Chief Currency and Trading Analyst at FXDDWed, Jan 23 2013 15:00 GMT
Duration: 0 h, 45 min
Moderator: Vicky Ferrer
Although he admits there are more, Greg Michalowski, Chief Currency Analyst from FXDD and author of "Attacking Currency Trends", outlines his 5 Cardinal Rules that retail forex traders should follow.
Although these types of rules are important — i.e., they take emotion out of trading, they are a basis for a trade — they are not foundational rules or Cardinal Rules for your trading.
The three most important things in trading are:
The three most important things in trading are:
1. DEFINE Risk
2. LIMIT Risk
3. ACCEPT Risk
"Borderlines" define areas where the market bias switches from bullish to bearish or bearish to bullish. There tends to be an "energy" around borderlines (i.e., the price moves away from them).
In today's market environment, markets are tending to switch around from bullish to bearish and bearish to bullish.
Traders who define and limit risk by using "Borderlines" have a flexibility needed for this type of environment.
Trader Joe risks 50 pips on a trade because it allows him to keep to his conviction without getting stopped out. He does not focus on limiting risk per se. He instead focuses on his directional conviction and reward.
He reasons, "If you can't risk 50 pips in the forex, you don't deserve to trade forex. No Risk. No Reward.
The EURUSD is going up because of a less dovish ECB and! think It will continue to go up to 2012 highs. I will buy on a dip to the 38.2% retracement and 200 bar MA at 1.3328 and put a 50 pips stop loss at 1.3278. My target is 1.3478, just ahead of the high price for 2012. The reward is 150 pips for a 3:1 reward to risk ratio. I want to risk less than 2% of my account balance and that comes to 1 unit."
Trader Mary is focused on limiting her risk. She looks for opportunities where she can risk 15 pips on her trade and have the potential for an "energy" to develop soon after her trade. That "energy" in turn allows her to "risk a little" in hopes of "making more than a little". Mary admits she does not really know how much her reward will be. All she knows is she is focused on defining and limiting risk by using "key" technical levels, and the rewards will come it the market agrees with her directional bias.
She reasons, "The entry level is an important technical level Either the market will agree with me or it will not, but since I am risking a little, I only have to make more than a little to start earning a multiple of my risk.
I think the EURUSD is going down because the price broke below the 100 and 200 bar MA and 38.2% retracement. My risk is if the price moves back above the 100 bar MA or 15 pips. My reward should be something more than 15 pips. I want to risk no more than 2% of my account balance and that comes to 3.33 unit."
Mary could have lost $500 too and she would only have to lose 15 pips to hit that mark.
Joe would have to lose 50 pips to get stopped.
By Accepting Risk, a trader:
• Commits themselves to their position
• Takes a more positive approach to the position
• Can defuse any left over fear they may have
Staying in the game allows you to be more familiar with the nuances of the market. It took the Beatles > 10,000 hours of gig playing before they refined what they were doing and made it big. Traders need to play a lot of gigs too.
• Traders who risk 5%, 8%, 10% or more on a trade are more likely to trade with more fear. Fear is a traders worst enemy.
• More fear often leads to panic.
• Large losses lead to a get it back quickly trading mentality (lose it more quickly can happen too)
The longer you can stay in the game, the better chance for you to be a success in trading.
STAY IN THE GAME
Fundamental Analysis explains the cause and effect reason or reasons why a currency pair moved or is likely to move higher or lower. It is typically as a result of a political or economic event or a combination of many events.
Technical Analysis uses prices graphed on a chart along with visual trend lines or mathematically defined values used to help define and limit risk and determine a bullish or bearish bias.
With Fundamental Analysis, there are a myriad of reasons for bullish or bearish bias and some can be unpredictable.
Fundamental Analysis also fails to tell traders the most important requirements for success - What is my risk and where am I wrong?
Without being able to define risk or limit risk, risk is unlimited and fear is increased.
Applying technical tools like trend lines or moving averages fills in the missing requirement by allowing traders to define and limit risk against a technical level. It tells the trader where he is wrong.
Since defining risk and limiting risk is the most important requirement in trading, technical analysis should be the primary tool for entering a position.
Fundamental Analysis can be beneficial to your success in trading, but it should always be the secondary tool for taking a position.
My Five Cardinal Rules for Retail Forex Trading
1. Risk. Risk. Risk.
2. Stay in the Game
3. Technical Analysis is the primary tool. Fundamental Analysis is the secondary tool.
4. Follow the K.I.S.S. Principle
What is the K.I.S.S. Principle?
K.I.S.S. = Keep It Simple to be Successful
Most retail traders think that the more complex the better. After all, we are programmed in life to think the more we know, the smarter and more successful we will become.
This is often not true in forex trading.
Complexity increases anxiety. Anxiety increases fear. Fear is a traders worst enemy.
• Simplify your trading.
• Use technical tools that are simple, visual to many, that define risk
• Be consistent
• Be positive
Recording of the webinar