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Recommendations to Novice TradersBeat the Odds in Forex Trading
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our web site at www.Wiley Finance.com.
Beat the Odds in Forex Trading
How to Identify and Profit from High Percentage Market Patterns
IGOR TOSHCHAKOV
John Wiley & Sons, Inc.
Copyright © 2006 by Igor Toshchakov. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data:
Toshchakov, Igor, 1961– Beat the odds in Forex trading : how to identify and profit from high percentage market patterns / Igor Toshchakov. p. cm.—(Wiley trading series) Includes index. ISBN-13: 978-0-471-93331-1 (cloth) ISBN-10: 0-471-93331-7 (cloth) 1. Foreign exchange market. 2. Foreign exchange futures. 3. Speculation. I. Title. II. Series. HG3851.T67 2006 332.4'5—dc22
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
Contents
Introduction vii
CHAPTER 1 How to Get Started 3
CHAPTER 2 Establishing a Trading Account 7
CHAPTER 3 Choosing the Right Dealer 15
CHAPTER 4 Psychological Challenges of Speculative Trading 27
CHAPTER 5 Discretionary versus Mechanical Trading Systems 33
CHAPTER 6 Technical and Fundamental Analysis 37
CHAPTER 7 Philosophy of the Igrok Method 53
CHAPTER 8 Evaluating Probabilities Using Technical Analysis 59
CHAPTER 9 Basic Trading Strategies and Techniques 77
CHAPTER 10 Choosing a Currency Pair to Trade 95
CHAPTER 11 Money Management Rules and Techniques 97
CHAPTER 12 Market Behavior and TraderDiscipline 103
v vi CONTENTS
PART IV Short-Term and Intraday Trading
CHAPTER 13 Principles of the Intraday Trading Plan 113
CHAPTER 14 Entering the Market 117
CHAPTER 15 Exiting the Market 125
CHAPTER 16 The Importance of Timing 133
CHAPTER 17 Trading Strategy During the Central Bank Intervention 141
PART V Templates for Short-Term and
CHAPTER 18 Average Daily Trading Range Templates 147
CHAPTER 19 Technical Formation Templates 159
CHAPTER 20 Trendlines, Support, and Resistance Templates 191
CHAPTER 21 A Sample Trade 207
Index 211
Introduction
Over the period of time that I have been dealing with speculative cur- rency trade, I was lucky enough to have an opportunity not only to accu- mulate significant personal experience, but also to observe the work of several hundred independent traders. In addition, I have more than a decade of experience in teaching the theory and practice of currency trad- ing to individual investors. I have also been studying the experience of other traders personally, via books and other publications as well as through participating in discussions at various professional seminars and forums, and have corresponded with traders/colleagues from many coun- tries around the world. This additional experience has allowed me to con- duct my own comprehensive research on problems that all serious traders run into during their professional careers. I have also been able to gather extensive material that has served as the initial base for this course and that I have used to create my own trading method. Although nothing ideal exists in nature, I believe my method of trading deserves some serious consideration by those who chose speculative currency trading as a pro- fession or just as a source of additional income. I would like to start the introduction to this book by mentioning that my own experience as a FOREX speculative trader, and the experience of my respected colleagues whom I have met personally or through publica- tions, has shown that the problems all individual traders have to deal with are virtually the same. However, the number of solutions to the problems is almost the same as the number of traders themselves. Over time, practi- cal results can range from complete triumph to complete desperation. For each participant, this business starts with a variation of a famous line from Shakespeare’s Hamlet: “To be a trader or not to be.” Is it worth risking money, time and sometimes even a career built in another profession, in order to reach success in a new field? If you join this market, how do you enter into that desirable 5 to 7 percent of participants who statistically
vii viii INTRODUCTION
succeed? How do you reach success so that the money, time, and energy invested into this business will not only be justified but will also bring you significant dividends? Each participant should be able to answer these questions personally; my task is more modest. For those who have already made the choice in favor of “to be,” I offer my version of the secret about how to beat the odds and win the market game. I truly believe this book will allow novice traders to save a good deal of time and money that oth- erwise would be wasted by following the traditional trial-and-error method of learning from their own mistakes before gaining the necessary experience.1
PA R T I
Recommendations to Novice Traders
participation in real trading. This initial stage can be divided into five steps:
1.Theoretical preparation and learning. 2.Choosing and acquiring the charting and analytical software, and sources of current market information (data vendors). 3.Developing practical skills and using acquired theoretical knowledge; de- veloping trading techniques and skills as well as trading strategies and systems, on the virtual trading account under real market conditions. 4.Choosing the dealer or the broker company. 5.Defining the size of the investment capital and opening a trading account.
