The Forex Guide to Fundamentals

Talking Points:

• Fundamentals tack economic changes
• Traders want to buy the currency with strong fundamentals
• Check the economic calendar for upcoming events

Trade analysis is normally grouped into two categories, Technical and Fundamental. Normally when developing a trading strategy, traders will choose one or even a combination of both forms of analysis when developing a trading plan. While its always important to know and understand key technical levels, it is also good to know what is fundamentally driving market price.

This series of articles is geared to better understating Fundamental trading, and how shifts in market data can affect market price. Today we will begin by reviewing exactly what fundamentals are and where we can find pertinent market data to make better trading decisions.

What is a Fundamental

So what is a market fundamental? A market fundamental is a piece of specific data or event that causes money to flow either in or out of an underlying asset. As a trader we attempt to find the strongest currency and pair it with a weaker one. This means when trading a fundamental strategy, we will be looking for a series of data points that makes one more attractive than the other.

Knowing this, traders should be factoring in things such as employment data, inflation, interest rates and even political turmoil before buying a particular currency. If the underlying fundamental data is improving or getting stronger we have found a candidate currency to buy relative to another with poor performance.
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Economic Calendar

So now that you are a little more familiar with what a fundamental is, now we need to find all this data so we can make an educated trading decision. Every good fundamental trader should have access to an economic calendar. This is where we can see which data points are being released from week to week.
Traders should keep an eye on the calendar at all times, as data hits or misses expectations this will ultimately change our fundamental outlook on a currency.

Attachment 5847

Which Events to Track

The final question is which events we should follow. This is a fair question, because there is a slew of economic data released each week! To help make things easier, the high importance events have been marked on the economic calendar as high priority/impact. These are the events that our normally monitored by policy makers such as central banks and have the ability to immediately influence market price. While these events are certainly important, just watching events such as this week’s employment figures for the US may not give us an overall opinion of the market.

The key to trading fundamentals is to combine a variety of data points to then make an educated trading decision. As we continue our study of fundamentals we will take a look at the main influences on an economy and how they can mold our trading opinion.

Watch the Market

As a fundamental trader, it is important to know how different events affect the valuation of a currency. This will allow you to monitor, track and trade currencies in real time.

This will conclude our first look at Forex fundamentals. In our next edition, we will begin looking at capital flows and how they can affect price and our outlook on the market!

---Written by Walker England, Trading Instructor


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The Forex Guide to Fundamentals, Part 2: Capital Flows & Interest Rates

Talking Points:

• Capital flows calculates money moving in and out of a currency
• Economic events and interest rates all affect capital flows
• Carry Traders look to take advantage of interest rate differentials

Fundamental analysis in Forex studies economic factors that cause shifts in buying and selling patterns of traders. As demand increases for a currency so does its value. Likewise as money flows out of a currency its value begins to decrease.

To get a better view on how these movements affect the market, today we will analyze capital flows and interest rates. Let’s get started!

What is a Capital Flow

Capital flows describes the flow of funds in to or out from a particular currency. Normally this flow is directly related to capital investments inside of a particular country. For instance, if foreign investors wanted to invest in stocks on the S&P 500, it would require Dollars to do so. This means money would flow into the USD from another currency to make the purchase.

The logic from here is one of supply and demand. If capital inflows exceed outflows that means there is a demand for countries currency. This can provide fundamental trading opportunities as for traders as prices rise to accommodate the new demand. This is also true with a net capital outflow. As there is less demand for a particular countries currency, we would expect a fundamental opportunity to place new sell orders.

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Interest Rates & Central Banks

Interest rates are important to capital flows. As investors, speculators, and traders in general all look to maximize their returns they tend to look towards higher yielding investments. That means countries with the highest interest rates, and best economic data tend to see their countries strengthen due to capital flows.

One way to track capital flows is by monitoring economic data on the economic calendar along with central bank releases. Central banks are charges with setting the banking rate that is associated with their currency. As this value changes, so will demand for a particular currency pair. Let’s take a look at an example of this in action.

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EURAUD & The Carry Trade

Below we have a monthly chart of the EURAUD. From 2009 to present, the EURAUD has declined as much as 10,839 pips! Why did this happen? The key to understanding this cart is in capital flows. At its peak during this time the central bank target rate as set by the RBA for the AUD was at 4.75%. This is considerably higher than the 1.5% associated with the Euro at its peak for the designated time frame.

