We're going to start posting more about Forex setups and opportunities. The Forex (FX) market is not well understood by all, so here's some important things to note if considering FX trades/strategies.
The Forex market is a trader's market
Forex markets are not easy, but they can be worth it. The FX markets are by far the largest of the available markets to trade. Usually here people quote how many trillion a day is turned over in the FX markets but I've not looked it up recently and it really does not matter - the real underlying benefit of the size of the Forex markets is the spreads (Fees) are very low and it's easy to trade large positions.
A negative laid against the FX markets is there's a history of banks being fined for manipulating them. My viewpoint on this has always been if there's manipulation there's design. Where there's design, there's opportunity if one can work out enough about the design to create some betting edges. For whatever reason, some well known TA patterns can work really well in FX markets.
This combination of things, from a trader's perspective, mean the FX markets "May be" reasonable structured "Often enough" for certain patterns to work if traded multiple times to let the positive odds of the setup play out. The costs on each trade are very low, helping to build a large enough sample size. If you have a strategy that is successful, you can size up positions to make real money.
The FX markets have a lot of opportunity, but they're cruel. Having traded for a long time in the FX markets it is not hard at all to imagine someone sitting watching your personal orders on a screen and moving the market against you. There probably is quite a lot of fuckery going on (But where is there not?) but TA has always been reasonable effective in FX. (Stuff about big FX traders using TA).
Position sizing is very flexible in Forex
Biggest advantage of the market (Especially if looking at it from the perspective of trading to make ongoing profits). The smallest position size that can be traded in the Forex market is about $0.07 a pip on Yen pairs and $0.10 a pip on USD. To put "A pip" into context, if the market moves 100 of those in a day, we say - "Wow! 100 pips". So wide stop losses risk usually under $10 a trade (Rarely over $20).
Tighter stop losses of 20 - 30 pips can be successfully used (In my experience) but this takes some building up to. New Forex traders picking their own entries/exits are probably going to find less frustration if using stops of about 40 - 50 pips. So $4 - 5 risk per position. Using stops of this size you'd be mainly focused on a 1 hour chart and looking at 4 hour/daily for the trend direction.
With any good broker, to go from trading $0.10 a pip to trading $90 a pip is going to be no different. You do not have to jump up, of course, risk per pip goes up in smallest increments of $0.10. So risk can go from $5 a trade, to $10 a trade, $15 a trade, $20 a trade (And so on) if using the example 50 pip stop (On a USD pair at $0.10 per pip.
This offers a better progressive path (Again, assuming you want to trade for ongoing income). If you can make an average of 10 pips a week (And 10 pip moves happen over the space of minutes or hours) on $90, that's $900 a week. You can trade at $1,000's per pip in the Forex markets but if you're getting to routinely trading over $100 a pip you should speak with your broker and ask them about custom liquidity to ensure you get good entries/exits (And you should neg on spreads, you'll get them cheaper being a volume trader). For those in the US, there's no pattern rules or account size minimum for Forex trading (Taxes are often better too, but check local laws).
All things happen in the Forex market
The notion of being a perma bull/bear is nonsensical as a long-term strategy in the Forex markets. For one, you're always concurrently a bull and a bear. It's not possible to just "Be a bull on the USD". USD relative to what? Are we betting USD raises against a banana? We need another currency. For example the JPY. Then we'd go long USDJPY. By being long USD, we'd also be short JPY at the same time.
Underlying the Forex trade are these mechanics;
- You want to buy USDs. You need something to buy them with.
- You get Yen. You buy the USDs with the Yen.
- At some time in the future, you'll buy Yen with the USD.
- The change in the rate of USDJPY will determine the profit/loss of the trade.
Where do I get get the Yens?
IDK. You just click the button and it all works. It's magic. Understanding the underlying process is not essential to making the trade. I'm just explaining how you always have to be long/short. And what are you going to do, short Yen forever to be long USD (Would not have been a good idea up to now). You're always concurrently long/short something in the Forex markets (And trends do not last forever).
In the market market there's always liable to be a ranging bull market, a savage bear market and a dull flat market. There's about 23 pairs that can be traded (Most people stick within a range of about 5 - 15 with the USD majors being the most popular 5) and this means a lot of different types of strategies can be used. Strategies for an upwards chart, or downwards - even sideways.
This is useful. If for whatever reason something seems to work best when a market is trending down you can find a downtrend. If it works best trending up you can find an uptrend. Uptrends tend to be easiest if trading on smaller timeframes (Due to the spread being on top of price, this means more trailing stops on shorts hit than on longs).
Forex markets are overall quite range bound (And why this is so makes sense, we're talking about entire currency collapses for there to be super strong trends). Inside of these large ranges there's daily/weekly up and down trends but the extremes are often fairly predictable. The average range of days and weeks can be somewhat also. And then there's black swans...
Funky shit happens in the Forex market! It does not happen often, but when it does it happens suddenly and aggressively. These come spaced very far apart and usually without prior warning. They can be devastating. Using stop losses in these markets as a habit on every trade is a very good habit to be in. The SNB event is the biggest black swan in the time I've been trading FX.
This whole monthly move happened over the space of a few minutes. Heading into this the market was nice and smooth up. Day after day. Week after week. I was long in the days before this happened. I remember the day it happened thinking I was going to short a bit higher but I'd go long again today if it dropped, lucky it dropped too fast for me to even think about buying.
