Figure 6: When to Trade - A

Give yourself a chance!  Trade when the market is most likely to help you.
Take a look at the average trading ranges for the four majors below.

Figure 5: What to Trad

Understanding the major components of a trading plan is a prerequisite
for successful trading.

All of these factors work together.  Trading a high spread currency using
short interval entry signals and highly leveraged positions will probably be
a failing strategy.  Conversely, trading a tight spread currency using mid-
to long-interval entry signals and little leverage has a better chance of
success.  
In the final analysis, the currency, signals, and money management
approach must all gel together and exist without contradictions.  Novice
investors make critical errors by trying to patch together strategies from
various sources, rather than systematically building, testing, and deploying
a comprehensive trading plan.  The sophisticated investor, who does this
difficult work, operates with a complementary trading plan that creates
consistent profit opportunities.
WHEN
Forex is a 24/7 market – but is the market action the same at all times?  Of
course not, but not many traders stop to consider the impact of this fact on
their trades.  Studying historical price data reaching back to January
2000, the impact is clear, as shown in Figures 6 & 7.

Figure 4: The Dealer Comparison Matri

Comparing different dealers using common metrics helps to clarify where
each dealer’s strength lies.  Armed with that information, the trader is
ready to choose the dealer who best fits his trading style.

Which dealer would you choose?  Novice traders will often choose the
dealer with the best marketing, simply because it’s the one they know.

They learn about the dealer, visit the site, register for a demo, then scale
the learning curve to grow comfortable trading with that dealer, using
their charts, etc.
Frequently, the dealer with the best marketing is not the best dealer for the
trader, or perhaps, for any trader.  Traders use systems that work in the
short term, mid term, or long term, with varying holding times and
strategies.  The type of dealer needed for each approach is quite different.
For every trader there is an optimal dealer.  For many, the path of least
resistance leads to the dealer who makes first contact, not the dealer who
will provide the best trading outcome.  The sophisticated investor
optimizes returns by matching his trading style to his dealer.
WHAT
A comprehensive trading plan is framed by three main elements: the
trading vehicle, or currency pair, the events that trigger market entry and
exit, and the overall approach to trade management.

Figure 3: The Leverage-Loss Matri

What’s the ultimate worst case scenario?  Consecutive losses.  Knowing
how many consecutive losses your system is likely to sustain is the key to
capital conservation. Examples of leverage: 1:1 = one $100K contract per
$100K in capital.  20:1 = 20 $100K contracts per $100K in capital

Convenience
The fact that you need to go to bed or spend time with your family does not
stop the forex markets from operating.  In other markets you can trade a
specific window that usually lasts 6-10 hours, which is physically
manageable.  Forex, on the other hand, demands 24 hour monitoring.
That can be accomplished through automated trading systems or, less
optimally, through pre-set stop and limit orders or physical monitoring of
a trade.
Cost
“No commission trading” is a marketing slogan many dealers offer as a
perceived benefit of forex.  But the fact that there is no commission does
not change the high level of transaction costs paid to dealers through the
bid-ask spread.

There is no doubt that the liquidity, leverage, convenience, and transaction
costs found in the forex markets are great tools for investors – but not
always.  Just as easily as these tools can be used for wealth creation, they
can be misused for wealth destruction.  The novice investor destroys
wealth, and the sophisticated investor creates it.
WHERE
It is one thing to choose a dealer, and quite another to choose the correct
dealer.  Dealers’ service offerings can take many forms, and each dealer
usually has one or two major features that they highlight above all others.
When analyzing dealers, first understand and rank all of their service
offerings, then apply those findings to your trading style to arrive at your
optimal dealer.

Figure 2: The Who’s Who of Fore

They key difference among these market participants is their level of 

sophistication, where the elements of sophistication include: 

ƒ Money management techniques 

ƒ Profit objectives 

ƒ Level of computerization 

ƒ Quantitative abilities 

ƒ Research abilities 

ƒ Level of discipline

Of course there are sophisticated and non-sophisticated banks, 

governments, corporations, investment funds, and traders.  But among 

these segments it is the individual trader who has the least amount of 

external governance.  Whereas governments, banks, corporations, and 

investment funds adhere to regulations and restrictions (to a certain 

extent), traders are only restricted by their level of capital. 

In the absence of these external restrictions, traders fall into two groups: 

those who can impose internal restrictions – discipline - on their trading 

strategies and those who cannot: the fence-swingers, et al.   

Those who can impose this discipline we will call the sophisticated 

investor.  In the zero-sum game of forex trading, the sophisticated investor 

uses tools and strategies that emulate those of the highly sophisticated 

institutional participants to extract profits from the novice participant.  It 

is only the sophisticated investor who has the ability to extract positive 

returns from the forex markets. 

WHY 

Forex trading has surged in recent years, as more individuals earn their 

living trading and the popularity of riskier investment vehicles like hedge 

funds has increased.  The bottom line for these investors is superior 

returns, and in foreign exchange four major factors create a unique 

investment environment: 

ƒ Liquidity  

ƒ Leverage  

ƒ Convenience  

ƒ Cost  

In no other market can you find a playing field that is so biased to the 

investor, at least on the surface.  But to take advantage of these factors you 

have to be constantly aware of their downside. 

Liquidity 

In a liquid market there is a high degree of transparency, even when large 

transactions change hands.  The sophisticated investor understands what 

this means: forex attracts huge players.  As a trader grows in 

sophistication, they understand that these huge players have significant 

price impact, and watch for their market entry. 