Traders and investors alike looking to take advantage of this yield differential were actively selling Euros while purchasing the Aussie Dollar. This allowed traders to collect rollover for holding open their position. Along the way as more traders caught on and demanded more Aussie Dollars, positions began to also gain capital appreciation as the chart began to trend lower. Traders who look specifically for this long term yield are known as carry traders and will continue to hold a currency pair as long as capital flows remain in their favor!

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Watch the Market

As a fundamental trader, it is important to know how different events affect the valuation of a currency. To follow along with the market and to familiarize yourself with capital flows in Forex, make sure to sign up for a Free Forex Demo account with FXCM. This will allow you to monitor, track and trade currencies in real time.

This will conclude our second look at Forex fundamentals! If you missed one of the previous editions of The Fundamental Guide to Forex, please enjoy the articles linked below.

The Forex Guide to Fundamentals, Part1: What is a Fundamental?

---Written by Walker England, Trading Instructor

Talking Points:

• Central Banks are found in most major economies around the globe
• A tightening of monetary policy can increase currency rates
• A loosening of policy can cause excess supply and a devaluation of a currency

Fundamental traders keep a watchful eye on Central Banks and the policy decisions they make. These intuitions, through changes in monetary policy, not only can affect an underlying economy but by de facto currency rates as well. Today we will continue our look at market fundamentals by examining Central Banks and how their policy decisions can affect Forex prices. Let’s get started!

Central Banks

Central Banks are institutions used by nations around the globe to assist in managing their country or region with the commercial banking industry, interest rates, and currency prices. Examples of active central banks include the Federal Reserve of the United States, European Central Bank (ECB), Bank of England (BOE), Bank of Canada, and the Reserve Bank of Australia (RBA). The sphere of influence of a central bank may range from a single country such as the Reserve Bank of Australia or, represent policy created for a region or group of countries such as the ECB. Because of this, the actions of Central Banks have the ability to move markets and should be on every fundamental trader’s radar.

Learn Forex: Central Banking Rates

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Monetary Policy

Normally, a Central Bank will use the monetary tools at their disposal to meet their designated goals. Monetary policy describes the actions taken by a central bank to control the money supply inside of its designated region. Depending on the state of the economy, the fed may select to either take an expansionary or contractionary policy, with the supply of money being influenced by two specific methods.

During times of crisis or economic slowdown, central banks will normally look to expand their monetary policy. They can do this by expanding asset purchases which increases the monetary base and by also decreasing interest rates. The theory behind monetary expansionary is to make money available to banks and businesses in an attempt to increase growth and development. As a byproduct of an expansionary policy, fundamental indicators such as GDP are expected to grow and unemployment decline.

As the economy heats up, the Fed will consider taking on contractionary measures. At this point, the monetary base may begin to be restricted and interest rates can begin to increase. These actions make excess investment capital scares, and place a higher premium on lending. With less capital circulating, the economy is expected to contract and slow down. During a time of contraction, GDP is expected to decline and unemployment to contrarily increase.

Learn Forex: Fed Events for March 2014

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Central Banks and Forex

By controlling the money supply, and interest rates, the decisions mandated by the Federal Reserve can change currency prices. If a Central bank begins a series of contractionary policies, this may increase the price of that banks underlying currency. As money and lending is tightened demand for currency will increase. When this is coupled with a lower supply of currency and increased lending requirements this can drastically increase prices.

Conversely, when central banks loosen monetary policy, this can cause a depreciation of their currency. Lower interest rates can cause lending to increase at lower prices. As well expanding central bank balance sheets can create an excess supply of a currency. With a new larger supply of a currency and with demand being low this can cause prices to drop.

Policy Decisions

Policy decisions and economic releases from Central Banks will occur sporadically throughout the month. The best way to track upcoming news is through the use of a good economic calendar. As these decisions are made, it is also important to track the movements of the market! You can check out the latest movements in the Forex market by registering for a Free Forex Demo account with FXCM. This way you can become comfortable with the market and the affects of Central Banks on price in real time!

This will conclude the 3rd installment of the Forex Guide to Fundamentals! If you missed one of the previous editions, please enjoy the articles linked below.

---Written by Walker England, Trading Instructor

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Talking Points:

• News events can help us decipher an economy’s strength
• GDP, CPI and Employment figures can change the demand of a currency
• Fundamental traders look to pair currencies from a strong economy to a weaker one

There are a variety of news events fundamental traders may monitor to determine the strength or weakness of an economy. Ultimately, these factors will influence money flows causing currency pairs to fluctuate. Today we will continue our look at market fundamentals by examining three of the most important events and how they can affect currency prices.

