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Safety First, Forex

Posted by on in Trading Rules and Systems
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Safety First, Forex

There is a spectrum of trading strategies available to traders all over the world. A strategies core can be formed by any individual tracking the changing prices of currencies. Therefore the core of a strategy may be so relatively based on an individual that he or she may trade according to a basis of superstitions, which is likely to end in tears.

There are fortunately some general guidelines to minimizing the risk of a strategy. It is firstly important to remember that the market is always changing; we need to gain insight into these changes. To do this the trader must be separated from the action of buying or selling in order to avoid personal decisions. Remember: The market has a heart of “stone-cold” servers; it has no emotion at all! The only control the trader has is when to buy or sell.

 

 

1st General Guideline: Read between the Lines

When it comes to news, even the most basic of releases may have hidden agendas. For example a government agency can use a news release as a tool to advance a particular view. This happens due to the cause and effect of popular investment psychology. An example of this is when Japan’s Prime Minister was quoted saying,” Excessive Depreciation of the Yen must be avoided but we must make efforts and give considerations to guide the Yen down, if it’s relatively overvalued.” Therefore Japan’s Prime Minister basically asks traders to slow down the depreciation of his currency. We must read this keeping in mind the possibility that the Japanese Prime Minister fears the opposite will occur, an appreciation of his currency. A day later the Dollar vs. Yen surged to a 3 year high. The Prime Minister’s news release was a Contrarian indicator, this is an indicator to determine majority beliefs of a price change and do the opposite. However when a bank analyst is quoted on a bank forecast of a price change it is unlikely to be a contrarian statement as his/her reputation is on the line. With this in mind, modern day Forex traders must always be aware and read news with insight into how the news is being reported and what is being reported. (Cofnas, 2002: 24).

 

 2nd General Guideline: Don’t Trade Surges

Price surges indicate surprise or shock, the market becomes unstable enabling the short term trend to become erratic. Additionally, technical indicators are unclear during surges. For these reasons professionals are known to take shelter and wait. Fortunately price action tends to change the trend to pre-surge conditions, provided nothing vital occurred. For example, the terrorist attacks of 9/11. If however the surge is due to an accidental airplane crash in Queens, New York, there will be an instantaneous currency reaction shortly followed by a return to the pre-surge trend. (Cofnas, 2002: 24).

 

3rd General Guideline: KISS: ‘Keep It Simple Stupid’

In the pursuit to be extremely successful and “stay in the game” one may attempt to discover some magic formula to win. To achieve this dream one may start using indicators of all shapes and sizes to the extent of misunderstanding the market and making avoidable mistakes. When it comes to indicators, one should keep it simple by using only a few indicators that work best for the trader. A good indicator gives clues to: trend direction, resistance and support and buying and selling pressure. (Cofnas, 2002: 24).

With these safety features in place, a trader’s risk will be further reduced.

 

Remember:

“The secret of success lies not in buying at the lowest possible price and selling at the absolute top. It is the avoidance of large losses”

-Robert D. Edwards and John Magee, Technical Analysis of Stock Trends (1984).

 

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