Photo Credit: Unhindered by Talent

If you intend to succeed as a currency trader, then this is a very important lesson, so read on. Aren’t you in business because you want to make money? Well, the first thing you need to learn about money is how to manage it. In trading, this is one aspect that is often overlooked. A lot of traders just couldn’t wait to get right into trading without any regard with respect to the size of their account. The only thing they do is try to assess how much they can afford to lose in a single trade and then go ahead and click the “trade” button. In other words, these people are not traders — they’re gamblers!

Photo Credit: Jeb Ro

Without money management rules, trading becomes gambling as you leave almost everything to chance. In this case you are not looking at the long term return in your investment. What you are doing in this case is simply looking for a jackpot. By managing your money well, you not only get protected from huge losses, but you will also end up reaping large gains in the long run!

If you believe that gambling is the only way to succeed in trading, then you are very wrong. Take for example a casino, surely there are a lot of people already who have won jackpots, but how come the casino is still alive and well? The answer is quite simple: While there were many people who won jackpots, there were even more who didn’t. It is from these people who didn’t win that casinos reap huge profits. They know that, using the principles of statistics, in the long run, they will always emerge as the winner — not the gamblers.

So the lesson is clear: be a statistician, not a gambler. This way, you will always be assured of winning.

Photo Credit: Zainub

A price surge is an indicator of surprise of panic. When these events occur, professional traders take cover and observe. The retail trader also should allow the market digest such shocks. Trading during an announcement or right before, or in the midst of turmoil, will lessen the chance of effectively predicting the probable direction. Technical indicators will be distorted during surge periods.

Photo Credit: bobster1985
You should wait for a confirmation of the new direction and bear in mind that price action will have the tendency of reverting to pre-surge ranges granting that there are no fundamental occurrences.

An example is when the airplane in Queens NY crashed on Nov. 12, all currencies reacted instantly. However, within a short time the surged retraced when the panic died down.

Photo credit Forex_Me

If you’re new to forex, then you should know that there is an ideal mindset, character as well as mental attitude that every forex trader needs to have.

Very few people have this innate personality, and so, if you’re not one of them, then you will have to acquire and nurture this trait so that it becomes like second nature to you.

Photo Credit: pfala

As regards your trading, this entails being free of anxiety, fear, despair or regret. At the same time this also involves the ability to stay calm, confident, focused and disciplined despite adverse trading outcomes.

Here are the five keys to developing this ideal forex trading mindset:

1. Trade with a Disciplined Plan - trading entails serious planning, so don’t take it for granted.
2. Good Execution and Good Anticipation - Although anticipation and execution are related, between the two, you are most likely to lose money because of bad execution.
3. Cut Your Losses Early and Let Your Profits Run - this is a fundamental forex trading principle and cannot be violated without dire consequences.
4. Do Not Over Trade - leveraging your trade too much can lead to financial disaster.
5. Do Not Marry Your Trades - stick to your plan as in tip number one. Don’t ever compromise your position.

Photo Credit: ferryenjoy

Generally, there are three types of forex trading timeframes:

• Long-term;
• short-term or swing; and
• intraday or day-trading.

So which one is the best? There is no best timeframe. It really depends on you and the type of personality that you have.

The long-term timeframe

Long-term traders usually would prefer daily and weekly charts, since these charts establish longer term, allowing them ample time to “catch their breath.”
In this type of trading, we are usually talking about Trades usually talk about timeframes that span from a few weeks to several months or even years!

Advantages of long-term timeframe: the main advantage of this timeframe is you need not watch markets intraday. The fewer number of transactions means that there are less paying of spreads.

Disadvantages:

On the downside, this timeframe is characterized by large swings, requiring large stops. Generally there are only one to a couple of good trades in a year. This timeframe requires a lot of patience. Also, a larger account is required to get on longer term swings plus frequent losing months.

The short-term timeframe

In this type of trading traders usually utilize hourly timeframes, with trades held from many hours to about a week.

