Seven Big Things Professors Won't Teach You (But You Should Know)

Are you studying finance? If so, then terms like present and future value, efficient market theory, capital budgeting, arbitrage pricing and a whole slew of other exciting phrases are becoming part of your vocabulary. And if you’re thinking about studying finance in college or graduate school, be prepared to be lectured on those topics and more during your coursework. This is all well and good. If you plan on a future in finance, you’ll need a grounding in financial theory. Here’s the problem, though. Your instructors won’t teach you the good stuff, the stuff that can really help you excel in your job or make money in the markets. That all falls under the umbrella of “practical knowledge” which is not what college curricula are generally designed to pass along to young, eager minds looking to learn.

Have no fear, though! This report will help fill in the gaps. While it’s impossible to cover everything you could possibly want to learn in this brief space, here you will be given seven specific areas of focus. It is my intent to provide you with something of a guide to help you go beyond your text books and take your financial education to another level. From there you’ll be able truly accelerate your growth at a rapid pace, allowing you the opportunity to have more success. Ready? Let’s go.

#1 You Really Can Make Loads of Money in the Markets
Have you ever had an instructor talk about all the money there is out there to be had trading the financial markets? Unless you’ve had the great fortune of having one of those rare professors who actually has experience doing just that (and there are a few), the answer is most likely, “No”. This is because most finance faculty have had the efficient market theory drilled in to their heads for years. After all, every bit of research they have ever seen says you cannot make “excess profits”. Well, that simply is not true.

If you want to trade the markets, or even think you might want to, then these three books by Jack Schwager are a must read: Market Wizards, The New Market Wizards, and Stock Market Wizards. These books are all essentially a collection of interviews in which the great money managers, investors, and traders or our time share their experiences with Schwager, a respected professional in his own right. These men and women have literally made billions in the markets. You get direct insight from these market luminaries, and Schwager also provides tons of educational content in his own right through glossaries, discussions of market topics, and outstanding summaries of the knowledge and understanding the interviews impart. Belief that you can achieve awesome results is the first component to being successful, and the Market Wizard series will definitely make you believe! There are other books with a similar concept, but Schwager’s works are by far the worth owning. You will absolutely read them again and again, and they will more than pay for themselves.

#2 The Stock Market is Not the Only Market
If you read the Market Wizards books noted in the previous section, you will quickly realized that there is money to be made in all sorts of different markets: stocks, bonds, currencies, commodities, futures, options. In fact, the equity markets are really a minor player in the realm of modern global finance. This is not something that gets a lot of play in the classroom, though. Why? Because of the focuses on portfolio theory, capital budgeting, and other subjects which end up have relatively little importance to the average financial professional. In particular, you should explore currencies and fixed income in more detail than what you will probably get in your classes.

The currency market (also known as foreign exchange, forex, or FX) is by far the largest. Currencies are usually discussed in an international finance type of course which provides a cursory coverage at best. Yes, the triangular arbitrage is important, but even with the advent of many so called “trading rooms” in business schools across the country, students are not being taught the real practicalities of forex trading and the impact of foreign exchange market movements on the rest of the financial system. The fact of the matter is that currency trading is now even easier than is the case for stocks. You can do it on-line, 24-hours per day. Those interested in learn more on the topic, or taking the plunge in to foreign exchange trading would do well to start with Cornelius Luca’s excellent book Trading in the Global Currency Markets. It is a good introduction to the market, including the terminology and analytic methods one needs to talk the talk and walk the walk. For those with an interest in learning how some of the real currency superstars think, Investment Biker and Adventure Capitalist by Jim Rogers and Soros on Soros and The Alchemy of Finance by George Soros are well worth the read. Rogers is a well known investor and commentator and just the name “Soros” in and of itself has the power to move markets.

Perhaps even more important than foreign exchange, if smaller in actual trading volume, is the fixed income market. Fixed income encompasses tradable instruments ranging from very short term paper such as T-Bills, Eurodollars, and Commercial Paper out to long-term debt in the form of Treasury and Corporate Bonds, not to mention mortgage and asset backed instruments. Fixed Income securities are issued by governments, government agencies, municipalities and companies all over the world. The sad thing is how little coverage this topic gets in financial education. This despite the fact that the basis of fixed income is cash flow, which is also the core of most valuation methods currently taught in college business programs. Interest rates drive everything, from the action of the stock market to fluctuations in currency exchange rates. That is why even the slightest little comment from folks like Alan Greenspan and other similar monetary authorities around the globe is analyzed for its meaning and potential impact. An understanding of the fixed income markets will benefit you enormously, regardless of what area of finance you specialize it. To that end, The Bond Market by Christina Ray is a worthwhile reference. Ray breaks down the intricacies of fixed income securities in a very easy to understand fashion. Of course there is also Fabozzi’s The Handbook of Fixed Income Securities, which can probably be found on every trading desk. The Fabozzi book is comprehensive in nature, where as the Ray book covers fewer topics, but breaks them down in a more manageable, practical way.

There are, of course, many other markets and tradables beyond these. The point I want to reinforce here, however, is that as a financial professional you need to be aware of what is happening in currencies and interest rates. Failure to do so means you will have an incomplete market picture for your analysis.

#3 The Mind is More Important than the Tools
In finance class we learn all sorts of things, like how to calculate present and future values and how to price securities. Finance is all about numbers, formulae, and analysis, right? Wrong! We are given all sorts of tools to use, but there is something very important missing - an understanding of the human mind and its impact on how those tools get applied, misapplied, or not applied at all. It would behoove anyone with an eye on the market activity to take a few psychology classes along the way.

The financial markets, no matter how they may be characterized otherwise, are a collection of individuals interacting with each other. As such, it is important for us to understand the impact of collective psychology. You merely have to watch the markets to see the impact of group think. The bubble in internet stocks that burst in 2000 is a perfect example. Clear-headed market analysis went out the window as everyone jumped on the bandwagon thinking that there was no way to lose. Then, on the downside it was the exact opposite. The no one wanted anything to do with stocks in certain sectors, not because of any legitimate evaluation, but because they had been burned before. This sort of thing happens to greater or lesser degrees all the time, in all time frames. A very good book on the topic is Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay and Bernard M. Baruch. It explores the whole topic of manias, especially where it relates to the financial arena, and should give you an excellent view in to mob mentality.

But we should not just think about the market when we think about psychology. If you want to be a successful trader or investor, you need to understand what’s going on inside your own head as well. Being able to produce sustained above average returns takes more than luck. It takes a major mental commitment and knowledge of the pitfalls we can create for ourselves without even knowing it. We can have the best trading system in the world, but if we cannot stick to the methodology because we allow our mind to override the signals or analysis, what good is it? Dr. Van K Tharp, who is profiled in Market Wizards and has worked with a great many traders, put together an excellent work on the subject. Trade Your Way to Financial Freedom is a good follow-on to the Market Wizards series. Another good mental book is The Way of the Warrior Trader by Richard D. McCall, and Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas is a popular title on the subject as well. Be sure to take seriously the psychology of trading. It really can make the difference between success and failure.

#4 Technical Analysis is Respected
The weak form of the Efficient Market Hypothesis essentially tells us technical analysis, which focuses a lot on historical price movements, is worthless because it has already been factored in to the market price. As such, technical analysis has been widely looked down upon in academia for years. Well, the real word of trading and market analysis takes another view. It is true that technicians were once a rare and misunderstood breed. Over the past decade or so, however, the discipline has become increasingly valued as a legitimate methodology. Academics still raise their eyebrows at the mere idea that one could make money looking at charts, but practitioners are paid to get results and many use technicals to do just that. As such, technical analysis should be seen as a legitimate analytic tool for your own work in the markets.

Here’s the thing, though. Technical Analysis covers a vast array of techniques and methods. Some folks are chartists. Others use calculated indicators. Still others use astrology and other more esoteric methods. As suggested above, in a wide definition, technical analysis is the use of past market action to determine likely future action. The idea is that markets will react somewhat predictably to certain occurrences. Underlying that notion is the fact that people react somewhat predictably to stimuli, and the market is nothing more than a collection of people. Ah, ha! Psychology comes back again. I told you in the last section it was important.

