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Why you need to develop your own forex trading system

There are many forex trading systems and trading strategies out there. There are many free ones printed in forex trading articles, journals, books and on trading-related websites. You can buy them as software or you can subscribe to them periodically.

Novice traders say they do not have the time, the aptitude, the talent nor the brains to work out how to trade properly. They would rather purchase a program or subscribe to a forex trading system for hundreds - or in some cases - thousands of dollars. They say they do not have to do anything except be told what to buy, when to buy and how much of it you need to buy. Some ask me if this strategy or approach is advisable for trading the forex markets. To answer this question, I am then forced to consider the advantages and disadvantages of using such an approach to trading.

There are reasons why a trader would use a forex trading system or forex trading strategy that someone else developed and tested:

1. It is easy. A novice trader does not need to study how the forex market works and how he interacts with that market. He does not need to educate himself: he does not need to bother with books and seminars. He does not need to test the trading system, since the seller has already done that for him and reported promising hypothetical or actual results.

2. A novice trader hopes to get a forex trading system at a �bargain� price... sometimes even for free.


Hazards of trading a forex system or strategy developed and tested by someone else are the following:

1. Faulty Trading Systems

There are many faulty forex systems out there. They may be faulty because their assumptions and their mechanisms may no longer be true, accurate or valid. As a novice trader, how can you distinguish between the good systems and the bad systems if you don�t know how trading systems are built?

2. Discipline and confidence

All systems have drawdown periods. Some good forex trading systems may not make money for six months or an entire year. Even if it was a good system, can you continue to follow it even if it gives you a loss after a loss after a loss? How can you follow it if you do not have confidence in it? How can you be confident if you do not know the ins and outs of the system and if you have not tested it yourself?


I do not believe that people would blindly follow a system even if they were told that it would bring them riches. I can give someone a forex trading system, I can supply him with exceptional hypothetical or actual results and still, he would not be able to follow it.

I remember giving my dad a fully-mechanical forex trading system I developed. I told him a few simple rules and I told him not to question them. All he had to do was to follow them. We both traded it for two months, I grew my small account by roughly 50% (it happened to be a good two months), but he was losing. He wondered why. I asked to see his trading records. When I looked at his trading records, I found that he kept disobeying the rules. When I asked him why he disobeyed them, he wanted to improve the results after it had a couple of losing trades. He was trying to improve the results. According to him, the system asked him to do what he thought was not right during certain market conditions, so he did not follow it.

To overcome the hazards above, I see no way except for a trader to learn how to develop his own trading system. This is the only way a trader can know if a particular trading system or strategy is good or not.

Once a trader learns how to develop forex trading systems and strategies, he can then be better equipped to test them as well. By this point he might even find that he is better off using the system he created, because it becomes increasingly difficult to find another system more suited to his profit objectives while operating within his risk tolerance levels. It is likely that once he develops this level of competence, he will simply acquire other systems only to dissect them, grab the parts he likes and add them to his own system. To me, the irony is that for a trader to know which system to purchase, he must first learn how to create a system. And after knowing how to create a trading system, he will no longer have the need to buy one.

In conclusion then, I would have to say that if you are not inclined to learn how to develop your own trading methodology, then perhaps you should consider giving your money for someone else to invest. Give it to someone who is trading a system that he developed and tested himself because he is more likely to have the confidence and courage to follow his own set of rules.

From http://www.forex-articles.net

Thoughts On Forex

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I guess if you are a daytrader, 30 minute and 15 minute candle charts and line charts in combination with MACD and MA could be more useful than hourly charts or even daily charts. Especially watch out for the down-sign and up-sign with long tails in candle charts and confirmation of the change of short-term trend in line charts breaking accumulation area in these charts. If you are a nimble trader, even a candle-sign is enough to start moving in with stops above or below the long tail end. For dollar/yen trade, read swiss/yen, pound/yen and euro/yen together to confirm the top or bottom. For Eurodollar or dollar/swiss trade, read pound/swiss and euro/pound together to confirm the same. If you are a daytrader, what matters is the flow of that particular day, not the bull or bear bias, so, 30 Min and 15 Min Candle Charts and Line charts are not bad tools to follow these flows. Good trades.

