Welcome to the Essentials of 'Forex' Sticky. ‘Essentials’ Stickies are threads that are ‘stuck’ to the top of a forum index. They contain information about the forum you’re in that is of critical or ongoing value - hence the ‘Essentials’ name. If there’s anything missing from this Sticky that you hoped or expected to find, please contact
timsk, T2W Content Manager and, if at all possible, it will be added.
NB:
The structure of the forums was completely overhauled in August 2012, resulting in a much simpler layout which is easier to navigate. In the case of Forex, there used to be three separate forums; whereas now there is only one. A consequence of this is that the ‘Essentials’ Stickies are out of date and will be amended in due course. In the meantime, we have left them in tact as they contain information and ideas that are of value to members. We apologise for any confusion caused and trust that you will bear with us through this period of transition. Thank you!
What is the Forex Forum?
It's the forum in which members discuss their strategies and systems for trading foreign exchange currency pairs - known as Forex - or simply FX. This section of the Sticky provides an overview of what trading strategies and systems are. Hopefully, this will help you to develop your own strategy or system and enable you to distinguish the good from the not so good when assessing other people's.
Other Resources on T2W & Beyond
Listed here is a selection of resources to help you build your own forex strategy or system. There are a number of great contributions in the Articles section, as well as videos and a popular website. Each item has a short précis and a direct link.
What is the Forex Forum?
Each day, every trader in the world is faced with the same problem: how to decide when to enter and exit the market? Most traders agree that one needs some kind of a plan – or strategy – to indicate when would be an optimum time to enter the market, with the probability of a successful trade in their favour. As the name suggests, this forum is where members discuss how to solve this problem and build a consistently profitable trading strategy or system.
STRATEGY OR SYSTEM – WHAT’S THE DIFFERENCE?
The words strategy, system, methodology and plan tend to be used interchangeably and their respective meanings are whatever the individual trader ascribes to them. However, as a generalisation, ‘strategy’ tends to refer to a discretionary approach to trading, whereas ‘system’ tends to refer to a mechanical approach to trading. The former involves the trader making all trading decisions themselves, whereas the latter involves deferring some or all trading decisions to some kind of filter, often coded computer software. In some instances, the whole trading process is completely automated, leaving the computer to execute trades while the ‘trader’ relaxes with a long drink by the pool. Well, that’s the theory anyway! The debate between the two camps – discretionary and mechanical – is often heated. Which is best? Most traders adopt the approach that they’re most comfortable with and the one that produces the best results. Only you can decide which is best for you.
LINING UP THE DUCKS
Unless you’re a ‘scalper’ doing dozens of trades every day, purely discretionary traders will spend much of their time looking for - or waiting for - a suitable set up. Either way, they spend more time not trading than they do trading. A set up occurs when a clearly defined set of variables come together to indicate that a trade may be on the cards. In the ‘Best Threads’ Sticky in this forum, a good example of a set up can be found in the thread entitled: ‘The 3 Duck’s Trading System’. The idea behind the set up is implied in the title, i.e. when all three ‘ducks’ are neatly lined up, that’s the time to enter the trade. The ducks are just a metaphor for a simple set of trading rules or criteria which creates the set up. The ‘ducks’ could be based on price action, volume, fundamentals or indicators. The tricky bit is in deciding how many rules to have (i.e. ducks) and what they should be. This is the focus of many of the threads in this forum. (Note the use of the word ‘system’ in the thread title. As the author of the thread points out: “. . . it’s not a system in the mechanical sense, it’s more a set of guidelines . . .”)
FUNNY WHAT? FUNDAMENTALS!
Broadly speaking, traders can build their discretionary strategies or mechanical systems around either fundamental analysis or technical analysis, (the latter is commonly referred to as ‘TA’). Increasingly, using a combination of the two is gaining popularity. Fundamental analysis, when applied to the forex market, focuses on such things as the economy, interest rates, productivity, government reports, news, and even rumour. By studying the fundamentals, a trader may conclude that the value of a currency is overpriced, underpriced or at fair value.
FAMOUS EXAMPLE
One of the most famous exponents of trading the forex market using fundamental analysis is George Soros. On what has been dubbed ‘Black Wednesday’, 16th September 1992, he spotted weakness in GBP and sold short USD $10 billion worth of sterling. This was based on the UK's high inflation and the Bank of England’s (BoE) reluctance to raise interest rates in line with other EU countries. The BoE was then forced to pull out of the European Exchange Rate Mechanism (ERM), causing the value of sterling to fall, earning Soros an estimated USD $1.1billion in the process. Not bad for one day’s work and it earned him the somewhat dubious honour of ‘the man who broke the Bank of England’.