I am not here to advocate technical analysis, though. It is merely one of many available tools. Some folks prefer it. Others are more fundamentally oriented, using earnings, economic conditions, etc. to determine valuation. A lot of it comes down to personality and interests. You learn the basics of fundamental analysis (pro forma earning projections, growth rates, discounting future earnings, etc) in your finance classes. If you learn technicals at all, is probably only in passing. It is up to you to explore the topic on your own. There are several very worthwhile resources at your disposal in that regard. Tops among them is John Murphy’s Technical Analysis of the Financial Markets. This book is widely considered the bible of technical analysis and will give you an outstanding overview of the topic. The Steve Nison books on candlestick charting, starting with Japanese Candlestick Charting, are excellent as well. Mind over Markets by Eric T. Jones discusses the “Market Profile” technique, which is not widely known in academia but has many adherents in the markets.

Perhaps the best book on combining technical and fundamental analysis is How to Make Money in Stocks by William J. O’Neil. Among titles to consider about developing trading systems there are Campaign Trading by John Sweeney, Street Smarts by Laurence A. Connors and Linda Bradford Raschke, Long-Term Secrets to Short-Term Trading by Larry Williams, and Trading Systems That Work by Thomas Stridsman.

Anyone seriously considering the pursuit of technical analysis, personally or professionally, should consider joining the Market Technicians Association. The MTA provides a certification and other educational programs, and is a good way to meet technicians from around the world. Also, Stocks & Commodities magazine is the industry standard for the discussion of technical analysis and trading system design.

#5 You Can Trade Real Estate
You know all that accounting you have to learn, and all those finance basics they make you take before you get to the good stuff? Well, you can put that education to use in the real estate market right now. The most advanced topic one needs to understand to play the real estate market is that of leverage, or to put it another way, how to use other people’s money (OPM). Property can be bought and sold just like any other asset. You can trade it, which basically means buying a property and selling it shortly thereafter, preferably at a higher price, oftentimes after doing some fix-up work. You can also invest in real estate by going for longer-term price appreciation and/or cash flow from rents. The best part is, anyone can do it, regardless of income or education.

Analyzing a potential real estate purchase is much like doing fundamental analysis on a stock you might like to buy, and oftentimes with similar time frames in mind. You try to determine a fair market value, see what kind of returns you can generate, etc. Obviously, owning property does not provide the same liquidity, nor does it have the same kind of potential for that trading rush, but there are advantages. You can buy property for very little down, sometimes with nothing at all down. Can’t do that with stocks where at a minimum you have to have 50% for the margin requirements. That means your potential returns in real estate can be truly exceptional.

With all this in mind, you would do well to learn all you can about real estate, and there is certainly a lot of information out there. If there is a class available to you, take it. Talk to people you might know in the business - realtors, bankers, attorneys, investors. It is not necessary for you to have loads of money, great credit, or any of what we normally get told are the requirements for buying real estate. Creativity, persistence, and a strong desire to succeed are more important. A couple of books that will help you learn some great techniques for building a real estate investment program are Nothing Down for the 2000s and Creating Wealth by Robert Allen, the man who put the concept of little or no money down on the map. Another worthwhile addition to your library would be Ira Wealth: Revolutionary Strategies for Real Estate Investment by Patrick W. Rice, Jennifer Dirks. This book provides a good discussion of how IRA accounts can be used to invest in real estate, despite what you might have been told by banks and brokers. Real Estate is a fantastic way to build wealth, and the best part is the tax code actually works in your favor! Make sure to take a look in to it for yourself.

#6 Study Personal Finance
Some colleges actually have personal finance courses available, but oftentimes business students consider such classes beneath them. I should know. I was one of them. It isn’t high finance. There’s no glamour in managing your checking account, and insurance can put one to sleep. Wrong attitude! A good understanding or personal finance will go a long, long way in life. In fact, it will probably be more valuable to you in the grand scheme of things than all the stuff in your finance course text books. Personal finance covers a wide array of topics. I will briefly touch on some of the bigger ones.

Savings and investment is probably what most people think of when we talk about personal finance. In short, it is what you do with the income you have above and beyond your normal living expense, commonly referred to as discretionary income or funds. Obviously, retirement savings is a hot topic. You need to be fully educated on whatever program your employer provides, if any, and what options you have outside that. Make the best use of what’s available to you. The more funds you can get to work early, the better for the long term situation thanks to the magic of compound interest. At the same time, you should be putting money aside in a rainy day fund. You will hear different experts recommend anything from a month to a year worth of salary as a reserve against loss of income, emergencies, etc. Your situation will dictate what is right for you, but something should definitely be set aside in a secure, easily accessible place. Of course if it’s your ambition to trade, you’ll want a program in place to build up a sufficient bankroll for that purpose. In most cases, $5000 is the recommended minimum. Starting much lower than that will make transactions costs significant, plus you will have fewer options in terms of working within a risk structure suitable to your needs.

A very important area of personal finance, and one that needs more focus, is debt use and management. We are a society fueled by debt. That has its plusses and minuses. Borrowing, when handled properly, allows us to do things we would not have been able to do otherwise: buy a car or a house, pay for our education, fund investments, etc. Unfortunately, too many people misuse debt, especially credit card debt, and get themselves in trouble. A lot of these problems can be remedied through discipline. Do you really need those DVDs? Are you dining out more than your budget allows? Remember, you are going to have a hard time building up investment capital if you have to pay all your excess earnings out to the credit card companies. Moreover, you do not ever want to put yourself in a potential bankruptcy situation? It takes a long time to recover from that kind of filing.

The last big personal finance topic we will cover is estate planning. For a young person that sounds like something way off in the future. True, it is, but that does not mean there are not things you need to be looking at now. Do you have a will? Not everyone really needs one, but if you have assets you would like to make sure go to those you want receiving them should anything ever happen, you should put something together. The process is not that difficult. Do you have life insurance? Again, you may not need it. Many single people do not, whereas most folks with a family should probably have a policy. It’s a topic a lot of folks hate even think about, but it is well worth the time.

There are a lot of things related to personal finance you can do now, or at a minimum learn about, that can help you throughout your life. For example, taxes will be an ever present part of your life. Understanding them, even if you never do your own returns, cannot help but provide benefits. Take that view with the whole arena of personal finance. Make it a habit to explore something new all the time. You never know when it could come in very handy. Maybe you’ll even do it for a living!

A very useful tool for improving your personal finance acumen is Cashflow® , a game you can play in board version, or on your computer. The game covers a wide range of topics in a fun, entertaining fashion.

#7 Beware of the Experts
Thinking for yourself is a good thing. Learn to do your own due diligence when it comes to your money. There are lots of so called experts out there. They get quoted in the media all the time. Be careful what you read in to that, though. Newspaper columnists, for example, want something to keep the reader’s attention, make them come back again. Sometimes that means people get quoted, even though they really do not have much to say. An expert is born! I speak from experience on this topic. Myself and my former colleagues often had inane comments not even intended to be serious analysis find their way in to major columns. We’re talking significant business media, not to mention getting picked up by the wires and local papers across the country. Reporters also have favorite interview sources. That can be great if the source is good, but if not the interviews and quotes will give credibility to one who may not deserve it. For that reason, you should really take anything you hear or read with a grain of salt. People have a lot of different perspectives which will not always match your interests.

There’s also the fact that sometimes even the best and the brightest can really mess up royally. We need look no further than Long Term Capital Management (LTCM) to see that. A group of very smart, very successful traders did quite well for a while. Then, it all fell apart and forced some major action by the monetary authorities to prevent what could have been a global financial market disaster. You can learn more about LTCM by reading Roger Lowenstein’s well titled book When Genius Failed, which documents the rise and fall of the firm and its major figures. There was also a PBS documentary you can get on video called Trillion Dollar Bet which covers mostly the same topic.

