lesson 1: Moving Averages

Above is a screenshot of three timeframes of the AUDUSD currency pair which are the 4h, 1h and 5m respectively. Naturally enough it could be any pair as this is for illustration purposes only.

So, three timeframes descending from the largest to smallest. Even just a quick glance at these makes it blatantly obvious that the value of the Australian Dollar is for the meantime losing ground against it's U.S. counterpart. Now in this example that maybe the case however it does not always look so evident.

In order for a validation of price action (PA) bias we add a moving average (MA), which in this case is a 100 simple moving average (SMA). Why a 100 SMA? Good question, well basically I find it works well since institutional investors which includes banks tend to make good use of it. Hey but let's not get picky on technicalities shall we.

Anyhow what I wish to do is explain the individual components of the plan then show how it all fits together. Now the lesson that comes out of this exercise is 'what is the PA bias? Well clearly it is to the downside, since price is below the MA in all three timeframes. right? So in this case we maybe looking at going short (sell) on the Aussie Dollar. 

I say maybe because this is only a 1st stage confirmation. There are more lessons to come. One other point to cover here is that this stage can only be ticked off for a green light when price is above or below the 100 SMA on ALL THREE TIMEFRAMES. If they don't match, it's clearly a no go.

Ok I hope the first part is clear enough, if you have any questions please put them in the comments. The second lesson covers an area not much talked about. The currency interest swap rate. Component number 2.

When Not to Trade?

What is the criteria for a no trade? The image above is a screenshot of the EURJPY as is now. As a trade goes it meets all of our requirements as set forth in lessons 1 - 4. Looks like a good trade setup right? Well it does if all you're looking at is our 3 timeframes.  However the D1 tells a different story. As one can see there is a strong support at 136.000 which has resisted 2 attempts to break through so therefore there could be a substantial rebound.

I would not eliminate this trade entirely but rather just wait to see how it all pans out. As of composing this post PA is still around 90 pips away from reach this level of support. This is where patience becomes the virtue. It looks highly likely it could do so and if that being the case a rebound is imminent since it has held back 2 attempts already. They say the 'third time is the charm'. How would one know if the 136.000 will hold a 3rd attempt? We know there is no such thing as an absolute certainty in the forex world.

Using a fibonacci retracement tool would help. If the rebound reaches 50 - 61.8% it would give a good indication of a bullish bias, however if it only reaches a 38.2% it could well indicate just the opposite.
The bottom line is just don't trade because you feel you must because that's just not so. Only trade when you have a clearer picture of what is going on.

Amendments

This evening whilst editing and reshaping the layout on the blog posts, I inadvertently screwed up the timeline in respect to the lessons, which you know doubt would have noticed. I haven't a clue how this happened and as such not sure how to rectify it at present.

However seeing as how they are central to this blog I will be creating labels for them in the right hand column. This will be essential for anyone referencing the site at a later date.

Again my apologies. There is a lesson there that one should not execute intricate tamperings late at night.

The Magic of Compounded Interest

I believe I mentioned in an earlier post that forex was NOT a get rich scheme. However let me ask, all things legal, what financial institution will reward you with a monthly 10% ROI? No bank, no superannuation fund, no property portfolio (unless it's humongous) will give you a return such as this.

The above xl spreadsheet displays a 4 year forex investment starting with an initial 1k outlay. By the end of the 4th year you would be on the brink of breaking into a 6 figure account. This is what is on offer here. Even using only 75% of your monthly return at this point to live off would equate to $6,597.75, and since you would be reinvesting the remaining 25% every month you would be getting a pay rise if you so wished.

Question is, is a consistent 10% a month achievable? I would say, absolutely, in fact it is  down right conservative. Would you do what it takes? Remain patient and consistent in your trading methodology and you could make yourself unemployable? Why so? Because no one could afford to match what you can pay yourself. Think about it?

Looking at the Big Picture

If there is one point (of which they'll be many) is not to get trade myopic. Always keep your eyes on the big picture to see where you are going. There is no such thing as a bullet proof plan which wins 100% of the time, show me a person who says they have and I'll show you a fair dinkum bullshit artist.