GDP

First we have the Gross Domestic Product (GDP). The GDP growth rate looks specifically at changes in growth patterns of an economy by tabulating household consumption, government spending, domestic investment’s, and net exports for a country. As growth increases it means an economy is expanding and can cause a high demand for a nation’s currency as that currency is needed to make new purchases. As well, a contraction or slowdown in growth can have the opposite effect.

Ultimately this growth (or lack of it) causes inflationary pressures in the market place. With central banks looking to potentially change monetary policy due to these results GDP announcements can become volatile events.

Learn Forex: US GDP

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CPI

Next, we will look at the Consumer Price Index (CPI). CPI is another economic indicator that is released on a monthly basis by most major economies. It is designed to give a timely glimpse into current inflation levels in an economy. Inflation tracked through CPI looks specifically at purchasing power and the rise of prices of goods and services. If prices are rising drastically this can be signs of growth as well as rising inflation.

In most scenarios, if CPI is released lower than expected, normally this would influence Reserve Banksto consider stimulating the economy by opting for lower interest rates or commit to new open market operations to increase the money supply. Conversely a higher CPI reading suggests an inflating economy. This would give cause for increasing current interest rates and thus affect demand for a currency.

Learn Forex: US CPI

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Employment Figures

Lastly fundamental traders should monitor employment figures to get a bearing on the strength or weakness of an underlying economy. A booming economy will offer many employment opportunities and drive down unemployment figures. As business contracts, the opposite is true. As unemployment rises, it can have a devastating effect on an underlying economy.

While there are a variety of employment statistics that can be tracked one of the most watched is the Non Farm Payroll (NFP) figure released in the United States. This event shows new jobs added to the workforce outside of the agricultural sector and shows the strength of the US economy. As this number is released fundamental traders will watch for opportunities to buy or sell currencies coupled with the dollar.

This will conclude the 4th installment of the Forex Guide to Fundamentals! If you missed one of the previous editions, please enjoy the articles linked below.
The Forex Guide to Fundamentals, Part3: Central Banks
The Forex Guide to Fundamentals, Part2: Capital Flows & Interest Rates
The Forex Guide to Fundamentals, Part1: What is a Fundamental?

---Written by Walker England, Trading Instructor

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Talking Points:

• How To Prepare For the Announcement
• Know Key Levels
• Know The EURUSD SSI Bias

The thing for the speculator to determine is the line of least resistance – and wait for the moment when the line defines itself. Getting in to early will often cause you to be whipsawed. Best to define areas of resistance, and wait for a breakout. Once prices breakout, the patient trader will have two forces in his favor 1) underlying conditions and 2) traders who were wrong and have to cover their positions.
-Jesse Livermore

The European Central Bank or ECB has been the misery of many FX traders since they unexpectedly cut their interest rates from 0.50% to 0.25% in November of 2013. Since then, many traders have assumed, incorrectly, that the ECB will force the EURUSD to lower levels so they tried to front-run the ECB by shorting EURUSD into these meeting. The rate cuts haven’t happened and it’s important to understand why not and what could change this development of price action with the upcoming Central Bank Announcement.

How to Prepare For the Announcement

The first thing to understand is what moves markets on an interest rate announcement. It is not necessarily the hiking or cutting of interest rates alone. Rather, a move more aggressively happens on a move against market expectations. The reason for expectations being a key determinant is that institutional money managers want to be the first in the trend so they’ll trade in the direction of market expectations.

Learn Forex: Unexpected Rate Cut vs. Expected Rate Hike

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The daily charts above show you that expectations determine the move more than the event itself. An unexpected rate cut drops a currency pair but even an expected rate hike can drop a currency pair because expectations were already priced in. Therefore, the first thing you need to know is what the market is expecting. For the April ECB meeting, the market is expecting no rate change which can bring about one of two events:

• ECB Maintains rates as expected and EUR trend remains elevated
• ECB unexpectedly cuts rates , and EUR drops towards the 2014 low of 1.3476

However, it’s important to note that past meeting where the bank hasn’t cut has led to a continuation of the trend dating back to July 2013. Here’s a chart that highlights the past ECB announcements. If the trend continues and the ECB doesn’t cut like they did on November 7th, 2013, the trend could continue higher. Also, an important note, given that the main rate is at 0.25%, it is seen as unlikely by multiple economists that they would cut to zero based on their monetary policy view that inflation doesn’t seem to be slipping as fast as in November 2013.