The bottom line is that you need to make sure of the value you are getting from these so-called experts. Use your own education, experience and basic common sense, mixed in with a good dose of research, to see if what they have to offer is a) credible and b) worthy of your attention. Even then, once you have decided that they can help your toward your goals, make sure any recommendations you receive fit in with your situation.

By the way, this goes for you too. Do not allow yourself to get big in the head once you have achieved some success and set yourself up for a major reversal. The old saying “Pride goeth before the fall” is very true. If you are not careful, you can lose track of what made you successful and find yourself suffering a major set-back. Refer to some of the interviews in the Market Wizards books noted earlier to examples.

Hopefully you have at least started the process of expanding your financial awareness beyond the narrow bounds of what college finance programs provide. The finance industry and markets can be both incredibly rewarding and highly frustrating. If you take the contents of this report to heart and use it to guide your own personal education, I think you will find yourself experiencing more of the reward and less of the frustration.

I was never the best student growing up. Homework wasn’t something I focused on a whole lot as a kid, especially when I could just get it done in homeroom! We’re not kids anymore, though. If you haven’t already, you will come to find that homework is an important part of life. I refer not to bringing work home from the office, however. Instead, I mean being prepared. Whether it’s an interview, a meeting, a class, a trade or investment, or just life in general, it always is best to go in prepared. Consider the topics addressed in this report, and do your homework.


Sources :

1. fxstreet.com:Seven Big Things Professors Won't Teach You (But You Should Know)

Benefits of Trading the Forex Market

Forex: Benefits of Trading the Forex Market

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss some differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.
Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.
This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.
Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.
Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.
The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.
The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere.
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.


Forex market vs. Equity markets Liquidity

FX market: Near two trillion dollars of daily volume.
Equity market: Around 200 billion on a daily basis.

Trading hours
FX market: 24hr market, 5.5 days a week.
Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

Profit potential
FX market: In both, rising and falling markets.
Equity market: Most traders/investor profit only from rising markets.

Transaction costs
FX market: Commission free and tight spreads.
Equity market: High Commissions and transaction fees.

Buying power
FX market: Leverage up to 400:1.
Equity market: Leverage from 2:1 to 4:1.

Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)
Equity market: More than 40,000 stocks to choose from


Forex market vs. Futures market Liquidity

FX Market: Near two trillion dollars of daily volume.
Futures market: Around 400 billion dollars on a daily basis.

Transaction costs
FX market: Commission free and tight spreads.
Futures market: High commissions fees.

Margin
FX market: Fixed rate of margin on every position.
Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution
FX market: Instantaneous execution.
Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.


Sources :

1. fxstreet.com:Benefits of Trading the Forex Market

133 Trading Tips

1. Learn the basics of forex trading. It's amazing how many people simply don't know what they're doing. In order to compete at the highest level in the trading business and be one of the few truly successful participants you must be well-educated about what you are doing. This does not mean having a degree from a well-respected university – the market doesn’t care where you were educated.

2. Forex trading is a zero sum game. For every long there is also a short. If 80% of the traders are on the long side ,then the remaining 20% are on the short side. This means further that the shorts must be well capitalized and are considered to be strong hands. The 80%, who are holding much smaller positions per trader, are considered to be weaker hands who will be forced to liquidate those longs on any sudden turn in prices.

3. Nobody is bigger than the market.

4. The challenge is not to be the market, but to read the market. Riding the wave is much more rewarding than being hit by it.

5. Trade with the trends, rather than trying to pick tops and bottoms.

6. Trying to pick tops and bottoms is another common fx trading mistake. If you're going to trade tops and bottoms, at least wait until the price action actually confirms that a top or a bottom has been formed before you take a position in the market. Trying to pin-point tops and bottoms in the foreign exchange market is very risky, but exercising a little patience and waiting for a proven top or bottom to form can increase your odds of profiting and somewhat reduce your risk.

7. There are at least three types of markets: up trending, range bound, and down. Have different trading strategies for each.

8. Standing aside is a position.

9. In uptrends, buy the dips ;in downtrends, sell bounces.

10. In a Bull market, never sell a dull market, in Bear market, never buy a dull market.

11. Up market and down market patterns are ALWAYS present, merely one is more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped out time and again. Select trades with the trend.

12. A buy signal that fails is a sell signal. A sell signal that fails is a buy signal.

13. Let profits run, cut losses short.

14. Let your profits run, but don't let greed get in the way. Once you've already made a nice profit on a trade, consider taking either some or all of the money off the table and move on to the next trade. It's natural to hope that one trade will end up as your "winning lottery ticket" and make you rich, but that is simply not realistic. Don't hold the position too long and end up giving all your well-deserved profits back to the market.

15. Use protective stops to limit losses.

16. Use appropriate stop-loss orders at all times to cut your losses and never, ever sit back and let your losses run. Almost every trader at some point makes the mistake of letting his or her losses run in hopes that the market will eventually turn around in his or her favor but, more often than not, it simply leads to an even greater loss. You win some, you lose some. Simply learn to cut your losses, take your occasional lumps and move on to the next trade. And if you made a mistake, learn from it and don't do it again. To avoid letting your losses run, get into the habit of determining an acceptable profit target as well as an acceptable risk tolerance level for each and every forex trade before entering the market. Then simply place a stop-loss order at the appropriate price - but not so tight (close to the market) that the stop could quickly take you out of the position before the market has a chance to move in your favor. Using a stop is always the smart move.

17. Avoid placing protective stops at obvious round numbers. Protective stops on long positions should be placed below round numbers (10, 20, 25, 50,75, 100) and on short positions ,above such numbers.

18. Placing stop loss is an art. The trader must combine technical factors on the price chart with money management considerations.

19. Analyze your losses. Learn from your losses. They're expensive lessons; you paid for them. Most traders don't learn from their mistakes because they don't like to think about them.

20. Stay out of trouble, your first loss is your smallest loss.

21. Survive! In forex trading, the ones who stay around long enough to be there when those "big moves" come along are often successful.

22. If you are a new trader, be a small trader (mini account) for at least a year, then analyze your good trades and your bad ones. You can really learn more from your bad ones.

23. Don't trade unless you're well financed...so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you.

24. Be more objective and less emotional.

25. Use money management principles.

26. Money management increases the odds that the trader will survive to reach the long run.

27. Diversify, but don’t overdo it.

28. Employ at least a 3 to 1 reward-to-risk ratio.

29. Calculate the risk/reward ratio before putting a trade on, then guard against holding it too long.

30. Don’t trade impulsively ; have a plan

31. Have specific goals and objectives.

32. Five steps to build a trading system: a) Start with a concept b)Turn it into a set of objective rules. c) Visually check it out on the charts d) Formally test it with a demo e) Evaluate the results.

33. Plan your work and work your plan.

34. Trade with a plan - not with hope, greed, or fear. Plan where you will get in the market, how much you will risk on the trade, and where you will take your profits.

35. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.

36. Any successful trading system must take into account three important factors: price forecasting , timing , and money management. Price forecasting indicates which way a market is expected to trend. Timing determines specific entry and exit points. Money management determines how much to commit to the trade.

37. Don't cherry-pick your system's set-ups. Trade every signal.

38.Trading systems that work in an up market may not work in a down market.

39. Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react.Don't change during the session unless you have a very good reason.

40. Double-check everything.

41. Always think in terms of probabilities. Trading is all about thinking in probabilities NOT certainties. You can make all the “right” decisions and the trade still goes against you. This does not make it a “wrong” trade, just one of the many trades you will take which, through probability, are on the “loosing” side of your trading plan. Don’t expect not to have negative trades - they are a necessary part of the plan and cannot be avoided.