I win trades plus I lose trades but if you use a good plan and stick to your code (like me 😀) your monthly results will remain in the 'black'. I hate stressing, that is why I set TP levels, plus I love the idea of low maintenance trading. Set and forget. If the trade wins....good. If the trade loses....good. Either way doesn't matter, when you put the winning odds in your favour the law of averages takes over. Too easy.

So take it easy, work the plan and let the market do it's thing.

Lesson 4: Support/Resistance and Pulling the Trigger

Executing the trade:

Before even contemplating a trade the first and foremost point to consider is one of leverage. In other words, what size? Using the demo account as an example as shown in the last post, the account is $14,107.97. Ok our SL is 50 pips and TP is 110. What concerns us here is the SL. Leveraged at 3% it goes as follows:

14,107.97 divided by 100 equals 141.07, times 3 gives us 423.23 then divide by 50 and you get 8.46 (which is 0.84). Which you can see in the above charts.

A pending Sell Stop has been initiated at the last area of support on the 5M chart at 1.25690, with our SL at 1.26190 and TP at 1.24590. I should add here that all trades are set as pending just in case the PA fails to reach the appointed level of support or resistance.
On some occasions they do not and in which case they are either amended or deleted.

This trade meets all the requirements for the time being which are:

1. It (EURUSD) has a positive sell swap.
2. The PA is below the 100 SMA on all 3 timeframes.

Lesson 3: Part 2 - The Winning Risk to Reward Ratio

Before you read this it is important to watch the video in Part 1 of lesson 3.

As of writing this post the video 'Forex Risk to Reward Ratio' by Casey Stubbs of  Winners Edge Trading has clocked up 1,927 views with 6 likes. However when one considers that this Youtube video which was published on the 30th October 2010, that being nearly 4 years ago now, it really hasn't  gotten anywhere near the amount of  attention it truly deserves.

Who in their right mind would possibly argue that having a success rate even as low as 33.3% is nothing short of awesome. Couple this with the last component of the plan on when to pull the trigger and I can categorically show you (with proof) how your win rate can be easily above this. I will mention though at this point that I do not personally implement either of the examples Casey uses in his video, but prefer to use a Stop Loss (SL) of 50 pips and a Take Profit (TP) of 110. As you can see the TP is roughly 10% more than a traditional 1:2 risk to reward ratio, which if implemented would mean you would only 'break even' at 33.3% as opposed to showing a profit albeit a minor one as shown in the video.

In the next lesson we will cover support and  resistance along with trade execution. Join me then.

  

Lesson 3: Part 1 - The Winning Risk to Reward Ratio

Lesson 2: Interest Swap Advantage

First of all before I'll begin by mentioning if once we're done with the lessons, if the plan still remains unclear in parts this is OK as I will be recapping as time goes on.

Let's begin......

Anyone who is well versed in forex, and indeed anyone who has even been exposed to it knows one thing. Yes it's about currency pairs, and funnily enough currency pairs move. Sometimes the PA of the pair is fast and furious, sometimes it becomes sluggish, seemingly stuck in the proverbial quadmire. Which can be a tad annoying. It all depends on the fundamentals. There are more fundamentals than you can poke a stick at, every country plays the same game. There is a myriad of then like employment figures, interest rate changes, gross domestic product (GDP), you get the idea. It's just economic news released every month on every facet of a countries business activities. The market digests it and reacts (and sometimes overeacts) according. 

As for me I don't really get too excited about the economic or even the political arenas, not that it is unimportant, it is otherwise the market's wouldn't move. It is afterall the engine that drives the market. I just prefer concentrating on the technicals. Anyhow back to currency pairs, they only playout in three different ways. They: 

1. Trend

2. Range

3. Consolidate

These of which I won't go into now as I'll be sidetracking. I will cover them later but if in the interim you wish to know more just Google them.

Now what is it about swap rates that's so interesting? Right at the top of the post you will see three MT4 (for Android) screenshots.

In the order descending the first is a list of currency quotes, Using again the AUDUSD as an example I clicked on that pair which brings us to screenshot number 2, which shows a dialog box. Clicking on Properties brings us to the last screenshot 3.

