Essentials Of 'Forex'

This is a discussion on Essentials Of 'Forex' within the Forex forums, part of the Markets category; Welcome to the Essentials of 'Forex' Sticky. ‘Essentials’ Stickies are threads that are ‘stuck’ to the top of a forum ...

Reply
 
LinkBack Thread Tools Search this Thread
Old Feb 8, 2010, 11:51am   #1
The Staff are paid members that perform various roles such as editorial, advertising, support or technical work.
 
timsk's Avatar
Joined Mar 2002
Essentials Of 'Forex'

Welcome to the Essentials of 'Forex' Sticky. ‘Essentials’ Stickies are threads that are ‘stuck’ to the top of a forum index. They contain information about the forum you’re in that is of critical or ongoing value - hence the ‘Essentials’ name. If there’s anything missing from this Sticky that you hoped or expected to find, please contact timsk, T2W Content Manager and, if at all possible, it will be added.

NB:
The structure of the forums was completely overhauled in August 2012, resulting in a much simpler layout which is easier to navigate. In the case of Forex, there used to be three separate forums; whereas now there is only one. A consequence of this is that the ‘Essentials’ Stickies are out of date and will be amended in due course. In the meantime, we have left them in tact as they contain information and ideas that are of value to members. We apologise for any confusion caused and trust that you will bear with us through this period of transition. Thank you!


What is the Forex Forum?
It's the forum in which members discuss their strategies and systems for trading foreign exchange currency pairs - known as Forex - or simply FX. This section of the Sticky provides an overview of what trading strategies and systems are. Hopefully, this will help you to develop your own strategy or system and enable you to distinguish the good from the not so good when assessing other people's.

Other Resources on T2W & Beyond
Listed here is a selection of resources to help you build your own forex strategy or system. There are a number of great contributions in the Articles section, as well as videos and a popular website. Each item has a short précis and a direct link.

What is the Forex Forum?
Each day, every trader in the world is faced with the same problem: how to decide when to enter and exit the market? Most traders agree that one needs some kind of a plan – or strategy – to indicate when would be an optimum time to enter the market, with the probability of a successful trade in their favour. As the name suggests, this forum is where members discuss how to solve this problem and build a consistently profitable trading strategy or system.

STRATEGY OR SYSTEM – WHAT’S THE DIFFERENCE?
The words strategy, system, methodology and plan tend to be used interchangeably and their respective meanings are whatever the individual trader ascribes to them. However, as a generalisation, ‘strategy’ tends to refer to a discretionary approach to trading, whereas ‘system’ tends to refer to a mechanical approach to trading. The former involves the trader making all trading decisions themselves, whereas the latter involves deferring some or all trading decisions to some kind of filter, often coded computer software. In some instances, the whole trading process is completely automated, leaving the computer to execute trades while the ‘trader’ relaxes with a long drink by the pool. Well, that’s the theory anyway! The debate between the two camps – discretionary and mechanical – is often heated. Which is best? Most traders adopt the approach that they’re most comfortable with and the one that produces the best results. Only you can decide which is best for you.

LINING UP THE DUCKS
Unless you’re a ‘scalper’ doing dozens of trades every day, purely discretionary traders will spend much of their time looking for - or waiting for - a suitable set up. Either way, they spend more time not trading than they do trading. A set up occurs when a clearly defined set of variables come together to indicate that a trade may be on the cards. In the ‘Best Threads’ Sticky in this forum, a good example of a set up can be found in the thread entitled: ‘The 3 Duck’s Trading System’. The idea behind the set up is implied in the title, i.e. when all three ‘ducks’ are neatly lined up, that’s the time to enter the trade. The ducks are just a metaphor for a simple set of trading rules or criteria which creates the set up. The ‘ducks’ could be based on price action, volume, fundamentals or indicators. The tricky bit is in deciding how many rules to have (i.e. ducks) and what they should be. This is the focus of many of the threads in this forum. (Note the use of the word ‘system’ in the thread title. As the author of the thread points out: “. . . it’s not a system in the mechanical sense, it’s more a set of guidelines . . .”)