TA (NB: if you think TA stands for ‘Territorial Army’, then you’ve not been paying attention!)
By contrast to fundamental analysis, practitioners of TA tend not to worry about the perceived value of an instrument. They believe that the all the fundamentals listed above are already factored into the current price. The logic is that markets are driven by people who, in turn, are driven by fear and greed. A price chart is simply a historical record that plots the euphoria and despair experienced by those who have made and lost money from trading the instrument in the past. When it comes to making or losing money, human beings appear not to be especially good at learning from their mistakes (or successes) and even worse at learning from those of others. Enthusiasts of TA conclude two things from this: 1) history tends to repeat itself and 2) there is order in the markets. In other words, markets are not random. Therefore, by studying a historical price chart, a trader can gain insight into the probable actions of market participants in the future and, as a result of these actions, guage the probable direction of price.
FAMOUS EXAMPLE
A famous example of fear and greed as displayed in a price chart can be seen in the stricken bank Northern Rock (NRK), or ‘Northern Wreck’ as it came to be known. (Although this is a forex forum, the example of a stock chart is provided here because it’s so well known. The basic principle applies to all markets and instruments.) By the end of September 2007, the share price of NRK had fallen from a spring high of over £11.00 to a low of about £1.20. At that point, investors, traders and gamblers alike all piled in and bought up the stock, primarily for fundamental reasons. Their perception was that it was underpriced. The phrases, ‘heavily oversold’, ‘bargain of the century’ and ‘cheap as chips’ could be heard in the pubs, clubs and cafes the length and breadth of the land. The prospect of easy money caused lots of people, ordinarily of sound mind, to take leave of their senses and overlook the basic fact that the bank was essentially broke and had to go cap in hand to the BoE to bail it out. A handful who bought at the very bottom may have got away with it as price pulled back to an October ’07 high of £3.00. However, the rally was very short lived. By mid November that year, price had fallen back down below the early October lows. Most of the speculators who bought what they thought were ‘cheap’ shares lost their money. Practitioners of TA even have a name for this price pattern; it’s called a ‘dead cat bounce’. See the chart, below. It's worth pointing out that critics of TA will argue that it's simple to spot patterns such as this in hindsight, while spotting them and trading them as they develop is the devil's own job.
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Other Resources on T2W & Beyond
T2W ARTICLES
The Articles section can be accessed via the ‘Articles’ tab mid way along the red menu bar at the top of the page. Once there, under ‘Topics’ on the left hand side of the page, click on ‘Technical Analysis’ and ‘Fundamental Analysis’, which are listed under the heading ‘Methodologies’. There are many good articles on these topics to choose from – listed here are just a handful to whet your appetite.
Behavioural Economics for Traders
This article is not as heavy as it sounds. It’s packed full of interesting nuggets like this: “Take a simple coin toss. Ellen Langer showed that people are more willing to bet on the outcome before the coin is flipped than after. People behave as if their involvement makes a difference in value.”
The Objective Filter for an Oscillator
Many traders, especially ‘newbies’, gravitate towards indicators as a means of making sense of a price chart. Like any tool, indicators must be used in the right way and at the right time. In this article, Sam Seidon explains how to use indicators effectively at objective zones of supply and demand.
Pushing the Envelope
In this video, author and trading instructor Bo Yoder emphasises the importance of market psychology and putting yourself in the shoes of someone who is sitting on a very profitable trade or, conversely, is nursing a considerable loss. This is especially pertinent to short term intraday traders.
Developing a Trading Strategy
Developing a Trading Strategy (Part 2)
These two contributions from Tim Wreford are among the most popular and highly rated Articles on T2W. And with good reason; they do exactly what they say on the tin! If you don’t know where to start in developing your trading strategy – then this is as good a place as any!
VIDEOS
Phil Newton’s Break out Strategy
Phil Newton’s Break out Strategy (Part 2)
In these two videos, professional forex trader and instructor Phil Newton – aka 'Newtron Bomb’ on T2W – outlines this simple strategy. For more information to back up the video, check out the thread of (almost) the same name:
Phil Newton's Range Break Out strategy and a similarly named Article with thread entitled:
15 Minute Break out Strategy.
WEBSITES
Forex Factory
A popular forum aimed mainly at retail forex traders with three main resource areas: a comprehensive calendar with a simple graphic to indicate the likely impact of an announcement, a news section which is similar in content to T2W’s ‘Forex News & Analysis’ forum and, lastly, a simple charting package which displays a composite rate based on the average rates from industry leading brokers.
If you know of any resources either here on T2W or beyond that would be of interest and value to members who want to learn more about forex strategies and systems, please contact
timsk, T2W Content Manager and, if at all possible, they will be added.