Of the information shown what is of interest (no pun intended) is the long/short swap rates. Which are shown in points* as follows:

Swap long:   4.6

Swap short: -9

Which positioning looks most favourable? Going long or going short? Looks like the answer is self evident. Most of my trades can last from anywhere between 2 - 5 days on average. If I was to go short on this pair two things would happen. Every day I am in trade I would be losing 9 points. How much money this would equate to would depend on how much per pip you're playing with and how long your trade is open for. Remember interest rate swaps kick in on the beginning of the day's trade, which is 0800hours here in Australia's east coast.

So over the time whilst your trade is open this would erode your eventual profit (assuming your take profit (TP) is reached but however if you're unlucky it would increase your losses. This would be on top of the spread you paid your broker. Now on the other hand going positive has the opposite effect, by increasing your profit and minimising your losses. Which sounds like the best deal? Again it becomes self evident.

In the last post we looked at the same pair. PA was below the SMA on all timeframes right? That is why I said 'maybe' as to going short. It probably would have been successful but however not a reliable return on investment (ROI). See my point? 

Lesson number 3 will cover risk to reward. A crucial element in the plan.

* A point is 1/10 pip, so therefore in the example above if you executed the trade on $1.00 (0.10) a pip you would effectively be losing 0.90 cents a day from your floating equity.

Be wary of the shovel Sellers

So why are there so many shovel seller's on the Internet? Answer is because there are so many gold diggers. Of course it is a truism that not all opportunists looking for monetising within the Internet are necessarily gold diggers; any more than goods or service providers are shovel seller's. It is merely a case of discretion.

The unfortunate scene I have witnessed on the Internet are the activities of individuals or companies making hyper-exaggerated claims of ludicrous returns that can be made in forex trading. Usually by the purchase of an expert advisor (EA), a specially devised indicator or even a buyer signalling service. As the old saying goes, if it sounds too good to be true, it probably is.

Here is the reality folks, in order to perform well in the currency market you DO NOT NEED a super dooper black box autonomous trading expert advisor, you DO NOT NEED some souped up ultra gimmicky indicator and you DO NOT NEED to subscribe into a service whereby some smart arse know all proceeds to tell you when you should buy and sell.

Lesson number 1 begins in the next blog entry......

Baptism of Fire

Let us not underestimate what it takes to succeed at forex or indeed any worthy venture in life. I have heard it said that forex is not a get rich quick scheme but it is a get rich slow scheme, it's not a race, but a marathon, and this requires preparation and endurance. To find your competitor you need look no further than into a mirror.

When after my initial big losses which was 1k followed by another equal amount I can tell you it made me think hard and long at what I was doing. All I kept thinking that if others could do it then so can I. Besides there was no plan b in place if this failed, or should I say quit. It was all or nothing.

On the third attempt reloaded my account with $500 into a micro account (1:100) allowing for trades to be executed at 10cents a pip (the smallest trade size Possible). Then adhered to very strict money management procedures. Became more consistent in my trading methods and consistency stuck to my plan.

At first it was like playing ping pong with my broker. Win, lose, win, lose etc. Not really damaging the account but not making much headway either. I felt I was close to cracking it, I could feel it. Then with some minor modifications to my plan the account finally started moving forward and up.

Just bare with me and all will be revealed. Is there a way to be consistently profitable in what seems like a chaotic market. There most certainly is and the laws of averages state it must be so.

Knowledge is Power

To be more accurate I believe it is fair to say that applied knowledge is what empowers. Knowledge by itself is useless unless one makes good use of it. So for me the learning curve had begun in ernest, I set about learning and discovering what forex was really about, what made it tick, and what were the dynamics involved. I wish to share what I have learnt, but in due time.

The Internet is a huge resource tool, most folks would have to agree with me on that fact. There can be no denial. If there is one thing I have become aware of is that not all information is given with integrity, so you do have to hunt around a bit and execute due diligence when it's warranted. One site that is an absolute must for any would be trader is BabyPips.com. This would have to be one of the most resourcefull sites on the topic of currency trading. This cannot be stressed enough. This plus forex4noobs.com, which is dedicated to the education of candlestick trading. Highly recommended.

