Trading education » Hsu

Forex Education – Identifying The 4 Human Weaknesses

admin — Wed, 24 Mar 2010 17:12:36 +0000

The 4 basic human weaknesses in trading: Greed, fear, impatience and pride. How do these emotions cause so many Forex traders to lose money? Let’s examine the ways.

Greed

Greed causes poor traders to increase the size of their trading positions the moment they’re “in the money” (in a winning trade). This often results in these traders having the largest position size trade just before the market turns in the opposite direction. As a result, this causes them to suffer large losses.

Fear

Fear makes people avoid entering into good trades because they don’t know what they’re doing. Heard of the phrase “buy low, sell high”? Unfortunately, many traders think that this is true. The profitable traders however, know that a more accurate phrase would be: “buy high, sell higher”.

Fear is often the result of not knowing what one is doing. If you have a proper, reliable trading system, fear shouldn’t be in your trading vocabulary.

Impatience

The opposite of fear, impatience leads people to enter into trades when there are no clear trading signals. Needless to say, most of these impatient trades usually turn out to be unprofitable.

Pride

This is very possibly the worst trading weakness of all! Pride makes a trader hold on to losing positions with the false hope that the position will turn around in his favour. Winning traders are humble, and aren’t afraid to admit that they’ve made a mistake when they lose money. After all, no one can be right all the time!

Unfortunately, many losing traders refuse to admit that they’re wrong, and often lose money to pay for their pride.

Summary

Understanding the effects of these emotions is crucial before one can be a consistently profitable trader. Use this knowledge as a tool to make money from ignorant traders, and don’t fall into these traps yourself!

By: Harold Hsu

Forex Trading Education – Should You Use A Trailing Stop Loss?

admin — Sun, 24 Jan 2010 00:02:39 +0000

There’s a gross misunderstanding about trailing stop losses that cause many amateur traders to misuse it… resulting in them losing money unnecessarily without even knowing why!

Trailing stop losses are often used by amateur traders because they believe it maximizes profits and reduces losses. While this may be possible in theory, in practice this is rarely the case. Allow me to elaborate a little bit more…

Why Trailing Stop Losses Are Rarely Useful

According to my own trading experience, as well as the trading experiences of many profitable traders, trailing stop losses often lower the profit potential of a good trade.

You see, the currency markets rarely trend cleanly: they tend to retrace several times during a big move, and there’s often a lot of ‘noise’ and ‘whipsawing’ as they trend.

During a major retracement in a trend, it’s very common for your stop loss target to be triggered just before prices resume with the original trend. This prematurely limits your profit potential and you’ll be often left with only a small piece of the profits.

But!

Trailing stop losses do have their uses… but I’d strongly suggest that you use them only if you’re very sure about what you’re doing. I would advise only expert traders to use this advanced tool.

Perhaps a better way for you to take advantage of a trailing stop loss is to only use it once during a trade: you can manually shift your stop loss level to your entry price when the market price moves in your favour.

At least in this way you won’t suffer a loss no matter what. But if prices continue to move up, try not to move your stop loss any further up… doing that will only limit the possible profit potential.

By: Harold Hsu

Forex Trading Education – How Stop-Loss Hunting Occurs

admin — Sun, 17 Jan 2010 10:18:54 +0000

Stop-loss hunting is essentially the act of a powerful (i.e. wealthy) financial institution that temporarily causes the market price to hit your stop-loss order and causing you to exit the market at a loss. In this short article, I will discuss the typical market conditions that encourage stop-loss hunting, and how to avoid it.

How Does It Happen?

For stop-loss hunting to occur, the financial institutions will need to buy (or sell) a large volume of currency before prices can move in the direction that the institutional traders want them to.

Thus, the institutional traders will typically prefer to hunt for stop-losses when the trading volume is low, such as the time just before an important economic news announcement.

Here’s what happens:

The institutional traders wait for prices to hit a resistance level (for example) They enter orders to purchase a large volume of currency Because the trading volume is low, the large buying order will cause market prices to shoot up past the resistance level All the poor traders who placed their stop-losses a few pips above the resistance level will get stopped out Because their stops (buy stop orders) are hit, the price will continue to go up even higher, hitting more of other traders’ stop-losses! Next, the institutional traders sell the currency because everyone else will be looking to sell, and prices are likely to go back down again since all the buyers have already been ‘exhausted’

How To Avoid Stop-Loss Hunting

Unfortunately, there is no sure way of stopping this from happening. The only thing you can do is to avoid trading during the off-peak trading times, or times before an economic announcement. These are all times of low liquidity and it’s easier for the financial institutions to influence market prices then.