42. The place to start your market analysis is always by determining the general trend of the market.

43. Trade only with a strategy that you've proven to yourself.

44. When pyramiding (adding positions), follow these guidelines. a. Each successive layer should be smaller than before.
b. Add only to winning positions.
c. Never add to a losing position. One of the few trade management rules that we can state we never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small to risk more money on. If indeed it is a winner disguised as a loser, why not wait until it shows it’s true colors (and becomes a
d. winner)before you add to it. If you do this you will notice that nearly always the trade ends up hitting your stop loss and does not look back. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very fortunate. Sometimes the trade hits your stop loss and then turns around and becomes a winner and you can count yourself unlucky. Whatever the result, it is never worth adding to a loser, hoping that it will become a winner. The odds of success are just too low to risk more capital in addition to the initial risk.
e. Adjust protective stops to the breakeven point.

45. Risk Control
A)Never risk more than 3-4 percent of your capital on any trade
B)Predetermine your exit point before you get into a trade
c)If you lose a certain predetermined amount of your starting capital, stop trading, analyze what went wrong, and wait until you feel confident before you begin trading

46. Don’t trade scared money. No one ever made any money trading when they had to do it to pay the mortgage at the end of the month. Having a requirement to make X dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and leads quickly to disaster. Trading is about taking a reasonable risk in order to achieve a good reward. The markets and how and when they give up their profits is not under your control. Do not trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by another income stream or cash reserve. This will only lead to additional unmanageable stress and be very detrimental to your trading performance.

47. Know why you are in the markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful forex trading
48. Never meet a margin call; don’t throw good money after bad.

49. Close out losing positions before the winning ones,

50. Except for very short term trading, make decisions away from the market, preferably when the markets are closed.

51. Work from the long term to the short term.

52. Use intraday charts to fine-tune entry and exit.

53. Master interday trading before trying intraday trading.

54. Don't trade the time frame. Trade the pattern. Reversal patterns, hesitation patterns and breakout patterns appear often. Learn to look for the pattern in any time frame.

55. Try to ignore conventional wisdom; don’t take anything said in the financial media too seriously.

56. Always do your homework and stay current on global events. You never know what's going to set off a particular currency on any given day.

57. Learn to be comfortable being in the minority. If you are right on the market, most people will disagree with you. (90% losers,10% winners).

58. Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.

59. Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend.

60. Buy the rumor, sell the news.

61. K.I.S.S – Keep It Simple Stupid, more complicated isn’t always better.

62. Timing is especially crucial in forex trading.

63. Timing is everything in forex trading. Determining the correct direction of the market only solves a portion of the trading problem. If the timing of the entry point is off by a day ,or sometimes even minutes ,it can mean the difference between a winner or a loser.

64. A “buy and hold” strategy doesn’t apply in forex trading

65. When you open an account with a broker, don't just decide on the amount of money, decide on the length of time you should trade. This approach helps you conserve your equity, and helps avoid the Las Vegas approach of "Well, I'll trade till my stake runs out." Experience shows that many who have been at it over a long period of time end up making money.

66. Carry a notebook with you, and jot down interesting market information. Write down the market openings, price ranges, your fills, stop orders, and your own personal observations. Re-read your notes from time to time; use them to help analyze your performance.

67. Don't count profits in your first 20 trades. Keep track of the percentage of wins. Once you know you can pick direction, profits can be increased with multi-plot trading and variations in using your stops. In other words, now is the time to get serious about money management.

68."Rome was not built in a day," and no real movement of importance takes place in one day.

69. Do not overtrade.

70. Have two accounts. One real account and the other a demo account. Learning doesn't stop when trading real dollars begins. Keep the demo account and use it to test alternative trades, alternative stops, etc.

71. Patience is important not only in waiting for the right trades,but also in staying with trades that are working.

72. You are superstitious; don't trade if something bothers you.
73. Technical analysis is the study of market action through the use of charts,for the purpose of forecasting future price trends.

74. The charts reflect the bullish or bearish psychology of the marketplace.

75. The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends

76. The fundamentalist studies the cause of market movement, while the technician studies the effect.

77. Rising commodity prices generally hint at a stronger economy and rising inflationary pressure. Falling commodity prices usually warn that the economy is slowing along with inflation.

78. The longer the period of time that priced trade in a support or resistance area,the more significant that area becomes.

79. There are three decisions confronting the trader –whether- to go long, go short or do nothing. When a market is rising ,the best strategy is preferable. When the market is falling, the second approach would be correct. However ,when the market is moving sideways ,the third choise –to stay out of the market- is usually the wisest.

80. Channel lines have measuring implications. Once a breakout occurs from an existing price channel ,prices usually travel a distance equal to the width of the channel .Therefore, the trader has to simply measure the width of the channel and then project that amount from the point at which either trendline is broken.

81. The larger the Pattern ,the Great the potential. When we use the term “larger” ,we are referring to the the height and the width of the price pattern. The height measures the volatility of the pattern. The width is the amount of time required to build and complete the pattern. The greater the size of the pattern-that is ,the wider the price swings within the pattern (the volatility ) and the longer it takes to build –the more important the pattern becomes and the greater the potential for the ensuing price move.

82. The breaking of important trendlines . The first sign of an impending trend reversal is often the breaking of an important trendline. Remember however ,that the violation of a major trendline does not necessarily signal a trend reversal.The breaking of a major up trendline might signal the beginning of a sideways price pattern ,which later would be intedified as either the reversal or consolidation type.Sometimes the breaking of the major trendline coincides with the completion of the price pattern.

83. The minimum requirement for a triangle is four reversal points. Remember that it always takes two points to draw a trendline.

84. The moving average is a follower , not a leader. It never anticipates;it only reacts. The moving average follows a market and tells us that a trend has begun, but only after the fact.

85. Shorter term averages are more sensitive to the price action ,whereas longer range averages are less sensitive.In certain types of markets ,it is more advantageous to use a shorter average and ,at other times , a longer and less sensitive average proves more useful.

86. When the closing price moves above the moving average , a buy signal is generated. A sell signal is given when prices move below the moving average.

87. A buying signal on a two-moving average combination occurs when the shorter term of two consecutive averages intersects the longer one upward. A selling signal occurs when the reverse happens, and the longer of two consecutive averages intersects the shorter one downward.

89. Shorter average generates more false signals ,it has the advantage of giving trend signals earlier in the move .The trick is to find the average that is sensitive enough to generate early signals, but insensitive enough to avoid most of the random “noise”.

90. Cutting losses is painful for every trader.The ability to cut one’s losses in time is the sign of a seasoned trader.

91.A channel breakout suggests a target for the currency price equal to the width of the channel.

92. Long term charts provide important information regarding long-terms or cycles. The trader can get a correct perspective regarding the real direction of the market in the long run, the strength or direction of the current trend occurring within that trend, or the possibility of a breakout from the long-term trend.

93. Common Points All Of Reversal Patterms
A)The first signal of an impending trend reversal is often the breaking of an important trendline.
B)The larger the pattern,the greater the subsequent move
C)Topping patterns are usually shorter in duration and more volatile than bottoms.
D)Bottoms usually have smaller price ranges and take longer to build

94. The head-and-shoulders formation is confirmed only when the completion of the three rallies and their reversals is followed by a breach of the neckline. The failure of the price to break through the neckline on closing prices basis puts on hold or negates the validity of the formation.

95. The double-top formation is confirmed only when the full completion of the two rallies and their respective reversals is followed by a breach of the neckline (the closing price is outside the neckline ).The failure of the price to break through the neckline puts on hold or negates the validity of the formation.

96. The flag formation is a reliable chart pattern that provides two vital signals: direction and price objective. This formation consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat.

97. A Breakaway gap provides the direction of the market.

98. The runaway or measurement gap provides the direction of the market. This gap confirms the health and velocity of the trend.

99. The runaway or measurement gap is the only type of gap that provides a price objective. The price objective is the previous length of the trend, measured from the runaway gap, in the same direction as the original trend.

100. The exhaustion gap provides the direction of the market.

101. Near the beginning of important moves, oscillator analysis isn’t that helpful and can be misleading. Toward the end of market moves ,however ,oscillators become extremely valuable.

102. When the oscillator reaches an extreme value in either the upper or lower end of the band, this suggest that the current price move have gone too far too fast and is due for a correction of some type.