Advantages:
A notable advantage of this type of trading is that there are more opportunities for trades, with a less likelihood of losing months. This trading method is also characterized by less reliance on one or a couple of yearly trades.
Disadvantages:

The disadvantage of this type of trading is that there will be higher transaction costs, meaning more spreads to pay, plus the added factor of overnight risk.

Intraday timeframe

This timeframe is characterized by the use of minute charts such as one of five-minute charts. These trades as the name implies are made intraday and exited by market close.

Advantages:
For those who prefer this trading timeframe, there are plenty of trading opportunities coupled with less chance of losing months. Here, overnight risks are virtually non-existent.

Disadvantages:
Just like all other trading systems, this too has its disadvantages. Usually the costs for transactions will be much higher, since you need to pay more spreads. This is also pretty taxing mentally, since the frequency of trading makes it more difficult. Profits are limited by the need to exit at the trading day’s end.

Remember, there is no right or wrong timeframe. It all depends on you.

Photo Credit: TheChristianAlert.org 

A lot of traders aren’t doing too well simply because they have chosen the wrong trading timeframe. So what then is the right timeframe? Well it depends on your personality. If you’re new to currency or forex trading, your tendency would be to make big bucks quick and so you start trading small timeframes, say the one or five minute charts. However, this isn’t always the best approach, since you may have traded the wrong timeframe for your personality.

So, the best way for you to find out which timeframe suits you best is to take it easy at first. Experiment a bit without taking a lot of risk. Try and see if you’re comfortable trading the one hour charts. You will notice that this timeframe is longer, and might suit you just fine and without the feeling that you’re being rushed.

There are people, on the other hand, who find the one hour timeframe too long and too slow. They could never trade that way since they would become very impatient. Traders of this type would be better off trading a ten minute chart, which, because of their personality, allow them mple time to make correct decisions based on their trading plan.

On the other extreme, a world renowned buisnessman and philantrophist by the name of Warren Buffet, wouldn’t understand at all how he can trade a one hour chart. For him this timeframe is too fast. He prefers to trade only daily, weekly, and monthly charts.

To come right to the point, the right timeframe for you depends entirely on your personality. If you’re comfortable with the timeframe you’re trading, then that’s the right timeframe for you.

Don’t think just because you’re nervous, feeling somewhat pressured rfrustrated that you’re trading the wrong timeframe. The reason you’re feeling pressured could be because you are trading real money, and so it’s normal for anyone to feel that way. However, if the reason you feel pressured shouldn’t be because you think things are happening too fast, then you’re trading the wrong timeframe, which will make it difficult for you to make the right decisions.

In the end it’s you alone who can determine what the correct timeframe should be.

Photo Credit: nestor galina

The key to making money in trading is having the ability of predicting what the next move is in the market. However, this is easier said than done.

Veteran forex traders have long known that if one were to become a successful trader of currencies, he or she should look beyond the world of forex, because currencies are moved by a lot of factors. These factors include supply and demand, politics, interest rates, economic growth, etc.

Economic growth and exports are both directly related to the domestic industry of any country. Therefore it is but natural for these currencies to be closely correlated with the commodity prices. There are three major currencies that are closely linked with commodities: the Australian dollar (AUD), the Canadian dollar (CAD) and the New Zealand dollar (NZD).

Other currencies, such as the Japanses yen (JPY) and the Swiss franc, are also affected by commodity prices, but overall possess a weaker correlation, are the Swiss franc (CHF) and the Japanese yen (JPY). Knowing which and why a currency is correlated with a particular commodity can help traders understand and predict certain movements in the market.

If you think commodity currencies trading is for you, it is best to always keep an eye on oil and gold market movements while the other eye should be glued on the currency market - look how quickly the market responds.

Because there will always be a slightly delayed impact of these movements on the currency market, this usually offers an opportunity to plan a broader movement in the commodity market as against the currency market. The thing is, as a currency trader, it is a great advantage to be well informed about commodity prices and how they affect the movement of currencies.

Photo Credit: Blackrabbit33

Any commodity trader, especially seasoned ones, may find it worthwhile look at currency trading as an alternative to trading commodities.