By: Harold Hsu

Forex Trading Education – What Is A Carry Trade?

admin — Sun, 10 Jan 2010 19:59:46 +0000

You’ve read about it in the newspapers, and you see it in almost every financial trading magazine… but what exactly is a carry trade? And why is it so popular?

Before I go into what happens in carry trades, allow me to briefly share with you why “carry trade” is an important concept to understand…

Throughout most of 2006 and 2007, carry trades have played a major role in influencing the major trends of various currency pairs. Just take a quick look at the EURUSD, USDJPY, AUDJPY, CADJPY or NZJPY trading charts during this period and you’ll see what I mean. You’ll notice a major uptrend across these currency pairs, and this is mainly due to the effect of carry trades. If you were in-the-loop during this period, you’d undoubtedly be a very rich trader by now! All you had to do was to trade in the direction of the trend and you’d be winning big most of the time.

Simple Carry Trade Theory

Thankfully, the concept of a carry trade isn’t difficult to understand. Let me use an example to illustrate:

Imagine there are two banks. Bank A charges an interest rate of 8% a year, and Bank B charges an interest rate of 2% a year.

If you’re a quick thinker (and I’m sure you are), you’ll realize that you can just borrow money from Bank B, and deposit that money in Bank A (to earn interest) for a sure profit!

And this simple technique is basically what carry trades are about. The difference is that instead of exploiting the interest difference between Bank A and Bank B, institutional traders and fund managers exploit the difference between the interest differences between countries.

Carry Trades In Reality

In reality, people like to borrow the Japanese Yen (JPY) to purchase other ‘higher interest rate’ currencies such as the New Zealand Dollar (NZD) and the Australian Dollar (AUD).

This is because the Yen typically charges a relatively low interest rate of 0.5%, compared to the NZD and AUD which interest rates are roughly 6-8%

By: Harold Hsu

Forex Trading Education – Fundamental Economic Indicators

admin — Thu, 07 Jan 2010 17:39:48 +0000

What Are Fundamental Economic Indicators?

Economic indicators are typically important news announcements that involve sensitive economic data of a country.

How Do Economic Indicators Affect Trading Decisions?

Consider this example:

It’s Monday morning and the U.S. Dollar had been spiraling down in the past two weeks. At this point, it’s pretty safe to assume that there are many traders holding on to large USD short positions.

However, there is an important economic announcement scheduled to be broadcasted on Friday. Industry experts are estimating this coming announcement to reflect a positive outlook for the U.S. economy, and most traders will thus be expecting a short-term USD rally this Friday. As the week progresses, the traders will gradually be exiting their short positions to lock in their profits – they wouldn’t want the upcoming positive news announcement to eat away their gains!

In this example, you can see that economic indicators affect market prices on two levels:

Directly: When positive USD-related news is announced, the dollar rallies Indirectly: Traders who are expecting the news to go against their open positions will slowly exit their trades, causing the USD to rise even before the announcement

How Should You Trade With Economic Indicators?

This is actually a trick question. Generally, one should avoid trading during the times of fundamental news announcements. This is because the market volatility during these periods is extraordinarily large, and the combination of this plus a high chance of slippage will almost guarantee that you lose money.

News trading is advised only for the advanced traders, and beginner traders should stay well clear of this territory.

By: Harold Hsu

Forex Trading Education – Risk Management 101

admin — Thu, 07 Jan 2010 04:58:41 +0000

Many retail traders focus so much on trying to make money off the market that they often neglect to protect their capital. This causes them to ultimately wipe out their trading accounts no matter how good their ‘money-making’ strategy is.

You see, there are two aspects to profitable trading: increasing your gains, and reducing your losses. Unfortunately the former is the only thing most traders pay attention to. Protecting one’s losses is not as sexy or exciting as making money; and so many amateur traders make the crucial mistake of having a weak money management system in place.

How Much To Risk

When planning out your money management strategy, the first thing you’ll need to decide is how much of your capital you are willing to risk per trade. Experts generally recommend that you risk no more than 2% of your total equity.

An Example

When trading with standard lots, each pip is worth approximately $10.

So let’s say you start trading with $10,000. 2% of $10,000 is $200. That means that you should risk no more than $200 (or 2% of your capital) per trade. And since each pip is worth $10, you can risk a maximum of 20 pips ($200/$10) for each trade that you take. Essentially, this means that you should have a stop-loss of no more than 20 pips away from your entry price.

Does this make sense?

Adjustments Needed

Of course, a 20 pip stop-loss level might be considered too tight for many traders. In reality, it’s up to you to play around with the variables of your money management system. For scalpers for example, a 20 pip stop-loss level might even be too high!

It all boils down to your overall trading strategy… a swing trader will definitely want to use a higher stop-loss allowance, and he can do so by either increasing his equity capital, or by trading using mini lots instead.