103. The oscillator is most useful when its value reaches an extreme reading near the upper or lower end of its boundaries. The market is said to be overbought when it is near the upper extreme and oversold when it is near the lower extreme. This warns that the price trend is overextended and vulnerable.

104. A divergence between the oscillator and the price action when the oscillator is in an extreme position is usually an important warning.

105.-Oscillator-The crossing of the zero line can give important trading signals in the direction of the price trend.

106.Because of the way it is constructed, the momentum line is always a step ahead of the price movement. It leads the advance or decline in prices , then levels off while the current price trend is still in effect. It then begins to move in the opposite direction as prices begin to level off.

107. RSI is plotted on a vertical scale of 0 to 100. Movements above 70 are considered overbought, while an oversold condition would be a move under 30 .Because of shifting that takes place in bull and bear markets, the 80 level usually becomes the overbought level in bull markets and the 20 level the oversold level in bear markets.

108. The first move of RSI into the overbought or oversold region is usually just a warning. The signal to pay close attention to is the second move by the oscillator into the danger zone. If the second move fails to confirm the price move into new highs or new lows, a possible divergence exists. At that point ,some defensive action can be taken to protect existing positions. If the oscillator moves in the opposite direction, breaking a previous high or low, then a divergence or failure swing is confirmed.

109. Stochastics simply measures , on a percentage basis of 0 to 100, where the closing price is in relation to the total price range for a selected time period. A very high reading (over 80) would put the closing price near the top of the range ,while a low reading (under 20) near the bottom of the range.

110. One way to combine daily and weekly stochastics is to use weekly signals to determine market direction and daily signals for timing(it depends from the type of the trader). It’s also a good idea to combine stochastics with RSI.

111. Most oscillator buy signals work best in uptrends and oscillator sell signals are most profitables in downtrends. The place to start your market analysis is always by determining the general trend of the market. Oscillators can then be used to help time market entry.

112. Give less attention to the oscillators in the early stages of an important move, but pay close attention to its signals as the move reaches maturity.

113.The best way to combine technical indicators is use weekly signals to determine market direction and the daily signals to fine-tune entry and exit points. A daily signal is followed only when it agrees with the weekly signal. (daily-weekly, 4 hour-daily,4 hour-1 hour).

114. The failure of prices to react to bullish news in an overbought area is a clear warning that a turn may be near. The failure of prices in an oversold area to react to bearish news can be taken as a warning that all the bad news has been fully discounted in the current low price. Any bullish news will push prices higher.

115. -Elliot Wave Theory- A complete bull market cycle is made up of eight waves, five up waves followed by three down waves.

116 -Elliot Wave Theory- A trend divides into five waves in the direction of the longer trend.

117-Elliot Wave Theory- Corrections always take place in three waves.

118-Elliot Wave Theory- Waves can be expanded into longer waves and subdivided into shorter waves.

119-Elliot Wave Theory- Sometimes one of the impulse waves extends. The other two should then be equal in time and magnitude.

120-Elliot Wave Theory- The Finobacci sequence is the mathematical basis of the Elliot Wave Theory.

121-Elliot Wave Theory- The number of waves follows the Finobacci sequence.

122-Elliot Wave Theory- Finobacci ratios and retracements are used to determine price objectives. The most common retracements are 62%, 50% and 38%.

123 -Elliot Wave Theory- Bear markets should not fall below the bottom of the previous fourth wave.

124 -Elliot Wave Theory- Wave 4 should not overlap wave 1.

125 .Support and resistance are the most effective chart tools to use for entry and exit points. For purposes of placing stop loss, support and resistance levels are most valuable.

126. One of the commodities most effected by the dollar is the gold market. The prices of gold and the U.S. dollar usually trend in opposite directions.

127. The Yen is sensitive to changes in the price or structure of the raw material markets.

128. The commodity-producing countries (Canada, Australia, N. Zealand ) are more dependent on Japan than the other way around.

129. The Yen is sensitive to the fortunes of the Nikkei index, the Japanese stock market and the real estate market.

130. The majority of the pound transactions take place in London with a volume decreasing significantly in the U.S. market, and slowing down to a trickle in Asia. Therefore, in the New York market, many banks have to stop quoting the pound at noon.

131. Swiss Franc has a very close economic relationship with Germany, and thus to the euro zone.

132. The major markets are London, with 32 percent of the market,New York with 18 percent and Tokyo with 8 percent. Singapore follows with 7 percent, Germany has 5 percent and Switzerland, France and Hong Kong have 4 percent each.

133. Don't use the markets to feed your need for excitement.


Sources :

1. fxstreet.com:133 Trading Tips

Forex Trading System

What is a Forex Trading System?

Forex trading system is the subsystem of the forex trading plan which controls when and at which price you open and close your trades. A trading system operates on the signals generated by technical analysis and/or fundamental analysis. The signals are processed to determine if the trader should buy or sell a particular currency pair or should close the existing position(s). Any currency trading system prevents information overload by filtering the universe of technical and/or fundamental signals in such a way that only the most reliable (successful in the past) signals or signal combinations are acted upon.

There are two types of trading systems - the discretionary and the mechanical. Discretionary trading systems require the trader to use his or her own judgement to determine the importance of each of the technical or fundamental signals (whose number is potentially unlimited) that he or she receives. Mechanical trading systems operate on a fixed number of technical or fundamental signals without the participation of the trader. Discretionary trading systems require the constant application of creativity (flexibility of approach) from the trader in the interpretation of the changing market conditions. Mechanical trading systems require the creativity from the trader only in the forex system development phase.

Discretionary forex trading systems are best used by professional forex traders with a lot of experience (internalized practical market knowledge) against which they can determine the validity of any signal that they receive. These traders typically remember a large number of different signal patterns from the past (just like the master chessmen) that they can compare to the current market conditions, to make their analysis more objective. In essence, they use themselves (i.e. their brain) as their trading system - often very successfully - because human mind has the greatest pattern recognition power on the planet.

Beginning currency traders are advised to start by following professionally created mechanical forex trading systems. Most of these systems are sold in the form of the forex signals that are usually developed by seasoned traders who have found a way to systematize their knowledge of the markets into a working strategy. At the same time, the beginning traders can work on building their own knowledge base of the forex market through the quality forex books, educational courses, bank reports and newswires on this subject -so that they can too, with time, create mechanical trading systems from their own insights and intuitions (using the forex charting packages which allow to do this).

Starting without a proven mechanical forex trading system (that has positive mathematical expectation) drastically reduces the chances of preserving the capital. This is because any intuition or a hunch that the traders experience as a result of some newly gained knowledge of the forex market is likely to be overridden by one of the two emotional derivatives of their life-long programming towards the money - the greed and the fear. In other words, without strict adherence to an existing mechanical trading system the beginning trader will eventually succumb to his or her emotions. As a matter of fact, the only way the traders can learn discipline in the early phases of their trading careers is by closely following the signals generated by a proven mechanical forex trading system.

Note: Neural Network Packages (e.g. NeuroShell) emulate the process of human learning and can be used to accumualte the knowledge of the past technical and/or fundamental signal patterns (just like the mind of professional forex traders does) for the purpose of the future currency price forecasting.

Quote: "A mechanical approach to the markets can be successful and this is backed up by the fact that approximately 80% of the $30 billion in the managed futures industry is traded by exact systematic methods", from the "The Ultimate Trading Guide" by John R. Hill, George Pruitt, and Lundy Hill.


Components of a Forex Trading System.

A typical forex trading system consists of two subsystems - the entry system and the exit system. These systems can operate on a different or the same set of inputs. The inputs can be technical or fundamental signals.A system consists of a number of rules which interpret the signals that it receives. The entry system evaluates the signals to determine if and at which level the positions should be opened. The exit system evaluates the signals to determine if and at which level the open positions should be closed.