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A Forex trading system is a method of trading that uses objective entry and exit criteria based on parameters that have been validated by historical testing on quantifiable data. Although there is no hard and fast rule for design a Forex trading system, different experts have different opinions; however, the essence remains the same. In general, the Forex trading system provides the discipline to overcome the fear and greed that in many cases paralyzes a trader, and prevents him or her from making timely decisions. Each order placed is governed by a pre-determined set of rules that does not deviate based on anything other than market action.

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Increasingly, investors are turning to forex trading brokers to get in on some foreign currency trading. Unfortunately, not only is this branch of financial trading the one with the biggest profits and risks, but it is also most fraught with scams and shysters.

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Wed, 18 Oct 2006 06:53:00 GMT
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This is only a guide.


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Make A Killing Online With This Automated Analytical Forex Software as seen on CNN

Introduction to Currency Exchange and the FX Market

What is Currency Exchange?

Currency exchange is the trading of one currency against another. Professionals refer to this as foreign exchange, but may also use the acronyms Forex or FX.
The Need for Currency Exchange

Currency exchange is necessary in numerous circumstances.

Consumers typically come into contact with currency exchange when they travel. They go to a bank or currency exchange bureau to convert one currency (typically, their "home currency") into another (i.e., the currency of the country they intend to travel to) so they can pay for goods and services in the foreign country. Consumers may also purchase goods in a foreign country or via the Internet with their credit card, in which case they will find that the amount they paid in the foreign currency will have been converted to their home currency on their credit card statement. Although each such currency exchange is a relatively small transaction, the aggregate of all such transactions is significant.

Businesses typically have to convert currencies when they conduct business outside their home country. For example, if they export goods to another country and receive payment in the currency of that foreign country, then the payment must often be converted back to the home currency. Similarly, if they have to import goods or services, then businesses will often have to pay in a foreign currency, requiring them to first convert their home currency into the foreign currency. Large companies convert huge amounts of currency each year; for example, a company such as General Electric (GE) converts tens of billions of dollars each year. The timing of when they convert can have a large affect on their balance sheet and "bottom line.

Investors and speculators require currency exchange whenever they trade in any foreign investment, be that equities, bonds, bank deposits, or real estate. For example, when a Swedish investor buys shares in Sun Microsystems on the NASDAQ, she will have to pay for the shares in U.S. Dollars and likely have to convert Swedish Krona to U.S. Dollars. Similarly, a Japanese real estate investor who sells a New York property may well want to convert the proceeds of the sale in U.S. Dollars to Japanese Yen.

Investors and speculators also trade currencies directly in order to benefit from movements in the currency exchange markets. For example, if an American investor believes that the Japanese economy is strengthening and as a result expects the Japanese Yen to appreciate in value (i.e., go up relative to other currencies), then she may want to buy Japanese Yen and take what is referred to as a long position. Similarly, if an American investor believes that the Euro will go down over time, then she may want to sell Euro to take a short position. Interestingly, investors and speculators can profit equally from currencies becoming stronger (by taking a long position) or from currencies becoming weaker (by taking a short position). Speculators are often day traders, trying to take advantage of market movements in very short time periods; buying a currency and then selling it again may happen within hours or even minutes. They are attracted to currency trading for numerous reasons, including (i) the size and daily volatility of the market, which gives them unparalleled excitement, (ii) the almost perfect liquidity of the currency exchange market, (iii) the fact that the currency exchange market is "open" 24 hours a day market, and (vi) the fact that currencies can be traded with no brokerage charges.

Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers. These institutions also generally participate in the currency market for hedging and proprietary trading purposes.

Governments and central banks trade currencies to improve trading conditions or to intervene in an attempt to adjust economic or financial imbalances. Although they do not trade for speculative reasons --- they are a non-profit organization --- they often tend to be profitable, since they generally trade on a long-term basis.
Currency Exchange Rates and Spreads

Currency exchange rates are determined by the currency exchange market. (The currency exchange market is described further below.) A currency exchange rate is always quoted for a currency pair using ISO code abbreviations. For example, EUR/USD refers to the two currencies Euro (the European currency) and U.S. Dollar. The first is referred to as the base currency, while the second as the quote currency. The EUR/USD exchange rate specifies how many US Dollars you have to pay to buy one Euro, or conversely how many US Dollars you obtain when you sell one Euro. More generally, if buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of the base currency, and if selling, the exchange rate specifies how much you get in the quote currency when selling one unit of the base currency.