The bottom line however, is to never violate the 2%-capital-risk-per-trade rule.

By: Harold Hsu

Forex Trading Education – What Is A Trailing Stop Loss?

admin — Wed, 06 Jan 2010 01:51:10 +0000

Trailing stop losses are a very popular topic among new traders. It seems like trailing stop losses have the best of both worlds: you can protect yourself from losing too much, and also lock in more and more profits at the same time.

What Is A Trailing Stop Loss?

Basically, a trailing stop loss involves the moving of your stop loss level as your trade progresses in your favour.

For example, when you buy a currency pair and the price moves up 30 pips, your stop loss level (which was initially 30 pips below your entry price) is then moved to your entry price, ensuring that you won’t lose any money.

When the market rice moves a further 30 pips higher (a total of 60 pips above your entry price), your stop loss level will be positioned at 30 pips higher than your entry level.

However, when prices start moving against your favour, the trailing stop loss does not shift.

2 Types Of Trailing Stop Loss

Trailing stop losses can either be placed manually by the trader, or automatically placed by a trading platform.

Manual trailing stop losses are typically placed at prominent support/resistance levels, especially below previous swing lows or above previous swing highs. It is up to the individual trader to determine where to place the trailing stop loss.

A more popular way of using stop losses however, is to set a fixed pip amount to trail the market price. This can be done in most trading platforms.

In the above example, the trailing stop loss is set to trail the market by 30 pips. It is initially placed below the entry price by 30 pips, and as the market price moves up by 30 pips, the stop loss is shifted to the entry price (which is 30 pips below the new market price).

By: Harold Hsu

Forex Trading Education – How To Trade Price Consolidations

admin — Mon, 04 Jan 2010 10:57:52 +0000

Trading on price consolidation breakouts is a popular choice among Forex traders. In this article, I will present to you one of the most effective and simplest ways to trade consolidations.

What Is A Price Consolidation?

Price consolidation occurs when there is no obvious uptrend or downtrend in short-term time frames. Ranging markets are not considered to be consolidating because prices are still fluctuating up and down. In a true consolidation, market prices don’t fluctuate and typically stay within a 10 to 15 pip range.

What Time Frames Should I Trade?

Consolidating prices don’t usually last very long. That’s why you’ll usually trade using intraday time frames (i.e. hourly charts or minute charts). Occasionally, daily charts may show flat prices as well… but these are more the exception rather than the norm.

How Do I Trade It?

Most people enter into a trade when prices break out of the highest price (or lowest price) of the consolidation. If prices break upwards, they buy. If prices break downwards, they sell. The decision to trade on breakouts is based on the assumption that the momentum of the break will be strong enough to push price further in the same direction.

How Effective Is It To Trade Breakouts?

In my experience, breakout trading can yield rather consistent profits. This is because they usually follow through. The hard part is deciding when to exit your trade once it’s in-the-money, because breakouts sometimes reverse directions quite quickly.

What Should Be My Profit Target?

Usually, a profit target of 30 pips is good enough. Sometimes, you may want to try for 50 pips. I don’t usually hold breakout trade positions after I’m in-the-money for 50 pips because then the price action will usually turn erratic.

By: Harold Hsu

Forex Trading Education – The Key To Becoming A Winning Trader

admin — Sat, 02 Jan 2010 07:21:20 +0000

Many traders only look at how to make money in Forex trading, and don’t pay enough attention on how to avoid losing money. As you might guess by now, the real key to becoming a profitable trader is damage control.

Unfortunately, many people don’t like to hear about this truth because it’s not sexy or exciting. They think Forex trading is like gambling; fortunes can be made and lost in a single day. This is partially true, except that many more fortunes are lost rather than made.

And that’s why this is one of the hardest concepts to practice in live trading. We are all so used to thinking that trading is an exciting activity, when true profitable trading actually involves a lot of hard work, analysis and risk management… hardly exciting at all!

How Winning Traders Trade

Winning traders always focus on both the winning and losing potential of every trade. To them, trading is a business. And as with any business, there are risks. No one can predict the future and the best thing anyone can do is to make an effort to measure the potential upside gains, given the downside risks. If the upside potential doesn’t justify the downside risk, don’t trade.

Good traders always ask themselves the question: “What’s the worse that can happen in this trade?”, or “Will I be able to take the potential loss?”

Winning traders actually focus more on the risks rather than the potential rewards. Damage control to them is more important than trying to make money.

And when you take care not to lose money, the profits will naturally come rolling in.

So How Should You Trade?

Just before you begin your trading day, you should always look towards one goal: To trade without suffering a loss. This should be your highest priority; your priority is not to make the most money. If you manage to not lose any money at the end of a trading day (even if you only break even), then you should congratulate yourself!

By: Harold Hsu