Forex Minds Want to Know

I would like to extend a warm thanks to all who read my weekly newsletters. I enjoy writing them thoroughly and if they provide some useful tips and tricks for the many Forex traders out there, then that is an even bigger bonus. As an instructor and Extended Learning Track (XLT) mentor for Online Trading Academy, I am constantly receiving numerous emails from my students and traders new to the world of Online Trading Academy education and one of the biggest challenges I face on a day to day basis is not the market itself, but rather my ever-expanding inbox! I endeavor to reply to each and every message I get, so this week I thought I would answer a few of my recent queries in this article. I have found that a majority of the questions posed to me are often pretty much around similar subjects, so hopefully, I will have covered a wide variety of topics in this article which everyone can take something from.

"Hi Sam. Thanks for your weekly articles. While I understand that you are writing about Forex in your letters, I have noticed that you do reference other markets, as well. Do you personally just trade Forex or widen your scope? What advice would you give a new trader for expanding their market outlook? Many Thanks." Jerry T – Florida, USA

Thanks for your question Jerry. Yes, you are right, I do mention other markets in my articles like the S&P 500, Oil, Gold and Bonds. I do, as a trader and educator, pay close attention to markets and assets outside of Forex due to the fact that there are many correlations between commodities and currency prices, as well as bonds and stocks. I always emphasize, though, that a trader should never use these correlations alone as their reason to take a trade. Just because Gold is selling off one day does not mean we should automatically buy Dollars! All trading decisions need to be planned well in advance and respect the rules of a well-constructed trading plan. If these correlations are used to help with the analysis process, however, on a well-thought-out trade opportunity, they can be very powerful tools indeed. I myself also trade Futures markets and use these assets as primarily a day trading vehicle. Each market has its own characteristics and key times of the day for the best opportunities, so while the Stock Index Futures markets are quiet overnight, I can find great Forex trades lining up in the meantime and vice versa. I would advise a new trader to focus on just one asset to begin with, but as they start to gain consistency in their trading, then move on to Futures and Options to further broaden their horizons.

"Sam I have been trading Forex for a year now and was originally taught that the best trade strategies involve the Breakout style method. While this has worked for me on some occasions, I also find there to be a high failure rate (and plenty of frustration for me!) Both you and Sam Seiden always talk about Supply and Demand in your articles and seem to look for completely the opposite of me. What are your thoughts on Breakout trading?" Angela D – Washington State, USA

This is a great question Angela and one I have been asked many times before. My simple answer is that I am not a fan of the Breakout trade at all. Sure, they can work, but for me and as you stated yourself, they do have a high failure rate, offering in my opinion the highest risk and the lowest potential reward. For anyone new to the markets, Breakouts involve buying into a market as it makes a new high, or shorting a market as it makes a new low. Now the biggest single danger with this is that a trade using this style of entry involves buying after many others have bought, or selling after many others have sold. If the majority of others in the market then decide to close their positions, you will be faced with a losing trade very quickly. You can only make money consistently in the markets by being one of the very first to buy or sell, well before others jump on the train. However, this takes not only strong emotional fortitude, but also the ability to understand how to find the key turning points in any market. As Sam Seiden and I say, prices only turn when there is an imbalance between Supply and Demand. These two factors alone shape prices and if supply is greater than demand, then prices will fall; if demand is greater, then supply prices must rally. In the ongoing XLT programs, we work with our students to help them identify these key areas on a chart, which offer the highest reward and lowest risk. Buy Low and Sell High is the aim of the game where breakouts suggest that you Buy High and Sell Low, meaning you will always be late to the trade.