Learn Forex: Past Reactions on ECB Day

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Know Key EURUSD Levels

Know that you know the expectations, it’s important to know another thing. We don’t know what’s going to happen with 100% certainty. Therefore, it’s important to have a clear understanding of what support and resistance levels are in play that could determine a confirmation of trend continuation or a reversal to the downside.

Major resistance: 1.3967 March 13 high
2nd key resistance: 1.3893 Dec. 27 high
1st key resistance: 1.3876 March 24 high

Spot: 1.3750
1st key support: 1.3643 Feb. 27 low
2nd key support: 1.3562 Feb. 12 low
Major Support: 1.3476 2014 Low

If the ECB keeps interest rates on hold and levels of resistance (top side targets) are taken out, that would indicate strength and trend continuation. If the ECB either cuts rates unexpectedly or talks down the Euro at the press conference and the price goes below some of the key support levels that could show a potential turning of trend is developing. The levels above (and drawn on the chart below, can help you through the volatility sure to take place on the ECB announcement.

Learn Forex: Key EURUSD Levels

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Know EURUSD SSI Bias Going into the ECB Event

The Speculative Sentiment Index or SSI allows you to see how FXCM’s entire book is positioned on a ratio basis. The SSI is utilized as a contrarian indicator as our Traits of Successful Traders Report showed that retail traders often try to fade strength or add to losing positions an overall short positioning favors trend continuation. As of March 28th, the ratio of long to short positions in the EURUSD stands at -2.50 as 29% of traders are long.

Learn Forex: SSI Bias Remains Net Short Favoring Bull Trend Continuation

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Courtesy of DailyFX SSI

The short bias has been prevalent on EURUSD since the pair pushed off the July 2013 low of 1.2754. While the trend has not been straight up, you would definitely be profitable if you held a buy trade since July 2013 as opposed to a sell trade which would show you a loss. This simple sentiment indicator helps you see that if the ECB keeps rates the same and the bias remains negative that the pair could continue its march higher towards 1.40 & beyond into summer of 2014.

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

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Talking Points:
-Why Emotions Get Shunned By Traders
-A Better Way to Look at Emotions
-Applying Your Emotions to FX Trading Appropriately

“Instead of hoping he must fear and instead of fearing he must hope.He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”
-Jesse Livermore

We’re only in it for the money. That key trading concept is obvious but shouldn’t be forgotten. The reason why this mantra is key is because we’re not into trading for the following reasons:
-To Beat the Market
-To Show People How Smart You Are
-To Feel Excitement through use of Aggressive Leverage

Why Emotions Get Shunned By Traders

Some traders opt for an Automated Trading or Black Box strategy. The purpose of a black-box system is to have your preferred trading rules or edge programmed so as to put you into a trade and exit you from a trade when the edge is gone or the profit target is achieved. The argument of this approach is that your emotions can’t get in the way of you entering or exiting a trade. However, a trading career is made up of more than just on trade and if you do not have the emotional strength to stick with your edge, programmer or discretionary, then your emotions are still getting the best of you.

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Either way, your emotions are at play. If you’re deciding when to enter the trade yourself, known as discretionary trading, your emotions are obviously at play. The way emotions effect newer traders is that new traders hope their losses will come back so they let them run in order to avoid booking a loss. They fear that their profits will turn into losses so they cut them short. However, this fear and hope tug-of-war doesn’t work out in the traders favor in the long term.

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A Better Way to Look at Emotions

Emotions aren’t bad if you know how to steer them towards your benefit. By default, you likely don’t like being wrong or losing money, who would? However, taking a big picture view, being wrong sometimes and losing a little money when deciding if the market is going to move in the direction you believe it will, these two things aren’t that bad and are in fact, inevitable.

So a better way to look at emotions is to flip how you’re using hope and fear and most specifically fear. If you can switch your fear from a place of fearing a losing to trade to fearing a losing trade getting out of control, you’ll discover a key emotional truth to trading well, regardless of your balance.

As the opening quote mentions, instead of hoping that your loss will turn into a profit so you don’t look like a failure, you should hope that your profits grow larger while always fearing a large relative loss. By flipping these from there default function, you’re no longer holding onto a losing trading waiting for it to come back while closing out your good trades at a minimal profit afraid that the profit will slip through your fingers. As Michael Martin put it, that’s like pulling your flowers and letting your weeds flourish in hoping they change.

