Markets have cycles too. And to the trader looking to make money in markets, the identification of such cycles is of the upmost importance.

Because if we wear our winter jackets, and gloves, and scarves in the middle of summer – well, we’re probably in for a pretty uncomfortable time.

And the same thing goes for right now: If I were to walk outside in a sleeveless t-shirt, shorts, and flip flops I’d likely catch hypothermia and be in for a very bad time, to say the least.

It’s the identification of these cycles and patterns that allow us to work with them. It’s just as Charles Darwin said: “It’s not the strongest, or the smartest of a species to survive. It’s those that are most wiling to adapt.”
If you want to survive as a trader, you have to learn how to adapt. In this article, we’re going to show you how to do that.

The Cycles of a Market

Most markets will exhibit one of three predominant market conditions. It doesn’t matter if you analyze a market fundamentally, or technically, or spiritually, or by consulting with the stars: Prices move in different types of patterns.

But traders don’t just want to identify these patterns; they want to use them. By identifying these patterns, or ‘states’ of a market; the trader can more eloquently decide how to trade in that particular environment.
The three major market conditions are trends, ranges, and breakouts; as shown below.

The Life Cycle of a Market



Once again, these conditions or states are often driven by fundamentals or news (or in the case of some ranges, a lack thereof). And once a trader identifies these conditions, they can employ the proper strategy to trade in that market.

The Trend is Your Friend

We talk about trends and trend-trading a lot at DailyFX. And there is a reason for it: The future is uncertain, and while identifying a market condition is of great help, it’s never going to work 100% of the time because things in the future change.

By identifying a trend, and noticing a bias that has existed in the market recently, we may be able to jump on that theme so that if it continues we might be able to see some profitable trades.

But trading a trend is a bit of a conundrum. See, it’s not enough to simply say ‘the trend is up so I’m just going to buy it.’ No, we want to enter in trends more efficiently than that. So, if I want to buy an up-trend, I really want to do so as cheaply as possible, which is he conundrum. I want to buy after price has come down.

When traders are speculating in a trend, they want to look to employ that age-old logic that we’ve been taught since we were all toddlers: Buy low, and sell high.

But what is ‘low’ and what is ‘high.’ These are relative terms that are worthless to the trader that doesn’t know how they want to define their entries.

We tackled this topic in-depth in the article How to Build and Trade a Trend-Following Strategy. In the picture below, taken from the article, we show you how traders can look to approach a trend-trading strategy using price action:

Trend Traders Want to Buy Low, and Sell High



Price action can be hugely beneficial when trading in trends, but many newer traders may have difficulty grasping the best way to employ this type of analysis into their trend trading approaches.

Another alternative is for traders to use simple indicators to define the trend and enter in the direction of that trend. This can even be taken a step further using Multiple Time Frame Analysis.

So, for example: A trader can use the 200 period moving average on the daily chart, and if price is above the moving average they are looking to buy while if price is below they are looking to sell.

They can then go down to the 4-hour chart to look for MACD signals in the direction of that trend. So if the trend was up on the daily chart, the trader wants to see MACD crossing up and over the signal line for a trigger into a long position.

When MACD crosses down and under the signal line, the trader can look to exit the position; and can look to re-enter on another bullish MACD crossover provided that the trend is still ‘up’ per the daily chart.
Ranges

Unfortunately, trends don’t last forever. Eventually prices get so high, or so low that new buyers or sellers are hesitant to enter the market. This can create congested or ‘back-and-forth’ types of markets that can be daunting to speculate in.

But there are two ways to approach such situations… in the first, the trader can look for this ‘ranginess’ to continue; looking to sell resistance, or to buy support with the expectation that prices will move to the other side of the range.
We looked at various ways to do this in the article, How to Trade Ranges.

Once again, price action can be of huge assistance; as noticing that prices have been range-bound is a necessity for being able to speculate in this type of condition in the first place. Below, we show a picture from the article How to Analyze and Trade Ranges with Price Action that illustrates how exactly a trader can look to do this using price, and price alone.

Price Action Helps Traders See Price Levels that Have Been Important


But ranges, like trends, don’t last forever. When a range is violated, a new market condition comes about…
The Breakout

Breakouts are one of the more difficult market conditions to master, as the accompanying price movements can be volatile, violent, and extremely costly if we find ourselves on the wrong side of the move. We covered how traders can approach this condition in-depth in the article, Trading the Break.