"Hello Sam. In early December 2009 you wrote an article about the US Dollar and where you thought it was headed over the next few months (US Dollar Destiny). I remember you being Bullish on the Dollar and it seems to have worked out well so far.
You gave a number of reasons for your outlook including both Fundamental and Technical reasons but was there anything which you could have used to help your judgment?" Karl H – Berlin, Germany

Hello Karl, and yes, I do remember the article. I do make a conscious effort to remain as objective in my analysis as possible because I know that the market will always do what it wants to do, not what I want it to do! However, I do like to look at the bigger time frames to gauge all possibilities for price direction. In the article you mentioned, I did indeed give a variety of reasons for believing the Dollar had bullish potential. Here is the chart I showed in early December:

As you can see, the Dollar Index had been in a heavily extended, downwards trend and fast approaching key areas of Support or Demand. By knowing that in areas where Demand is objectively greater than Supply there is a higher probability that prices will rise, I could really not come to any other conclusion. Sure there were Fundamental reasons to support Dollar strength but first and foremost, price itself suggested this to me. As you can see from the chart below, it turned out the Dollar did rally through the rest of December and January and I am sure I will give further outlooks in the coming months. Price Action comes before any other analysis for me and that would be the key piece of the analytical puzzle if I had to choose one.

"Sam, since I started my Forex trading career, I have always tried to use both Technical and Fundamental Analysis for taking trades. Sometimes I find, though, that one contradicts the other, making it hard for me to take a position. How do you overcome this personally?" Adam W – Arizona, USA

What a great question, Adam. I have met many traders who face the same problem themselves, so you are not alone by any means. I myself found it difficult, in the early stages of my trading career, to choose between the two forms of analysis, but soon came to the conclusion that Technical Trading was by far the best approach for me. I have learned to trust price and price alone and this has greatly enhanced my trading because first and foremost, it simplifies the whole process. I want my analysis to be clean and concise and by just devoting my attention to price action, I find that the decision-making is much easier. You see, if we rely too much on just fundamentals, there can be the danger of basing our trading analysis on opinion rather than objective observation. I could see a bad set of economic figures about the US economy and automatically read this as a reason to be a seller of the US Dollar, but if the market does not share my opinion, then I am typically going to find myself on the wrong side of the trade. Remember that much of the economic data we see each day has been already factored into current price, making the market itself more of a discounting mechanism than anything else. The actions of the buyers and sellers will show themselves to me on a chart, creating footprints of price, and this gives me the clues I need to be consistent. The market is bigger than us all and I choose to allow the market to lead my decisions rather than my instincts and opinion. Remember the market creates price action as the result of buying and selling decisions. Fundamentals and news releases create a perception of value, while supply and demand creates the reality of price itself.

"I have been trading Forex Spot for almost 3 years now, Sam, and I saw in one of your previous articles that you mentioned there are also Forex Futures Contracts available to trade, too. I am a complete beginner to Futures trading and didn't even know you could trade currency in this manner. Are Forex Futures something I should consider moving into? Many Thanks." Francis H – New York, USA

Hi Francis. This is another great topic for discussion and one that can be explored at many levels. I will write an article with more details soon but to get you started, here are some basic facts to chew over. Forex Futures can be traded in the same was as Forex Spot, as prices in both markets mirror one another. If you were trading EURUSD in the spot market, you would simply trade the EURO Forex contract in the futures market as an alternative. Forex Futures are traded thorough the Chicago Mercantile Exchange with full Direct Access Execution, giving actual volume readings unlike Spot Forex. Execution can be much better with very complex tools available for managing trades, especially useful for Intraday trading strategies. I personally use the Forex Futures for my day trading need for this very reason. However, I use the Forex Spot market for my Swing and Position trades. This is due to the fact that I can have access to a much wider choice of currency pairs with solid liquidity in the Spot arena and also because my position margins remain the same at all times in the Spot market. Futures margins can change overnight and there is the added issue that Futures contracts also expire after a set time, meaning that I would have to close a trade out then reopen it again if I was holding it over an extended period of time. Forex Futures are something to consider for sure, but make sure you research the area thoroughly before you jump in! As promised, more information to come in future articles.