Applying Your Emotions to FX Trading Appropriately

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So now that you know that your emotions are not your enemy when appropriately adjusted, what’s the best way to apply this information? This may come as a shock, but you need to start from the premise that you don’t know FOR SURE if your next trade will hit its protective stop or profit target. Of course, you’d prefer that every trade hit its profit target but by now, you know that’s not always the case.

However, like the picture from above, you’re not sure if the next trade will take you off the road you were
planning on driving down (read: the trend bends or ends to get you out of your trade). Therefore, when you’re in a trade based on your edge or indicators, it’s best to keep an eye for trades that go against you from the start and see that it’s best to fear these trades and get out there or just accept that your profit target most likely will not get hit but whatever you do, don’t remove your stop and hope for a trade that goes sour right away. These are the trades you should rightly fear draining your equity.

On the flip side, if you’re entering at the right time and price (unbeknownst to you or not), and the trade goes in your favor right away, then it’s best to keep the hope in play that this could be a big move that makes your day, week, month, or year and move your stop up to break even when your system sees it appropriate.

I’ll leave you with a quote from Michael Martin that’s been helpful for me and I hope it does the same for you. “Winners never quit, but quitters have more equity in their accounts when they admit defeat and return tomorrow with a fresh start and a clear head.” This world of trading is a paradox, the trading paradox involves embracing losing trades early and often while allowing those few golden trades make your year.


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Talking Points:

• News events can cause large, unpredictable price swings.
• Long-term trades or fundamental trades can remain open.
• Short-term trades can be closed.

Because my strategies revolve around technical analysis and sentiment, I am often asked what I do around news releases. Specifically, how I manage positions around major news releases that are likely to move the market. The truth is that it depends on why I opened the trade in the first place, and whether it is a short-term or long-term trade. Let's explore trading around news events.

AUDUSD M5 with 45 pips in profit (by equity) for NFP:

Attachment 7332

News Trading – Good & Bad

There’s no doubt that trading around news is exciting. It’s where we see the most volatility and the largest swings in our accounts’ equity. But as any news trader can attest, this type of volatility is a double edged sword. For any profit earned off of a news release, there was the possibility of a loss of equal size had the trade gone against us.

This is why you often hear me say “It’s a coin flip” when talking about having a position when an economic news release is announced. No one knows whether released data will be positive/negative or bullish/bearish. The only thing we know about economic data is when it will be released.

USDCAD M5 : 94 pips price movement by USD - Non-Farm Payrolls news event:

Attachment 7333

Now that we know when the news events occur, how should these affect our open positions?
When to Leave Trades Open During the News
There are two primary reasons why a person should leave a trade open during a major news event.

• The trade was based on fundamentals in the first place.
• The trade is a long term trade (greater than two week hold time)

The first reason is an obvious one but is worth mentioning. If our trade is based on fundamentals, we should leave it open to face fundamental news events. After all, that should be a large portion of our trading edge when it comes to fundamental trading. In the short term, positions can face large swings, but in the long run, price should move in our favor if we are correct on our fundamental analysis.

The second reason for leaving a trade open during news is if we are in a long term position; defined by a trade we plan on holding for longer than two weeks. We are looking at a longer period of time with a stop loss wide enough to endure sudden fluctuations caused by news events. It's likely the price will not move far enough to stop us out, so the trade may still play out as planned.

And even if we come across a time when a news event moves price far enough to stop out a longer term trade, we must remember that news is a coin flip. It can just as likely hit our limit as it can our stop. So in the long run, we want to keep our long term trades open during the news.

When to Close Trades During the News

But what about the trades that we should consider closing around news events? In my opinion, we should look to close out short term trades if either their stop or their limit is set within the Daily ATR (14), also known as the Average True Range. ATR tells us the average range from high price to lose price over the last 14 trading days. This gives us indication on how far we can expect the currency pair to move on a normal day.

If we are placing a trade with a stop or limit within the Daily ATR(14), we should consider closing out the trade before a High Importance news event is released. This is because price can move violently in either direction rendering your technical analysis void. It's highly likely that the news event will turn your technical trading edge into a 50/50 coin flip. It takes a perfectly formulated strategy and turns it into a roulette wheel.