If there is one piece of literature that explains forex very well it would have to be FOREX Patterns and Possibilities ~ trading strategies for trending and range-bound markets by Ed Ponzi. Not only does it explain about forex but also includes a number of good strategies one can apply in the market.

To sum up this post here is a footnote. There is no such thing as a born trader. No matter how skilled and learned a trader becomes, every single individual starts off as a novice. Intelligence alone will not make you a good trader or even guarantee your success. Only trial and error, perseverance and dedication. Prepare to become a student. There is very little that can compare with the 'biggest market' on planet Earth. In essence in forex we trade the entire world, matching the world's economies against one another. How can you possibly compare that with any other business. Let me tell you, it is worth fighting for.

GFC: The Near Financial Armageddon

Well it happened and whilst 'hell on earth' did not eventuate it come damn near close. Some countries coming to the brink of near financial collapse, but fortunately here in Australia we were spared the agony of losing our shirts and britches, our good PM big Kev saved the day especially when all taxpayers hit the jackpot by receiving a $AU900 handout. Now that doesn't happen to often does it?

It was round this time readers I was looking at securing yours truly just in case things got nasty and turn belly up. Whilst on the net I came upon a book with an interesting title - Survive and Prosper in the Great Depression of 2009 - 2012 ~ A step by step guide to amassing a fortune trading foreign currencies by J.J. glenellis.

Forex huh! Although I was aware and heard of forex, to be honest I knew as much about it as I do about open heart surgery. Anyhow Mr Glenellis made it look o' so simple and now in hindsight it was, but back then I was still green and had little knowledge  and indeed even less understanding about the 'mechanics' of the currency market.

This market we call forex is so awesomely big, it is nothing for 4 trillion U.S. Dollars to be traded globally on a daily basis. It outsizes the stock market by a mile. Saying that we can see it is a beast to be reckoned with and as such takes no prisoners. Anyone who treats it like a casino or does not respect it will surely be chewed and spat out. This I discovered when the market devoured my first 1k, and tauntingly gloated at me for being so naive.

Time to get down to business and back to the drawing board.

Postulating the Holy Grail

By the time 2003 came around I was easing off on the share trading, the Internet as it was, was gathering momentum. Opportunities seemed to be popping up everywhere, a lot though not always legit, but there seemed like a glimmer of hope that something could be out there worth taking on.

Built it and they will come.
Or maybe I should say SBI or site build it as it was known. If you have never heard of it, that's cool, because neither had I. The concept is to create a niche subject website, presumably on a topic you have good knowledge on, then monetise using a combination of affiliate links and Google Absence. In the process just plug away at making, adding, and creating lots of interesting stuff to keep your readers begging for more.

It all makes sense right, well let me say that owning, operating, being creative and writing good material worthy of people's attention is hard work. My site is still alive today even though I have no rights over it anymore as I dropped my yearly subscription and handed it over to SBI but have to confess though I was proud of that which I did achieve with cell-to-cell-health.com. Whilst the cash wasn't exactly what I had would have hoped, it did make a little and turned out more of a labour of love in the end.

All the while I am looking at finding maybe not so much as a holy grail of sorts because as we know this is as allusive as it's namesake. Hopefully a business which has a 'turnkey operation'.
I ended up back in the real world again and looked at Amway as well as another business by the name of Mannatech. Yes I joined both for a while but not at the same time though.

What did I learn from these? A lot about motivation and the power of the law of averages. This of which was to serve me well later on in forex trading, but more on that later. I learnt that success is a 'numbers game'. It did however take some time before this really kicked home.

A long Journey

This is a journey for me which started back in early 2009. One in which has had many bumps and grinds into a field of endeavour which initially was totally alien to me. Before trading in foreign currency I enjoyed a good deal of success purchasing company shares via Commsec starting back in the mid 90's. Mainly concentrating on solid ground companies such as Telstra, ASX, AMP etc. All of this was executed pre-internet via phone placed orders. Also at a time when the financial world was booming and on an absolute roll, long before the dreaded GFC. In fact there is very little you could do wrong back then, as everything seemed to be moving on the up and up. Yes indeed those where the days.