But breakouts emanate from ranges. In many cases, a piece of news or some type of fundamental driver will create enough supply or demand in a market so that the previously established range breaks; and when that happens the move can be massive.

Breakouts Come From Ranges, and Lead to New Trends



The problem with breakouts is that it might take three or four breaks of resistance to actually catch the move. So traders are usually best advised to be even more aggressive in their risk management of such strategies; looking for three or four times the initial risk amount when the breakout succeeds.

A Final Note on Life Cycles

Markets are unpredictable, as are the various life cycles that they may exhibit. Analysis is simply a way to try to get probabilities on our side, if even just a little bit. Noticing the market condition and employing the appropriate strategy is a key variable to increasing the effectiveness of that analysis, but risk management is the tying bind that makes long-term profitable trading possible.

-- Written by James Stanley

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Talking Points:
-What Is the Spread?
-Spread Focal Points That FX Traders Should Regard
-How a Wider Spread Can Eat Into Your Account Equity

“Price is what you pay. Value is what you get.”
Warren Buffett.

What Is the Spread?

Forex trading is a very cost-effective market relative to other markets. As a trader in the FX market, your only cost to enter a trade is the spread. The spread is measured in pips and is the difference between the bid and ask of two currencies that are known as the base and counter currency.


If you’re actively trading, you should care very much about how many pips make up the spread on the trade you’re considering. Your concern would focus on the fact that you’ll be paying the spread every time you enter into the trade and the less spread you pay, the quicker your trade will be profitable if the market moves in the direction you anticipated. Please note that you do not pay the spread when exiting the trade.

If you’re unfamiliar with the term pips, there is no need to remain confused. Chances are, you’ve heard the broadcaster on the financial news network mention that the stock market was up or down 100 “points” today or that Oil was down a handful “ticks”. The forex equivalent of points or ticks is pips and for a majority of currencies, the pip is found in the fourth spot past the decimal, but you have paris such as those with the Japanese Yen where the pip is found in the second spot past the decimal.


Spread Focal Points That FX Traders Should Regard

If you hold the trade for a longer period of time than a scalper would (multiple hours, days, or weeks) then the spread only become of interest to you upon entry as well as times of relative illiquidity. To think in terms of liquidity, its best to think as to when banks are less aggressive in offering prices on the markets. Banks are often least aggressive at times of uncertainty or when the multiple banks are scaling back on their price offerings like on major news events or on the close of the market or open of the market.

Learn Forex: Bid / Ask Travel Nearly in Tandem At Most Times except Thin Markets like EMFX



If you like to trade emerging market currencies, or have thought about doing so, you’ll notice the spreads are above average. Not only are the spreads larger but the moves are often quicker than most currencies on a total pip move basis. When you look at the driving force of Emerging Markets, you should be aware of more aggressive moves which can be caused by monetary policy divergence. This is common under such EMFX crosses like USDZAR (US DOLLAR / South African Rand) or USDMXN (US Dollar / Mexican Peso) or a Central Bank announcement resulting in a flow of capital out of the less developed / stable economies, which make risk: reward all the more important. However, there are two key things that you should focus on in terms of the spread; pip cost and spreads widening at illiquid moments in the market.

You’ve recently learned how spreads can cause margin calls especially when traders become over-leveraged and try to engage a hedge. However, if you’re not careful, the EMFX crosses and even thinner G10 crosses can eat into your account equity regardless of attempted hedge towards thinner times of the market, like the daily close and definitely the weekly close on Friday at 5pm ET. In crosses like USDMXN or even GBPNZD, you can easily see spreads of 30-250 pips.

Learn Forex: Focus on the Net Spread Effect




Before we move on to the next section, please understand that not all spreads are created equal. The pip cost or value will determine if a 2 pip spread is equivalent to a 20 pip spread from a cost perspective or maybe even cheaper. On USDMXN, you can see a 100k trade brings a pip value of $0.75, so a 20 pip spread would only be $15. Whereas a 2 pip spread on EURUSD with a $10 per pip value per 100k lot would be more expensive at a net cost of $2.

How a Wider Spread Can Eat Into Your Account Equity

The significance of a widening spread, like the one shown on both tick charts, is due to a fact that no trader can deny. If you hit the bid, and are now long the currency pair like GBPUSD, you should only care about the offer because the level at which you can get out of the trade will determine your loss or profit. When in a trade, a widening spread means that a profitable exit is less likely or the amount of profitably is diminished and this is why our Active Trader department with reduced spreads is such a popular option.