Learn Forex: Daily ATR(14) on the EURUSD

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Hot Off the Press

Fundamental news events can both be great for a position or absolutely horrible, so it's important to see if our strategy can sustain whatever the news brings. If our trades are long term or fundamentally driven, we should make it in the long run if we have an edge. If we are trading short term however, it might be best to run to cover and close out the trade. Why put in the time and effort just to flip a coin?

Good trading!
---Written by Rob Pasche

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Talking Points:

• News releases can be stressful on traders
• Develop a plan before the event arrives

Major news releases can be stressful on traders. That stress can show up for a variety of trading styles.
Perhaps you are already in a good position with a good entry and you are afraid the news release may take a bite out of your good entry.

Perhaps you want to enter into a new position as prices are near a technically sound entry point, but you are uncertain if the technical picture will hold up through the volatile release. Therefore, you agonize over the decision of whether to enter now or after the news event.

Maybe, you like to be in the action and initiating new positions during the release. The fast paced volatility during the news release still gets makes your palms sweat as you place trades.

As you can see, news events stress traders in a variety of ways.

Today, we are going to cover three steps to trade news events.

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Step 1 - Have a Strategy

It sounds simple, yet the emotion of the release can easily draw us off course. We see prices moving quickly in a straight line and are afraid to miss out or afraid to lose the gains we have been sitting on. Therefore, we make an emotional decision and act.

Having a strategy doesn’t have to be complicated. Remember, staying out of the market during news and doing nothing is a strategy.

A strategy for the trader with a floating profit entering the news event could be as simple as “I am going to close off half my position and move my stop loss to better than break even.”

For the trader wanting to initiate a new position that is technically based, they may decide to wait until at least 15 minutes after the release, then decide if the set-up is still valid.

The active news trader may realize they need a plan of buy and sell rules because they trade based on what ‘feels good.’

Step 2 - Use Conservative Leverage

If you are in the market when the news is released, make sure you are implementing conservative amounts of leverage. We don’t know where the prices may go and during releases, prices tend to move fast. Therefore, de-emphasize the influence of each trade on your account equity by using low amounts of leverage.

Our Traits of Successful Traders research found that traders who implement less than ten times effective leverage tend to be more profitable on average.


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3 - Don’t Deviate from the Strategy

If you have taken the time to think about a strategy from step number one and if you have realized the importance of being conservatively levered, then you are 90% of the way there! However, this last 10% can arguably be the most difficult. Whatever your plan is, stick to it!

If I put together a plan to lose 20 pounds of body weight that includes eating healthier and exercising, but I continue to eat high fat and sugar foods with limited exercise, then I am only setting myself up for frustration.

You don’t have to be stressed or frustrated through fundamental news releases.

Best of luck in your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education


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Talking Points:

• Must You Know What Will Happen Next?
• Is There a Better Way?
• Strategies When You Know That You Don’t Know

“Good investing is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake.”
-Michael Steinhardt

"95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears"
-Mark Douglas, Trading In the Zone

Many traders become enamored with the idea of forecasting. The need for forecasting seems to be inherent to successful trading. After all, you reason, I must know what will happen next in order to make money, right? Thankfully, that’s not right and this article will break down how you can trade well without knowing what will happen next.

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Must You Know What Will Happen Next?

While knowing what would happen next would be helpful, no one can know for sure. The reason that insider trading is a crime that is often tested in equity markets can help you see that some traders are so desperate to know the future that their willing to cheat and pay a stiff fine when caught. In short, it’s dangerous to think in terms of a certain future when your money is on the line and best to think of edges over certainties when taking a trade.

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The problem with thinking that you must know what the future holds for your trade, is that when something adverse happens to your trade from your expectations, fear sets in. Fear in and of itself isn’t bad. However, most traders with their money on the line, will often freeze and fail to close out the trade.

If you don’t need to know what will happen next, what do you need? The list is surprisingly short and simple but what’s more important is that you don’t think you know what will happen because if you do, you’ll likely overleverage and downplay the risks which are ever-present in the world of trading.

• A Clean Edge That You’re Comfortable Entering A Trade On
• A Well Defined Invalidation Point Where Your Trade Set-Up No Longer
• A Potential Reversal Entry Point
• An Appropriate Trade Size / Money Management

Is There a Better Way?

Yesterday, the European Central Bank decided to cut their refi rate and deposit rate. Many traders went into this meeting short, yet EURUSD covered ~250% of its daily ATR range and closed near the highs, indicating EURUSD strength. Simply put, the outcome was outside of most trader’s realm of possibility and if you went short and were struck by fear, you likely did not close out that short and were another “victim of the market”, which is another way of saying a victim of your own fears of losing.