A currency exchange rate is typically given as a pair consisting of a bid price and an ask price. The ask price applies when buying a currency pair and represents what has to be paid in the quote currency to obtain one unit of the base currency. The bid price applies when selling and represents what will be obtained in the quote currency when selling one unit of the base currency. The bid price is always lower than the ask price.

In the currency market, the following abbreviation for the currency exchange rate pair is used:

0.8423/28

The first component (before the slash) refers to the bid price (what you obtain in USD when you sell EUR), and in this case includes four digits after the decimal point. The second component (after the slash) is used to obtain the ask price (what you have to pay in USD if you buy EUR). The ask price is obtained by increasing the first component until the last two decimal places are equal to the digits in the second component. In this example, the ask price is 0.8428. As another example, 0.8498/03 refers to a bid price of 0.8498 and an ask price of 0.8503. (Note that for some exchange rates it is customary to quote rates in units of 100, as is the case with USD/JPY.)

The difference between the bid and the ask price is referred to as the spread. When trading large amounts of $1M or higher, the spread obtained in a quote is typically 5 basis points or PIPs, with each basis point referring to 0.0001 (or 0.01 when, say, the Yen is involved). In the example above, the spread is 0.0005 or 5 PIPs. When trading smaller amounts, the spread may be larger; for example, when trading less than $100,000, spreads of 50-200 PIPs are common. Credit card companies typically apply a spread of 200-300 PIPs. Banks and exchange bureaus typically use a spread in the range of 200-1000 PIPs (in addition to charging a commission). For investors and speculators, a lower spread translates into easier profit taking due to movements in exchange rates.
The Currency Exchange Market

The currency exchange market is an inter-bank or inter-dealer market that was established in 1971 when floating exchange rates began to materialize. In addition, it is an Over-The-Counter market, meaning that transactions are conducted between any two counter parties that agree to trade via the telephone or electronic network. Trading is thus not centralized, as is the case with many stock markets (i.e., NYSE, ASE, CME) or as the case for currency futures and currency options, which trade on special exchanges. Dealers often "advertise" exchange rates using a distribution network, such as the one provided by Reuters or Bridge. Dealers then use the information obtained there (or directly) to "agree" to a rate and a trade.

The major dealing centers today are: London, with about 30% of the market, New York, with 20%, Tokyo, with 12%, Zurich, Frankfurt, Hong Kong and Singapore, with about 7% each, followed by Paris and Sydney with 3% each.

In terms of trading volume, the currency exchange market is the worlds largest market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders of magnitude larger than the bond or stock market. For example, the New York Stock Exchange has a daily trading volume of approximately $60 billion. Thus, the currency exchange market is by far the most liquid market in the world today. Because of the volume in trading, it is impossible for individuals or companies to affect the exchange rates. In fact, even central banks and governments find it increasingly difficult to affect the exchange rates of the most liquid currencies, such as the US dollar, Japanese Yen, Euro, Swiss Frank, Canadian Dollar or Australian Dollar.

The currency exchange market is a true 24-hour market, 5 days a week. There are dealers in every major time zone. Trading begins Monday morning in Sydney (which corresponds to 3pm EST, Sunday) and then daily moves around the globe through the various trading centers until closing Friday evening at 4:30pm EST in New York.

Today, over 85% of all currency exchange transactions involve a few major currencies: the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), Swiss Frank (CHF), British Pound (GBP), Canadian Dollar (CAD), and Australian Dollar (AUD). In the currency exchange market, most of the currencies are traded only against the US Dollar. The term cross rate refers to an exchange rate between two non-dollar currencies. Trading between two non-dollar currencies usually occurs by first trading one against the US Dollar and then trading the US Dollar against the second non-dollar currency. Because of this, the spread in the exchange rate between two non-dollar currencies is often higher. (There are a few non-dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.) The following directly traded currency pairs make up the vast majority of the trading volume and are thus considered to be the most important ones: EUR/USD, USD/JPY, EUR/JPY, USD/CAD, EUR/GBP, GBP/USD, USD/CHF, AUD/USD, and AUD/JPY.
How currency trading is done traditionally

Currency trading is always done with currency pairs, such as EUR/USD, and so it is useful to consider the currency pair as an instrument, which can be bought or sold.