You should understand that the learning process could be more effec- tive and mutually enjoyable if you accept some of my preliminary advice and recommendations. These tips are related to the preliminary self-training that you have to conduct so you can better absorb the learning material. Therefore, the first part of the book is focused on general recommendations for novice traders.
CHAPTER 1
How to Get Started
in this book. The theory of speculative currency trading can be studied us- ing the existing special literature. Before starting to study my trading method, you must familiarize yourself with basic issues of the business in which you are attempting to participate or are already participating. Be- cause my trading method is different from the others that I call traditional ones, the theoretical preparation for my students has to have a specific character. For preliminary preparation on the trade theory, I recommend studying the following four issues:
1.History and development of the FOREX market. 2.Currency market participants, their roles and mutual relationships in the process of trade. 3.Technology and terminology of speculative currency trade. 4.General principles of fundamental and technical analysis.
The main efforts should be focused on studying the technical analysis key issues. The main focus should be on the following two subjects: Support and Resistance Theory and Retracement Theories (Dow and Fibonacci). My method uses only a relatively small part of the general theory of technical analysis and virtually does not employ fundamental analysis at all. However, I do not think it will hurt you to gain some knowledge of subjects that you
will most likely not need in the future. On the contrary, this knowledge should help you not just with better understanding of the offered method but internal market tendencies as well.
I don’t have any special or particular requirements for computer software, charting programs, or data sources of real time and delayed market quotes and other data. Moreover, my trade method requires only minimal data means. That’s why any service (even the cheapest one) delivering real-time market data might be sufficient. It has to have the ability to cre- ate charts, a set of main technical indicators, and a minimum set of graphic tools for drawing trend lines, support, and resistance lines. As far as I know, such a service can even be received at no charge from some In- ternet sites. Long-term analysis requires more sophisticated software, which can be found today on the market at a relatively inexpensive price and with quite acceptable quality. I didn’t do any special research on this subject and cannot offer you a comparison analysis of today’s informative services and charting pro- grams. I just want to mention that for the purpose of analysis of long-term charts, including daily, weekly, and monthly charts, I’m using SuperCharts by Omega Research and data feed of the Bridge/CRB. This software doesn’t envisage any real-time mode, and the data is loaded from Bridge/CRB daily at 11:00 P.M. GMT, after the end of each trading day. I am entirely sat- isfied with this service; it fulfills the requirements of my trade method, and I recommend something similar for your usage.
Before making the final decision to participate in real trade in the FOREX market, the majority of beginners go through the learning stage called dummy trading. This presents a virtual market game, with only virtual capital at risk. Mainly, this is the stage when a newcomer makes a final de- cision about whether to participate in real trading. His final decision is usually based on the results of such dummy trading. Considering such a training method as a necessary element for the beginners, I must empha- size that the results received in virtual dummy trading are different from the real results of the same traders in the real market when someone deals with real capital. The differences are always not in favor of the real trade. The psychological factor is mostly responsible for this. The risk of losing How to Get Started 5
real money influences the trader in the most negative way, triggering er- rors, some of which he was successfully avoiding while trading his dummy account. Therefore, I would like to warn you not to be very hope- ful and overexcited if the results of working in the real market entirely co- incide with the results received in dummy trading. The negative factor built into the trader’s psychology will reveal itself anyway. In order to reach a positive result in real trading, you must develop methods of lower- ing the psychological loads in the stressful situations of real trading. Do- ing so will constantly train and strengthen your psyche. The majority of FOREX dealer and broker companies today offer on- line trading, which presents an optimum solution and a big advantage for the majority of independent traders. Most of those companies also allow virtual dummy trading. In this regard, I have only one recommendation: It would be better to have a dummy trading account with a dealer or a bro- ker you are planning to work with when starting real trading. This way, you generally will be able to evaluate the quality of the service; get used to the manner in which your orders are filled by the dealer; and get used to the peculiarities of this particular on line trading software. If you can inde- pendently determine the initial amount of the virtual account, it is desir- able for this amount to match the size of the real investment you have planned. Such an approach will allow you to achieve the closest proximity to the real situation you will soon have to deal with.
