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Friday, July 13, 2007

The Essence-Forex versus Other Instruments(Tutorial- Part IX)

Friday, July 13, 2007

When I first started trading forex, I was told that 90% of all retail forex traders lose money in this business. After several years of trading forex, after associating with many brokers, and after receiving tens of thousands of emails from forex traders, I realized that 90% is wrong statistical number. It’s actually more like 98.8% of all retail forex traders eventually leave this business having less money than what they initially started with. Yes, in my experience, about 12 out of every 1,000 people that open an account with a forex broker will actually eventually leave that broker with a profit. And 12 out of 1,000 is probably still on the best case scenario side.

I am one of the lucky few that have been able to consistently extract money from the forex market, and I strongly believe that the biggest reason people are not successful in making money in forex is of course like in any business, it’s lack of persistency, but more than anything it’s because most forex traders focus on the wrong methods to be a profitable forex trader. If you are unlucky enough to focus on the wrong thing in forex, you will never be successful, period.

My mission with this article is to do these two things:

1. First of all, I want to briefly cover and explain the very core of how the forex market works, and what forces are behind its movement. Wouldn’t you think that before being able to profit from forex market movements, you better first know what moves it?

2. Second of all, I want to provide you with a very core and solid foundation of how I think in order to be able to consistently profit from this market, and provide you with my forex trading system that you can also use to consistently profit from this market, and I hope that you will be willing to stick to the trading system that I will share with you, in order to become proficient with it, and in order to be able to consistently make money in this crazy forex world.

Section 1
What really moves the forex market?

First thing that’s very important to realize in my opinion is that forex is not like a stock market. It’s not like options. It’s not like commodities. All those other markets have only one component. Let’s say you have a powerful stock trading system, and you think that Microsoft stock will go up, and you buy that stock, and it does go up, so you made some money, that’s great. Now, let’s say you think that Great British Pound will go up in forex, and you buy GBP/USD. Does that mean that you will make money? Not necessarily! You may actually have a large loss, instead of having a profit! How could that be you may ask? Very important thing to remember that forex is traded in pairs, so even if you are right that the pound is going to be strong, but what if U.S. dollar is stronger? GBP/USD will actually go down! This is a very simple principle, and I think most people know this principle, but very few actually think about it. This realization is crucial, in order to have a powerful forex trading system. Just imagine that you feel that Microsoft stock will go up, and you call your stock broker, and you ask them to buy you 1,000 shares, and your stock broker will ask you: “Well, sir, in order to buy Microsoft stock, you must first go short on some other stock…” It would be a bit more difficult to make money in the stock market if with buying a stock, you had to short another stock, wouldn’t it? You may be very right about the direction of a particular stock, but if the other stock that you shorted actually performed better than your original pick, you would pretty much be screwed.

You may wonder about why I started talking about the stock market here, while I am supposed to talk about forex. After all, I am supposed to teach you how to build a profitable forex trading system, not stock trading system. Well…just hold on. Stock market is actually a very important subject here.

When people think in terms of building powerful trading systems, they tend to think first about something called technical analysis, which basically means making trading decisions, based on charts and price action. The question is whether technical analysis is a good avenue to focus on, in order to build a forex trading system. First of all, technical analysis is a very broad term, and making a statement whether technical analysis is good or bad for trading forex would be too much of a generalization. But before we get too deep into it, let’s first analyze the nature of technical analysis, how it was born et cetera.

I think most people know that most techniques with technical analysis were born in order to trade the stock market. After all, the stock market is singular, meaning that you just have to worry about one instrument at a time, and since it’s mostly moved by people’s greed and fear, and most people that trade stocks professionally know technical patterns very well, it’s obvious that a lot of technical setups work in the stock market. Just imagine that there is something that’s called, “head and shoulders” pattern forming, and you have all these traders who see this pattern, so they decide to either take profits, or take speculative positions based on that pattern, so of course by the law of supply & demand, the pattern may actually move a particular stock. So basically, let’s move away a little bit from the stock market. I just wanted to mention it, because I wanted you to understand that stock market is a singular, fully speculative market, where speculative greed and fear move the price, so most of technical analysis tools known today were born to analyze speculative greed and fear in a market with singular instruments. I would like to emphasize some keywords in what I just said. The keywords are speculative and singular.

Let’s now talk about the forex market. The forex market is also being moved by supply and demand, like the stock market, but the very big distinction here is that a lot of forex volume is not speculative, and forex is not a singular market. Let’s together take a look at these distinctions, and try to understand fully what they mean, and how will they affect not only technical analysis trading, but trading the forex market in general.

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