* Buying the currency pair implies buying the first, base currency and selling (short) an equivalent amount of the second, quote currency (to pay for the base currency). (It is not necessary for the trader to own the quote currency prior to selling, as it is sold short.) A speculator buys a currency pair, if she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.
* Selling the currency pair implies selling the first, base currency (short), and buying the second, quote currency. A speculator sells a currency pair, if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

After buying a currency pair, the trader will have an open position in the currency pair. Right after such a transaction, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. In fact, the value will be slightly negative, because of the spread involved.

In todays currency market, a trade goes through a three-step process:

1. the trader communicates the currency pair and the amount he/she would like to trade with another dealer.
2. the dealer responds with a bid and an ask price
3. the trader responds to the bid and ask price with one of:
1. buy (by saying "Mine" or "I buy" or "I take")
2. sell (by saying "yours" or "I give you" or "I sell")
3. refuse.

The transaction occurs if the final response is either a buy or a sell. The dealer is required to quote a "good" market price, since he does not know whether the trader will buy or sell.

The currency exchange market described above is referred to as the spot market and the transaction described is referred to as a spot deal. A spot deal consists of a bilateral contract between a party delivering a specified amount of a given currency against receiving a specified amount of another currency from a second counter party, based on an agreed exchange rate, within two business days of the deal date, which is referred to as the settlement date. (The settlement date for USD/CAD is one business day after the deal date.) Speculators rarely deliver, however. Instead, they use what is referred to as a rollover swap. The rollover swap is designed to allow the changing of an old deal date to the current date by simultaneously closing an open position for todays date and opening the same position for the next day at a price reflecting the interest rate differential between the two currencies.

When a trader buys or sells a currency pair, the value of the currency pair, as an instrument, initially is close to zero. This is because (in the case of a buy) the quote currency is sold to buy an equivalent amount of the base currency. As the market rates fluctuate, however, the value of the currency pair position held will also fluctuate. Thus, if the rate for the currency pair goes down, the speculators long position will lose in value and become negative. To ensure that the speculator can carry the risk for the case where the position results in a loss, banks or dealers typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.

To limit down-side risk, traders often specify a Stop-Loss rate for each open trade. The Stop-Loss specifies that the trade should be closed automatically when the currency exchange rate for the currency pair in question reaches a certain threshold. For long positions, the Stop-Loss rate is always lower than the current exchange rate; for short positions, it is always higher. Traders, at times, also specify a Take-Profit rate for their trades in order to lock in a profit when the exchange rate reaches a certain threshold. For long positions, the Take-Profit rate must be above the current rate, while for short positions, it must be below the current rate.

A trader may also leave an order with a bank, broker or dealer. These so called leave orders are orders that a trade should be executed (in the future) when certain market conditions occur. There are three types of leave orders:

1. entry orders: specifies that a currency pair should be traded when it reaches a certain exchange rate. Entry orders are used when the trade would not offset a current position.
2. take-profit orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.
3. stop-loss orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.

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Additional Info On Forex Today

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Every trader should find his/her method/system which suits his/her own situation and personality. And that system/method must be the one that has proven to be able to make some money through trials. So, if Tom, the medium-term trader, revealed his money making method of last three decades, it may not have the same effect for Dick and Harry, the day traders, and vice versa. Agree that most fail for lack of system/method and/or lack of discipline to follow through.

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With a daily turnover of over trillions of dollars, the Foreign Exchange market conducts more than three times the aggregate amount volume of the United States Equity and Treasury markets combined. The Forex market is an over-the-counter market where buyers and sellers conduct foreign exchange business using different means of communication.

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Indeed large multinational and individual banks and other major financial institutions have dominated FX trading (also known as Forex trading), but there is a paradigm change in the nature and type of investing. According to one estimate, in the new millennium, there are over 6 million online investment accounts, up from 1.5 million in 1997. As a result, start-up firms now compete directly with financial institutions to serve investors in the new technologically driven economy, and the clear winner is the customer. The competition between the brick and mortar institutions and the Internet-based companies has dramatically lowered the costs of investing, and empowered the individual investor to take control of their own investment strategy in Forex trading.
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By Kathy Lien, Chief Strategist of www.