CHAPTER 2
Establishing a Trading Account
After the preliminary preparation stage is fulfilled and you think you are ready to participate in real trade in the FOREX market, you must choose a broker or dealer company to conduct your investment opera- tions. You must also determine the size of the initial investment that you will have to transfer into the trade account opened with the chosen dealer company. (Criteria for choosing the dealer company are pre- sented in Chapter 3). As is well known, this market has few specific characteristics; without considering them, success in speculative opera- tions is doubtful. Unfortunately they are totally beyond the trader’s control. Those pe- culiarities result from conditions characterizing the FOREX market and from historically developed practices and rules followed by all the partici- pants. Some specifications on the FOREX market include high volatility of main currencies; the possibility of trading under conditions of low-inter- est margin; and relatively high minimum contract value. These conditions are initially considered to be advantages and mainly attract investors into the business. However, they also have a negative side and can be consid- ered as an additional source of risk for a trader. Everything depends on the point of view of the observer, as in the well-known example of the half-empty and half-full glass. I don’t have any doubts that, because you have made the decision to par- ticipate in the market, you are sufficiently informed about its advantages. My
task is to point out some hidden risks and dangers. Some mistakes made mainly by novice traders during the first stage of their careers are described below. They are connected with insufficient initial capital or its incorrect dis- tribution and management. First, the beginner should be warned about two possible mistakes that are typical and usually made at the very beginning of the trading career.
Insufficient initial capital invested into trade is the first mistake made by a majority of newcomers, and it often turns out to be their last mistake. I have witnessed many cases of full loss of capital invested into cur- rency operations during the first month, weeks, days, and even hours. The invested capital is lost before a novice trader has time and an opportunity for learning. This happens for a few key reasons. At the beginning of a career, a new trader has neither sufficient knowledge and experience nor the feel- ing of danger or risk limit that should not be surpassed. Also, at the very beginning, there are some errors that could be avoided with the proper set up before conducting business. One of the frequent initial mistakes is in- sufficient investment in trading operations. Consider the condition when the average daily oscillation amplitude of the main currency in a percent ratio is comparable to the margin offered to the currency investor by banks, dealers, and brokers. (It is common nowadays to provide the trader with such a condition when the initial margin does not exceed 2 to 4 percent of the size of the contract for the daily trade.) If the currency oscillates 1 to 1.5 percent on a daily average, the loss of a larger part or even the entire trading account within just a couple of days is possible. I must mention that most novice traders partially realize risks they will have to deal with on the currency market, but are not al- ways capable of precisely formulating and evaluating them. Therefore, they often undertake incorrect actions for lowering them. Logical thinking dictates that the simplest way of lowering the risk of potential losses is by investing the minimum possible amount into trade. At the same time, the idea and the plan are to increase the investment later as the necessary ex- perience, knowledge, and skills are acquired. From my experience, this approach to lower the risk is virtually ineffective and even harmful. The situation reminds me of one of my favorite anecdotes: A commission ar- rives in a psychiatric hospital to inspect the facility. The commission members see an empty swimming pool into which the patients are diving
from the diving board. The commission members ask one of the patients why they are diving into an empty pool. The patient answers that the hos- pital administration promised to fill the pool with water immediately after the patients learn how to dive. Usually, most novice traders partially realize the risks they will have to deal with on the currency market, but they are not always capable of precisely formulating and evaluating these risks. In the same way, many novices try to lower the risk of losses while they are expecting to acquire sufficient practical experience, in order to invest larger amounts later on. They don’t understand that a small trading account actually increases the risk of losses. By artificially decreasing the initial investment capital, it is impossible to lower the risk. This is be- cause the size of the trading account and the risk degree of losing some part of the investment capital are not proportionally related. I will illus- trate this statement with a simple example. Let’s assume there are two accounts. One of them has invested capital of $5,000 and the other $50,000. All other things being equal (such as minimum contract size of $100,000), the initial margin equals 4 percent, and during one trade only, one minimum contract is operated. It is clear that only after two or three unsuccessful transactions (each resulting in a loss of an average of $1,000), the smaller account is practically inoperable and requires replen- ishment in order to continue participation in the market. See Figure 2.1. The larger account in this situation remains absolutely sufficient for further operations. Restoring the loss is easier than in the small account. Equalizing the chances to win with large and small accounts is possible only by proportionally decreasing the minimum contract size for a small account owner, or by the same proportional limitation of loss size. It is practically impossible to accomplish either of these options. The size of the trading account and the risk degree of losing some part of the investment capital are not proportionally related. The minimum contract size for everyone who works with a good dealer should not be below $100,000. It can be said that this amount is a minimum standard for small individual transactions. By putting short and tight stops, the trader increases the chances the stops will be triggered more often and the total loss will consist of many small losses. Sometimes, novice traders gradually add money to the trading ac- count. By replacing the losses on the market, they keep the small account instead of immediately investing the large sum in order to lower the risk. As a result, considerable amounts are often lost, invested into the market in small portions. One of the main reasons for these losses is insufficient capital at the moment when it is most required. Therefore, the most fre- quent disadvantage is insufficient initial investment.