Why is this so? In general oil, gold and currency have similar outlooks - a surge in one usually also means a surge in the others. Also, traders may an also earn interest if they happen to be on 2 percent or higher margin.

When you trade currencies, you should take interest rates into consideration. To cite an example, a trader who was long CAD/JPY would be able to make nice gains plus up to 3 percent earnings in interest income. The 3 percent estimate comes from Canada’s central bank rate, which is the amount earned, and deducting the 0% rates paid for shorting the Japanese yen.

These rates are unleveraged, meaning that with 10 times leverage, net of any exchange rate changes, there would be that much higher interest income. Please note that leverage will also render the trade riskier - something you should always remember when trading forex.

Photo Credit: rick
Let’s face it - one of the one of the world’s basic necessities is oil. In developed countries, most, if not all, of the people cannot live without it. The rise in oil prices has brought a big boost to oil producers’ pocketbooks. On the other hand, oil consumers have had to pinch pennies and tighten their belts.

Canada as you know is a net oil exporter, in fact it is the 9th largest crude oil producer in the world, and has benefited the most from the oil rally, while Japan, which is a big time oil importer, suffered the most.

Photo Credit: species_snob
Canada continues to climb up the oil producers’ list, with the steady increase in oil sands production. Did you know that in 2000 Canada even surpassed Saudi Arabia as the most significant oil supplier to the United States?

What isn’t known to many is that the size of the Canadian oil reserve is second only to Saudi Arabia.

The United States and Canada’s geographical proximity coupled with the growing political tension in the Middle East and South America, renders Canada as among the United State’s important source of oil.

However, Canada’s vast oil resources is getting a lot of attention from China, especially after Canada stumbled upon a new oil stash following a reclassification of its Alberta oil sands to the “economically recoverable” category.

This is the reason why the Canadian dollar has become one of the currencies that will benefit the most from an ongoing oil price surge.

Photo credit hdr_okinawa

In order to understand why the Japanese currency behaves as it does today we need to take a look at how it reacts to certain market conditions.

Japan is known as an exporting economy, but the country actually exports 99 percent of its oil. This is because Japan lacks domestic energy sources and needs to import a huge amount of oil, natural gas as well as other sources of energy.

In this connection, Japan is particularly vulnerable to changes in oil prices. Japan does not have the flexibility to use other sources of energy such as nuclear power because it also imports a huge amount of uranium for its nuclear power plants.

In the year 2003, Japan’s energy imports soared to 79 percent, with oil supplying 50 percent, coal 17 percent, nuclear power 14 percent, natural gas 14 percent, hydroelectric power 4 percent, and renewable resources at 1.1 percent.

That is why when oil prices surge, the Japanese economy would suffer.

Photo Credit: d70focus
Between forex markets, there are technical differences in the manner currencies are being quoted. Foreign exchange is always quoted versus the US dollar in forwards or futures markets. Here, the pricing is done according to how much in terms of US dollars is required to buy a unit of the other currency.

In the spot market, however, there are currencies that are quoted versus the US currency, while in others, the US currency is the one being quoted against them. For these reasons, the forwards-futures market and the spot market will not in all cases be parallel to each other.

In the spot market’s case, the British pound is quoted versus the US currency as GBP/USD. This is how the pair would also be quoted in the forwards and futures markets. So, when the British pound gains versus the US currency in the spot market, the pound will also be gaining against the dollar in the forwards and futures markets.

Usually, in the case of the US dollar and the Japanese yen, the dollar would be quoted versus the yen, so that in the spot market the pair would be quoted as USD/JPY.

In the spot if the quote is 115, this means that on US dollar would buy 115 Japanese yen. In the futures market, however, the quote would be (1/115). This means that a Japanese yen will buy .0087 US dollars. Therefore if the spot rate for USD/JPY would increase, this would certainly mean a decline in the value of the Japanese yen because of the surge of the US currency resulting in the Japanese yen buying less US dollars.

On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.