FUNNY WHAT? FUNDAMENTALS!
Broadly speaking, traders can build their discretionary strategies or mechanical systems around either fundamental analysis or technical analysis, (the latter is commonly referred to as ‘TA’). Increasingly, using a combination of the two is gaining popularity. Fundamental analysis, when applied to the forex market, focuses on such things as the economy, interest rates, productivity, government reports, news, and even rumour. By studying the fundamentals, a trader may conclude that the value of a currency is overpriced, underpriced or at fair value.

FAMOUS EXAMPLE
One of the most famous exponents of trading the forex market using fundamental analysis is George Soros. On what has been dubbed ‘Black Wednesday’, 16th September 1992, he spotted weakness in GBP and sold short USD $10 billion worth of sterling. This was based on the UK's high inflation and the Bank of England’s (BoE) reluctance to raise interest rates in line with other EU countries. The BoE was then forced to pull out of the European Exchange Rate Mechanism (ERM), causing the value of sterling to fall, earning Soros an estimated USD $1.1billion in the process. Not bad for one day’s work and it earned him the somewhat dubious honour of ‘the man who broke the Bank of England’.

TA (NB: if you think TA stands for ‘Territorial Army’, then you’ve not been paying attention!)
By contrast to fundamental analysis, practitioners of TA tend not to worry about the perceived value of an instrument. They believe that the all the fundamentals listed above are already factored into the current price. The logic is that markets are driven by people who, in turn, are driven by fear and greed. A price chart is simply a historical record that plots the euphoria and despair experienced by those who have made and lost money from trading the instrument in the past. When it comes to making or losing money, human beings appear not to be especially good at learning from their mistakes (or successes) and even worse at learning from those of others. Enthusiasts of TA conclude two things from this: 1) history tends to repeat itself and 2) there is order in the markets. In other words, markets are not random. Therefore, by studying a historical price chart, a trader can gain insight into the probable actions of market participants in the future and, as a result of these actions, guage the probable direction of price.

FAMOUS EXAMPLE
A famous example of fear and greed as displayed in a price chart can be seen in the stricken bank Northern Rock (NRK), or ‘Northern Wreck’ as it came to be known. (Although this is a forex forum, the example of a stock chart is provided here because it’s so well known. The basic principle applies to all markets and instruments.) By the end of September 2007, the share price of NRK had fallen from a spring high of over £11.00 to a low of about £1.20. At that point, investors, traders and gamblers alike all piled in and bought up the stock, primarily for fundamental reasons. Their perception was that it was underpriced. The phrases, ‘heavily oversold’, ‘bargain of the century’ and ‘cheap as chips’ could be heard in the pubs, clubs and cafes the length and breadth of the land. The prospect of easy money caused lots of people, ordinarily of sound mind, to take leave of their senses and overlook the basic fact that the bank was essentially broke and had to go cap in hand to the BoE to bail it out. A handful who bought at the very bottom may have got away with it as price pulled back to an October ’07 high of £3.00. However, the rally was very short lived. By mid November that year, price had fallen back down below the early October lows. Most of the speculators who bought what they thought were ‘cheap’ shares lost their money. Practitioners of TA even have a name for this price pattern; it’s called a ‘dead cat bounce’. See the chart, below. It's worth pointing out that critics of TA will argue that it's simple to spot patterns such as this in hindsight, while spotting them and trading them as they develop is the devil's own job.

nrk_candle_19_11_07.jpg

Other Resources on T2W & Beyond
T2W ARTICLES
The Articles section can be accessed via the ‘Articles’ tab mid way along the red menu bar at the top of the page. Once there, under ‘Topics’ on the left hand side of the page, click on ‘Technical Analysis’ and ‘Fundamental Analysis’, which are listed under the heading ‘Methodologies’. There are many good articles on these topics to choose from – listed here are just a handful to whet your appetite.

