3 Ways to Make More Money in Forex
09/05/2012 6:00 am EST
Sam Evans of Online Trading Academy outlines how currency traders can expand their horizons beyond their comfort zone, and as a result make more money trading FX.
Having taught and spent time with literally hundreds of students and traders of the currency markets, it never ceases to amaze me how we can get into habits very quickly—often ones that stick for a long time, and sometimes ones that are not so great for us to have either.
I have always recognized that the two biggest reasons why human beings struggle to trade with consistency and success overall, comes down to in my opinion, two main reasons:
- We allow our emotions to influence our trading decisions and money management.
- We tend to listen to others and make calls based on what we hear, see, read, and are told.
Taking into account the above points, it would be useful to apply and look into how exactly these dynamics have an effect on participants in the Forex markets overall. Without doubt, the currency market is a huge arena, and with such a large stage there is always going to be a wide amount of information available to those who are willing to look for it. However, the quality of that information and the likely impact it will have on your trading is what we really need to delve into.
You see, as human beings, we are more or less programmed to behave with a “herd mentality,” and it is this very functioning which has undoubtedly got us to where we are in many areas of progress. Only by sticking together did we ever have a chance of achieving some of the accomplishments we have over the course of history. By sticking together and putting our energy into a single common goal, humans have progressed without question.
However, let’s for now move onto herd mentality and how that works in the Forex markets. Over the years that I have been trading, my family and friends have asked me time and time again about where the profits and losses go during the everyday activity of the markets. They know that people lose sometimes and win sometimes, but what is fascinating is that they seem to think that there is a magical money pit which funds this money in the background!
Trust me, it would be nice if this was the case, but in the bitter reality of how money is truly made and lost in the financial markets, we need to accept that trading is nothing more than a zero-sum game. When one person loses, another person wins...and as my fellow instructor and master trader Sam Seiden says, “Trading is simply a transfer of funds from the accounts of those who don’t know what they are doing into the accounts of those who do.”
So the next question is how well we now think herd mentality will serve us in the competitive environment of the currency markets. Remember when one loses, another wins.
With this in mind, I would therefore always advise any individual hoping to trade the markets to start thinking differently from the rest. If you are doing what every other trader is doing, how can you ever realistically expect to step beyond the confines of the zero-sum game?
To do this, we need to expand our horizons and start to break away from the things that most FX traders will be doing. Let me share a couple of key areas which can help you to define an edge in this market and allow you to stop thinking like the rest:
1. Let Go of News Trading
One of the biggest challenges of currency trading due to the fact that the FX market is often described as a transparent arena in which the news is released to everyone at the same time, devoid of such problems as “insider trading” that the equity market is supposed to suffer from.
Again, while news trading is encouraged in FX, this does not in any way mean that this is the smart thing to do. Do you really think that institutional buying and selling is done on the whim of a news release?
Maybe you do, but please also think about the fact that institutions are taking positions of a huge size, and simply dipping in and dipping out is not an easy thing to do when you have a $20 million position at stake. These kind of positions need to be built over time and accumulated under the radar to the highest possible degree.
If I was building a trade of that size, I would not be changing my mind every time a new piece of news was leaked. Yes, I would expect periods of directional change, but I would have a plan and be sticking to it, no matter what the news is on a daily basis.
Next: Forget About the Spread|pagebreak|
2. Forget About the Spread
Every time a FX trader enters a trade, they pay a spread (the difference between the Bid and the Ask price) for that fill. In FX, this replaces the commission structure found in other asset classes, and is an attractive feature of the asset class.
However, this often becomes a double-edged sword for people too, because they are told that paying too high a spread is not a smart thing to do. And because short-term trading is so often pushed as the way to go, they avoid the currency pairs that have larger spreads. In my opinion, this can be a costly mistake. Take a look at the chart below:
Many newer FX traders would not be so keen to trade a pair like the EUR/NZD above, firstly because it is not often mentioned, and secondly because many FX brokers push how tight their spreads are on the majors. When you are offered a 1.6-pip spread on EUR/USD, why would you want to trade the EUR/NZD with a 5-pip spread?
I will tell you why: Because if the risk-reward profile if good enough, a small cost of spread is just another minimal business cost. There were plenty of supply and demand levels on offer in the chart example above, plus a good solid trend to allow profits to run. I would never worry about a larger spread if I am prepared to allow the trade to run longer should it fall in my favor.
3. Look at Cross Pairs
Finally, this last area relates directly to the previous point. In the last section, I spoke of how the majority of FX dealers will promote low spreads on the majors, thus encouraging people to trade the majors.
I never meet a FX trader who does not trade the EUR/USD, but I meet plenty who have never even looked at a cross-pair like CAD/JPY, simply because the media and the FX circles they mix in never really speak of them.
To me, this is a dream! I don’t want to be doing what everyone else is doing from a technical and trading point of view, and this extends to actual pairs I would trade as well. There are some unique uncorrelated pairs that the masses are not looking at that warrant my attention, and it would be foolish to ignore these unique opportunities, just because everyone else chooses to focus on the majors only. Remember that if I do what everyone else does, I will likely get what everyone else gets too.
Obviously there are many factors to consistent speculation, including using a solid rule-based strategy, implementing complete risk awareness, and following a detailed trade plan, all of which complement defining the all important “edge” you are hoping to gain in your trading.
I hope this article has helped in some way to offer insight into how any proactive trader should look to expand your thinking in your trading activities.
Sam Evans is a trading instructor with Online Trading Academy.