I know two harmonics traders who made a couple $100,000 and a bit over a million in this move respectively (Which was life changing for both of them). It turned out to be a perfect butterfly. my pending short orders were about 10 - 15 pips above the high. This was the best trade I ever missed.
But a lot of people got decimated this day. This was very unexpected. The market went from a slow uptrend into a 30% drop and it happened over the space of a few minutes. Black swan risk in the Forex markets is no joke.
ECN brokers and Market Markets
In Forex there are two main types of brokers. A market making broker will take the other side of your trade (Sometimes hedging it at a lower cost somewhere else) which means there can be occasions where the broker has a direct vested interest in you losing. And not to be too conspiratorial, but as someone who's traded with a few of these in my early days - it fucking shows!
An ECN broker has not engagement with the risk of your trade. They'll just send your trade through to another party to take the other side of. The broker charges a set commission on the trade and has no other interest in it. The ideal world for an ECN broker is people making big trades on an ongoing basis. Profitable clients are the favoured clients of ECN brokers (And it shows!).
Some brokers will offer two classes of accounts. One of them being a market maker based one and the other being an ECN based one. The only possible benefit of a market market account is the spread can be fixed and an ECN one will vary (Depending on supply/demand in the market). This is a small thing easily dealt with - in every instance I think better trading conditions are offered with ECN.
ECN accounts can also be listed as STP and sometimes go under "Pro" (Although it's usually worth clarifying with the the broker if these are ECN/STP accounts). Some brokers offer only ECN accounts. These tend to be the largest and more favoured brokers. One way to know a broker is offering ECN accounts if them having access to "cTrader" (This platform only works with ECN).
Finding good ECN brokers if you're from anywhere in the world outside of the reach of US regulations is easy. My favoured one is IC Markets. I use them for almost everything and have always found support to be great in the rare occasions I've needed them. Out of the offerings for under US regs, Oanda is the most reasonable (Although Oanda has some market making activity going on and is far from ideal).
As a footnote, some brokers offer "Cent accounts" in Forex trading. A cent account is where $1 deposited translates to a display equity of $100. Then the same position sizing as outlined above applies (Min $0.10 a pip). So a deposit of $10 gives a display/functional balance of $1,000. These are great for testing things out in real trading conditions with nominal risk.
Cent accounts are always market market accounts. They have wide spreads and are a far cry from the nice trading conditions offered in ECN accounts, but they are a great way to sample the Forex market with little risk or to test out new strategies (I use them a lot to test algos, if they can beat market making conditions they're worth staking in ECN conditions). I looked at a few different offerings of these, RoboForex was probably the best.
Swaps
Remember the magic with the getting the Yens above? Well, it's not totally magic and stuff goes on behind it. One of these things is the swaps. Read more about what these are and why anyone cares here. What I want to tell you about (IDK if it's in the link) is the sketchy hour during the credit/debts of swaps. This always happens at 10 - 11 GMT (5-6 EST).
During this time the magic stuff is being facilitated and because (Technical bla bla about liquidity goes here) the spreads get really big. Usually at least 4 times the average and it can be up to 10 times the average. During this hour price will usually range but it can be erratic in that range and gap a few times. There's nothing good you'll ever be able to do in this hour. This is the hour off in the ever running Forex market.
In the 30 - 45 mins before this hour every day you should check if your stops are going to be affected. If price is 10 pips away from a stop loss on a short, that stop is going to hit when the spread widens (Even although the price candle does not go there). At this time it's best to widen stops a little or to close trades and open them after the sketchy hour (Most of the time you'll get a similar price). This is very important for tight stop trades. Essential. it does not much affect large stop trades.
This happens every day. It catches out a lot of people. If I am reading reviews about a good broker and I see bad reviews about the broker, usually it will cite the broker "Cheating them by hitting stop loss when price did not go there". But these are ECN brokers, with no interest in cheating and no influence over the spread - stuff is happening in the market having the same affect on all brokers.
Position sizing
Position sizing in Forex is hard until it's easy. If you're good at maths it probably gets easy quickly but even if not you tend to just get into the habit of being able to have a reasonable idea of position sizes (If you're making a lot of similar trades). When starting out and if in any doubt at all - use a tool such as this one.
Since we're on Reddit - you'll be able to find better versions here (You'll just have to look up how to add them to a MT4). In this codebase you should be able to find various good tools to automate position sizing as per desired percentage risk. I'm being lazy right now, but I'll put together a list of various good ones I've used at some point.
Weekend gaps
The only time we have gap risk in Forex is over weekends. It's very rare for a gap to be over 20 pips. As a general rule I'll not hold a position size I'd not accept a 100 pip stop loss on and usually if I get a hard smack it's around 50 pips. If you hold positions over weekends this is a risk you have to account for (And you should also be aware in the first hour of trading the spreads will be large and it won't be a good time to open/close positions).
Free info on jargon and need to knows
Babypips is the go to. Has all the essential groundwork stuff you'd need to understand what people are saying when they talk about Forex. Many claim babypips is all you need to succeed, but there's 20% of successful Forex traders and I think well over 80% have heard of babypips - So I am sceptical. But the basics are the basics. You need to know them.
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