Behavioural Economics for Traders
This article is not as heavy as it sounds. It’s packed full of interesting nuggets like this: “Take a simple coin toss. Ellen Langer showed that people are more willing to bet on the outcome before the coin is flipped than after. People behave as if their involvement makes a difference in value.”

The Objective Filter for an Oscillator
Many traders, especially ‘newbies’, gravitate towards indicators as a means of making sense of a price chart. Like any tool, indicators must be used in the right way and at the right time. In this article, Sam Seidon explains how to use indicators effectively at objective zones of supply and demand.

Pushing the Envelope
In this video, author and trading instructor Bo Yoder emphasises the importance of market psychology and putting yourself in the shoes of someone who is sitting on a very profitable trade or, conversely, is nursing a considerable loss. This is especially pertinent to short term intraday traders.

Developing a Trading Strategy
Developing a Trading Strategy (Part 2)
These two contributions from Tim Wreford are among the most popular and highly rated Articles on T2W. And with good reason; they do exactly what they say on the tin! If you don’t know where to start in developing your trading strategy – then this is as good a place as any!

VIDEOS
Phil Newton’s Break out Strategy
Phil Newton’s Break out Strategy (Part 2)
In these two videos, professional forex trader and instructor Phil Newton – aka 'Newtron Bomb’ on T2W – outlines this simple strategy. For more information to back up the video, check out the thread of (almost) the same name: Phil Newton's Range Break Out strategy and a similarly named Article with thread entitled: 15 Minute Break out Strategy.

WEBSITES
Forex Factory
A popular forum aimed mainly at retail forex traders with three main resource areas: a comprehensive calendar with a simple graphic to indicate the likely impact of an announcement, a news section which is similar in content to T2W’s ‘Forex News & Analysis’ forum and, lastly, a simple charting package which displays a composite rate based on the average rates from industry leading brokers.

If you know of any resources either here on T2W or beyond that would be of interest and value to members who want to learn more about forex strategies and systems, please contact timsk, T2W Content Manager and, if at all possible, they will be added.
__________________
I'm New To T2W - Where Do I Start? - a must read for anyone new to T2W
I'm New To TRADING – Where Do I Start? - a must read for anyone new to TRADING
The Trading Plan Template - a must read for anyone without a proper TRADING PLAN
Please note: I am part of T2W Admin' Staff - I am NOT a Moderator!

Last edited by timsk; Aug 27, 2012 at 4:17pm. Reason: Updating
timsk is offline   Reply With Quote
Thanks! The following members like this post: MargaretLekker
Old Mar 12, 2011, 5:47pm   #2
 
shydog's Avatar
 
7 Posts
Joined Feb 2011
re: Best Threads in the 'Forex' Forum

I believe that the best system is the one you develope for yourself, which can take a lot of trial and error,until you are satisfied. But then the end results are worth all the effort! I have gone through the process of reading the 'Books,' following the experts, trying so many different methods, systems etc., until I tired of it all and almost gave up. Now I'm glad that I persevered, because I'm now confident with method I'm using. Not a "system" just an approach to trading.
I trade on the 60 minute Candle Charts and use the 30 minutes for possible entry. All that I have infront of me, on my charts, are Price Action (candles) and the "Fibo. Channels." The channels acts as 'support/resistance' levels + trend direction.
I set the Fibo Channels in the direction of the trend on the 60 min. chart and only adjust it when base line (1st Red line) is completely broken.

I guess this is just another version of 'Naked Trading' that works for me! And if this helps anyone along the way, then I'm happy.

I'm not offering advice on how, where and when to trade, because I'm not qualified. I just explaining what works for me, and me alone.

Happy trading to all.
shydog is offline   Reply With Quote
Old May 11, 2011, 4:05am   #3
Joined May 2011
re: Essentials Of 'Forex'

Trading is system is depended on the character of a trader. That is in my opinion, but In the world of trading we know that there are many experienced trader. That is why I want to know what is the best trading system as you know in your experience. I want to know many trading systems for consulting to many newbies in this online investment
Thank you
verbum4it is offline Broker   Reply With Quote
Old Sep 12, 2011, 8:54am   #4
NVP
 
NVP's Avatar
Joined Jun 2004
re: Best Threads in the 'Forex' Forum

Find what works for you and feels comfortable....