FIGURE 2.1 In this example, the small account becomes inoperable and needs replenishment after a loss of 60 percent of the investment capital. The actual capi- tal losses were equal to just less than two average daily ranges on major curren- cies. At the same time, the larger account, after having the same capital loss, remains in good and tradable condition.
The trading account (to the degree possible) should be sufficiently large, in order to correspond with market conditions and provide the required security and flexibility in making trade decisions. The trading account is a working tool for the trader. It should correspond not only to those tasks that each trader sets for himself personally, but also to those business re- quirements under which he will have to work. It is not worth trying to lower the risk by artificially decreasing the initial invested capital. This tar- get should be achieved in a natural way—primarily by trading the con- tracts of the minimum possible size at each given moment, until the time when the trader acquires sufficient experience and self-reliance.
The second mistake made by a majority of newcomers can be attributed to the overtrade risk. This problem is sometimes directly connected to in- sufficient trading capital. Quite often, though, the problem does not have any relation to this. Rather, it can be explained by the trader’s lack of knowledge of the main principles of money management, which means in- sufficient ability to control someone’s trading capital. A trader’s trading capital is his tool designed to earn money. In the first place, the trader has to take care to keep this tool intact, because its loss or damage will imme- diately result in the inability to continue his trading operations.
Overtrade most often reveals itself when the trader (hoping to receive the maximum possible profit) acquires an oversized contract, risking the larger part of his trading capital in just a single transaction. In case a mar- ket starts moving against the trader’s position, possible losses can exceed the acceptable limit. The result can be irreparable damage to the working
FIGURE 2.2 After a single trade on the full margin (using the maximum lever- age), the first trader has lost 50 percent of his total capital. Now he needs to make 100 percent gain on his capital left, just in order to break even. The trader of the second account did not exceed the risk limit and, after suffering the same loss in terms of pips, he still has a quite operable account.
capital, bringing the trading account to a condition unusable for further trade. The account will be unusable in a timely manner in the future, due to the impossibility of covering those losses that occurred during just one transaction. Under current conditions, many banks and dealers offer their clients margin trading terms at a leverage ranging from 20:1 to 50:1 (and even higher). The initial margin as an industry’s average is only 2 to 5 per- cent. Considering the average market activity during one day, it is easy to lose half or even a larger part of the trading capital. In order to avoid this occurrence, it is desirable to use certain margin self-limitation and not to use more than 5 to 10 percent of the trading capital during one trade. Traders should establish their individual limitation for the margin, and possibly keep this limitation not below 10 to 20 percent as compared to the size of the trade contract. In other words, for each $10,000 to $20,000 of the size of your trading capital, only one contract of $100,000 should be traded at any time. See Figure 2.2.
From the very beginning, it is useful to remember that there is no capital so large that it is impossible to lose during speculative operations in the FOREX market. The risk of losing part of or the entire investment capital is always present where there is the possibility to earn. The currency market is not an exception to this rule. In order to earn, the trader must take the risk of loss. In risking, though, traders must determine in advance the lim- its of their risk. They should never risk all or the largest part of their trad- ing capital at once. They should risk only that part whose loss they are sure will not result in catastrophic consequences for their trading ac- counts and the resulting inability to further participation in trading.
CHAPTER 3
Choosing the Right Dealer
success of the whole enterprise. Nowadays, the market is overcrowded with companies and banks offering their services to individual traders and investors to access the currency market. It is not easy to make the right choice without a certain set of criteria. These criteria best correspond to the interests, preferences, and means of each individual trader, and to the trade strategy and tactics chosen by him.