The purpose of an entry system is to find market points which allow to open positions with high potential reward and low potential risk (high reward-to-risk ratio). The risk is defined as the pip distance from the entry price to the next support or resistance level lying opposite to the entry direction (above entry for sell and below entry for buy). The reward is defined as the pip distance from the entry price to the next support or resistance level lying in the direction of the entry (above entry for buy and below entry for sell). It is generally advised that the traders accept only the trades with the reward-to-risk ratio of over 2 (e.g. risk=60 pips, reward=130 pips). However, depending on the accuracy of a trading system (i.e. the percentage of the winning trades of all the past trades) this requirement might be shifted to a lower or a higher value without sacrificing the profitability of the system. This is because the true measure of the long term profitability of a forex trading system is neither the average per-trade reward-to-risk ratio nor the accuracy of the system but the combination of these two measures which is calculated as the mathematical expectation of a trading system. In the absence of the accuracy measure of a trading system (as is the case with some discretionary trading systems) - the trader should strive to find entries with the highest possible reward-to-risk ratio.

Note: Elliott wave analysis allows to find entries with extremely high reward-to-risk ratios (e.g. just check some of reports on MTPredictor's site). It is worth noting that MTPredictor automatically calculates the reward-to-risk ratios and helps to find optimum entry points based on these ratios. Some Elliot wave software developers (e.g. Advanced Get) also supply their subscribers with detailed Elliott wave trading plans.

The purpose of an exit system is to protect the capital base and the unrealized profits. The capital base is protected by ensuring that the trades are exited with a fixed loss when the reasons for holding them are no longer valid. This is done by triggering a stop-loss order on your forex brokerage account when the price crosses the level which defined your risk at the entry. If you are a discretionary trader, forcing yourself to place the slop-loss on each trade and to stick to it no matter what will make you very selective about your entries - which should increase your profitability. The unrealized profits are protected either by a take-profit order which is triggered on your brokerage account when the price reaches the level which defined your profit at the entry or with the help of the trailing stop-loss which gradually locks in more profits as the price moves in your favour. In fact, the trailing stop-loss exit can be more suitable than the fixed take-profit exit if you wish to profit from the extending "character" of some impulse waves. In such a case the trailing stop-loss can be placed just a few pips opposite to the trendline which defines impulse wave. There is one more type of exit which can be used to protect the trader from missing trading opportunities - the time exit. A time exit is triggered if a trade hasn't reached either its stop-loss or take-profit level in the specified period of time. Exiting such trades minimizes the chances that the capital will be tied up when better opportunities appear on the other currency pairs.

Note: Most forex newswires (e.g. Marketnews) are a great source of real-time information on the location of the major support and resistance levels and clusters of large orders that are watched by professional forex traders and which can be used to manually update the position of your trailing stop-loss.


Development of a Currency Trading System.

Creating a mechanical forex trading system involves a number of steps: 1) Selecting the inputs for the trading system - technical analysis or fundamental analysis tools which will generate the signals for the system; 2) Developing the rule-set which will operate on these signals; 3) Optimizing the parameters of the analysis tools used to produce the signals; 4) Backtesting and forwardtesting the system over historical price data. Each of these steps is covered in more detail below:

Selecting the Inputs for the Trading System.
It is important to base your selection of inputs to the system on a sound premise about the way the currency markets operate. As an example, you can use 200-day moving average to determine if the market is in a long-term up or down trend because a large proportion of professional forex traders use this technical tool to measure market trendiness. It is also better to combine technical analysis tools of different type and scale because this increases the chances of finding high-probability entry points (those that are likely to be followed by sharp currency price moves in your favour), which should, in turn, contribute to the overall system accuracy.

If you use technical tools only on the higher time-frame charts like the daily or the weekly charts this will increase the duration of the trades and the time periods out of the market - because the signals will take longer to form. Either of these outcomes can have detrimental impact on the trader and investor morale during the inevitable losing streaks as is shown by our forex trading simulator (Please note: The size of this page is 0,6 Mbs and it requires that you have Flash installed and Javascript enabled in your browser). which can last longer than they are naturally prepared to wait. This makes it important to focus on lower time-frame charts (e.g. hourly charts) for signal generation which will lead to shorter trade durations and, consequently, to quicker recoveries from the drawdowns. Shorter trade durations can also help to the trader to overcome the temptation to overtrade because he or she can expect to see the next entry signal in the next couple of days - not in the next couple of weeks.

Quote: "Your freedom to choose your time-frame is too valuable to lose. Investors and margined speculators, on the other hand, can choose their own time-frames. This is one of their positional advantages, to use a favourite notion of Larry Hite* , one of the founders of Mint Investment Corp* - one of the largest of the futures fund operators. Investors and speculators can choose. Obviously it makes sense to choose time frames which match any natural rhythms that can be discerned in the currency markets." John Percival in his book "The Way of the Dollar".

Note: If you are using the Elliott Wave analysis your average holding period will depend on the degree of the impulse or corrective waves that you are trading.

Deciding which fundamental factors are best for your forex trading system (e.g. as inputs to your neural network) can be very difficult because the effect of various economic indicators on the currency prices changes with time. In other words, the strength of correlation between the price of a currency pair and the fundamental factors relevant to it is not fixed (even with interest rate differentials). In contrast, the relationship between the price patterns (especially the classical price patterns) and trader psychology (the driving force behind most important price moves) remains fairly stable over the years. This is the reason why the forex traders are encouraged to devote most of their efforts to building trading systems around the technical analysis.

Another important question is the time horizon of the prediction that the trader is trying to make with his system. Better not to try to forecast currency prices too far into the future. This is because the number and the complexity of interaction of various technical and fundamental factors rises geometrically with each trading day. It is, therefore, best to "leave" this task to high-end investment banks and houses which alone have the capacity to perform the necessary calculations inherent in longer-term currency course forecasting. It is more practical for the typical currency trader to concentrate on capturing the so-called "knee-jerk" market reactions driven by crowd emotionalism through the analysis of the current technical or fundamental conditions.

Quote: "Rule 5: Be prepared for anything don't try to predict what will happen or when. Investing is a skill, not a science. The Zen swordsman dicsniplines body and mind to counter any blow spontaneously; he does not anticipate the moves of an opponent, for that impedes his ability to react. Likewise, professional investors know they cannot control the real estate or stock market, let alone the global economy. Instead, they train themselves to be financially intelligent, to think confidently and creatively when opportunities or problems arise." one of the The Seven Rules of Investing given in Robert Kiyosaki's book "You Can Choose to Be Rich".

You should also try not to include too many indicators (over 12) in your forex trading system. This is because probability that the system will perform like it did in the past diminishes as you add more indicators to your system. As a rule, the larger the number of indicators in your system the longer the period of historical currency price data you need to backtest the system on.

Note: There is no necessity to learn all the available indicators and technical analysis methods before you can start creating your own robust trading systems. It is usually enough to master just a few "basic" technical indicators and formations to start combining them to identify high probability entry and exit points. The fundamental and technical reports issues by the investment banks are one of the best sources of information on which technical and/or fundamental signals are watched by the professional trading community that you can include in your forex trading system. In the long run it is best to stick to a sound forex trading strategy, that has high probability of being profitable in the long-run, than to dissipate your capital among a variety of "promising" techniques.

Developing the Rule-Set which will Operate on the Signals.
You can develop these rules based on your observation of how the prices move in relation to various technical and fundamental indicators. For example, you might notice that currency prices tend to resume trending behaviour after they correct toward and touch 200-day moving average. You can use this observation to formulate a rule which will enter the markets when the prices bounce off from the 200-day moving average. You might also notice that the prices tend to stop trending when they touch the outer daily Bollinger bands. You can use this information to create a rule which will exit the trades once the prices penetrate the outer daily Bollinger Band. Because creating rule-sets for mechanical trading systems forces you to quantify your insights about the market this practice helps to clarify them.