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So what is the better way? Believe it or not, it’s to approach the market, understanding how emotional markets can be and that it is best not to get tied up in the direction the market “has to go”. Many traders will hold on to a losing trade, not to the benefit of their account, but rather to protect their ego. Of course, the better path to trading is to focus on protecting your account equity and leaving your ego at the door of your trading room so that it does not affect your trading negatively.

Strategies When You Know That You Don’t Know

There is one commonality with traders who can trade without fear. They build losing trades into their approach. It’s similar to a gambit in chess and it takes away the edge and strong-hold that fear has on many traders. For those non-chess players, a gambit is a play in which you sacrifice a low-value piece, like a pawn, for the sake of gaining an advantage. In trading, the gambit could be your first trade that allows you to get a better taste of the edge you’re sensing at the moment the trade is entered.

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James Stanley’s USD Hedge is a great example of a strategy that works under the assumption that one trade will be a loser. What’s the significance of this? It pre-assumes the loss and will allow you to trade without the fear that plagues so many traders. Another tool that you can use to help you define if the trend is staying in your favor or going against you is a fractal.

If you look outside of the world of trading and chess, there are other businesses that presume a loss and therefore are able to act with a clear head when a loss comes. Those businesses are casinos and insurance companies. Both of these businesses presume a loss and work only in line with a calculated risk, they operate free of fear and you can as well if you presume small losses as part of your strategy.

Another great Mark Douglas quote:
“The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move in and out of positions, cutting my losses short to make myself mentally available to take the next opportunity.” -Mark Douglas

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

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Talking Points:

• The Discipline of Trading
• What Hurts New Traders
• The Two Characteristics of Successful Trading

“Self-discipline has a bigger effect on academic performance than does intellectual talent.”
-Charles Duhigg, The Power of Habit

The emotions that come when putting your capital at risk turn trading into something more than simple analysis. Analysis is a detached process of observation in which you look for clear patterns in order to develop an edge that you can profit from. However, when you’re capital is at risk, something more than analysis alone is required.

The Discipline of Trading

Discipline is a tricky topic. Many traders believe they have more than they really do or practice. What’s worse, the absence of discipline opens you up to multiple dangers that are near impossible to overcome.

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This quote can be very helpful. Because what you want right now is often now what is best for you nor is conducive to what you truly want in the long run. Trading brings together two things at all times that human beings hate: being wrong (sometimes publicly) and losing money.

Learn Forex: Have the Discipline to Recognize if a Trend Is Moving Away From You

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Sadly, many traders think they can avoid being wrong by not admitting they are wrong right now. I quantify admitting you are wrong by closing out a losing trade once it goes past your pre-determine loss point. Another helpful way to define being wrong or making an error is any deviation from your trading plan, regardless of the outcome. That will help you rely on a proper process as opposed to only being focused on the short-term outcome.

What Hurts New Traders

The mindset that comes with trading well is unlike anything most people have come across. That is why automated trading is so popular in trading, you don’t have to fight the devil within to enter & exit good trades. However, when traders won’t admit that their wrong, through closing their trades, they’re effectively admitting that they don’t have the mental hardware correctly installed for trading effectively.

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So how do you install the necessary mental hardware? For starters, it’s helpful to note that you’ll likely have to think in a way different than you have before. If you’re familiar with baseball, it may be helpful to think like a batter. A batter is attributed a batting average for getting a hit and a batting average of 0.350 means that a batter is getting a hit on 3.5 out of ten at bats or 35%. To give you an idea, that’s near the top batting average in Major League Baseball or MLB. If you can bring your trading mentality to think like a batter, you’ll see that having the discipline and being O.K. with a 35% win rate is a new mentality that can help your overall trading results.

The Two Characteristics of Successful Trading

To carry the baseball analogy further, it stands to reason that an appropriate through process is not all that’s necessary. You also need a good technique to hit the ball or in trading, a decent edge to put you into a higher probability trade.

An edge is akin to a trading strategy and there are all sorts of edges out there so it’s best to find the one that works best for you and how you’re comfortable viewing the market. My preference is a combination of Elliott Wave & Ichimoku for finding short term and medium term trends to ride.
With an edge to trade and discipline to follow, you’ll be on your way to separating
yourself from the pack.

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

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