Realise that nothing can deliver 100% profitable trades

Mitigate the losers

Optimise the winners

NVP
NVP is offline Coach/Trainer   Reply With Quote
Old Sep 12, 2011, 8:58am   #5
NVP
 
NVP's Avatar
Joined Jun 2004
re: Essentials Of 'Forex'

Quote:
Originally Posted by verbum4it View Post
Trading is system is depended on the character of a trader. That is in my opinion, but In the world of trading we know that there are many experienced trader. That is why I want to know what is the best trading system as you know in your experience. I want to know many trading systems for consulting to many newbies in this online investment
Thank you
Trading systems need to fit like a well made suit - you cant just buy them off the shelf...and they are not bought like packets of sweets....find one and adapt it to your own Trading needs and personality through practice research and perseverence

N
NVP is offline Coach/Trainer   Reply With Quote
Old Dec 31, 2011, 12:22am   #6
 
7thSignalTrader's Avatar
Joined Dec 2004
re: Essentials Of 'Forex'

What makes a Trading System "good?" Answer: Its effectiveness. What defines a Trading System's effectiveness? Answer: Its ability to produce trading signals that yield optimal results. What are optimal results? Answer: The Lowest Possible Draw coupled to the Highest Possible Net Profit.

That defines a "good" trading system.

What does a "good" trading system contain? Answer: The Essential Elements of an Effective Trading System. And, what are the essential elements of an Effective Trading System? Answer:

Timing
Direction
Magnitude
Probability
Framework


Try trading without these elements for long and "for long" won't be one of the enjoyable tenets of your experience as a Trader. All four (4), if properly designed (it does not matter what indicators you use, as long as they produce the attributes described), will typically lead to an effective Trading System.

Miss any of the four (4) attributes above and no trading system can ever qualify as "optimal" for its design intent.

Nice and neat.
__________________
Bot research, development, analysis, optimization and deployment. Educational purposes only. A short-term glimpse behind the scenes of how real Fx trading systems are designed and built:

http://www.youtube.com/user/TheCollaborativeFX
7thSignalTrader is offline   Reply With Quote
Old Feb 10, 2012, 11:45am   #7
NVP
 
NVP's Avatar
Joined Jun 2004
re: Essentials Of 'Forex'

When people ask me to eyeball the latest must have "Trading System" its a pretty simple exercise for me

1) ignore all the easy gimme trades that any dumb-ass trend following system will pickup

2) focus on the times when its a tough low volatility flat market and see just how many times the system gets caught out and trades at losses.....

in trading its not about how much you win , but how little you give back


N
NVP is offline Coach/Trainer   Reply With Quote
Old Apr 5, 2012, 9:53pm   #8
 
alan5616's Avatar
Joined Jan 2006
re: Essentials Of 'Forex'

Quote:
Originally Posted by NVP View Post
When people ask me to eyeball the latest must have "Trading System" its a pretty simple exercise for me

1) ignore all the easy gimme trades that any dumb-ass trend following system will pickup

2) focus on the times when its a tough low volatility flat market and see just how many times the system gets caught out and trades at losses.....

in trading its not about how much you win , but how little you give back


N
NVP hits the nail right on the head. I think it was George Soros who said that it doesn't matter how much you win when you're right as to how much you lose when you're wrong.
alan5616 is offline   Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
Essentials Of 'New to Trading' timsk First Steps 72 May 15, 2017 11:52am
Essentials Of 'Forex Discussion' timsk Forex 14 Jan 27, 2017 4:42pm
Essentials Of Stocks timsk Stocks 16 Dec 21, 2016 1:49pm
Essentials Of 'Forex News & Analysis' timsk Forex 7 Mar 9, 2015 1:31am

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)