WHAT IS THE AMOUNT (VALUE) OF THE INTRADAY AND OVERNIGHT MARGIN AND CORRESPONDING LEVERAGE?
Many reliable dealers (especially those who offer Internet trading) restrict the margin by 2 to 5 percent, which provides money contract leverage be- tween 20:1 and 50:1. Such terms seem quite reasonable and acceptable, considering the risk/investment efficiency ratio. Higher margin require-
ments yield lower investment efficiency, whereas a lower margin means that the dealer bargains against his own clients and will do everything possible to prevent his clients from winning. It is difficult to work under such terms because you will confront even more trading problems.
Today, a minimal contract size of $100,000 is common for most dealer companies offering their services to individual traders. This contract size is quite affordable from all points of view. It allows traders to con- duct reasonably effective money management with limited capital. It also makes it possible for small individual investors to participate in money speculation. Finally, it is a reasonable compromise between the required minimal deposit amount and potential profit level in absolute money nomination.
Evidently, the more the investment capital, the easier, safer, more flexible and more effective should be its management. The investment and finan- cial means of traders differ. It is a common situation when somebody will- ing to participate in speculative trading in a currency market simply does not have enough funds to open an account corresponding to the required safety rules. Each trader has his or her own security level, but I think (al- though it is a debatable issue) that the operable account size for the indi- vidual speculative trader begins with a minimal amount of $30,000, assuming that the initial margin is 2 percent and the minimal contract size is $100,000. I think $30,000 is the required minimum amount correspond- ing to FOREX market conditions, considering the following:
• If trading a single minimal contract of $100,000, a trader loses a pip amount equal to an average daily swing corresponding to $600 to $1,000 (depending on the selected currency pair), then the loss of 2 to 3 percent of the account per single transaction is rather painless. This loss cannot ruin the account, even in the case of a few consecutive losses. • Traders must consider that the market “noise” amplitude approxi- mates the amplitude of the average daily exchange rate fluctuation. Therefore, setting shorter stops while trading on a medium or longer oscillation ticks. • Some trading strategies recommended in this course suggest position reversal and doubling the contract size at the same time, which de- mands some additional margin for the safety of the corresponding working capital. • Traders should take into consideration that the trader’s job should be adequately reimbursed, including psychological stress, time, and ef- fort spent. There is no reason to spend up to 14 to 16 hours per day trading if you can earn the same money in a less stressful job. Simple calculation shows that even doubling of trading capital in one year can provide you with a secure income, but only in the case of an ade- quate initial investment.
The ideal option is considered to be a transaction execution of stop and limit orders at a fixed price, regardless of the state of the market, its speed, and its direction at the moment. Some dealers guarantee this method of execution, whereas others reserve the right to fulfill an order with a slippage. The value of this slippage depends on the current state of the market, and can fluctuate from a few pips to tens of pips. The slippage evidently creates favorable conditions for abuse of a trader by the dealer, although it is practically impossible to arbitrate the price received from the dealer executing this transaction.
The spread is the difference between the “bid” and the “ask” prices given at any moment on the trading terminal. The smaller the spread is, the bet- ter it is for the trader. The dealer’s spread size of five pips at the minimal contract size of $100,000 in a steady market can be regarded as adequate and acceptable, because it does not exceed the 5 percent limit of average daily deviation of currency rates. Some dealers, when trading contracts of $500,000 or more, do offer a spread of less than five pips to their clients. If you do not plan to trade contracts of $500,000 or more, you have to find a dealer who can maintain the minimum spread provided for the contract— even under active and quickly changing market conditions.
Many dealers now offer the opportunity for on-line trading, and more will do so in the future. Internet trading has certain advantages over the tradi- tional telephone communication with a broker or a dealer. The main ad- vantages of on-line trading are:
• The opportunity to monitor market movements by following current real-time prices, graphics, and even news on a PC monitor. Usually, it is free and is included in the service and trading software offered by a dealer. • Dealer trading software as well as other options often provide the trader with the opportunity to manipulate, modify, and customize graphics; conduct technical analysis using indicators; and draw trend lines, support, and resistance lines. In addition to being convenient, this provides substantial money savings. It eliminates the necessity of buying an expensive market-quotes service, and analytical and chart- ing software for conducting technical analysis. • Internet trading is supported by safe electronic registration data, which provides the necessary security and lowers the possibility of conflict situations between a trader and a dealer. These conflicts are due to probable human errors and slips of the tongue, which are com- mon during live phone communications.