Leverage 

The low margin requirements in the forex markets make everyone’s whatif analysis yield forecasts with 1000% growth annually.  What those 

forecasts fail to account for is the multiplying effect of leverage during 

periods of consecutive losses

Figure 1: The Forex Vortex

Natural selection takes on a whole new meaning in the forex markets,
where survival of the fittest is the only rule, and market action ruthlessly
eliminates anyone who has not uncovered the context of the game.

WHO
Far more important than knowing who trades forex is knowing who trades
forex successfully, and how they do it.  The players in the forex markets
operate with widely varying perspectives.  When one of these players
enters the market, a force is created that is proportional to the perspective
of the trade initiator.  That force can play a role in the short term, creating
radical price changes, and it can play a long term role, defining trends.
Figure 2 shows the major perspectives in the forex markets.

A N A L Y S I S

A N A L Y S I S
For most traders, a comprehensive trading plan is an unmet ideal.  In the
foreign exchange markets in particular, the lure of easy money often
distracts the trader from the reality of hard work.  But as anyone who has
had success trading can attest, trading is a discipline.  It requires a plan
informed by extensive knowledge of the markets and the ability to
carefully, consistently apply that knowledge.  The main ingredient of any
trading plan is an understanding of the context that defines the trading
environment.
THE SIX FORCES OF FOREX
Trading forex is like watching a school of fish move.  One minute is total
harmony, the next, complete chaos.  As the observer of this school of fish,
do you believe you can accurately predict the direction the school of fish
will move each time?  Would you bet on it?
What causes the fish to move the way they do?  Why do they work together
in one moment, moving with force and precision, and move in what seems
to be an infinite number of directions the next?  There’s no way to know
unless you can sense what the fish sense each time they move.  The fish
have an instinct about the nature of their environment.  They understand
the context of all things around them – natively – and can react
accordingly.  Surely if you shared this understanding you’d be a much
more accurate predictor of fish movement!
Trading forex is not much different - we need to develop that keen sense of
what is happening around us.  Will we ever be able to predict every move
in the forex markets?  Absolutely not.  But we can use our understanding
of the context of the market – the six forces of forex – to make better,
more profitable trading choices.  Once we understand these forces, we can
create and operate within a comprehensive trading plan:
ƒ Who trades forex?  Understand who participates in the markets,
why they are successful, and how you can emulate them.
ƒ Why trade forex?  There are superior returns in forex, but not for
all investors.  Are you one of them?

ƒ Where should you trade?  Choose to work with service
providers who can efficiently enable your style of trading.
ƒ What should you trade?  Select the currency pair, entry, exit
and money management methods that will maximize your returns.
ƒ When should you trade?  Trade when the environment is most
likely to produce the best conditions for executing your system.
ƒ How should you trade?  Trade using methods that maximize
your ability to emulate the proven winners.
Knowledge of these forces and how they work is a major determinant of
your success as a trader.  Figure 1 shows these 6 forces, their relative
rarity, and their effect on profitability.

The Six Forces of Forex

Few traders ever stop to consider the context
that defines the foreign exchange marketplace,
but all of them should.  As forex matures in its
role as a retail investment environment the
rules – and the stakes – will only multiply.
ANALYSIS
• Who: The faces of forex that shape market action
• Why: Understand the nature of forex, and its inherent opportunity
• Where: Matching your objectives to the optimal dealer
• What: Choosing a trading vehicle based on your investment premise
• When: Time your trades for maximum efficiency
• How: Select a toolkit that actually improves your trading ability
ACTION
• Take an inventory of your personal trading plan
• Find solutions that can help you execute your plan, step by step
WHAT IT MEANS
• Bad News: Successful trading is more work than you thought
• Good News: Everything you need to win is right at your fingertips
RELATED MATERIAL
Test-drive FX Engines for free online at www.fxengines.com to see the power of
system building, system testing, and system automation.
ABOUT THIS REPORT
The Forex Report is a periodic publication that investigates advanced strategies
for superior trading performance in the foreign exchange markets.  These
reports utilize advanced statistical and econometric modeling techniques to
create new insight into the trading strategy of the average trader.  This report,
The Six Forces of Forex, is a more general report intended for all audiences,
including those new to the forex market.
To learn more about The Forex Report or to register for delivery of all future
reports by email, including Case Studies, please visit www.fxengines.com.

Baby Boomer Entrepreneur - Shouldn't You Know The Top 10 Dying Industries?

Top 10 Dying Industries - Real Time Economics - WSJ

As an aspiring baby boomer entrepreneur you look forward to the exciting and new opportunity before you. But are you taking time to look around you to see what is crumbling and how it may impact your plans?

This Wall Street Journal Article shares information about the top 10 dying industries around us. Does you business idea sell to, use products of, or depend upon people who work in these industries? If so, you need to know what the future of these industries will be.

In the big picture sense, the point of this article is that everything is changing around us. A few weeks ago, I drove through a community where I had once owned a small restaurant It has been 25 years since the business closed. I was amazed to see how the community had changed. I wondered what that change would have done to the restaurant if it had continued to operate. I saw corners with vacant lots where thriving businesses had once operated. I wondered ...

So as you make your plans for your business, what assumptions are you making. Do you expect the world to stand still except for the improvements your business will bring to the market? Think and think again!

Shallie

The Business Networking Blog is moving

The Business Networking Blog has a new home at https://www.nrg-networks.com/blogs.php?cat=1. Please check the new location for new posts with business networking tips, hints, advice and stories.

The full archive of posts is also available at the new site.

For new posts go the new home of the business networking blog.

EDIT July 5, 2011
A number of people still visit here so I'm going to start adding posts here too. It may take a while to catch up.

Good Networking!

Dave Clarke