The rule-set of a forex trading system is in essence the clarified version of the weighing algorithms that you naturally create in your mind as you learn the technical and fundamental analysis and observe the price action. I say "weighing" because most of the technical rules are recorded in your mind as fuzzy patterns (e.g. "The longer the shadows of a doji the more likely the reversal" or "The steeper the trendline - the more bullish or bearish the market sentiment."). When you create the trading system, you transfer your knowledge to the computer in the form that can be understood by it. Admittedly, the quality of the computerized model very often will fall short of the actual mental model that you keep in your head. However, the real advantage of the "mechanicizing" your market knowledge is the ability to objectively determine the validity of your trading ideas by the process of the backtesting. It should be noted that the closest the computers approach to imitating the complexity of human comprehension of the market patterns is in the neural network packages.

Neural network packages can be especially useful if you wish to model your way of weighing the strength of support or resistance levels. For example, if you think that fibonacci retracements are more reliable entry points if they are confirmed by reversal candlestick patterns and/or RSI divergence you can "ask" a neural network to search for past occurrences of this pattern combination and determine the actual numeric weight that should be placed on each of these technical signals for the entry or exit to occur. This process is very beneficial because it allows the computer to extend your natural pattern recognition ability by perfecting (or objectifying) the weights associated with each technical input/signal. This way you can objectively measure the strength or the beauty of the technical setups that you encounter in your trading (e.g. the resultant model might require the position to be opened if the total sum of signal weighs is greater than 0,5 where a reversal candlestick signal is "worth" 0,15, fibonacci retracement is "worth" 0,3 and the RSI divergence is "worth" 0,45). In essence, your forex trading system is the description of how beautiful your trading setups should be, where "beauty" is defined as the convergence of confirming signals from different type and/or scale technical analysis tools. Advanced users of the neural networks can go even further by tying the position size (within the maximum percentage value set by their money management system) to the strength or the beauty of the technical setup. If done properly this practice will allow them to make the most of the best trading opportunities while simultaneously reducing the exposure on the less promising setups.

Meta4: An interesting parallel to weighing the signals in order to determine if the position should be taken or not is the way people fall in love. Each person carries a certain number of unconscious or semi-conscious qualifiers that "describe" in more or less fuzzy terms the appearance, the character, the temperament of their likely mate. When you meet the person who posses enough of these qualities (i.e. above some "threshold" or unconscious minimum) the cascade of the confirming signals sets your mind off into the love state. A similar process occurs in the mind of discretionary trader when the market action through all of its technical and/or fundamental signals (i.e. "when all the pieces fit") activates the hunch or intuition response from him or her. If you compare the mind of a discretionary trader to a neural network the hunch finds its direct expression in the output neuron. The similarity between the process of falling in love and experiencing a hunch is probably behind such market advices as "do not marry your trades" or "do not fall in love with your trades". To stretch the similarity further we can compare a stop-loss order to the practice employed by some of the married couples called the "boundary". The boundary is the some form of behaviour unacceptable to the other spouse which if violated will lead to the end of relationship. Yet another parallel is between adding to a losing position and trying to win a favour of an unloving partner - the more you invest the harder it is to let go and the more likely you are to end up devastated financially (emotionally in the relationships). As a final comparison the neural networks allow to model the connections among the ideas in the human mind in a similar manner that a website through all its external and internal links allows to express the particular mental idea-network of its creator.

Quote: "I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the "system," I constantly change the input to achieve the same output—profit!", Mark Weinstein in Jack D. Schwager's book "Market Wizards".

Note: It should be noted that the quality of your model will always be only as good as the inputs that you give or "feed" to it (as someone said - "Garbage in, garbage out"). This is because computers only extend your pattern recognition ability and cannot be relied upon to think up a winning system on their own - if this was false, the markets would have been cornered long ago by the guy with the most powerful computer.

Optimizing the Parameters of the Analysis Tools used to Produce the Signals.
Some forex charting packages (e.g. TradeStation) allow to optimize the parameters of the technical indicators that you use in your forex trading system. Optimization allows to find parameter values of your indicators that result in the highest profit (most frequently used measure of system performance in optimization) from the trading system over the past data. An example of the optimization is looking for the best time-period parameters for a two-moving-averages crossover system. Typically the periods of two moving averages are stepped from 1 to 50 in steps of 1 and the trading results for each of around 250 moving average combinations are recorded and then sorted to find the most profitable combination. Such process of going though all possible parameter combinations is called brute force optimization. As the number of indicators used in your system increases arithmetically the number of potential parameter combinations increases geometrically. The total number of parameter combinations is, therefore, said to be subject to combinatorial explosion. For example, to optimize a system with 5 indicators each of which has 50 different parameter values you would have to cycle through 312 500 000 (50^5) possible parameter combinations. The only way you can expect to quickly solve such huge optimization problems in your lifetime is through the use of generic optimizers (e.g. OptEvolve for the TradeStation or NeuroShell Trader Professional).

Optimization of the time-period parameter of the cycle-based indicators like Stochastics allows to automatically adjust them to the cycles present in the market instead of using the default time-period values - which is the method originally practiced by the developer of Stochastics.

As a final note, try not to over optimize your indicators because majority of the professional forex traders use default indicator settings. You are looking for trading setups where the smart money will be acting (as opposed to the general investor public) so it doesn't make much practical sense to use indicator settings that hardly any professional forex trader is aware of.

Backtesting and Forwardtesting the System over Historical Price Data.
Backtesting allows to see how your system would have performed if it was run during some period in the past. You optimize indicator parameters using the price data in the backtesting period. It is important that the time period that you backtest your system on is representative of the currency pair that you wish to trade - it should include all types of market conditions (trending, rangebound) and it should be as recent as possible. Once you are comfortable with the performance of your system you forward test it - you run it on the out-of-sample price data (the price data that would be immediate future to the backtesting period). This way you can see if the system is able to perform similarly to the way it did during the backtesting. The closer the system's performance during the forward testing is to its performance during the backtesting the more robust the system and the more confident you can be that it will continue to trade in a similar manner during the real-time trading. You might also wish to trade your system on a forex demo account for some time before beginning to trade it with the real money.

Backtesting helps the trader or investor to determine if they are prepared psychologically for the live trading of a forex trading system. By reviewing the past performance of a system they can decide if the size of the drawdown, the number of the consecutive losses and the average duration of the trades are acceptable for them. For the complete list of the performance measures that you might wish to review before starting to trade with professionally-created mechanical trading systems please visit the forex signals page. In contrast to the mechanical trading systems the discretionary trading systems cannot be backtested because the discretionary traders cannot guarantee that they will react to a similar set of signals in the future in the same manner that they did in the past.


Implementation of a Forex Trading System.

There are two ways you can implement a forex trading system - either manually or automatically. Discretionary trading systems can only be followed by the manual placing of the trades. Mechanical trading systems are better followed though the use of automation.

If you are following a discretionary trading system you will be typically screening the currency markets for the signals that you have outlined in your checklist. The checklist is the description of the technical or fundamental trading signals that your trading system's rule-set operates on. The checklist can also contain the guidelines on how often you should check your forex charts/forex newswires for the signals (using the economic news calendar provided by the forex newswires as your fundamental signal timing tool); in contrast, the mechanical forex trading systems will be going through their own checklists with every second, 24 hours a day - which no human can possibly do. Having a detailed checklist will help you to be more disciplined in the application of your system. It is best to write your checklist in the form of the questionnaire. You can automate your search for some technical signals with the help of those forex charting packages which allow you to set up the sound or email/SMS alerts to notify you whenever the technical signal of your interest is generated (e.g. in Intellicharts). The forex bank reports and the forex newswires frequently issue mini reports of technical conditions on the market which most often are simply the "filled-in" versions of the same checklist.

Manual implementation of the mechanical signals is NOT recommended. Since the signals are generated by the computer you will always feel compelled to double-check them against you own experience - because no computer can model your thinking with 100% accuracy. This can lead to the delays and/or missing of some of the signals which can potentially undermine the system profitability, that rests on the principle of taking each signal precisely at the time it is generated. A lot is being said about the widespread lack of the discipline in taking the signals of the mechanical forex trading systems. This problem can be easily overcome though the use of a reliable signal automation service. You solve all emotional problems associated with the manual trading of the signals by simply automating this process. Elimination of the emotions from the trading through the use of the automated mechanical forex trading systems should explain their popularity among the multi-billion dollar hedge fund industry.