The most reputable dealer companies charge no commissions for trans- actions executed by their clients. Others charge some commissions, but usually not very high ones. Personally, I cannot excuse some dealers charging so-called storage fees. In the financial world, the client is usu- ally paid when he stores his money—not the dealer. Reputable dealers transferring an open position to the following day execute the rollover operation in accordance with the current LIBOR rates and reflect it in a daily statement. Depending on the currency pair and direction in which the position was opened at the moment of its transfer to the next day, the client be added to his account just for holding the position open for more than one day. Other dealer companies do not bother themselves with such calcu- lations but simply charge the client for the interest on the position transferred to the following day. There are numerous discussions about the possibility of holding two opposite positions open when both long and short positions exist simultaneously. At a dealer’s statement in such case, both positions are shown to exist in reality. Each one generates profit and/or loss, and in such form they could be transferred to the fol- lowing day. I have met a few traders whose manner of trading envisaged such a condition or who used it as an important part of their trading strategy. I think such arguments are useless and senseless. The positions can- not voluntarily be divided into new and liquidation—depending on a trader’s will. The market functions in accordance with certain rules, and it is arranged in such a manner that positions of the opposite tendencies for the same currency pair and of the same size are offset automatically. The spot part of the FOREX market provides the offset and self-liquidation of all open positions by the end of each trading day. At the beginning of the next day, only those positions are recovered that had not been offset due to the lack of opposite (with opposite sign) transactions of corresponding size. For example, if the trader during the day executed USD/CHF transac- tions for the total amount of $600,000 to buy and $400,000 to sell, then the long USD/CHF position for the remaining $200,000 would be transferred to the next day. As you can see, this is accompanied by the offset of the opposite positions, and the corresponding gain/loss was deposited into or deducted from the trader’s account. There is a simple reason that some dealers allow and even encourage their clients to keep opposite positions for longer than one day. A dealer company can charge interest for practically nonexisting positions. A dealer company can also create the illusion for the trader that the trader is present at the market and should find a way out of the situation and liqui- date both opposite positions, whereas, in reality, they are nonexistent. Many traders consider the possibility of keeping these opposite posi- tions an advantage. This advantage allows them to hedge (or lock) their losing trades and to limit their losses in case the market moves against their initial position. At the same time, this possibility creates the illusion that loss of money is not final and that the money could be returned if the “right” way out of the situation was found. If you cannot stand the psycho- logical stress of trading without such useless “placebo” methods, then it is better to reconsider further participation in this business.
Legal issues (i.e., a set of acts governing and controlling the functions of banks, dealers, and broker companies in the FOREX market, established by government agencies) are of primary importance because traders have to entrust their money to the dealers. First, it is better for traders to make sure that their money is safe and that the breach of trust is impossible for the dealer. I am not a lawyer, so I have no right to advise my clients on legal mat- ters. The vast majority of dealer companies function in many countries, with various rules and regulations of which I am not aware. My recom- mendations are, therefore, based on my personal experience and prefer- ences. In any case, you had better survey the problem yourself and preferably ask a lawyer for legal advice. The following sections outline my personal opinion concerning dealer choice, considering the security of capital invested in FOREX operations.
Date: 2015-12-17; view: 1063
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PART I Recommendations to Novice Traders 1
PART II Developing a Trading Method 25
Strategies Using the Igrok Method 111
1Please also note that basic trading terminology, technical analysis terms, graphs, commonly known symbols, and abbreviations related to currency trading have been used in this book without detailed explanations of their meanings. Such in- formation (if needed) could easily be obtained from numerous textbooks and In- ternet sources, including my own web site at www.igrokforex.com.
The trading account is a working tool for the trader, and it should corre- spond also to those business requirements under which it will have to work.
This is the minimum for a majority of the dealers. More details on the problem of overtrade will be presented in Chapter 11.
The best way to find the right dealer is to compose a list of questions to ask the dealer, before making a final decision in favor of the preferred company or bank. The following are suggested questions that should be answered by the dealer before you make the decision to open a trading ac- count. Included are my recommendations about the optimization of mar- ket operation conditions: