The Foreign Exchange Markets Explained

The Foreign Exchange Markets Explained

Welcome to my Forex blog, which I have created, to enable regular traders to become profitable in the markets.

Many of you will have visited my site before and know that it has been around a very long time, since 2008 in fact and previously contained some eclectic articles on trading in general and the Forex markets in particular.

As the site became quite popular, it attracted the attention of a lot of traders and latterly ‘the hackers’, one day those hackers destroyed my content and brought the site to its knees.

My hosting couldn’t oblige me with backups as they didn’t have what they said they would have in the contract I signed with them and I didn’t have backups because ‘well you don’t do you’, you leave those things to the professionals.

So, forgetting all the past, the question is, where are we now ? Well where we are now, is 35 years down the Financial Trading road, with a wealth of experience under my belt and website that is fresh and ready to go again. The site is effectively new at least content wise.

When you have been round as long as I have, you’ve seen quite a lot, including:

• Nearly all possible extreme market conditions.
• The euphoria of people’s success and the despair of their failures.
• Seemingly never ending trending markets which even the best pundits said must be topping out, but didn’t.
• Ranging markets that signaled the supposed death knells of break out trading systems.
• All manner of sure fire ideas, method and downright con’s which have taken people’s money.

As I stated above, although I previously had an enormous amount of eclectic and somewhat opinionated articles on the Forex markets, having been given this ‘fresh start’, I thought I would embrace the challenge and alter things somewhat, with less comment and more regarding the facts about getting profitable.

I want to say everything I can about Forex, including everything that I have learnt in over 35 years of trading, and that means showing you how the markets work and what I see as being the easiest way to get an edge from them.

Additionally, I will talk with you realistically about the average retail traders overall chances of success in the Forex markets and some of the pitfalls you’ll encounter on your travels as a trader if you decide to take up the challenge.

 Why do the FX Markets Exist?

For many people, especially those of us who are more interested in the speculative side of things and  taking money out of the market, it is a commonly overlooked fact that the objective of the Foreign Exchange markets are to facilitate international trade.

When a company needs to buy $500 million worth of spark plugs from a manufacturing company located in the USA, then that company will expect to get paid in US dollars. If your company  happens to be living outside of the USA, in Europe for example,  then this means that in order to settle that bill you will need to enter the Foreign Exchange market and buy those dollars, selling your own local currency – in this case Euros – in exchange.

Such a transaction normally takes place with your bank or appointed financial institution who enter into the market on your behalf.

Another example of why the markets exist is that every time you step outside of your home country and go abroad , on holiday or a business trip, then unless you live in the ‘Euro Zone’ you will also need  to purchase foreign currency, so that you can pay for your purchases whilst you are away from home.

Speculation

Everywhere you find  a market place you’ll find speculation and people with opposing opinions who are ready to back those opinions with hard cash . You’d be surprised to what extent this exists, just look around you, you can back your hunch on almost anything.

It is my opinion, that trying to create ‘an edge’ in a two sided market, be it by trading live cattle, or foreign currency is one of the most deep seated human behaviours known to man. Having an opinion and being prepared to back your opinion with money, is right up there with desire to eat,  find a partner or put a roof over your head. One day they’ll find the name of the precise gene which is responsible for it.

If you don’t  believe me, or understand my point,  just think about the amount of ‘opinions’ on all manner of subjects which surround you. In short everyone has an opinion on everything from sporting events, political elections, reality TV,  even technology(iPhone V Samsung)  and some of those opinions can become very heated, if the people involved are really married to their opinions.

If you as a third party can provide a regulated platform for those people to express their opinions and back them with money, then you’ve got yourself a market.

As you know there are financial markets in a seemingly never ending myriad of instruments, so there is plenty of choice, I personally have always preferred the Foreign Exchange(Forex) markets as I like the challenge of a 24 hour per day market.

Forex allows me to open and close my positions at any time of the day or night.

Edge

Everyone who comes to the Forex markets and who is not using the market to facilitate their own business  as a hedger, comes to market with the idea that he/she can find an edge and take money away out of the market.

The main issue with this belief, is that the majority of people who come to the market looking for such an edge are  in the wrong state of mind to achieve their goal, nor do they have the necessary knowledge to understand what the right circumstances are in order to create that edge, nor how to measure whether or not they have obtained it.

This means that the fatality rate among new or beginning traders is very very high. This is a point frequently mentioned in the financial press and forums across the internet. The message is always passed as a ‘surprise’, as if it somehow isn’t fair and that more people should be allowed to become successful.

Think about what it would mean for the overall market, if more people were indeed successful – the markets would simply cease to exists. By implication , the majority must loose for the market itself to survive.

What is rarely mentioned in those same commentaries or articles is that the same failure rate occurs in a whole of host of other business areas, like business start-ups or even in more personal activities like weight loss, sports fitness or self-improvement efforts.

Over the years since before the birth of the internet, there have been trends in the products marketed and the ‘latest hot methods’ which will make you money so long as you click a couple of buttons. The ‘psychological pull’ to purchase such methods, that guarantee push button, almost immediate wealth, are very very strong for most people. This is especially so for those looking for a quick fix to their problems caused by the financial crisis and who are swimming in debt.

Anyone who has been around a little time will understand, what I mean by the above and also when I give the following examples, EMA cross over systems, Neural network systems, EA’s, automated robots, Binary Options etc. The latest offering includes, ‘Bank Manipulation’ methods which seems to be quite hot at the moment.

The problem I have with all of the methods that people  push around the internet or via publications, is that 99.9% of the people giving the information have never even been inside a bank other than to do their normal personal business, nor have never actually worked for a blue chip company that  makes a market in Forex or worked on a trading floor of any shape or form – so their commentary and advice is informed guesswork which they have picked up in forums, training courses.

This creates huge confusion in the messages that get passed to traders who are first starting out and the information which is then understood to be ‘the truth’ and later discovered to be concocted misunderstanding and mistruths.

Dice and roulette 

I would now like to talk about mathematical probabilities.

Ask yourself, how easy do you think it is to beat a dice or roulette wheel. Both you and I know that over the long term it is a mathematical improbability. Anyone who claims otherwise, is deceiving both themselves and you. I’ve met and even followed a few who tried to convince me otherwise.

With the odds on the roulette table or any other ‘games of chance’ offered in casino’s heavily stacked against you, I don’ play those games neither should you, I’m only interested in taking on tasks/enterprises/challenges that I know I can win.

And this is the way you need to look at Forex – let me explain.

The Forex Market and gaining that elusive edge

Whilst you will almost certainly agree with me that the Forex markets are a zero sum game, meaning one person’s losses are another person’s winnings, how many of you reading this will agree with me when I tell that the Forex markets like all other financial markets where you trade via and intermediary, broker, market maker or exchange are worse than zero sum games. They are negative sum games.

This is because all of the above intermediary’s must be paid and such payment has to come out winnings.

So because of this, your chances of success, just like in those casino games noted above is drastically reduced.

In order to win then you need an edge which firstly takes care of the ‘negative sum game’ costs of the various intermediaries and once you have that you’ll need even more edge in order to produce the profit for yourself and upon which you’ll be able to live.

Forex, unlike a casino has an ‘edge possibility’ mechanism which varies throughout the trading day.

What do I mean by this ? What I mean is that at certain times of the day it is easier to gain an edge than at others. There are points during the trading day when your chances of overall success are greater than at other times.

Depending on your trading style and strategy you won’t want to be trading or looking for non-trending opportunities during the London or New York opening sessions. Conversely, when the market is quiet, for example during the Asian overnight sessions your ‘edge opportunity’ for trend trading will be very limited.

One of the major rules about Forex then is to first understand what it is you are trying to achieve and once you know this, you then need to know when you’ll have the best chances of achieving this.

This sounds like a simple instruction, ‘understand what it is you are trying to achieve’ and ‘only try to achieve it when you have the best chances of success’ and I am sure the majority of people feel that they would be able to follow it, however the reality of things is that because the market plays unbelievable tricks with your emotions the average trader simply finds it impossible to follow such rules.

What this means is that ‘rule sets’ in whatever shape or form you introduce them get broken in an instant, with the traders emotions taking over and the result being ‘second guessing’, ‘decision breaking’, ‘over trading’ ‘getting even with the market’ and a host of other such ruinous traits.

Breaking your own lack of emotional control and becoming a responsible, controlled emotionless trader is one of the hardest things to achieve in trading. Note how I am talking about this aspect of trading prior to even looking at the markets themselves, that’s how important the role of a traders emotions plays on his bottom line.

As easy as it sounds all a trader actually needs to do in order to control those emotions is to have a plan, follow and execute that plan and reinvent and re-execute the plan i.e. rinse and repeat at intervals which suit his trading style and the ‘edge opportunity’ given by the trading method.

In practice this means that if you have a method which you know will reap you a 60% win rate then you’ll understand that on only six occasions out of ten will you have a winning trade.

Statistically of course if your win rate is 60%, this does not mean that those 60% winners will be spread out evenly, more likely than not, just as in roulette where you can get eighteen, twenty or even more runs of red on the roulette wheel, in trading you can get extended sequences of losing trades and it is this fact alone that mostly sends traders emotions all over the place, making them ‘second guess’, ‘want to get even with market’, ‘over trade’ and commit any of the other trading sins which are almost guaranteed to empty your trading account.

In the various courses I teach from this website I cover in depth responses to counter and answer these problems and thereby enabling you to control your trading decisions correctly.

On the assumption that your trader emotions are in check, then the only remaining question is how to achieve that 60% win rate with a dollar win to lose ratio in excess of 1 to 1.

Well the actual trading methods used I discuss in the members area, but you can get a glimpse of all this by adding your email here – I’ll open up the daily trade recommendation area and video play backs to explain my trading methods for you.

In addition in the next section I will explain the way the market operates.

The Forex Market and the way it moves.

The Forex market can be quite easily read once you understand what it is you are looking for. Let’s take a look at the following chart.

As you can see, the market appears to consist of a series of short sharp quick bursts of activity as price moves from acceptance at one price range to acceptance at another range.

The short sharp bursts of activity can be clearly seen as prices literally dashes across a sort of ‘no man’s land to arrive at a point where two way trading at an acceptable price level takes place.

There are several points that need to be discussed here.

At point A in snap shot 1, two way trading is obviously happening, but the trading is in balance, to a large extent buyers match the sellers and the movement of the market is caused by temporary imbalances that go hand in hand with one group, either the buyers or the sellers thinking they have the upper hand only to have their hopes dashed by the opposing party as they swiftly push the market back into equilibrium.

At point A in snap shot 2, two way trading is happening, bt the trading is out of balance.