Bottom Line:

The core of this article is to help you see how a wider spread can eat into your account equity beyond what you may first expect. If you are in an active trade, the only thing that matters is getting out at the best price according to your analysis and a smaller net-spread can help immensely. Therefore, as an educated and active Forex trader, beware of the spread.

Happy Trading!
---Written by Tyler Yell, Trading Instructor

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Forex Market (Spot Forex)

The Forex market, sometimes referred to as spot Forex, is the largest market in the world with over $5 trillion in volume each day. Participants buy and sell currencies "Over-the-counter" 24 hours a day, 5 days a week. Some of the more popular benefits to Forex trading are:

• Low cost of trading (spread only)
• No barrier to entry ($50 account minimum)
• Flexible trade sizes in 1,000 unit increments
• No contract expiration dates

Currency Futures Market

The currency futures market is available through the Chicago Mercantile Exchange (CME) in the United States. While the currencies involved are the same as the spot market, the futures market is noticeably smaller, with around $100 billion in daily trading volume. Currency futures are traded 23 hours a day, 5 days a week and offer similar leverage to what can be found in spot FX trading. But there are a few drawbacks to trading currency futures:Moderate barrier to entry (around $5,000 account minimum)

• Moderate cost of trading (spread + broker commissions + data fees)
• Contract expiration every 3 months
• Larger minimum trade size (10,000 units and up)

Stock Market

The stock market allows participants to buy and sell ownership in companies that they believe will grow in value over time. Over half of United States' households own stock in some form or another with around $300 billion worth changing hands each day on US exchanges. Most stock exchanges are open only a few hours a day and require a higher margin requirement than the Forex market and currency futures market. A few other differences between trading stocks and spot FX:

• Low barrier to entry (around $1,000 minimum)
• Moderate cost of trading (spread + commissions + data fees)
• Flexible trade sizes (but fixed commission making smaller trades more expensive)
• Day trading rule - $25,000 minimum account required if 4 day trades are closed across a 5 day span or trading account is frozen for 90 days

Good trading!
---Written by Rob Pasche

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Talking Points:

• What is a discretionary trader including benefits
• What is system trading including benefits
• Try out each style and learn how to control risk in each style with Traits of Successful Traders Guide

Eventually, there comes a time in the trader’s career, where they need to decide how much decision making they want to be involved with on each trade.
There are pros and cons to being a discretionary trader and likewise, for a system trader. Over the next few minutes, we will define how each type of trader makes decisions and explore some of the benefits and obstacles for both of them.



The Discretionary Trader

First, a discretionary trader uses a method of entry or exit that relies on subjective criteria. For example, a trader who is basing trading decisions off of fundamentals will be a discretionary trader. A technical trader will also likely be discretionary.

Learn Forex: Buying the Dip with CCI




The benefit of being a discretionary trader is that you can sense the mood of the market in real time. Though price may be moving in one direction, you can see symptoms of a reversal coming (either through divergence or candlestick pattern). Therefore, the discretionary trader has the ability to react quicker to changes in the market condition.

Too much of a good thing can become a disadvantage. For example, sensing market turns can be advantageous if the market actually turns. Too often, traders will see patterns in the market that don’t really exist. The traders are simply projecting their bias onto the chart and rationalizing their initial emotional bias. As a result, if left unchecked, emotional attachment of a discretionary trade can lead to significant losses as the trader ‘defends’ their initial bias.

The System Trader

System trading might also be referred to as mechanical, black box, or algo trading. The system trader uses a fixed set of rules to determine when or where to enter and exit the trade. The rules and interpretation of the rules are black and white so a computer can make the trades.

With FX being a 24 hour traded market, system trading has become quite popular. The computer doesn’t need a nap or to sleep at night which makes it a great candidate for following the rules and looking for trading opportunities that fit those rules.

A huge benefit of system trading is that you can get started with little or no trading experience. So system trading offers easy access to the FX market with a low barrier of entry to get started.

However, those types of obstacles can be overcome by implementing low amounts of leverage. Don’t take my word for it. We have researched this topic and three others to develop Traits of Successful Traders. One of those traits is to utilize less than ten times effective leverage.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX

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