An important aspect of mechanical system trading is the monitoring of its real-time performance. The hidden market dynamics (a particular way of reacting to technical or fundamental signals that an important group of forex market participants shares - or, systematic mass investor impulsiveness) that your system has captured during the back-testing may be changing or might already have changed at the time you start to trade your system with the real money. The only way you can say that the market dynamics that you are focusing on have changed or not is to compare the real-time and the past system perofrmance. If the system continues to perform like it did during the backtesting then you can conclude that the market dynamics it targets have not yet changed. If you notice significant deviations in such system performance measures like the maximum peak-to-valley drawdown, the average duration of trades, the average value of the profits/losses, the maximum number of consecutive winners/losses, it can signal that an important shift in market dynamics is taking place (e.g. a group of investment banks have modified their trading models). The quickest way to update your system to the changes in market dynamics is available for the neural network packages - which allow to retrain your model over the most recent price history. Retraining a neural network involves readjusting its matrix of weighs which allows it to stay attuned to the current market conditions. If mechanical trading systems suffer form the paradigm shifts on the market - the same can be said of the human mind (discretionary trading systmes) which tends to be very inflexible once a partciluar way of doing things (i.e. trading style) is ingrained in it.


Mastering System Trading.

To master system trading you should have the patience to wait calmly for the entry or the exit signal from your own forex trading system and act only on them - irregardless of the technical or fundamental conditions that you observe in-between these signals. It is no wonder why the best traders choose to compare themselves to skilful predators when they describe their trading style:

Quote: "Top traders love the hunting metaphor to describe what they do. One of them, for example, claims he is like a cheetah. The cheetah can outrun any animal, but it still stalks its prey. It won't attack until it is right on top of its prey. In addition, the cheetah usually waits for a weak or lame animal to get close. Another top trader told me that he trades like a lion. He watches the herd for weeks until something other than his presence causes the herd to panic. When the herd panics, he then chases a weak or lame animal that appears most confused. The difference between an average hunter and a really skilled animal like the swift cheetah or the cunning lion is that the skilled hunter waits until the odds are overwhelmingly in his favor", from "The Ten Tasks of Top Trading" by Van K. Tharp.

Quote: "Much of the time, even professionals don't have a clear picture of what is going on, but they have learned to have the patience to wait for select, specific setups. You must learn to trade on only the most recognizable and reliable patterns." from the "Street Smarts: High Probability Short-Term Trading Strategies".

The primary rule of systematic trading is to take each and every trading signal that your system generates. Only by taking all the signals at the time they are generated can you count on replicating the past performance of your system. If you have the slightest suspicion that you will not be able to take all the signals - either due to the timing of the signals or your busy schedule - you should arrange for the signals to be automatically traded.

At the end of the day, a forex trading system just like the money management system serves to protect yourself from your own destructive tendencies which very often mask themselves as the "well-meaning" hunches and gut responses. This doesn't mean that you shouldn't trust your instincts - only that you should base your trades on them only if you can eliminate emotions from your decisions. This is because a trading system is a method to profit from other traders' emotional instability, therefore, if you do not control your own emotions you will not be able to profit from any system. Removing the emotions from your manual trading can take years (!!!)- so it can be more practical and profitable to simply autotrade your system.

Even if you start your currency trading career by following a professionally created forex trading system you will receive full satisfaction from the trading - in terms of profit and self-actualization - only if you create and trade a winning system of your own. One of the best books which can help you to start this fascinating journey is "Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis" by Richard L. Weissman.

Quote: " In the meantime, it cannot be emphasized enough that, at the very least, genuine success in trading markets involves the adoption of a trading system. Without the discipline of such a system, the very best efforts are likely to be doomed to failure." Tony Plummer in his book "Forecasting Financial Markets: The Psychology of Successful Investing".

There are no certainties in the forex trading, because the future will never be exactly the same as the past. There are only probabilities, which you can systematically put in your favour with the help of a proven forex trading system.


Sources :

1. fxstreet.com: Forex Trading System

Top Ten Tips for Trading Forex

How to Make Money from Money

1. Practice before you start trading with real money. Could you imagine an athlete going to the Olympic Games without preparation and training? Make sure you have practised your trading on a demo platform and get comfortable with it and your trading style before committing real money.
2. Know what moves currency markets. Like any asset class, there are a number of factors that drive currency performance. A country’s macroeconomic situation can have a major influence – economic data releases, policy decisions and political events can change an economist’s outlook on the country, and therefore the currency. There are also technical factors such as interest rates, equity markets and international trade which may have an impact. Spend time getting to know these.
3. Understand the strategies. Yes there is a method to the madness. As a trader you need to be aware of three crucial trading strategies which are often used by currency traders; the carry, momentum, and value trade. Momentum tracks the direction of currency markets; the carry strategy sees investors selling currencies with low interest rates and buying those with high rates; and the valuation strategy takes a position based on the investor’s view of a currency’s value. However, the strategies that you use are up to you.
4. Manage risk. As with any investment decision, you must decide what risk you’re willing to accept. Ask yourself, “how much am I prepared to lose on this position?” If you don’t have a convincing or comfortable answer then you should rethink the trade. Do not risk more than you can afford to lose. Think about how you can mitigate your downside risk by using of trading strategies such as stop losses or limit orders.
5. Stick to your knitting. There are literally hundreds of currency pairs that can be traded in the currency markets, each of which have their own characteristics and considerations to understand and analyse. If you’re participating in the market on a part time and non professional basis, it is probably better to concentrate on just a few pairs and commit to thorough and robust research on those, rather than superficial research on the many. Some key things to consider when analysing a currency pair are its liquidity, transaction costs (the spread) and its volatility. As a general rule, major currencies usually have better liquidity, tighter spreads and lower volatility, versus emerging market currencies which have poor liquidity, wide spreads and volatile movements.
6. Plan your trade, and trade your plan. It’s one thing to have a plan, it’s quite another to execute it. It is important in currency trading to not get caught up in the moment – the markets are fast moving and in the short term can be unpredictable. Rather than trying to make a quick profit, stick to your long term plan based on your research. Good currency traders make money in the long term by being disciplined, not necessarily by making short term bets.
7. Research, research, research. It’s important to stay up to date. All currencies move quickly and checking the price once a week is not going to help you make strong long term returns. It is helpful to use an online provider that gives you up to the minute data and statistics. Traders use this data to constantly assess their trading positions.
8. Keep your emotions in check. Like many important decisions, it is vital to keep emotion out of any trading decision you make. If you’re upset about missing out on an opportunity and want to trade yourself better, or want to go ‘off-piste’ to make up for a loss earlier in the day – reconsider, because you’ve got the warning signs of someone about to make a rash and irrational decision. If you do feel yourself getting emotionally involved in a particular trade, take a deep breath, review your strategy, and establish how such a decision will affect your overall approach before going anywhere near the ‘execute’ button.
9. Don’t expect to win on every trade. That may not sound like much of a sales pitch, but even the most successful of traders don’t win on every trade. What they do have is a robust plan and long-term strategy which carefully considers the risks. So don’t necessarily be disheartened if a trade doesn’t go your way; review why it went wrong and see if there is anything to learn from the experience. But don’t think that currency trading is an option for those seeking quick money, because like any investment, it only should be played by those with a long-term end-game in mind.
10. Don’t put all your (nest) eggs in the currency basket. Foreign exchange is only one of the many asset classes you should be considering as part of a balanced investment portfolio. FX trading is not suitable for every investor, so if you are committing all of your financial resources to FX trading be sure you are fully aware of the risks and rewards of doing so, because it’s not recommended. The same applies for currency trading itself; spread your risk by not placing all your faith in a single trade because diversification is key; no matter what asset class you’re investing with.
    

Sources :

1. fxstreet.com:Top Ten Tips for Trading Forex